What is a Trust?
A trust is a legally binding arrangement whereby a person (the Settlor) transfers assets to another person (the Trustee) who takes legal title to the trust assets. The Trustee holds the trust assets for the benefit of other persons (the Beneficiaries, who may include the Settlor), or for a specific purpose. There are many forms of trust that have been developed over time, some of the most common forms are:
1. Accumulation and maintenance trusts;
2. Discretionary trusts;
3. Fixed interest in possession trusts;
4. Revocable trusts.
Definition of an International Trust (including the changes effected by the 2012 amendments to the law)
An international trust may be described as a trust created by a non-resident Settlor for the benefit of non-resident Beneficiaries. A trust can still qualify as an international trust for the purposes of the law even if the Settlor, Trustee, or the Beneficiaries are offshore companies or offshore partnerships.
Criteria to establish an International Trust:
a) The Settlor must not be a permanent resident of Cyprus in the year preceding the formation of the trust;
b) The Beneficiaries (other than a charity, which is exempted from this restriction) must not be a residents of Cyprus in the year preceding the formation of the trust;
c) The trust property may now include any real property situated in Cyprus;
d) There must be at least one trustee resident in Cyprus at all times.
The law confirms the validity of a trust created by any person who is of full age and of sound mind regardless of any provisions relating to inheritance or succession of the laws of Cyprus or the laws of any other country. The international trust is irrevocable unless a specific power of revocation is reserved in it and cannot be set aside by the Settlor's creditors unless and to the extent that the creditors can show that the trust was setup with the intent to defraud them. The burden of proof of such intent lies with the creditors and an action against the trustees to void the trust, on grounds of fraud, must be brought within two years from the date when the relevant transfer of assets is made to the trust.
Duration of an International Trust
The 2012 amendment to the law allows all types of trusts, including purpose and charitable trusts, to carry on indefinitely as per the intention of the settlors.
Change of governing law
The possibility of changing the law governing an international trust is expressly provided for in the law. It allows a Cyprus trust governed by Cyprus law to be changed to a foreign trust law and permits a foreign trust to adopt Cyprus Law if such change is recognized by the law of the country concerned.
Confidentiality takes a prominent position in the law. The settlors, trustees, and beneficiaries should not disclose information to third parties relating to international trusts, unless a Cyprus Court orders the information to be disclosed.
The law makes it abundantly clear that the income and gains of an international trust derived from sources outside Cyprus is exempt from all kinds of tax in Cyprus and no Cyprus estate duty is chargeable in respect of assets belonging to an international trust created in Cyprus.
The 2013 amendment to the Fiduciaries law requires the maintenance of a register of trusts containing the following information:
- the name of the trust;
- the name and address of the trustees;
- the date of establishment of the trust;
- the date of termination of the trust.
EXAMPLES OF ADVANTEGEOUS USES
Protection against high taxation
For settlors residing in high taxation jurisdictions it is possible to minimize their taxation on income or wealth by transferring property to a Cyprus International Trust, as under a proper tax structure they will be able to take advantage of the beneficial double taxation treaty network of Cyprus and the non-taxability of any income of the trust in the island.
Confidentiality is absolutely achieved, as there is no requirement to register or publish the financial results of an international trust. The Deed of the Trust is private to the parties concerned whereas when a person dies his Will becomes open to the public inspection in many overseas jurisdictions. A corporate trustee does not die and the continuity of the trust is not affected by the death of a settlor.
Organizing Collective investment
Where several persons wish to make joint investments a trust can provide the basis of their co-operation and the sharing of the financial results of their joint venture.
Investment Trust Funds, banks, etc may through a structure of a trust and an international business company that acts as a trustee, manage funds for their clients.
Holding property that cannot personally be held
A minor may not be able to hold property in his own name but a trustee can often hold it for his benefit.
Protection against Spendthrifts
Trustees can protect family fortunes for future generations by safeguarding capital and avoid it being frittered away by spendthrift beneficiaries.
Promoting causes and charities
Through a Cyprus international Trust a person may provide for a charity, promote a religious or artistic cause, or establish a foundation to support a worthy project.
Protection of assets
Assets can be placed into a Cyprus International Trust to safeguard the interests of a beneficiary, e.g. sheltering the inheritance of a child from claims in case of divorce. Professional partnerships may also find that trust assists in providing custody for personal assets and safeguarding them from loss through litigation.
ADVANTAGES OF CYPRUS TRUSTS
Tax reasons: Income arising overseas
Income arising overseas: An individual, who has income arising overseas which he does not wish to remit to his country of residence, can arrange for such income to be directed to a Cyprus offshore trust.
Divesting of personal assets
An individual who wishes to divest himself of personal assets for fiscal or other reasons can achieve this by transferring them to a Cyprus offshore trust.
Individuals moving to a high-tax country may obtain fiscal advantages in their new country by placing funds in a Cyprus offshore trust.
Investing in business overseas
An individual who wishes to invest in business overseas but wishes to ensure that the profits and dividends received are not remitted to the country of his residence, may set up a Cyprus offshore trust to invest in overseas business.
Investment holding company
A trust can be used in one country to own an underlying investment holding company in another. This type of tax planning device has many advantages in providing the maximum possible protection for both settlor and beneficiaries alike.
An individual with assets outside his country of residence and whose country of residence 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 Cyprus offshore trust.
An individual who wishes to keep anonymity can do this by setting up a discretionary trust which owns the shares in the company. This is a particularly useful and popular vehicle for carrying out trading and financial activities, particularly for residents of countries which do not recognize the concept of a trust
Global estate planning
An individual, through the use of a trust, can arrange to be succeeded in inheritance by persons, who, due to the legislation of the individual's country, would otherwise be excluded from the inheritance.
Individuals from volatile parts of the world may wish to protect part of their fortune from high domestic inflation rates by converting it into strong currency assets, or individuals can protect their assets against possible expropriation laws, future claims of Governments, law suits or international blocking or freezing regulations overseas.