Establishment
Reserved powers of settlors
Powers of trustees
Duration
Charitable institutions
Confidentiality
Registration
Tax benefits
Selection of applicable law
Jurisdiction and governing law
Variation
Comment
On March 9 2012 Parliament enacted Law 20(I)/2012, which amends and modernises the International Trust Law (69(I)/1992), taking into account the needs arising from today's international economy, as well as ensuring compliance with EU law and directives. Although the 1992 law had introduced attractive provisions for international trusts, after almost two decades the law was ripe for upgrade, in order to clarify certain areas of ambiguity and uncertainty as well as to remove certain limitations and restrictions.
The requirements for establishing a Cyprus international trust (CIT) under the amended law are clear:
- The settlor must not have been a permanent resident of Cyprus in the calendar year preceding that in which the trust is created;
- At least one of the trustees must be a permanent resident of Cyprus for the full duration of the trust; and
- None of the beneficiaries may have been a permanent resident of Cyprus in the calendar year preceding that in which the trust is created.
Previously, the settlor and the beneficiaries (with the exception of charities) could not be permanent residents of Cyprus. This caused difficulties if the settlor or any beneficiary subsequently became resident in Cyprus after the creation of the trust.
The requirement that the trust property does not include immovable property located in Cyprus has been deleted in the new law.
The amendments have introduced new provisions that reserve extensive powers for settlors, enabling them to revoke and/or modify any of the trust terms and to instruct the transfer, distribution or payment of income or capital from the trust property.
Furthermore, the settlors have now been granted the explicit power to appoint and/or remove a trustee, a beneficiary or a director of any of the companies that belong to the trust structure, and to issue binding instructions to the trustees in connection with the exercise of any power in relation to the trust.
The settlor has also been given the right and the power to change the applicable law that governs the trust and the forum of the trust's management.
The powers of trustees have also been extended through Section 8 of the 2012 law. Trustees of CITs may now hold, maintain or invest in movable property in Cyprus and abroad, including shares in companies formed in Cyprus and in real estate located in Cyprus or abroad. Under the 1992 law, it was unclear whether trustees could invest in movable or immovable property in Cyprus.
More specifically, the new law provides that unless the instrument creating the trust provides otherwise, the trustee has the power to:
- invest at any time the whole or any part of the trust funds in any kind of investment, as he or she would have done were he or she the absolute beneficiary of the assets of the trust;
- vary the investment or retain it in its original state; and
- hold, maintain or invest in any movable property in Cyprus and abroad, including shares in companies created in Cyprus and in immovable property located in Cyprus or abroad.
Under the 1992 law, a CIT could be valid for up to 100 years from the date of its creation (subject to certain exceptions). The 2012 law has abolished all restrictions on the duration of trusts. For trusts created on or after the amendment, no limitation applies regarding the duration or continuation of the trust's validity and enforceability. Furthermore, no rule against perpetuity or long-term investment (or any equivalent principle or rule) will apply to a trust or to any advancement, distribution, payment or disposition of property from the trust.
Subject to express terms to the contrary, no concession, distribution, payment, holding or disposal of the income or capital of the trust to another trust is invalidated merely by reason that the other trust continues to be valid and enforceable after the date on which the first trust must cease to exist.
The 2012 law extensively redefines charitable institutions. It provides that a CIT is deemed to be a 'charitable institution' if it has as its main objective the achievement one or more of the purposes set out in Section 7(1) of the law, such as the prevention or relief of poverty or the advancement of:
- education;
- religion;
- health or the saving of lives;
- art, civilisation, cultural heritage or science;
- environmental protection or improvement; or
- animal welfare and protection.
Confidentiality has been preserved under the amendment. Pursuant to Section 11 of the law, the trustee, the protector or the supervisor of the trust's performance (or any other person) is forbidden from disclosing any documents or information regarding the trust to any person that is not legally entitled.
Disclosure can be made only if:
- the instrument creating the trust provides otherwise;
- a court order for disclosure is issued; or
- a request is submitted by a beneficiary to the trustee for disclosure of the trust accounts or for any documents or information relating to the proceeds and payments made by the trustees that form part of the accounts.
The trustee will have the power to make such disclosure only, if in his or her opinion, it is necessary and is in the trust's best interests.
No registration requirements have been introduced - Section 15 of the law remains unchanged, providing that "International Trusts are exempt from the obligation of registration under any law".
The instrument creating a CIT will be liable to stamp duty of €430 (Section 12(2) of the law).
Following the amendment, where a beneficiary is resident in Cyprus, the income and gains of a CIT derived (or deemed to be derived) from sources inside and outside Cyprus shall be subject to all taxes imposed in Cyprus (Section 12(1)(a)). Where the beneficiary is not resident in Cyprus, the income and gains of a CIT derived (or deemed to be derived) from sources inside Cyprus shall be subject to all taxes imposed in Cyprus (Section 12(1)(b)).
Therefore, a trust with non-Cyprus residents having income from non-Cyprus sources will be exempt from Cyprus tax.
The trust will be governed by the law selected by the settlor, which may be express or implied by the terms of the instrument that creates the trust. The express and implied selection of the laws of Cyprus will be valid, effective and final (notwithstanding the circumstances).
If no applicable law has been selected, or where the law that has been selected makes no provision for trusts or makes no provisions for a specific category of trust (in which case the selection of law shall be deemed invalid), the trust will be governed by the law to which it is most closely related.
According to the new Section 12A(4), the factors that must be taken into account when determining the law that is most closely related to the trust are:
- the state in which the management of the trust is carried out, as prescribed by the settlor;
- the state in which the assets are located;
- the country in which the trustee resides; and
- the purposes of the trust and the countries where these must be implemented.
Jurisdiction and governing law
A new Section 12B has been introduced, which specifically provides the circumstances under which the Cyprus courts will have jurisdiction (unless the instrument creating the trust provides otherwise) without prejudice to the provisions of the EU Regulation 22/2001, on jurisdiction and the enforcement of judgments.
Furthermore, all matters arising in relation to a CIT will now be determined in accordance with the laws of Cyprus, without reference to the applicable law of any other jurisdiction. Therefore, any matters regarding the validity, interpretation or effect of any trust or transfer will be decided by the laws of Cyprus.
The fiduciary powers and duties of trustees are also now regulated solely by the laws of Cyprus. According to the law, no CIT is void or voidable merely because it is contrary to any law of any other jurisdiction.
If the terms of the trust so provide, the applicable law of the trust may be changed to or from the law of Cyprus, provided that:
- in the case of a change from the law of Cyprus to another law, the new applicable law recognises the validity of the trust and the respective interests of the beneficiaries; and
- in the case of a change from another law to Cyprus law, such a change is recognised by the previously applicable law.
A trust may be varied in any way provided by its terms or by the court, subject to the exercise of its discretion, on the filing of an application approving any arrangement that varies or revokes the terms of the international trust or enlarges or modifies the powers of management for administration of the trustees.
The changes introduced by the 2012 law apply to all CITs, irrespective of the date on which they were set up, and its provisions in no way affect the validity of any distribution or transfer that took place before the enactment of the new law.
It is expected that with these recent amendments, Cyprus will become an even more popular and attractive trust jurisdiction, taking into consideration the simplified procedure for setting up a CIT, the relaxed provisions in the new law and the favourable tax benefits that CITs can enjoy.
For further information on this topic please contact Stella Kammitsi at Chryssafinis & Polyviou by telephone (+357 22 67 9760), fax (+357 22 67 9750) or email ([email protected]).