Cyprus International TRUST

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Introduction

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Cyprus has long been established and recognised internationally as a healthy offshore financial centre for shipping, banking and corporate business. The demand for practical international tax planning solutions by entrepreneurs continues to increase, and the choice of location for the operation of their businesses plays a key role in their decisions.
The use of the trust as a vehicle of international tax planning and business structuring is continuously growing. Trusts are used today more than ever before in a myriad of circumstances, many of which would have been impossible to conceive at the time the concept was originally conceived.
Cypriot trusts are effective vehicles for channelling income to and from companies in different jurisdictions. Cyprus is in an optimal position to use companies in conjunction with Cypriot offshore trusts.
Trusts are created for numerous reasons, including:
- Reduce tax liabilities.
- Alter the devolution of assets on death.
- Avoid the inconvenience and publicity of probate.
- Protect assets from actual or potential creditors.
- Defining the Cyprus international trust

The essential legal requirements of an international trust are that:
- The settlor is not a permanent resident of Cyprus
- The beneficiary is not a permanent resident
- The trust property does not include any immovable property in Cyprus.
- A minimum of one trustee is resident in Cyprus

Tax aspects of Cyprus trusts

International Trusts Law of Cyprus. International Trusts are not taxed in Cyprus. In fact, Cyprus International Trusts enjoy important tax advantages, providing significant tax planning possibilities. The following advantages are indicative of the possible options for tax minimisation.
- all income whether trading or otherwise of an International Trust, (i.e. Trust whose property is located and income is derived from outside Cyprus) is not taxable in Cyprus
- dividends, interest or other income received by a Trust from a Cyprus international business company are also neither taxable nor subject to withholding tax gains on the disposal of the assets of an International Trust are not subject to capital gains tax in Cyprus an alien who creates an International Trust in Cyprus and retires in Cyprus is still exempt from tax is all the property settled and the income earned is abroad, even if he is a beneficiary an International Trust created for estate duty planning purposes would not be subject to estate duty in Cyprus.
Trust capital received in Cyprus by a foreigner (resident or retired in Cyprus) from trusts not resident in Cyprus is not taxable on the trustee.
Trusts are usually used by high net-worth individuals for the purpose of protecting their estate from inheritance or capital gains taxes in their home country. They can also be used by expatriates settling into a trust before repatriating assets acquired while working abroad, to protect such assets from the tax net of their home country.

Other aspects of Cyprus trusts

- No exchange control regulations.
- The same person can be the settlor, the trustee (through a Cyprus IBC) in which he/she can be the sole director and he/she can be the only beneficial owner of the shares, and also a beneficiary (i.e. an individual could have absolute control and ownership of the trust fund.)
- An international trust may form a Cyprus international business company, partnership or branch and obtain the benefits available to them.
- An international trust may carry out business in Cyprus subject to the laws of the country which are imposed on the beneficiaries and not on the trust itself.
- There are no reporting requirements in Cyprus for international trusts.
- It can last for 100 years.
- Its income can be accumulated for the entire duration of the trust.
- Under the International Trusts Law, the duty of the trustee is limited to disclosing any document or information relating to, or forming part of, the accounts of the international trust.
- Although a beneficiary with a fixed share is entitled to such disclosure, a discretionary beneficiary may only be so entitled from the time when the trustees have exercised their discretion in his favour. The law also prevents the trustees, government officials and officers of the Central Bank from disclosing any information to third parties, unless specifically authorised by an order of a Cypriot court. Such an order is unlikely to be issued, unless the disclosure is of paramount importance to the outcome of the case in question.
The laws relating to money laundering activities empower the court to order disclosure where reasonable grounds for suspicion that an offence has been committed exist.
The general obligation of confidentiality may be strengthened by express provisions in the trust instrument, such as “non-disclosure”, “exclusion” and “no challenge” clauses. Despite the general obligation, trustees may disclose trust information if they have a bona fide belief that disclosure is necessary in the exercise of their fiduciary duties or powers, and that will not prejudice the interests of the beneficiaries.
There are many situations other than saving in taxes where Cyprus Trusts can prove advantageous.

These include the following:
- an individual, through the use of a Cyprus Trust, can ensure that minors, mentality handicapped persons or persons that cannot be trusted with the management of the individual’s estate are well provided for, even after the individual’s death
- an individual, through the use of a Cyprus Trust, can arrange to be inherited by persons, who due to the legislation of the individual’s country, would otherwise be excluded from the inheritance
- an individual who wishes to divest himself of personal assets for fiscal or other reasons can achieve that by transferring them to a Cypriot International Trust
- an individual who wishes to keep the ownership of a company anonymous and confidential, can do this by setting up a Discretionary Cyprus Trust to own the shares in the company
- an individual who has or may have income arising overs overseas which’s not wish to remit to his country or residence, can arrange for such income to be directed to the Trustees of a Cyprus Settlement to be held on a Discretionary Trust in accordance with his wishes
- an individual with assets outside his country of residence, which country may in future extend its exchange control restrictions to include remittance of overseas funds, may wish to retain the flexibility of overseas funds by transferring them to a Discretionary Trust

Asset protection trusts
Trusts are widely used for the protection of assets from the claims of actual or potential creditors. To a large extent, the asset-protection use of a trust has developed as a response to litigation in the United States of America because of the huge awards handed down by juries in civil law cases.
In Cyprus, the International Trusts Law 69/92 makes specific provision to asset protection trusts. It provides that notwithstanding the provisions of any bankruptcy or liquidation laws in Cyprus, or in any other country, and notwithstanding the fact that the trust is voluntary and without consideration, unless it is proven to the court that the trust was made with the intent to defraud persons who, at the time when the payment or transfer of assets was made to the trust, were creditors of the settlor, the trust shall not be void or voidable. The law specifies that the burden of proof of such an intent on the part of the settlor lies with the creditors seeking to annul the transfer made to a Cyprus international trust. Moreover, such an action must be initiated by the creditors within two years from the date of transfer or disposal of the assets to the trust.
At first sight, this legislative provision renders Cyprus an "asset protection trust haven" in that it effectively insulates the trust assets from creditors whilst limiting the time period within which they can bring any such claim to the court. However, the provisions stand unchallenged in court to date and it is unclear whether they provide effective insulation, particularly where the trust property is located in other jurisdictions.
Parties to a trust which has been properly and validly created may successfully resist a claim that the trust is really a trust but some other legal arrangement, such as an agency or nomination, on the basis that equity looks to substance, not form. This applies to both local and international trusts.
If on the other hand an arrangement concealed as a trust, effectively termed a “sham”, is identified as such, any transfer of property to the purported trustees will be rendered ineffective. No title will have been transferred and the transaction will be set aside.

Types of trusts

1. Discretionary trust
It is possible for a settlor in Cyprus to establish a discretionary trust based on Cap 193, which states that the powers of the trustees can be expanded by the settlor in the trust’s deed.
A discretionary trust grants the trustees discretion to pay the income or capital of a trust fund to any or all of a particular class of persons defined in the trust’s deed. The trustee may be given also discretion in deciding when to pay any money to any of the members of the class. Consequently, none of the beneficiaries has any right to be paid any money out of the trust fund, since the trustee may exercise his discretion and postpone any such payment or even decide not to pay a particular beneficiary at all.
The discretionary trust is the most commonly used type of trust in Cyprus due to the many advantages it provides.
These include:
- The beneficiaries cannot be taxed on the trust fund, because they have no legal right in the trust fund until the trustees exercise their discretion in their favour.
- Similarly, the beneficiaries cannot be subject to local exchange control regulations regarding compulsory repatriation of assets until the trustees exercise their discretion.
- Since the beneficiary only has contingent interest, the trust’s assets are not available to his creditors, should he go bankrupt.
It is a flexible instrument, allowing trustees to vary the diverse interests under the trust, as and when circumstances change, without the need to have recourse to the procedures of variation of trusts (i.e. getting the agreement of all the beneficiaries or asking the court to vary the terms of the trust). It should be pointed out that in the case of discretionary trusts it is customary that the settlor also prepares a "letter of wishes" in which he expresses his wishes to the trustees on any matters concerning the trust.

2. Fixed trust
A fixed trust does not give the trustees any discretion when distributing the assets to the beneficiaries. An example of this type of trust is one which requires the trustees to distribute the income of the trust property to a particular individual during that individual's lifetime and thereafter distribute the capital to a named beneficiary or beneficiaries in specified shares.

3. Fixed and discretionary trust
It is possible to have a combination of a fixed and a discretionary trust. The trustees may have discretion as to the distribution of income for a period of time, but are required to distribute the capital ultimately in fixed proportions.
On the other hand, they may be required to distribute the income to a specified person or persons in fixed proportions, but may have discretion as to how they distribute the capital amongst a class of beneficiaries.

4. Trading trust
Under a trading trust the trustee is usually a limited liability company which has powers to carry on business, and the trust has trading functions and employees to manage its business. Third parties are not aware of the existence of the trust as all documentation used is in the name of the trustee company.

5. Purpose trust
The Cyprus International Trusts Law of 1992 provides a legal definition of a purpose trust. This can be a useful addition to international corporate planning and can be used to accumulate corporate earnings for general corporate purposes rather than for a defined group of individuals.
Cypriot trust law has been shaped on the basis of UK law and the Cyprus Trustee Law Cap.193 emulates the English Trustee Act 1925. Concerning the current Cyprus legislative frame, Trust law is governed by The Cyprus International Trusts Law 1992 (No.69(I)/1992) as that has been amended by the recent reforms of March 2012 (International Trusts (Amending) Law of 2012). 

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http://www.lowtax.net/articles/cyprus_international_trusts.asp

 

THEORETICAL BACKGROUND Cyprus International Trusts very much follow the way UK trusts operate.
A Trust is legally defined as a relationship by a person (the Settlor) who places assets under the control of the Trustee for the benefit of a third party (the Beneficiary). These assets are separate and do not form part of the Trustee's own estate. The title of the trust assets stands in the name of the Trustee and the Trustee is empowered to manage the assets held in trust in accordance with the terms of the trust agreement. The Trustee can also be a Beneficiary. A Trust could have fixed or unlimited duration.
A Cyprus International Trust is a Trust whereby the following are met:
• The Settlor, either a legal entity or a natural person, is a Cyprus non resident during the calendar year preceding the trust formation, and
• At least one of the Trustees during the Trust duration is a Cyprus resident, and
• None of the Beneficiaries, with exception of a Charitable Trust, is a Cyprus resident during the calendar year preceding the trust formation. A “resident” has the meaning assigned to by the Income Tax Law, meaning either a person residing in the Republic for more than One Hundred Eighty Three (183) days a calendar year, or a legal entity that its management and control are exercised in the Republic.  
A person wishing to establish a Cyprus based trust now has the following options:
• To create a trust, either by a trust deed or by will, and vest in trustees movable and immovable property situated in Cyprus or abroad, inclusive of shares in a Cyprus company;
• to incorporate a Cyprus company or partnership to be the owner or the manager of property to be placed in trust in the Cypriot corporation or in an overseas company and managed by the Cyprus corporation;
• to incorporate in Cyprus a subsidiary company or a branch of an overseas corporation to hold or manage property placed in trust in the Cyprus subsidiary or branch of the overseas corporation;
• to set up an international trust in accordance with the provisions of the International Trusts Laws of 1992 and 2012.  The recent amendments have reinforced further the advantages offered by the formation of a Cyprus International Trust. The key features of the recent amendments relate to changes concerning residency provisions (section 2 of the 1992 Law), the Settlor' s (addition of new section 4a to the 1, 2012 amendment) & the Trustee's powers (section 8 of the 1992 Law), the trust's duration, (section 5 of the 1992 Law), the applicable law, charitable trusts (amended section 7 of the 1992 Law) and property ownership.

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The new changes in more detail:
1.
Changes in relation to the definition of the Settlor's and the Beneficiary's residency, whereby both the Settlor and the Beneficiary may now be Cyprus residents, provided they are not Cyprus residents the calendar year preceding the formation of the trust. This lifts the prior restriction in relation to Cyprus residency.   2. Changes in relation to the taxation of the trust income, whereby non Cyprus residents will only be taxed in Cyprus for their income that is sourced in Cyprus. Therefore, income that is sourced elsewhere is exempt from taxation in Cyprus.  3. Changes in relation to the restrictions that existed in relation to both movable and immovable property ownership, whereby the trustees can now invest in immovable property both in Cyprus and outside Cyprus. In relation to the Cyprus movable property that can also be shares in a company incorporated in Cyprus.  4. Changes in relation to the governing law, which in relation to International Trusts is the law chosen by the Settlor. Without limitation, all issues concerning the validity of a Cyprus International Trust or its administration or amendment of the Trust's functions will be governed by the Laws of the Republic of Cyprus. The prior provisions of the relevant law concerning the permission of changes to the applicable law have also been maintained.  5. Changes in relation to the powers vested to the Settlor, whereby the Settlor can freely invest as if he/she was the beneficial owner and/or appoint and remove trustees and beneficiaries and directors at any of the companies that belong to the Trust, as well as decide on the applicable to the Trust law. 6. Changes in relation to the duration of the trust, whereby in respect of trusts created after the Amendments, the prior duration of 100 years has been altered to an indefinite one, unless otherwise provided in the terms of the trust.  7. Changes in relation to the definition of “charitable trust”, whereby the main purpose of a trust is broadened to include more aims, in line with the UK Charities Act 2006 (England & Wales).    8. Introduction of the new term “Protector”, meaning a person other than the Trustee and who is vested with the powers to offer advise to the Trustee in relation to his/her powers, including the right to appoint or cancel the appointment of the Trustee.  
The new changes are envisaged to work positively for those seeking to invest in Cyprus both in relation to investing in a Cyprus company and in Cyprus real estate.

More specifically for those seeking advise on which type of trust is suitable for their investment, the following are provided as a guidance:

2.
a. Discretionary Trust A Discretionary Trust is a trust whereby the Trustees have “discretion” about how to use the trust's income and about how to distribute the trust's capital. A Discretionary Trust is used in those cases whereby there is a need to protect the beneficiaries from taxation, as in that case the beneficiaries have no legal right on the trust until the trust funds are distributed to them by the Trustees.    
Similarly, where there is a need to protect beneficiaries from any creditors in the event of bankruptcy, as through a Discretionary Trust the beneficiaries will have only contingent interest in the trust fund.  
b. Fixed Trust A Fixed Trust is usually set up as a way of preventing the Trustees from using their full powers in the way assets are distributed to the Beneficiaries as in that case the Trustees will have to follow the terms of the Trust.  
 
c. Purpose Trust A Purpose Trust is set up in order to advance a specific purpose. It is a trust that has no beneficiaries as it is usually set up for a charitable purpose. A purpose Trust can be executed by the Settlor, his personal representatives or by an enforcer.  
d. Accumulation & Maintenance Trust An Accumulation & Maintenance Trust is usually set up in those cases whereby assets are needed to be held on behalf of someone until a certain future event will take place, such as a child reaching adulthood or a person getting married.

B. PRACTICAL CONSIDERATIONS
 
Requirements There are no formalities in setting up a Cyprus International Trust and it can be done simply through a Deed or by a will. 
Confidentiality is important and is ensured in the formation of a Cyprus International Trust (section 11 of the 1992 Law), except by Court Order concerning the disclosure of information that is material to the outcome of civil or criminal proceedings. The Deed of Trust is a document private to the individuals concerned. That means that the names of the persons referred to in the Trust are not disclosed to any state authority. Also, a will through a trust is not open to public for inspection. That offers a strong advantage in comparison to jurisdictions where a will becomes open to public for inspection.

3.
Moreover, confidentiality is safeguarded by the fact that there is no requirement to publish the results of an International Trust.  
Protection of assets Trust assets are protected in the event of a bankruptcy or a liquidation by the Settlor, as no claim can be raised by the creditors, unless it is proven in Court that the Trust was created with intention to defraud. The burden of proof lies with the creditors.   
Jurisdiction
Without prejudice to the provisions of Council Regulation (EC) No. 44/2001, Cyprus Courts have jurisdiction in relation to a Cyprus International Trust in the following cases:
• The applicable law stated in the trust deed is the law of the Republic of Cyprus,
• The Trustee of the Trust is a Cyprus resident,
• A company acting as a Trustee is a company incorporated in Cyprus,
• Any of the Trust assets are located in the Republic,
• The control of the Trust is exercised in the Republic,
• The parties accept the Cyprus Courts jurisdiction,
• The instrument of the Trust refers any disputes to the Cyprus Courts.

Where a choice as to the applicable law has not been made, the law with which the Trust has the closest link is applied. This is usually considered to be where the control of the Trust is exercised, where the Trust assets are located, the Trustee's place of residence, the purposes of the Trust are and where these will be implemented.    
A Trust established in Cyprus can be transferred to another jurisdiction and vice versa. That is particularly beneficial in a case of a change of circumstances where for example tax reasons would demand such action.  
 
Jurisdiction of the Cyprus Courts The Trustee, the Beneficiary or the Protector can lodge to the Courts an application in relation to any matters concerning a Cyprus Trust and the Courts have powers to issue any order in relation to any aspect of the Trust.
Foreign Trusts A foreign Trust is governed by the laws of the country where it has been set up. A foreign Trust is not enforceable in the Republic if it is deemed by the Courts to be against the public interest.
Applicable Law also on previously created trusts The new amendments of 2012 apply to all International Trusts irrespectively of the time they were set up unless they are inconsistent with the provisions of the Amended law.  Any previously valid transfer or disposal is not being affected by the new amendments.

4.
Tax Advantages
- Beneficiary being a non Cyprus resident The Trust benefits from the excellent taxation regime of Cyprus and correspondingly is subject to tax on the maximum rate of 10%.
- Beneficiary being a Cyprus resident Whereby the Beneficiary is a Cyprus resident, both income that is sourced within the Republic as well as from outside Cyprus is subject to tax.
There is no capital gains tax on the disposal of assets of a Cyprus International Trust and there is no withholding tax on dividends paid out by a Cyprus trust.
Anti Money laundering Laws - The Trustee is always under the obligation to comply with Anti Money Laundering legislation, but the application of such legislation does not give rise to any need for disclosure of the necessary documents to the authorities, save for when a court or administrative order is issued for this purpose. 
Cyprus International Trusts: Who they may suitable for a Cyprus International Trust may be suitable in all those cases where a beneficial tax structure is required or where there is a need to safeguard assets.

Some practical examples include the following scenarios:
- For individuals that reside in jurisdictions with a high tax rates and that are seeking to make investments, as they will have the possibility of taking advantage of the various Double Tax treaties in place between Cyprus and a great number of other jurisdictions. Dividends, royalties and  interest received by an International Trust from a Cyprus Company are tax exempt. Also, International Trusts are exempt from estate duty or inheritance tax.
- For individuals seeking to safeguard property from undesired claims, for example in divorce or litigation cases,
- For individuals that due to being minors are non able to hold property in their name or for individuals that due to a mental disability, are non capable of holding property directly,
- For individuals seeking confidentiality in relation to their assets and wealth for fiscal or other reasons and for purposes of wealth management,
- For individuals that own a holding company and are seeking better tax planning, whereby a Trust can be set up in one country to hold an investment holding company in another,
- For individuals seeking to manage effectively their pension or retirement funds,
- For individuals that own shares in a company and that are residing in a jurisdiction where the concept of a trust is not recognised and whereby a trust would assist them in keeping their anonymity,
- For financial institutions and banks whereby the formation of a trust together with an International business company as a Trustee can be used to manage more effectively the funds of their clients.

5.
Revocation of an International Trust A Cyprus International Trust is revocable only if that is specifically expressed in the instrument of the Trust.

Stamp Duty Stamp duty is payable upon the set up of a Cyprus International Trust and that currently is set at EURO 5000. We need to emphasise that the Cyprus Trust is valid even if this fee is not paid and that the payment of this fee must be paid only if any person is intending to rely upon the contents of the Trust document in Court.

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Taxation

http://www.centralbank.gov.cy/media/pdf/ITLWE_ITCSLAW.pdf

http://www.cypruslawdigest.com/topics/tax/item/172-taxation-of-cyprus-international-trusts

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Nominee shareholders - valid trusts arrangements or a mere façade?
 
First to be explored is the legal nature of the so called “nominee shareholder”.
Nominee shareholder is a shareholder of a company holding shares nominally only, that is, only in name. In such a way the identity of the ultimate beneficial owner (“UBO”) of the shares is not disclosed. Such arrangements serve corporate and financial privacy and secure anonymity up to a certain extent. The nominee shareholder is said to hold the shares in trust for the UBO of the shares, thus the nominee shareholders are described as “trustees”.   The nominee shareholder is considered to be a trustee holding the “numbered” shares in trust for the beneficiary who is the real owner (equitable) of the shares of the company. The nominee shareholder holds the legal title of the shares hence he is the registered shareholder appearing in the register of the company whereas the UBO holds the beneficial title of the shares. A declaration of trust is usually signed by the nominee shareholder indicating that he has no rights whatsoever on those shares. This Declaration of Trust (otherwise trust deed) is a private agreement between the nominee shareholder and the UBO and is not disclosed to the Cyprus Registrar of Companies. Of course because of the anti-money laundering regulations the identity of the UBO needs to be disclosed when opening a bank account and it is an absolute pre-requisite for the banks to open corporate accounts. It is the UBO who is entitled to income and capital gains on the shares. Nominee shareholders have no access to the company's bank account, cannot sign cheques or make payments and have no legal right to handle any of the company's assets. The actual owner of the shares still benefits from their ownership and receives their dividends as normal. It is also customary for the nominee shareholder to issue and sign an undated Instrument of Transfer in favour of the UBO to be used at any moment to legally transfer the shares unto his name. This safeguards the rights of the UBO.  It is though quite often the case that such trust deeds are purely drafted and without any undated instrument of transfer in place there is no guarantee that the trustee nominee shareholder will properly fulfil his obligations and apply the UBO’s instructions as to an intended transfer of shares. Unless, there is a mechanism to hold trustees to account, there is no trust, because the trustees’ duties are devalued. For the rights’ holder to be able to complain without a valid trust in force would turn the trust arrangement into a simple contract. Apart for the use of the “trust” label established in order to disguise ownership and control is questionable whether such arrangements constitute a valid trust or a mere façade.  The validity of such “trusts” not upheld as yet by a Court decision in Cyprus, our firm has recently launched legal proceedings against, among others, a nominee shareholder unwilling to co-operate with the beneficial owners of the shares. It should be noted that during proceedings at interim stage on an ex parte basis, the Cyprus Court issued prohibitory interim orders against such nominee shareholder and the officers of the company to prevent alienation of the shares in issue pending final adjudication of the dispute. This could be interpreted as a prima facie indication of the readiness of the Cyprus Court to protect the beneficiary’s rights over the shares.
The law of trusts will always find the path to operate in aid of the beneficiary.
 
Disclaimer 
 
This publication has been prepared only as a general guide and for information purposes.
It does not constitute or should not be read as a legal advice.
One must not rely on it without receiving independent advice based on the particular facts of his/her own case.
No responsibility can be accepted by the authors or the publishers for any loss occasioned by acting or refraining from acting on the basis of this publication.