Q.001 The Jurisdiction
Cyprus is the third-largest island in the Mediterranean, with an area of 9,251km. It is situated at the crossroads of Europe, Asia, the Middle East and Africa. It is approximately 70 km from Turkey, 120 km from Syria, and 400 km from Egypt.
On account of its location, Cyprus has always played a prominent role in regional politics and trade, and traditionally it has been the gateway to the trade routes linking Western Europe with the Arab world and the Far East. After 80 years as a British colony, Cyprus became an independent sovereign republic in 1960. The new republic's institutions and administration, banking system and business and legal environment were heavily influenced by the British legacy.
The Turkish invasion of 1974, which left more than one-third of the island under Turkish rule, has had no effect on day-to-day life in the Republic of Cyprus, which is a cosmopolitan country with a high quality of life, ranking 33rd in the world in the United Nations Human Development Index.
Cyprus became a member of the European Union in 2004 and adopted the euro as its currency in 2008. In preparation for EU accession, the legal framework was thoroughly reviewed to bring it into line with European norms and as a result Cyprus has a modern, business-friendly legal and tax system which is fully compliant with EU and OECD norms.
There is a democratic system of government with effective separation of powers. The President is head of state; he is elected for a five-year term of office and may be re-elected. The President appoints the Council of Ministers, whose members initiate legislation and perform the administration within their respective ministries. The House of Representatives is the legislative body whose members are elected by universal suffrage within a multi-party system. The judiciary is a separate and independent body.
Cyprus maintains extensive diplomatic relations and is a member of the United Nations, the Council of Europe, the Commonwealth, the World Bank, the International Monetary Fund, and the Non- Aligned Movement. It is also a signatory to numerous international conventions and bilateral co-operation agreements.
The population of Cyprus, excluding the area under Turkish occupation, was 854,800 at the end of 2016. The official languages are Greek and Turkish, but almost everyone speaks English as a second language. English is the lingua franca of international business in Cyprus.
As a result of the British influence, Cyprus law is based on the principles of English law, modified more recently by the European acquis communautaire. At independence, the strength of the English principles was enforced by s.29 of the Cyprus Courts of Justice Law 14 of 1960, which expressly instructed the courts to adhere to the principles of common law and equity, ''save insofar as other provision has been or shall be made by any law and so long as not inconsistent with the Constitution''. In cases where domestic law has not made a provision for a specific legal point, the courts of the island have held that reliance may be placed on common law or equity.
Q.002 Trust law
Trust law in Cyprus derives from English sources. During the period of British administration, English common law and the principles of equity were introduced to and applied in Cyprus and the law governing the formation and administration of trusts in Cyprus was in effect English law. In 1955 Cyprus enacted its own statute, the Trustee Law of 1955 (Cap 193) which, with a few changes, reproduced the English Trustee Act 1925. The principles of equity which underlie resulting, constructive and implied trusts and are applied in English cases continue to be applied by the Cyprus courts to such trusts.
As far as the investment powers of trustees are concerned, s.2(2) of the Trustee Law allows the settlor to exercise complete discretion with regard to the powers he wishes to transfer to the trustees. Trustees may invest trust assets either in investments authorised by the trust deed or in those authorised by the law. Power to invest in specific investments may also be authorised by order of a competent court.
On the question of variation of a Cyprus trust, the position closely mirrors that existing in England before the Variation of Trusts Act 1958. Upon application, a Cyprus court may amend the terms of the trust, or the powers of the trustees to manage the trust, if it is satisfied that the proposed amendment is in the interest of the persons on whose behalf the application is made and no substantial prejudice is caused to the interests of any other interested party.
The perpetuity periods of Cyprus trusts are not governed by the English statutory provisions of 1964, as these were enacted after the independence of Cyprus. In the absence of any statutory provision to the contrary the old English equity principles apply, and no trusts other than charitable trusts may continue in perpetuity. Trusts endure for either the period of the life or lives in being plus 21 years or, where there is no life in being, merely for 21 years. The accumulation period of a trust may be extended to include the entire perpetuity period.
Trusts can currently be established in Cyprus either as domestic trusts under the Trustee Law or as Cyprus International Trusts constituted under the provisions of the International Trusts Law (Law 69 of 1992) as amended by the International Trust (Amending) Law of 2012 (together ''the ITL''). It should be noted that the ITL is not a self-contained statute but rather a law which builds on the existing statutory base. This has the effect that the general principles of trust law as found in the common law and statutes of Cyprus continue to apply, unless and to the extent that the existing law is overridden by a specific provision of the ITL. Indeed, as explained below, the 2012 amendments to the ITL include a provision that international trusts may continue in perpetuity.
Q.003 Charitable trusts
The Charities Law (Cap 41) is the principal legislation governing charities. Section 15 states that all proceedings under that Law shall be determined in accordance with the law relating to charitable trusts for the time being in force in England, which includes the definition of a charitable trust. Charitable trusts in Cyprus may continue in perpetuity and a Cyprus International Trust may qualify as a charitable trust if it satisfies the test for an ordinary charitable trust.
Q.004 The International Trusts Law
When it was enacted in 1992, the Cyprus International Trusts Law gave Cyprus a ''state of the art'' international trusts regime, with excellent tax mitigation and asset protection features, and restricted its availability by stipulating that neither the settlor nor any beneficiary could be a permanent resident of Cyprus. Over the years, as other jurisdictions modernised their trust regimes, it became apparent that, while the basic structure provided by the International Trusts Law remained sound, it required updating to remove a number of outdated restrictions and to meet changed circumstances. A fundamental reform of the law took place in 2012 with the enactment of the International Trust (Amending) Lawof 2012.
Q.005 Residence requirements
When the 1992 law was drafted, the availability of international trusts was restricted to non-resident settlors in order to prevent tax avoidance by Cyprus residents. It was not clear whether settlors could relocate to Cyprus after establishing a Cyprus International Trust, and the resultant uncertainty undoubtedly discouraged many of them from doing so. The ITL as amended provides only that the settlor may not be a Cyprus tax resident in the year preceding the year of creation of the trust. It also removes the prohibition contained in the 1992 law on resident beneficiaries and on ownership of immovable property in Cyprus, thus avoiding difficulties that might otherwise arise if the settlor or any beneficiary were subsequently to take up residence in Cyprus.
Q.006 Asset protection
The 1992 law contained strong asset protection features: no foreign law relating to inheritance or succession could invalidate a trust and trusts could not be set aside by the settlor's creditors in the case of the settlor's bankruptcy or liquidation unless and to the extent that the creditors could demonstrate that the trust was made with intent to defraud them. The onus of proof is on the person or persons seeking to upset the trust and the action to do so must be instituted within two years from the date of transfer of assets to the trust. The 2012 reform explicitly provides that any question relating to the validity or administration of an international trust or a disposition to an international trust will be determined by the laws of Cyprus without reference to the law of any other jurisdiction, and that the law relating to inheritance or succession in force in Cyprus or any other country will not in any way affect the validity of the international trust or any transfer or disposition of property to it. It also makes clear that the trustees' fiduciary powers and duties of trustees and the powers and duties of any protectors of the trusts are governed exclusively by Cyprus law. Furthermore, it provides that dispositions to a trust may not be challenged on the grounds that they are inconsistent with the laws of another jurisdiction, for example regarding family and succession issues, or on the grounds that the other jurisdiction does not recognise the concept of trusts.
The amending law entrenches jurisdictional protection by providing that an international trust containing a choice of law clause in favour of Cyprus law is fully protected from unfounded foreign judicial claims asamatter of public policy and order.
These provisions further reinforce the already formidable asset protection features of the Cyprus International Trust.
Q.007 Reserved powers and interests
A new section of the ITL introduced by the 2012 reform allows the settlor of a trust to reserve powers to himself or herself, to retain a beneficial interest in trust property, or to act as the protector or enforcer of the trust, without affecting the validity of the trust. The powers which may be reserved are extensive, and include the power to revoke, vary or amend the terms of the trust, to apply any income or capital of the trust property, to act as a director or officer of any corporation wholly or partly owned by the trust, to give binding directions to the trustee in connection with the trust property and to appoint or remove any trustee, enforcer, protector or beneficiary. The settlor may impose a general stipulation that the trustees' powers are exercisable only with the consent of the settlor or any other person specified in the terms of the trust. The settlor may also reserve the power to change the governing law of the trust.
Q.008 Duration of trusts
As was usual at the time, the 1992 law restricted the maximum life of international trusts to 100 years from the date on the trust came into existence. Only charitable trusts and non-charitable purpose trusts were allowed to exist in perpetuity. In the intervening period this restriction on the maximum life of trusts came to be seen as a disadvantage of trusts compared with foundations and several jurisdictions removed any restriction on the duration of trusts.
The amended law follows this practice, by providing that from the date the amendment takes effect and subject to the terms of the trust, there will be no limit on the period for which a trust may continue to be valid and enforceable, and no rule against perpetuities or remoteness of vesting or any analogous rule will apply to a trust or to any advancement, appointment, payment or application of property from a trust. Except where the terms of a trust expressly provide to the contrary, no advancement, appointment, payment or application of income or capital from the trust to another trust is invalidated solely by reason of that other trust continuing to be valid and enforceable beyond the date on which the first trust must terminate.
Q.009 Trustees' investment powers
Following the 2012 reform, trustees enjoy the investment powers of an absolute owner, allowing them to invest in a broader range of investments for the best interests of the beneficiaries, in line with those of a trustee in England and Wales, and other trust jurisdictions which have followed the English Trustee Act 2000, including Malta.
Trustees may invest in movable and immovable property both in Cyprus and overseas, including shares in companies incorporated in Cyprus.
Q.010 Variation of trusts
The courts have powers to vary the terms of a Cyprus International Trust on the lines of the English Variation of Trusts Act 1958. More specifically, the courts, upon application, may amend or repeal the terms of the Cyprus International Trust or the powers of the trustees to manage the trust if they are satisfied that the proposed arrangement will be in the interest of the person on whose behalf the application is made and no substantial prejudice is caused to the interests of any other interested party. Section 9 of the ITL provides that the law applicable to a Cyprus International Trust can be expressly changed to a foreign law provided that the new law recognises the validity of the trust and the respective interests of the beneficiaries; a trust established in a foreign jurisdiction may by its terms select Cyprus law provided that the foreign law itself recognises such a change.
Q.011 International unit trust schemes
The International Collective Investment Schemes Law (''ICIS Law''), which provided for the setting up in Cyprus of open-ended investment funds in various ways, including international unit trust schemes, was repealed by the Alternative Investment Funds Law of 2014 (''AIF Law''). Under the AIF Law the unit trust structure provided for by the ICIS Law is no longer available.
Click here to continue reading ...
Originally published by Thomson Reuters.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.