Families have been using trusts to preserve and manage their wealth for centuries. Unlike corporate vehicles, the lack of rigid formal requirements for the creation and operation of trusts, and the tremendous flexibility of trust instruments, make them uniquely useful for estate and succession planning.
Although some of the tax benefits that were associated with trusts have been eroded in recent years, they still offer great advantages – particularly for individuals who are changing, or planning to change, their domicile, residence or citizenship; those with families resident abroad; those seeking asset protection; and those who wish to dispose of their estate on death freely and without a lengthy and expensive probate procedure.
At its simplest, a trust is an arrangement whereby property or assets are transferred from one person (the ‘settlor’) to another person (the ‘trustee’) to hold the property for the benefit of a specified list or class of persons (the ‘beneficiaries’). The practical advantages of a trust are gained from the distinction that is drawn between the formal or legal owner of property, the trustee, and those people that have the use or benefit of the property, the beneficiaries.
A trust can be created solely by verbal agreement but it is usual for a written document (the ‘trust deed’) to be prepared. This evidences the creation of the trust, sets out the terms and conditions upon which the trustees hold the trust assets and outlines the rights of the beneficiaries. It is vital that a trustee remains independent and exercises proper control over the trust property.
The Cyprus International Trust (CIT)
The main legal framework governing trusts in Cyprus is a combination of English common law, the Trustees Law of Cyprus (Cap 193), which is modelled on the English Trustee Act of 1925, and the International Trusts Law of Cyprus (Law 69(I) of 1992 as amended by Law 20(I)/2012).
There are four types of CIT:
- Express private trusts
- Charitable Trusts
- Fixed Trusts
- Discretionary Trusts
The procedure for establishing a CIT trust is straightforward and can be arranged in a relatively short period of time. The settlor and the beneficiaries must not be tax residents in Cyprus during the year preceding the year of creating a CIT and at least one of the trustees must be a permanent resident of Cyprus.
Succession, heirship or other laws applicable in foreign jurisdictions or court judgments or orders or arbitral awards or decisions by foreign competent authorities do not affect the validity of a CIT or the transfer of property to the trustee of a CIT. A CIT may only be challenged on defraud of creditor grounds with a two-year limitation period. The trustees of a CIT are bound by confidentiality and cannot disclose information or documents unless ordered by a Cyprus Court or required by law
The settlor has the right to reserve many powers including, the powers to revoke or amend the trust, to instruct the trustee, to appoint and remove trustees, the protector or the enforcer, to change the law regulating the CIT or the place of its administration. A CIT may last for an indefinite period and the income of a CIT may be accumulated without limitations. The law regulating a CIT may be changed to another foreign law.
Generally, CITs are transparent for tax purposes although they are liable to taxes such as VAT and stamp duty on their activities in Cyprus. The trustee is not assessed on the income or gains of the trust and is responsible for discharging the tax liabilities of the beneficiaries on their behalf.
Beneficiaries who are not tax resident in Cyprus are subject to tax only on income and profits sourced in Cyprus. Beneficiaries who are tax resident in Cyprus are subject to tax in Cyprus on income and gains of the trust earned from sources within and outside Cyprus.
Capital gains tax applies only regarding gains from the disposal of real estate situated in Cyprus or shares of a company holding property situated in Cyprus. No estate duty is payable by a CIT that was formed for the purposes of estate duty planning.
Cyprus trusts fall within the scope of double tax treaties provided that the other contracting state recognises trust structures and principles of equity and the trust itself meets the eligibility criteria set out in the relevant treaty.