What is a trust?
Taxation of CITs
Different types of CIT
Cyprus international trusts (CITs), also known as Cyprus offshore trusts, are regulated by the International Trusts Law (69(I)/1992), which complements the Trustees Law (193/1955).
CITs provide multiple benefits – such as anonymity, asset protection, flexibility and taxation incentives and benefits – which high net-worth individuals around the world can use within the framework of their tax planning and investment strategies.
A 'trust' is a fiduciary relationship, according to which the settlor (also known as the grantor) transfers property – which may be tangible or intangible – to the trustee, who holds it on trust for the benefit of the beneficiary or beneficiaries.
In order to establish a CIT, a trust deed must be drafted and signed by the settlor and the trustee, establishing the conditions under which the trustee will hold and manage the trust property.
The following conditions must also be met:
- The settlor, either a natural or a legal person, must not be a Cyprus resident during the calendar year preceding the year of the trust's creation. Further, the settlor must be of legal age and sound mind.(1)
- At least one of the trustees must be a Cyprus resident for the duration of the trust.
- No beneficiary, either a natural or legal person, can be a Cyprus resident during the calendar year immediately preceding the year in which the trust was created (with the exception of charitable organisations).
- The trust deed must be stamped in Cyprus. Further, the CIT's name, the trustee's name and the trust date (not the deed itself) must be registered with the Cyprus Bar Association.
Further, in order to create a valid CIT, the following certainties must apply:
- Certainty of intention – the trust instrument (ie, the trust deed) must demonstrate clearly the express intention of setting up a trust.
- Certainty of subject matter – the trust assets must be readily identifiable.
- Certainty of objects – the beneficiaries must be ascertained or ascertainable at the time of the trust's establishment. The amended law of 2012 may also consider unborn children as beneficiaries.
The following benefits relate to CITs:
- Asset protection – the main advantage of a CIT is the separation of legal ownership from beneficial ownership. Assets transferred to a trust are no longer part of the property owned by the settlor and cannot be claimed by creditors or litigators.
- Income, gains and profits from non-Cyprus sources are exempted from income, capital gains, dividend tax or any other taxes in Cyprus.
- No estate duty or inheritance tax is due in Cyprus.
- Registration of the trust does not require the submission of the relevant trust deed or the disclosure by the settlor or the beneficiaries; therefore, confidentiality is safeguarded (expect under a disclosure order by a Cyprus court which is granted only in cases of fraud).
- A CIT may be used to reduce or eliminate the settlor's inheritance tax.
- A CIT is ideal for high-net-worth individuals, especially individuals with complicated family structures (ie, individuals who are divorced or have children with different spouses).
- A CIT may hold shares of legal entities with nominees for confidentiality.
- There are no exchange control regulations for CITs in Cyprus.
- The same person can be the settlor, trustee (through a Cyprus company in which he or she can be the sole director and the only beneficial owner of the shares) and beneficiary (ie, an individual could have direct absolute control and ownership of the trust fund).
- A CIT trust may form an international business company, partnership or branch and obtain the relevant benefits.
- Trust capital received in Cyprus by a foreign national, whether resident or retired in Cyprus, from trusts not resident in Cyprus is not taxable on the trustee.
- Dividends, interest or royalties received by a CIT from a Cyprus or an international business company are not taxable or subject to withholding tax.
CITs provide a significant number of tax advantages and can be used as part of an international tax planning strategy. General information on how trusts are taxed in Cyprus is listed below. However, in order to estimate the tax that may be imposed on a trust, its specifications, purpose and any other relevant circumstances that may concern it must be considered.
Income received from sources outside Cyprus is not taxable in Cyprus if the beneficiary is not a Cyprus tax resident, while income received from local sources is taxable in Cyprus. Income received from local or overseas sources is taxable in Cyprus, provided that the beneficiary is a Cyprus tax resident.
Dividends, interest or other income received by a trust from a Cyprus company are not taxable.
Payments to beneficiaries
Non-resident beneficiaries are not subject to tax on the payments that they receive from a Cyprus tax.
Capital gains that occur after the disposal of a CIT's assets are not subject to capital gains tax in Cyprus.
A CIT is not subject to estate duty in Cyprus.
There are a variety of trusts that can be set up in Cyprus. The choice of trust depends on the settlor's requirements and objectives.
A discretionary trust is the most commonly used trust in Cyprus due to the many advantages that it provides, including the following:
- The beneficiaries cannot be taxed on the trust fund because they have no legal right to the fund until the trustees exercise their discretion in their favour.
- The beneficiaries cannot be subject to local exchange control regulations regarding compulsory repatriation of assets until the trustees exercise their discretion.
- The beneficiaries' trust assets are unavailable to creditors in case of bankruptcy.
- Trustees can vary the different interests under the trust as and when circumstances change, without the need to have recourse to trust variation procedures (ie, an agreement from all beneficiaries or asking the court to vary the terms of the trust).
- Individuals interested in keeping their anonymity can set up a discretionary trust, which owns the shares in their company.
A discretionary trust allows trustees to pay the income or capital of a trust fund to any or all of a particular class of persons defined in the trust deed. The trustee may also be given discretion in deciding when to pay members. Thus, none of the beneficiaries has a right to be paid by the trust fund, since the trustee may exercise his or her discretion and postpone any such payment or even decide not to pay a particular beneficiary at all. However, the settlors in a letter of wishes may set out their intentions regarding the administration of the trust.
A fixed trust gives the trustees no discretion when distributing assets to the beneficiaries. An example of this type of trust is one which requires the trustees to:
- distribute the income of the trust's property to a particular individual, during that individual's lifetime; and
- thereafter distribute the capital to a named beneficiary or beneficiaries in specified shares.
Fixed and discretionary trust
It is possible to establish a trust that combines elements of fixed and discretionary trusts. For example, the trustees may have discretion regarding the distribution of income for a specified period, but ultimately they must distribute the capital in fixed proportions.
Under a trading trust, the trustee is generally a limited liability company. The trust has trading functions and the company's employees manage its business. Third parties are unaware of the existence of the trust, as all documentation used is in the trustee company's name.
Under the International Trusts Law 1992, a purpose trust can be used to accumulate corporate earnings for general or specific corporate purposes instead of providing for a defined group of individuals.
A charitable trust is a type of purpose trust. A CIT will be deemed to be charitable if its main purpose is one of the following:
- poverty relief;
- the advancement of education;
- community development;
- arts, culture or science;
- amateur sport;
- human rights;
- environmental protection; or
- animal welfare.
For further information on this topic please contact Angelos Paphitis at A G Paphitis & Co by telephone (+357 25 73 10 00) or by email ([email protected]). The A G Paphitis & Co website can be accessed at www.agplaw.com.