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The Cyprus International Trust [Reviewed]

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THE CYPRUS INTERNATIONAL TRUST

On 8 March 2012 the House of Representatives in Cyprus enacted the International Trusts (Amending) Law of 2012 effecting various structural amendments to the International Trusts Law of 1992.

A new era began for Trusts in Cyprus giving a favourable trust regime by ensuring that international investors, settlors and beneficiaries enjoy the highest possible degree of protection in a modern and attractive favourable environment.

Settlors, trustees and beneficiaries are now highly protected as the provisions of the international trust law clearly provide that in case the trust is governed by Cyprus law any foreign laws can not affect their rights as identified in the trust deed.

In addition, strict confidentiality is secured prohibiting any disclosure of information unless a court order is issued.

The reform of the International Trusts Law gives Cyprus the most modern and favourable trust regime in Europe and restores it to the “premier league” of trust jurisdictions.

Regulated by the International Trust Law of 1992 as amended by the International Trust (Amending) Law of 2012 (together the “Law”)

Forward

Formation of a Trust under the Law:

  • The settlor is not a resident of Cyprus during the calendar year immediately preceding the creation of the trust;
  • At least one of the trustees at the time of creation is a resident in Cyprus during the whole duration of the trust;
  • No beneficiary (except a charitable institution) is a resident of Cyprus in the calendar year immediately preceding the year of creation of the Trust;
  • The Trust property can include immovable property situated in Cyprus.

Validity of the Cyprus International Trust

1.   Following the amendments (the “Amendments”) of the Trust Law (the “Law”)in 2012 any issues pertaining to, inter alia, the validity, interpretation, amendment or administration of an international trust or a disposition to an international trust will be determined by the laws of Cyprus without regard to the law of any other jurisdiction.

2.   It is noted that, any inheritance or succession statutes in Cyprus or overseas will not affect any transfer or disposition of property or similarly affect the validity of a CIT. The Trust consequently supersedes all inheritance laws.

3.   Following point 1. above, the Amendments provide that no disposition to an CIT may be challenged on the basis that it contravenes the laws of another jurisdiction such as, inter alia, any forced-heirship laws, forced succession laws or inheritance laws or mandatory provisions of family law or laws prohibiting or not recognising trusts.

4.   Following the Amendments the trustees’ fiduciary powers and duties and the powers and duties of any protectors of the trusts are governed exclusively by Cyprus law.

Reserved Powers to the Settlor

1.   Following the Amendments the Settlor is permitted to reserve powers to himself, to retain a beneficial interest in trust property, or to act as the protector or enforcer of the trust.

2.   Note that the reservation of any right or interest in the Trust by a Settlor directly or through his capacity as protector or enforcer of the trust shall not affect the validity of the trust.

3.   The powers referred to above are the following:

i.    to revoke, vary or amend the terms of a trust;

ii.   to advance, appoint, pay or otherwise apply income or capital of the trust property;

iii.  to give binding directions as to the appointment or removal of a director or officer of any company wholly or partly owned by the trust;

iv.  to give binding directions to the trustee in connection with the purchase, retention, sale, management, lending, pledging or charging of the trust property;

v.   to appoint or remove any trustee, enforcer, protector or beneficiary;

vi.  to change the law of the trust;

vii. to restrict the exercise of any powers or discretions of a trustee by requiring a consent of the Settlor.

Cyprus International Trusts and the Tax Aspect

Cyprus International Trusts provide significant tax and estate planning possibilities to interested parties.

  1. Income
  • Only the income and profits of an international trust derived or deemed to derive from sources within Cyprus are subject to all taxes that are applicable in Cyprus, noting that dividends or interest received from Cyprus sources are not taxable. The beneficiary will not be taxed on any income derived from sources outside Cyprus.
  1. Dividends
  • Dividends or other income received by an International Trust from a Cyprus Company are neither taxable nor subject to withholding tax.
  1. Capital Gains
  • Gains on the disposal of the assets of an International Trust are not subject to capital gains tax in Cyprus. As stated in point 1 if the assets are situated in Cyprus then it is subject to Capital Gains Tax in Cyprus.
  1. Estate Duty
  • An International Trust created for estate duty planning purposes would not be subject to estate duty in Cyprus.

Advantages of a Cyprus Trust

  1. Estate Planning
  • An individual with assets outside his country of residence, which country may in future extend its exchange control restrictions to include remittance of overseas funds, may wish to retain the flexibility of overseas funds by transferring them to a Cyprus International Trust.
  • An individual who wishes to divest himself of personal assets for various reasons, such as protection from creditors or family members can achieve this through a disposition to a Cyprus International Trust.
  • Persons permanently leaving one country and taking up residence in another, may obtain fiscal advantages in their new country by placing funds in an appropriate Settlement in Cyprus
  1. Anonymity
  • An individual who wishes to keep the ownership of a company anonymous and confidential, can do this by setting up a Cyprus International Trust which owns the shares in the company.

 Conclusions

Protection of the assets from external parties (creditors / family members) thereby securing the assets for successors:

The only way that a creditor can have a claim over the trust property is if he can prove to the courts of Cyprus that the CIT was made with the intent to defraud the creditors of the Settlor at the time of the transfer of the Settlor’s assets to the trust.

The Settlor can determine who the successors will be, irrespective of the inheritance laws  in his country of domicile:

All matters arising in relation to a CIT or any disposition of property to or upon such a trust are to be determined according to the laws of the Republic of Cyprus without reference to the law of any other jurisdiction.

Creditor Protection

  • The CIT offers maximum protection against all claims of creditors (or family members) on the property under the trust regardless of the beneficiaries being the Settlor himself or his close family members or whomever he wishes to benefit from the CIT.
  • In accordance to the Law no creditor’s claim can invalidate the trust irrespective of whether such a claim is brought in the event of the Settlor’s bankruptcy or liquidation and irrespective of whether such a claim was brought under Cypriot or foreign law (foreign law protection analysed in detail in the “Protection from foreign law” section below).
  • A creditor may only have a claim over the trust property is if he can prove to the courts of Cyprus that the CIT was made with the intent to defraud the creditors of the Settlor at the time of the transfer of the assets to the trust.
  • The Law provides that even if there is such a claim the creditor cannot bring any action if more than two years have elapsed from the date when the transfer or disposal of assets was made to the trustees of the CIT.
  • The Law further defines the creditor as being the person to whom the Settlor owes a debt or has any other obligation at the time of creation of the trust or the date the property was transferred to the trust.
  • Consequently, a Settlor who transfers his property on the day before entering into risky ventures would not be at risk from a person who became a creditor after that date, noting that this has not yet been tested by the Cypriot courts.
  • The Law also defines the “intent to defraud” as being the intention of the Settlor to avoid in bad faith any obligation owed to the creditor. The onus is on the creditor to prove a dishonest intention to avoid any obligation.

Protection From Foreign Laws

The Law protects the CIT from foreign laws as it explicitly provides that any question relating to the validity or administration of a Cyprus 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 Cyprus International Trust or any transfer or disposition of property to it.

The definition set by the Law is as follows:

All matters arising in relation to an international trust or any disposition of property to or upon such a trust, including without limitation matters as to:

1.   The validity, interpretation or effect of the trust or disposition or any variation thereof;

2.  The validity or effect of any transfer or other disposition of property to a trust;

3. The administration of the trust, whether it is conducted in the Republic or elsewhere, including matters concerning the functions, appointment and removal of trustees, protectors and enforcers;

4.  The existence and extent of any functions in respect of the trust, including without limitation powers of variation, revocation and appointment, and the validity of the exercise of any such function;

5.  The powers, obligations or duties of the trustees, protectors or enforcers or as to the liabilities or rights of the trustees, protectors or enforcers are to be determined according to the law of the Republic without reference to the law of any other jurisdiction.

  • It is provided that the law relating to inheritance or succession in force in the Republic or in any other country shall not affect in any way the transfer or disposition or the validity of the Cyprus International Trust.
  • The provisions of the Law further ring-fence the CIT from the possibility of foreign authorities bypassing the protection of this section of the Law by the simple expedient of bringing proceedings relating to an international trust before the Courts of a foreign jurisdiction, and then seeking recognition and enforcement of that foreign judgment in Cyprus.
  • The Law protects the CIT from the above by conferring exclusive jurisdictional competence in relation to the CIT on Cypriot courts but more importantly stipulating that the provisions of the Law shall apply regardless of any other provisions of the rules on conflicts of law applicable in the Republic and shall constitute a fundamental rule of law, whose compliance is a matter of public order.
  • The importance of the last provision is that it sets the matter being of a “public order” which is of course an established ground for refusing recognition and enforcement of foreign laws and judgments.
  • The Law also provides ample protection where the CIT affects rights arising under foreign laws from a ‘personal relationship’or ‘heirship right’ by providing that dispositions to a trust may not be challenged on the grounds that they conflict with the laws of another jurisdiction for example regarding family and succession issues, or on the ground that the foreign jurisdiction does not recognise the concept of trusts.
  • The Cyprus courts will not recognise a forced heirship claim which seeks to defeat an otherwise valid CIT, and such claims cannot be enforced against assets held in a CIT simply because the laws of the foreign jurisdiction prohibit or do not recognise the concept of a trust.
  • Practically, if the assets of a CIT are situated outside Cyprus, it is possible that a foreign court order could be applied to assets situated in the jurisdiction despite the presence of the robust Cyprus provisions. Such a scenario may be averted by “Cypriotising” the trust property / foreign assets to further protect them from claims of foreign courts by gifting the assets / trust property to a Cyprus company and then disposing the shares of the Cyprus Company to the CIT.

The Cyprus International Trust is the most effective and modern Trust instrument available at the moment in international tax planning and estate planning. There are no comparable competitors to the CIT in the Common Law world, and there are no comparable equivalents under Continental Law.


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