The “Trust” as a concept
In simple terms, a trust is an arrangement whereby a settlor, transfers property to a trustee, who is an independent person with no benefit from the trust, to hold for such time as the trust shall prescribe (could be for an indefinite period) for the benefit of a beneficiary.
The trustee is under a fiduciary duty to administer the trust property prudently in the interests of beneficiaries, and to strictly comply with the terms of the trust. Any action taken by the trustee that is in excess of their powers or contravenes the terms of the trust instrument is a “breach of trust” and the trustee is personally liable for the full extent of any loss incurred as a result of such a breach.
The beneficiaries have the right to enjoy their interest in the trust property. In the case of breach of a trust, the beneficiaries may bring an action in court to force the trustees to administer the trust property in accordance with the terms of the trust.
Use of a Trust
Given its widely known benefit of constituting a highly personalised/tailor made wealth structuring solution, a trust has been used over the years for many reasons; As a vehicle for international tax planning and structuring; or as a means to protect assets and/or ensure their transfer towards specific beneficiaries or purposes upon the death of the settlor, to name just a few.
Parties involved in a Trust:
A Trust is a tripartite arrangement. It involves three parties:
The Settlor (Party 1) being the person who creates the Trust and transfers (settles) property to the Trustee (Party 2), for the sole benefit of the Beneficiary (Party 3).
The legal document that defines the Trustee, the Settlor, the Beneficiaries and the terms & conditions of holding, administering and ultimately transferring the trust assets, is known as the Trust Instrument (or Trust Deed or Trust Agreement). The Trustees are bound by the terms of the Trust Instrument.
A fourth party may sometimes be added in the arrangement, known as the “Protector”. The Protector is usually a physical person, other than the Trustee, to whom certain powers may be conferred by the Trust Instrument (for example, the power to advise the Trustee on the exercise of his powers, or the right to appoint or remove the Trustee). The Protector’s role is effectively to protect the rights and interests of Beneficiaries by overseeing the activities of the Trustee and ensuring the Trustee is acting in the best interests of the Beneficiaries at all times.
The Settlor may also be the Protector. Furthermore, the Settlor may reserve certain powers to him/herself (the list is extensive and may include the power to remove trustee or require the trustee to exercise his powers with the consent of the Settlor).
With the establishment of a Trust, the Trustee becomes the legal owner of the property, as a fiduciary for the benefit of the Beneficiary. The Settlor may also be a Beneficiary of the Trust for his/her lifetime. So effectively, the Beneficiary is in effect the person who either immediately or eventually will receive the benefit of the trust property (in the form of income) or the property itself. The extent of the Beneficiary’s interest under the Trust depends on the wording of the Trust Instrument.
Cyprus law on Trusts
The legislative instruments governing the establishment of trusts in Cyprus are:
Trustee Law of 1955, Cap 193
Cyprus International Trusts Law of 1992 as amended by Law 20(I)/2012 and Law 98(I)/2013 (known as the CIT Law)
Furthermore, the English common law and principles of equity are also adhered to in Cyprus by virtue of section 29 of the Courts of Justice Law 14 of 1960.
The CIT Law, as reformed with the 2012 and 2013 amendments, is currently considered as one of the most favourable international trust regimes available worldwide with straightforward and well written provisions, ensuring that both settlors and beneficiaries enjoy the highest possible degree of protection.
What is a Cyprus International Trust (CIT)?
A Cyprus International Trust (CIT) is a Trust which can be formed under certain conditions:
The Settlor, whether a physical or legal person, cannot be a tax resident of Cyprus in the calendar year preceding the year of the creation of the trust;
The beneficiary/ries, whether a physical or legal person, cannot be a tax resident of Cyprus in the calendar year preceding the year of the creation of the trust; and
At least one trustee is, for the duration of the trust, a Cyprus tax resident.
There is no prohibition on Settlors or Beneficiaries relocating to Cyprus after the creation of the Trust. The trust property may include ALL kinds of assets, situated anywhere in the world, and may include real estate property located in Cyprus. There is no time limit restricting the validity and enforceability of a CIT, which may continue in perpetuity.
Key features (benefits) of a CIT
A CIT has a number of benefits, the key of which are:
The Cyprus courts have jurisdiction and all matters in relation to the CIT are determined in accordance with Cyprus law
The Trustees’ and Protectors’ duties are governed exclusively by Cyprus law
Where the CIT is governed by Cyprus law, the CIT Law applies without any threat from foreign conflicting legislation. This means that the CIT is protected from any foreign judicial claims, and its validity will not be affected by the provisions of any law in any other jurisdiction who may not recognise the notion of trusts. It is for this reason that CITs are considered a powerful and effect asset protection mechanism.
A CIT is considered irrevocable unless otherwise provided by the Trust Instrument
Confidentiality. Trustees are bound by a duty of confidentiality and the government or other officials are prohibited from disclosing any information or documents in connection with the trust property, trustees, settlor, and/or beneficiaries.
The settlor has the right to reserve a range of powers to himself/herself, including the powers, amongst others, to revoke or amend the trust, to instruct the trustee, to appoint or remove trustees, the protector, to change the law regulating the CIT or the place of its administration.
Uses of a CIT
1. For asset protection
CITs are used to protect and shield assets of the Settlor against actual or potential creditors or other persons who may have a claim against him/her.
By establishing a Trust, the assets settled into the Trust are automatically segregated from the Settlor’s estate and thus shielded from any bankruptcy or liquidation laws in Cyprus or any other jurisdiction. The CIT Law provides that unless it is proven to the court that the trust was made with the sole intent to defraud persons who, at the time when the transfer of assets was made to the trust were creditors of the settlor, the trust cannot be void or voidable.
The burden of proof of such claim lies with the creditors seeking to annul the transfer of assets made to a CIT. Any such action must be instituted by the creditors within two years from the date of transfer or disposal of the assets to the trust.
2. For inheritance planning or avoidance
A CIT is an effective way for a Settlor to decide how his assets will be distributed upon his death and avoid any applicable “forced heirship” rules which determine to which relatives and in what proportions the assets shall pass by law. By settling his assets in a CIT, a Settlor can decide for himself how his/her assets will be distributed upon his death in a flexible and confidential manner, shielded from any forced heirship claims.
3. For tax planning
CITs are treated as tax transparent. All income and gains of a CIT which derives from sources out of Cyprus is exempt from all taxes in Cyprus. Stamp duty in the amount of EUR 430 is the only duty payable at the moment the trust is created. This position changes if beneficiaries take presence in Cyprus following the creation of the CIT or where the CIT holds immovable property situated in Cyprus. In case the beneficiary/ries are Cyprus tax residents or even non-residents, they shall be subject to income tax in Cyprus for any income earned or deemed to be earned from sources within Cyprus, for example where the trust property includes Cyprus immovable property.
4. For investing in businesses overseas
A CIT may be used as an investment vehicle where a non-resident Settlor, decides to invest in a business overseas and wishes to ensure that any dividends or other proceeds from such investment will not be remitted in his country of residence.
5. For safeguarding family fortunes
A CIT may be used to safeguard family fortunes against future generations including spendthrift beneficiaries or against complicated family structures with divorced spouses and children from different marriages.
6. For migration planning purposes
High net worth individuals or families planning to relocate to high tax jurisdictions may settle their assets in a CIT for the purpose of obtaining tax benefits in the destination country.