Cyprus International Trusts

Contributed by CS&P Fiduciaire. [www.carloscevola.com]

Introduction
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, (ie a 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 networth 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.
  1. 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
  2. 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
  3. 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
  4. 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 sharesin the company
  5. an individual who has or may have income arising overseaswhich he does 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
  6. 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.

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