• Introduction
• Incorporation
• Validation of the International Trust
• Compliance
• Trust Administration
• Taxation of the International Trust
• Corporate flexibility
• Privacy
• Protection

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Introduction

To attract foreign investors to establish international trusts in Cyprus,
the International Trusts Law was implemented in 1992. The International Trust Law deals with the regularization of international trusts, and is built on the existing Cyprus Trust Law
which is based on the English Trustee Act 1925.

An International trust may be best described as a trust created by a nonresident settlor for the benefit of nonresident beneficiaries. A trust can still qualify as an international trust for the purposes of the law even if the settler, trustee or the beneficiaries are offshore companies or offshore partnerships.

Cyprus International Trusts enjoy important tax advantages, providing significant tax planning possibilities and offers much protection to its assets. Trusts are usually used by high net worth individuals for the purpose of protecting their estate from inheritance or capital gains 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.

The International trust Law may be used to enable a settlor:
(i) to avoid forced heirship laws in his country of domicile
(ii) to create an asset protection trust
(iii) to adopt a perpetuity period of up to 100 years and provide for accumulation of income throughout that period or (iv) to create a charitable or purpose trust.

The Law provides for “diligence and prudence” test of authorized investments by trustees, for changing proper law, for variation of the trust and for confidentiality.
The International Trusts Law expressly provides that no foreign law relating to inheritance or succession shall invalidate such a trust or affect any transfer or disposition relating to the creation of such a trust in any way.

The presence of a number of reputable international fund management companies on the island and the high standing of the legal and accounting professions ensure the availability of expert advice as well as the competent management services required for the proper operation of a Trust.

Incorporation

International Trusts do not have to be registered with any Cyprus authorities.
The declaration of trust will be drafted by the registered agent, or lawyer, after which the assets can be transferred to the trust. In most cases a Letter of Wishes is provided to the trustee.

To constitute an International Trust, the settlor must be non-resident, at least one trustee must be resident in Cyprus, no beneficiary (unless a charity or an offshore company) may be a permanent resident of Cyprus and the trust fund may not include immovable property in Cyprus. These conditions do not present difficulties in practice.

Who can be a Settlor?
An individual can 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 bestowed on it by its constitution or law.

A settlor has some measure of control over the trust assets by having a power to dismiss trustees, but he must remember that dismissal is not retrospective and that the power cannot be exercised by the settlor so as to benefit himself. In providing for the transfer of trust assets to new trustees a balance needs to be kept between the legitimate need of the new trustee to take command of the trust assets and the legitimate requirement of the old trustee to meet liabilities incurred in his capacity as such.

What property may be subject to a Trust?
Property of all descriptions can be settled into trust. However, the trust fund of a Cyprus International Trust must not include any immovable property in the Republic of Cyprus

Who can be 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.

Who can be 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 or beneficiary as, in that instance, no trust would effectively exist.

What is a 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.

Drafting the trust instruments
Trust drafting seems easy but is actually difficult. A small error relating to the trust period may be fatal to the effectiveness of the trust.

In defining “beneficiaries”, the draftsman needs to ensure that everyone is included whom it might in any circumstances be desired to benefit. Does the settlor want illegitimate children to be included? In English law, they are nowadays included by statute. This may not be the case elsewhere – e.g. in Cyprus. It is generally desirable to include spouses: a widow may otherwise be impecunious. A power to add beneficiaries needs to be circumscribed; some practitioners think such a power is not valid, and in the context of the “anonymous trust” they may well be right.

Validation of the trust

The Trust can be valid for 100 years from the date of its creation, whence it will terminate if it has not hitherto been terminated pursuant to a relevant term in the instrument creating it. Charitable and Purpose Trusts are not subject to the rule and may exist in perpetuity.
The Law confirms the validity of a trust created by any person who is of full age and of sound mind regardless of any provisions relating to Inheritance or Succession of the Law of Cyprus or the law of any other country. The International Trust is irrevocable unless a specific power of revocation is reserved in it and cannot be set aside by the settlor’s creditors unless and to the extent that the creditors can show that the trust was made with the intent to defraud them. The burden of proof of such intent lies with the creditors and an action against the trustees to avoid the trust, on grounds of fraud, must be brought within two years from the date when the relevant transfer of assets is made to the trust.

Sham
Parties to a trust which has been properly and validly created may successfully resist a claim that the trust is not really a trust but some other legal arrangement such as an agency or a nomination, or merely an empty pretence, on the basis that equity looks to substance, not form. This applies to both local and international trusts
If an arrangement masquerading as a trust is found to be a sham, any transfer of property to the purported trustees will be rendered ineffective, no title will have been transferred and the transaction will be set aside. The purported trustees will have never been more than nominees or bare trustees, holding the property on a resulting trust for the settlor who will have remained the sole beneficial owner. Any action of the purported trustees inconsistent with the continued beneficial ownership of the settlor will have been unlawful and the trustees will have to make good any losses caused, unless they can demonstrate that they were not aware that the settlor lacked the necessary intent and they were not knowing participants in the sham.

Compliance

There are no name restrictions regarding the International Trust.

Trust Administration

There are no registration or reporting requirements for Trusts established in Cyprus.

Taxation of the trust

Cyprus International Trusts enjoy important tax advantages, providing significant tax planning possibilities. The following advantages are indicative of the possible options for tax minimization:

• All income, whether 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, interest or other income received by a Trust from a Cyprus international business company are neither taxable nor subject to withholding tax.
• Gains on the disposal of the assets of an international Trust are not subject to capital gains tax 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.
• The assets of an international trust are not subject to estate duty in Cyprus.

Trusts are usually used by wealthy individuals for the purpose of protecting their inheritance or capital gains 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.

It is possible for trusts to come under the score of double taxation treaties. This will depend on whether the other signatory state recognizes trust structures and principles of equity and whether the trust itself meets the eligibility criteria set out in the given treaty.

License fees
The stamp duty chargeable for the instrument creating an International Trust will be £250.

Corporate flexibility

Cyprus law is flexible in that it allows the removal of a Trust from its jurisdiction and vice versa. This could be important in cases where a change in circumstances may render such a transfer advantageous for fiscal or other reasons.
The possibility to change the proper law of an International Trust is expressly provided in the law. It allows a Cyprus trust governed by Cyprus law to change to a foreign law trust and permits a foreign trust to adopt Cyprus law if such change is recognized by the law of the country concerned.

Privacy

The names of the Trust or of the persons referred to in the Trust Deed are not disclosed.
The only authority to be informed of the creation of an International Trust is the Central Bank and only in cases where the International Trust owns shares in a Cyprus international business company.
The settlor, trustees and beneficiaries should not disclose information to third parties relating to International Trusts, unless a Cypriot court orders the information to be disclosed.

Protection

The trust assets are protected from confiscation or expropriation orders or similar actions by foreign governments.

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