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The legal framework, regulating the establishment of Cyprus International Trusts (“CIT”) also known as the Cyprus Offshore Trust, is formally known as the International Trusts Law 69(I)/1992, which compliments the Trustees Law 193/1955.
Cyprus International Trusts provide multiple benefits to the concerned parties, such as anonymity, asset protection, flexibility, tax incentives and benefits, which can be used by high-net-worth individuals from all over the world, within the frames of their tax planning and investment strategy.
What is a Trust?
- A trust is a fiduciary relationship according to which the Grantor transfers property, which may be tangible or intangible, to the Trustee, who holds it on behalf of the Beneficiary or Beneficiaries.
What conditions must be met in order to set up a valid Trust?
- In order to establish a trust, a Trust Deed must be drafted, and then signed by the Settlor and the Trustee, establishing the conditions under which the Trust Property will be held and managed by the Trustee.
- The Settlor (or also known as Grantor), either a natural or a legal person, must not be a resident in the Republic of Cyprus* during the calendar year preceding the year of the creation of the Trust. Moreover, the Settlor must be of full age and sound mind;
- At least one of the trustees must be a resident of the Republic of Cyprus* during the whole duration of the trust;
- No beneficiary, either a natural or legal person, can be a resident of the Republic of Cyprus* during the calendar year immediately preceding the year in which the trust was created (with the exception of charitable organisations).
*As defined by the Income tax Laws of 2002 to No.2 of 2011.
Furthermore, it is to be noted that in order to create a valid Cyprus International Trust, the three certainties must apply:
- Certainty of Intention: The Trust Instrument (i.e. the Trust Deed) must demonstrate clearly the express intention of setting up a Trust.
- Certainty of Subject Matter: The Trust Assets must be readily identifiable.
- Certainty of Objects: The Beneficiaries must be ascertained or ascertainable at the time of the establishment of the Trust. Please note that the amended law of 2012 may consider unborn children as beneficiaries as well.
Why would someone opt for the creation of a CIT?
- To invest overseas and ensure the protection of the investments;
- To divest personal assets;
- To maximize protection in the case of commercial agreements;
- To protect the identity of the Settlor and of the Beneficiaries;
- To provide for minors and/or successive generations (for inheritance planning purposes);
- To use the CIT as a tax planning vehicle in order to minimize the tax burden, especially if the Beneficiaries are resident in a jurisdiction with a high tax regime;
- To protect personal assets from domestic inflation rates, possible expropriation laws and other similar regulations;
- For charity purposes;
How are Cyprus International Trusts taxed?
Cyprus International Trusts provide a significant number of tax advantages and can be used as part of an international tax planning strategy. Below you shall find general information on how trusts may be taxed in Cyprus. However, please note that in order to estimate the exact tax that may be imposed on a trust, it is necessary to take into account its specifications, its purpose and any other relevant circumstances that may concern it.
- Income received from sources located outside Cyprus is not taxable in Cyprus if the beneficiary is not a Cyprus tax resident, while income received from local sources is taxable in Cyprus.
- Income received from either local or overseas sources is taxable in Cyprus, provided the beneficiary is a Cyprus tax resident.
- Dividends, interest or other income received by a Trust from a Cyprus company are not taxable.
- The Cyprus trustee company is subject to 12,5% tax on trustee fees.
Payments to beneficiaries
- Non-resident beneficiaries are not subject to tax on the payments they receive from a Cyprus tax.
- Capital Gains that occur after the disposal of assets of a Cyprus International Trust are not subject to capital gains tax in Cyprus.
- A Cyprus International Trust is not subject to estate duty in Cyprus.
What type of trusts can be established?
There is a variety of trusts that can be set up in Cyprus. The choice of the type of trust depends on the requirements of the settlor and the objectives s/he wants to achieve. Among these are the following:
The Discretionary Trust is the most commonly used type of trust in Cyprus due to the many advantages it provides. Among these are the following:
- 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.
- The beneficiaries cannot be subject to local exchange control regulations regarding compulsory repatriation of assets until the trustees exercise their discretion.
- The beneficiaries’ trust assets are not available to their creditors in case of a bankruptcy.
- Trustees are allowed to vary the various 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).
- Individuals interested in keeping their anonymity set up a discretionary trust, which owns the shares in their company.
The discretionary Trust allows trustees to pay the income or capital of a trust fund to any or all of a particular class of persons defined in the trust deed. The trustee may also be given discretion in deciding when to pay any money to any of the members of the class. Thus, 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. However, the Settlors in a “Letter of Wishes” may set out their intentions regarding the administration of the trust.
The 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.
Fixed and Discretionary Trust
It is possible to have established a trust combining elements of a Fixed and a Discretionary Trust.
- For instance, the trustees may have discretion regarding the distribution of income for a specified period of time, but ultimately they are required to distribute the capital in fixed proportions.
Under a Trading Trust, usually the trustee is a limited liability company. The trust has trading functions and the company’s employees 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.
Under the Cyprus International Trusts Law of 1992, the Purpose Trust can be used to accumulate corporate earnings for general or specific corporate purposes instead of providing for a defined group of individuals.
Charitable Trust is a type of a Purpose Trust. A Cyprus International Trust shall be deemed to be charitable if its main purpose is one of the following: relief of poverty, advancement of education, religion, health, community development, arts, culture or science, amateur sport, human rights, environmental protection, animal welfare.