DEFINITION OF A TRUST
Incorporating an international trust provides a variety of financial planning opportunities. The use of the Trust as a vehicle of International Tax planning and business structuring is constantly growing. Trusts are used today more than ever before in a myriad of circumstances, many of which would have been impossible to conceive at the time the concept was originally formed.
THE TRUST
- The concept of a trust is legally defined as a relationship created during one’s lifetime or upon death by a person (the settlor) who places assets under the control of another person (the trustee) for the benefit of a third party (the beneficiary).
- The assets cannot be part of the trustee’s own estate and must constitute a separate “fund”.
- The title of the trust assets stands in the name of the trustee
- The trustee is empowered and duty bound to manage the assets held in trust in accordance with the terms of the trust agreement.
- A trust can still qualify as an international trust for the purposes of the law even if the settlor, trustee or the beneficiaries are Cyprus International Business Companies or International Business Partnerships. This is a distinguishing element of the definition, which can offer unique opportunities for a wide range of investors as compared to trusts in other international jurisdictions.
THE SETTLOR
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.
THE BENEFICIARIES
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.
THE TRUSTEES
An individual who is an adult and of sound mind, or a corporate body, if authorized by its constitution, may be a trustee.
THE PROPERTY SUBJECT TO A TRUST
Property of all descriptions can be settled into 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 PROTECTOR
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.
DURATION
The duration of the trust may continue until the one hundredth anniversary from the date on which it came into existence and accumulation may continue for the duration of the trust. Purpose and charitable trusts may carry on indefinitely.
ADVANTAGES OF CYPRUS INTERNATIONAL TRUST
Further to the tax advantages mentioned above, there are other advantages provided by Cyprus, including the following:
Estate planning
An individual, through the use of a Cyprus Trust, can ensure that minors, mentally handicapped persons or persons that cannot be trusted with the management of the individual’s estate are well provided for, even after the individual’s death.
An individual, through the use of a Cyprus Trust, can arrange to be inherited by persons, who due to the legislation of the individual’s country, would otherwise be excluded from the inheritance. An individual who wishes to divest himself of personal assets for fiscal or other reasons can achieve that by transferring them to a Cypriot International Trust.
Anonymity and the Cyprus Trust Registry
An individual, who wishes to keep the ownership of a company anonymous and confidential, can do this by setting up a Discretionary Cyprus Trust to own the shares in the company.
The law imposes the obligation on resident trustees to register all Cyprus International Trusts with one of the three Competent Authorities i.e. the Cyprus Securities and Exchange Commission (CySEC), the Institute of Certified Public Accountants of Cyprus (ICPAC) or with the Cyprus Bar Association. The Trust registries maintained by the supervising authorities shall contain the following information about the Trusts:
- Name of the trust
- Date of creation of the trust
- Date of termination of the trust
- Name and address of the trustee
- Date of any change in the law governing the trust to or from Cyprus Law.
The identity of the settlor and the beneficiaries is not disclosed in the Registry. The Registers of Trusts are not available to the public, but they are available for inspection by the Competent Authorities.
Maintaining funds overseas
An individual who has or may have income arising overseas which he does not wish to remit to his country of residence, can arrange for such income to be directed to the Trustees of a Cyprus Settlement to be held on Discretionary Trusts in accordance with his wishes.
An individual with assets outside his country of residence, which country 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 Discretionary Trust.
Asset protection
International Trusts law provides that notwithstanding the provisions of any bankruptcy or liquidation laws in Cyprus or in any other country, unless it is proven to the Court that the trust was made with intent to defraud persons who, at the time when the payment or transfer of assets was made to the trust, were creditors of the settlor, the trust shall not be void or voidable. The burden of proof lies with the creditors and such an action must be instituted by the creditors within two years from the date of transfer or disposal of the assets of the trust.
Taxation
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 minimisation.
Income
All income whether local, foreign, 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
Dividends, interest or other income received by a Trust from a Cyprus company are also neither taxable nor subject to withholding tax.
Payments to beneficiaries
There is no withholding tax on payments to non-resident beneficiaries.
Capital gains
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.
Estate duty
An International Trust created for estate duty planning purposes would not be subject to estate duty in Cyprus.
Protection of estate
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.
Double Tax Treaties
Cyprus has a wide network of double tax treaties, which are accessible by “residents” of the contracting states. The OECD in its article 4 defines a resident as a person liable to tax in the contracting state and does not refer to trusts, but even though a trust may not be considered a “person” or “body of persons” under article 3(1) of the OECD model, the trustees certainly are. The Cyprus trustee company will pass the “two fold test” and qualify both as a person and a resident liable to tax on trustee fees as long as its management & control is in Cyprus, therefore the ‘other source country’ will accept that benefits of the trust are distributed.
We can say that for a Cyprus trustee company acting as trustee and which is liable to tax in Cyprus at full rates (even though it only pays tax in its trustees’ fees and not on the income of the trust itself), the benefit of certain Cyprus’ double tax treaties may be available in respect of trust income and gains.
UBO Trust Register
In case the shareholder of a company is an express trust or a similar legal arrangement, then the name of the trust shall be submitted in the UBO Companies Register and depending on its place of administration, its details shall also be submitted in the UBO Trust Register. The term “express trust” is defined as the trust which is created explicitly and voluntarily by the settlor and does not include any trust arising by operation of law or any trust or decision for which the settlor has no explicit intention to create.
Any express trust or similar legal arrangement must be registered therein provided that: (a) its trustee is located or residing in the Republic of Cyprus, or, (b) its trustee, which is located or residing outside the EU, establishes a business relationship or acquires immovable property on behalf of the express trust in the Republic of Cyprus.
Information to be submitted in the UBO Trust Register
A. For the express trusts or similar legal arrangements
- Name;
- Country and date of creation and/or establishment;
- Applicable law;
- Termination Date (if applicable);
- In case of a similar legal arrangement, the kind of such arrangement;
- Information in regards to the country of establishment or residence of the trustee, as well as his address;
- In case where the trustee is situated outside the EU and creates a business relationship in the Republic, the date of the beginning of the business relationship, the name of the person to whom such business relationship is established and the document regulating such relationship;
- In case where the trustee is situated outside the EU and acquires immovable property on behalf of an express trust in the Republic, the registration number of such immovable property and its title.
- Any other information and/or supporting documentation requested by CySEC for identification purposes.
B. For the Ultimate Beneficial Owners of the Trust (Trustee, Settlor, Protector, Beneficiaries, any other physical person exercising final control of the trust through direct or indirect ownership or by other means)
- Name and surname;
- Name of father;
- Date of birth;
- Place of birth;
- Nationality or Nationalities;
- Residential Address;
- Number, Type and Country of issuance of identification document;
- Date of Death (where applicable);
- Date on which the UBO became the beneficial owner;
- The nature and extent of the rights which are directly or indirectly held by the beneficial owner;
- The role of the beneficial owner in the trust or in the similar legal arrangement;
- Any other information and/or supporting documentation requested by CySEC for identification purposes.