Cyprus International Trusts: Advantages and Formation Process
The use of trusts is established for the protection of assets, international tax planning, as a means of settling succession matters and generally as an aid in asset management. In Cyprus, being a common law jurisdiction embedding the principles of equity in its legal order, a trust is formed in accordance with the Cyprus International Trusts Law of 1992, as amended (the "Law"), which broadly follows the common law principles of equity with respect to the formation of trusts. Cyprus also maintains a high position as one of the most attractive jurisdictions for international tax planning due to the favourable provisions in the Law applicable. This article outlines the advantages of forming a Cyprus International Trust in Cyprus as well as some of the key characteristics, registration process and other useful information.
What is a Trust in Cyprus?
A trust generally may be defined as an institution whereby an owner (more appropriately called the "settlor") of a thing – usually a proprietary asset – delivers it or delegates it in the custody of a person (called a "trustee") for use or for management or for safe custody. This is a general definition based on equity principles reflecting this type of arrangement given that the Law does not contain a definition as to what constitutes a "trust". In a trust, the legal title to the proprietary asset and any ensuing rights are transferred to the trustee who becomes the legal owner for the purpose of its management for the benefit of the beneficiary(ies), who may be the settlor(s) and/or any third person(s). It is important to note that the trustee owes fiduciary duties to the beneficiaries and must adhere to the standards set out by the Law as well as professional standards in case of a professional trustee (e.g. trustee services provided by lawyers).
To constitute a valid a trust the 3 certainties, as they are called, must be satisfied:
(i) The Certainty of Intention: this refers to the intention of the settlor who is to transfer the property to create a trust. This may be expressed either orally or in writing. Such intention is usually expressed in writing through a trust creating instrument/deed.
(ii) The Certainty of Subject Matter: there must be certainty as to both an identifiable property being subject of the trust as well as the portion of the property or ensuing rights that the beneficiaries will receive. Generalities or vagueness to the description of the subject matter of the trust may lead to the invalidity of the trust.
(iii) The Certainty of Objects: this certainty refers to the fact that the trustee should know who the beneficiaries are and they should be identifiable. The beneficiaries cannot be a large or vaguely identified group that the settlor would not be in a position to identify who the beneficiaries are.
It should be emphasised that lacking any one of the 3 certainties, a trust would be void ab initio. Therefore, the 3 certainties should be carefully appraised before setting up a trust arrangement.
Why setting up a Trust?
There are several instances that may suggest the set up of a trust, with some of the commonest to be the following:
- Protection of assets
- Settling of succession/inheritance matters
- Tax planning/financial purposes
- Confidentiality protection
- The promotion of a charitable purpose as prescribed by Law
- Management of family property for the benefit of family members being minors or incapacitated
- Commercial purposes
Key characteristics of the Cyprus International Trust
i) Requirements with respect to residency of Cyprus International Trust participants
According to the Law in order to form a Cyprus International Trust the following requirements exist:
- The settlor, either being a physical or legal person, of the International Trust must not be a permanent resident of the Republic of Cyprus in the year preceding the year of settlement of the International Trust.
- The beneficiary(ies), either being physical or legal person(s), must not (with the exception of charitable trusts) be resident(s) of the Republic of Cyprus in the year preceding the year of the settlement of the Republic of Trust.
- There must always be at least one trustee being a resident of the Republic of Cyprus.
The word "resident" bears the meaning given to it by the Income Tax Laws of 2002, as amended.
ii) Types of Trust
There are different types of trusts generally, but the most common is the Express Private Trust which is created by the settlor expressly either via a deed, in writing, by will and in some exceptional circumstances an oral statement could be seen as sufficient. Secondly, there is the Discretionary Trust which allows the trustee to exercise his/her discretion to bring the most beneficial outcome for the beneficiaries and may also determine what portion should go to each beneficiary. Thirdly, it is the Fixed Trust which allows the settlor to decide how the capital of the trust is to be apportioned, to whom and for how long. Fourthly, the Protective Trust is considered more suitable when the intention is to protect the assets and capital in the trust from certain events, like the bankruptcy of the beneficiary. Additionally, a Charitable Trust may be used where the trust is set up for the relief of poverty, the advancement of education or religion or any other purpose that is beneficial to the community.
iii) Taxation of the Cyprus International Trust
In Cyprus, the taxation legislation exempts Cyprus International Trusts from income tax, capital tax and estate duty tax making Cyprus International Trusts a very attractive arrangement.
There is no maximum duration unless otherwise mentioned in the terms of the trust instrument.
v) Cyprus Trust Asset Protection
An important aspect of Cyprus International Trusts is that they cannot be considered as void or voidable in case of the settlor's bankruptcy, unless it is proven at court that the trust was made solely to defraud the creditors.
A Cyprus International Trust can be transferred to another's country jurisdiction and vice versa, meaning that a Trust established in another jurisdiction may be transferred to Cyprus.
Cyprus law prohibits the disclosure to unrelated third parties of any information received under the trust except pursuant to a court order, where it is evident that the disclosure of such information is crucial to the outcome of the court proceedings.
Advantages of formation of a Cyprus International Trust
- A Cyprus International Trust helps to protect assets from possible claims as well as to protect the interests of beneficiaries as the assets of a Cyprus International Trust are segregated from the settlor's funds (e.g. in case of bankruptcy or liquidation of settlor).
- A settlor may manage his/her property according to his/her wishes in perpetuity.
- The activity of a Cyprus International Trust in Cyprus is regulated pursuant to the terms of the trust agreement/deed and is not limited by Law.
- The trust property may include all kinds of assets and property anywhere in the world.
- In the case of a beneficiary who is not a resident of Cyprus, the income and profits of a Cyprus International Trust, which are acquired or are considered to be acquired from sources outside of Cyprus are not subject to any tax imposed in Cyprus.
- A Cyprus International Trust is subject to strict confidentiality. Any information or documentation may only be disclosed pursuant to a court order.
- There is no requirement for registration or publication of constitutional documents and financial statements of the Cyprus International Trust.
- A Cyprus International Trust is not subject to contest by the creditors of the settlor unless it is proven at court that the trust was set up to defraud such creditors. Such action may be initiated by the creditors within 2 years from the date of creation of the trust.
As the Cyprus International Trust must have at least one (1) Cyprus-resident trustee, it is the responsibility of the trustee to notify the relevant competent authority (Cyprus Securities and Exchange Commission, the Cyprus Bar Association or the Cyprus Association of Certified Accountants) fifteen (15) days after the creation of the Cyprus International Trust in order to lodged in the Cyprus Trust Registry. Any amendments that follow in relation to the trust must also be notified to the competent authority, not later than fifteen (15) days of such amendment.
For the purposes of ensuring that information contained in the Cyprus Trust Registry kept with the above mentioned competent authorities remains confidential, the Law provides that information contained in the Trust Registries are not available to the public and only the 3 above mentioned competent authorities may access such information.
As per the Law Regulating Companies Providing Administrative Services and Related Matters of 2012, as amended, for the completion of registration of a Cyprus International trust in the Cyprus Trust Registry of the competent authority, the following information is required. The registration does not require the submission of the respective trust creating instrument/deed/agreement. The below information shall remain in the Cyprus Trust Register for a term not exceeding five (5) years after the termination of a trust.
- Name of the trust;
- Date of creation of the trust;
- Date of termination of the trust;
- Name and address of the trustee;
- Date of any change in the law governing the trust to or from Cyprus Law.
According to the AML legislation and regulations, depending on the set up of the trust, the details and the true identity of the persons involved in a trust shall be verified and all relevant information shall be collected, including the following categories of information:
iii) Beneficiaries or class of beneficiaries;
iv) Protectors, if any;
v) Investment consultants, accountants, tax consultants, if any;
vi) Activities of the trust;
vii) Any other person that exercises the effective control on the trust.
Our law firm E. TZIONI & ASSOCIATES LLC, offers the following services:
i) Support in finding a suitable trust structure to meet the requirements.
ii) Formation of Cyprus International Trusts.
iii) Drafting of trust deeds/instruments/agreements in accordance with the required outcome.
iv) Trust organisation and management, compliance with all legal requirements.
v) Provision of trustee and/or protector services.
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.