Cyprus International Trust - the applicable legislation
Trust laws in Cyprus derive from English sources. A Cyprus International Trust is a trust which is constituted under the provisions of the International Trusts Law, Law 69(I)/92 (“ITL”) as amended by Law 20(I)/2012 and Law 98(I)/2013. The ITL is a law which builds on the existing statutory base being the Trustee Law of 1955 (Cap 193).
The ITL defines a Cyprus International Trust (“CIT”) as one in respect of which:
- the settlor is not a resident of the Republic of Cyprus1 during the calendar year immediately preceding the creation of the trust;
- at least one of the trustees is a resident of the Republic for the whole duration of the trust;
- none of the beneficiaries, with the exception of charitable institutions, is a resident of the Republic during the calendar year immediately preceding the year in which the trust was created.
The ITL, as amended, clarifies that the settlor, or the trustee or any one or more of the beneficiaries, can also be a company or a partnership.
What are the formalities that need to be fulfilled?
The Law Regulating Companies Providing Administrative Services and Related Matters, Law 196(I)/2012 (the “Fiduciaries Law”), as amended at the end of 2013 by Law 109(I)/2013, obliges trustees and service providers who fall within its scope to identify and verify the main parties of trusts governed by Cyprus law that they establish or administer.
The Fiduciaries Law contains provisions for the establishment of registers of trust to be held by the three bodies responsible for supervising service providers (i.e., the Cyprus Securities and Exchange Commission, the Cyprus Bar Association and the Institute of Certified Public Accountants of Cyprus).
The information to be inserted in the registers and which the service providers are required to notify to their respective competent authorities are the following:
- the name of the trust
- the name of the trustee at all relevant times
- the date of creation of the trust
- the date of any change in the law governing the trust
- the date of termination of the trust.
For the trust instrument to be properly executed, stamp duty at the standard rate of Euro 430 (four hundred thirty) is payable under the ITL irrespective of the amount of the trust fund.
Property under CIT
In principle, any property, including immovable and movable property in Cyprus, may form the trust fund. Subject to any restrictions contained in the trust deed itself, the trustees have wide powers of investment which must be exercised with the diligence and prudence of a reasonable person.
The ITL provides that there will be no limit on the period for which a trust may continue to be valid and enforceable, and no rule against perpetuities, or remoteness of vesting or any analogous rule will apply to a trust or to any amendment, appointment, payment or application of property from a trust.
CITs are completely tax exempt from Cyprus taxes provided the trust income is derived from sources abroad, the trust fund does not include any immovable property in Cyprus and the trust does not have Cyprus resident beneficiaries. In particular, under such conditions, the trust income is tax exempt, the interest from bank deposits is not subject to special defence contribution, the CIT is not subject to capital gains tax and the CIT’s distributions are not subject to any withholding taxes.
In the event a CIT receives income and profits which derive from sources within the Republic (such as rental income from Cyprus property, sale of real estate located in Cyprus etc.), then the CIT will be subject to tax in accordance with the applicable income tax laws of the Republic.
Validity of a trust
A CIT may be challenged only on defraud of creditor grounds with a 2 (two) year limitation period from the date of transfer of the assets to the trust.
Dispositions to a trust may not be challenged on the grounds that they are inconsistent with the laws of another jurisdiction, for example regarding family and succession issues, or on the grounds that the other jurisdiction does not recognize the concept of trusts.
No law relating to inheritance or succession in force either in Cyprus or in any other country shall affect in any way the validity of a transfer or transfer of assets into the CIT and the validity of such transfer shall not be challenged. The law explicitly provides that any question relating to the validity or administration of an international trust or a disposition to an international trust will be determined by the laws of Cyprus without reference to the law of any other jurisdiction, and that the law relating to inheritance or succession in force in Cyprus or any other country will not in any way affect the validity of the international trust or any transfer or disposition of property to it.
Reservation of powers by the settlor
One of the main features of the creation of a trust is the transfer of ownership of assets previously owned by the settlor to the trustee, who is appointed to manage the assets for the benefit of the beneficiaries according to the trust instrument.
However, a settlor would often wish to remain involved in the management of the assets of the trust. The ITL as recently amended provides that the settlor has the right to reserve many powers including the power to revoke or amend the trust, to instruct the trustees, to appoint and remove the trustees and the protector (if exists), to change the law regulating the CIT or the place of its administration.
Revocation of a CIT
A CIT may be revoked if so provided by the instrument creating the trust.
Amendments to the CIT
The ITL allows changes, with the approval of the court, to the terms of the trust. Without prejudice to any powers of the court to vary the terms of the trust, a trust may be amended in any way as provided for by its terms.
The trustees, the protector or any other person concerned, are bound by confidentiality and cannot disclose information or documents (including the identity of the settlor or of any beneficiary of the trust, the accounts or assets of the trust) related to the CIT.
Only a court may order the disclosure of information of documents pertaining to the above in civil or criminal proceedings, and to do so, disclosure must be deemed very important to the outcome of the case.
Uses of CIT
CITs may be used not only in circumstances which can be broadly defined as “family situations” but also in commercial transactions and for other purposes. For example a CIT may be created:
- As an investment and tax planning vehicle
- To preserve and manage family wealth
- To protect high-risk professionals
- Within the ambit of pre-immigration planning
- To hold the property for minors until certain age
- To protect property against claims
- To enable charitable objects to be carried out
- As a protection against marriage failing.