Benefits of Cyprus international trust regime
By: A. G. Paphitis & Co Law Firm
In Cyprus, trusts are governed by a specific legal framework which constitutes a combination of English and Cyprus law, the Principles of Equity and Statute Law (the Trustees Law of Cyprus, Cap 193), which is modelled on the English Trustee Act 1925; and the Cyprus International Trusts Law (Law 69(I)/1992, as amended by Laws 20(I)/2012 and 98(I)/2013).The International Trusts Law is one of the world’s most attractive legal frameworks as it builds on the well-established English principles of equity and trusts. Under this framework, Cyprus international trusts can be created in most complex situations and enjoy many advantages that cannot be found in aggregate in other trust jurisdictions.
What is a ‘trust’ under Cypriot law?
A ‘trust’ is defined as the legal relationship that is created when an individual (the settlor) places assets under the responsibility and control of an individual (the trustee) for the benefit of some other person or people (the beneficiaries) or for a particular purpose. The settlor (also known as the ‘grantor’, ‘trustor’ or ‘trust maker’) is the person who creates the trust and is the owner of the property or assets to be divested therein.
A ‘trustee’ is the legal or natural person responsible for holding trust assets for the benefit of beneficiaries under the terms of a trust.
‘Beneficiaries’ are the persons who receive the benefits of trust assets. Notably, in the case of discretionary trusts (one of the most common types of trust in Cyprus), specific persons or entities are not named as beneficiaries. Instead, classes of beneficiaries are defined – for example: “all current and future children of Mrs X” or “charity organisations providing education for refugees and their children in the UK”.
Protectors can restrict key powers of trustees (eg, adding beneficiaries to the trust). Appointing a protector of a trust is optional.
A trust is a fiduciary relationship between a settlor and a trustee, under which the former gives the latter the right to hold title to a trust asset for the benefit of the beneficiaries. Trustees have the legal title to the trust assets, while beneficiaries (commonly known as ‘beneficial owners’) have beneficial or equitable title to the trust assets. The main role of a trustee is to protect and administer the trust prudently and comply with its terms. These terms are settled in a trust deed, trust instrument or settlement of the trust. If a trustee commits a breach of trust, they are personally liable for any loss incurred. A Cyprus trust can be settled for several reasons, including:
- legal protection of the settlor’s assets;
- wealth planning purposes;
- charity purposes;
- tax planning purposes;
- succession planning purposes;
- purposes relating to employee benefits, such as premium funds or a pension scheme; and
- common investment purposes.
Benefits of Cyprus international trust regime
The International Trusts Law enables the creation of trusts with tax planning benefits and asset protection features. The law is ideal for high-net-worth individuals who have complicated family structures and aim to optimise their tax planning. The major benefits of the regime are set out below.
A trust protects assets against risks, future claims by governments or creditors and claims of current or former spouses. Cyprus international trusts can be used to protect assets against future claims in contract based on prior transactions entered into by the previous owner.
Any international trust settled in Cyprus may enjoy the country’s tax benefits. This means that all dividends, interest and royalties received from the trust are not taxable or subject to withholding tax. Further, they are not subject to estate or inheritance tax. If beneficiaries are non-tax residents of Cyprus, only Cyprus sources of income are taxable under Cyprus’s income tax law.
Difficult to void
It is difficult for a trust to be declared void. This requires the claimant to prove to the court that the trust was created for the purposes of duping the settlor’s creditors on payment and transfer of the assets. Such claims must be brought within two years of the transfer.
Following the 2012 amendment of the International Trusts Law, Cyprus international trusts can be established for the duration of a lifetime plus 21 years. Where no natural person is involved in the agreement, trusts can exist for 21 years.
Cyprus international trusts are subject to strict confidentiality. Any information or documentation pertaining to a trust may be disclosed only by order of the court. All trusts must be registered, although the relevant trust deed need not be submitted. In case of inspection, disclosures of settlors and beneficiaries will be seen only by the competent authorities. Further, Cyprus trusts have no reporting requirements.
Reservation of powers
Settlors have the power to revoke, vary or modify the terms of a trust. They can also appoint or remove any trustee or protector and instruct the trustee on how to manage the trust. This can be done through a letter of wishes. Settlors are also the enforcer of a trust. Settlors can specifically set out their powers in the trust deed. Moreover, beneficiaries or settlors can become residents of Cyprus after they form a trust, or a Cyprus international trust can be redomiciled to another jurisdiction. Registering a trust in Cyprus has many advantages. The simplicity of the registration procedure, the limited requirements for participants and the clear legal framework make the Cyprus international trust regime an effective tax planning and asset management instrument.
For more information about trusts please visit our Trusts & Trustee Services page.