Trusts allow people to avoid the consequences of legal ownership of assets such as taxes while enjoying the benefits of ownership such as wealth.
The concept of a trust was developed over a period of several centuries and is legally defined as a relationship created – inter vivos or on death – 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 would constitute a separate “fund” and are not part of the trustee’s own estate. In addition title of the trust assets stands in the name of the trustee and the trustee is empowered and duty-bound to manage the assets held in trust in accordance with the terms of the trust agreement.
An individual may be the settlor if he or she is capable of freely disposing of the property to be settled. A corporate body’s power to be a settlor depends upon the powers conferred on it by its constitution or law.
Any individual, including unborn persons, minors, and persons of unsound mind, or a corporate body can be the beneficiary. A settlor creating a trust may also be a beneficiary of that trust. A trustee can also be the beneficiary of a trust provided that he or she is not the sole trustee nor beneficiary as in that instance no trust would effectively exist.
An individual who is an adult and of sound mind, or a corporate body, if authorized by its constitution, maybe a trustee.
Property of all descriptions can be settled into a trust. However, as will be seen later the trust fund of a Cyprus International Trust must not include any immovable property in the Republic of Cyprus.
The settlor may stipulate that the trustees consult a nominated independent third party before exercising any power of discretion, in order that this third party, or protector, can be satisfied that the assets of the trust and the duties of the trustees are being attended to in a satisfactory manner.
Most countries base their legal system on either civil law or common law. In civil law countries such as Austria, France, and Costa Rica, domestic trusts are either uncommon or not legally recognized. This makes international trusts of great importance for residents of civil law countries who want to reduce their taxes and protect their assets.
Common law countries such as Cyprus, UK, the US, and Canada recognize trusts quite freely and many people establish trusts onshore for asset protection or inheritance purposes. International trusts, however, provide additional benefits. With their liberal taxation laws and strict confidentiality practices, international financial jurisdictions are ideal bases for trusts of all kinds.
Trusts are a powerful tax-planning tool but they also have many other uses of great importance. It may be particularly essential for those who have set up confidential international financial center accounts or companies to consider using a trust to transfer those assets after death. A trust can be used to hold a bank account or the shares of an international business company and these problems can then be avoided.
Cyprus International Trusts
Since 1992, when Cyprus enacted The International Trusts Law, Cyprus proved a favorable jurisdiction for creating international trusts. The International Trusts Law complements the Trustee Law which is based on the English Trustee Act 1925.
Under section 2 of the International Trusts Law, a trust qualifies for a Cyprus International Trust where:
- The settlor is not a permanent resident of Cyprus;
- At least one trustee is a permanent resident of Cyprus;
- No beneficiaries (other than a charitable institution) are permanent residents of Cyprus; and
- The trust property does not include any immovable property in Cyprus.
- If the settlor wants to maintain full control over the management of the trust, he may do so by forming a Cyprus Company the shares of which may belong entirely to him and who can also be the sole director of such a company which could act as sole trustee of an International trust to which the assets of the settlor were transferred.
Advantages of Cyprus International Trusts
- Favorable legal system
- No exchange control
- Reputable International Fund Management services
- Relocation of International Trust
International Trusts Law allows the removal of an International trust from Cyprus and vice versa, provided the following conditions exist:
1. There must be a stipulation in the trust deed allowing such a change of jurisdiction;
2. When a trust moves to another jurisdiction from Cyprus, Cyprus law requires that the new jurisdiction recognizes the validity of the trust and the respective rights of the beneficiaries;
3. When trust is to be moved to Cyprus from another jurisdiction, the move must be recognized by the laws of the jurisdiction it intends to leave and which had governed the trust previously. This could be important in the case where a change in circumstances may render such a transfer advantageous for fiscal or other reasons.
Cyprus International Trusts are not taxed in Cyprus. In fact, Cyprus International Trusts enjoy important tax advantages, offering significant tax planning possibilities to interested parties. Although taxation considerations relating to Trusts are fairly complicated, the following advantages are indicative of the possible options for tax minimization.
All income whether trading or otherwise of an International Trust, (i.e. 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 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.
Retired in Cyprus
An alien who creates an International Trust in Cyprus and retires in Cyprus is still exempt from tax if 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.
Other tax protections
Trusts are usually used by wealthy individuals for the purpose of protecting their estate from inheritance or capital gain 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.
Use of double tax treaties
Cyprus has a rich network of double taxation treaties, which are accessible by “residents” of the contracting states. Although the OECD model does not refer to trusts, the OECD definition of a resident being a person liable to tax in the contracting state, it is clear that while trust may not be considered a “person” or “body of persons” the trustees certainly are. In case a Cyprus company acts as trustee and is liable to tax in Cyprus at full rates (even though it only pays tax on its trustees’ fees and not on the income of the trust itself), the benefit of Cyprus’ double tax treaties is available in respect of trust income and gains.