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Trusts: a cornerstone vehicle for wealth preservation

Trusts can be considered the cornerstone of wealth preservation, asset protection and estate planning, a valuable tool utilized both in the commercial and family context.  Cyprus is a beneficial jurisdiction for the establishment of a trust, with a favorable tax regime, particularly for non-locals, numerous tax advantages and the lack of stringent conditions for trust settlement.  Trusts are unique in that they are extremely flexible instruments with varying purposes and when structured properly, can indeed assist with tax planning and property management, ensuring that trust property is safeguarded while returns on investments are maximized, for the ultimate future enjoyment by beneficiaries.

Legal framework:

The applicable legal framework for the establishment and administration of trusts in Cyprus is as follows:

  • The Trustees Law (Cap.193) which mainly adopts the English Trustee Act of 1925;
  • Doctrines of equity and case law in England;
  • The Cyprus International Trusts Law, as amended in 2012.

What is a Trust?

Even though Cypriot law does not expressly define a trust, it is universally defined as a legal or fiduciary arrangement created (in lifetime, or on death) by a settlor where property is placed under the control of a trustee upon the terms set forth in the trust settlement or the trust deed, for the benefit of a beneficiary(ies), or for a specified purpose. The legal title to the property is transferred to the trustee (who thereinafter becomes the legal owner), however this trust property is strictly managed for the benefit of the beneficiary(ies) who own all vested equitable interests recognized under the principles of equity.

There are four main types of trusts:

  • Express private trusts
  • Charitable Trusts
  • Fixed Trusts
  • Discretionary Trusts

The 3 certainties

It is imperative that the following certainties are fulfilled for the creation of a valid trust:

  • Certainty of Intention – there must be an express intention to establish a trust (usually supported by a Trust Agreement) which must be demonstrated by the settlor;
  • Certainty of subject matter – the trust property must be easily identifiable and clearly ascertained at the time of trust settlement; and
  • Certainty of objects – the identities of beneficiaries must be ascertained or ascertainable so the extent that the trustee is able to compile a complete list.

Cyprus International Trust (CIT) 

In Cyprus, trusts are classified either as ‘local trust’ where the settlor or one of the beneficiaries are residents of Cyprus or as a ‘Cyprus International Trust’(CIT). A CIT is established under the provisions of The International Trusts Law and following extensive amendments in 2012, a CIT must meet the below conditions:

  1. At least one of the trustees must be a permanent resident of Cyprus during the whole duration of the trust; and
  2. There is no requirement for the settlor, either physical or legal persons, to be a permanent resident of Cyprus in the calendar year which precedes the year in which the trust was created; and
  3. There is no requirement for the beneficiaries, either physical or legal persons, to be a permanent resident of Cyprus in the calendar year which precedes the year in which the trust was created.

As provided in the Income Tax Laws, a physical person is considered tax resident of Cyprus if he/she resides in Cyprus for a period which exceeds in aggregate 183 days in a tax year.

A company is considered tax resident of Cyprus if its management and control is exercised in / from Cyprus.

Registration Requirement

Cyprus has recently enacted the operation of the Trusts Registry to be maintained by Cyprus Securities and Exchange Commission (CySEC) and aimed at the collection and maintenance of identities of beneficiaries for express trusts and other similar legal arrangements. While data on beneficiaries will have to be disclosed, this Trusts Register is not open to the public, requiring legal and physical persons, apart from supervisory bodies and tax authorities to demonstrate a legitimate interest prior to being granted access to such sensitive data.

How am I protected from the Trustee?

The law recognizes the beneficiaries of a Cyprus trust as the equitable (beneficial) owners of the trust property. Effectively, this means that the trustee only legally holds and manages the trust property for their benefit and cannot in any way personally benefit, unless authorized, either expressly by the trust deed or the beneficiaries. Regardless, by virtue of Article 4A and 8 of the CIT legislation, the law has vested trustees with extensive powers such as the ability to revoke or modify the terms of a trust, the authorization to give instructions on the sale, management, lending and general administration of trust property as well as to use their own judgment call as regards to making investment decisions concerning the trust capital and its distribution.As such, it is important to choose a reliable and financially experienced trustee, as well as to ensure that their powers remain in check.

Fiduciary Duties – The law protects the beneficiaries by imposing strict fiduciary duties on the trustee, prohibiting them from making any unauthorized profit or putting themselves in the position of conflict of interest. The duties owed by the trustees to the beneficiary(ies) are enforceable by the courts, making them potentially personally liable towards the beneficiary( ies), both in a civil and criminal capacity,  in the case of misconduct or misappropriation of trust property.

Some of the core fiduciary duties owed by the trustee include the duty to act impartially and treat all beneficiaries equally, to act in good faith, exercising due care and skill when holding or distributing trust property, in accordance with the trust deed and the duty to maintain proper accounts and record-keeping.

Appointing a Protector – Although the role of a trustee and a protector may initially seem intertwined, they do have their differences and a prudent settlor may well wish to appoint both a trustee and a protector to a trust. While a trustee manages the trust assets on an ongoing basis, aiming to distribute them in accordance with a settlor’s wishes, a trust protector overviews the trustee’s actions, acting as an impartial ‘third-party’, ensuring that the best interests of the beneficiary(ies) are served. A trust protector can indirectly restrict trustee powers by vetoing investment decisions, suggesting investment strategies and opt to appoint an additional trustee or replace an existing one. Trust protectors actively engage in the smooth running of the trust and the resolution of disputes between involved parties.

Exhaustive and precise trust deed – Finally, the starting point of protection and the evidence that will be used, both in a court of law or out of court negotiations, is the trust deed or trust agreement. It is important to ensure that this document is properly drafted to include a clear, exhaustive list of trustee powers along with their pre-defined reservations or restrictions. The trust deed should be construed in a manner so to reflect the settlor’s intentions to their fullest extent and fill in any gaps that may be created by virtue of a change of circumstance or the passing of time, such as upon death of one of the beneficiaries, upon loss or damage of trust property etc. in order to effectively minimize future disputes.

How to know a trust in Cyprus is suitable for you?

Valuable Asset Protection tool Since it is the trustee that holds the legal title to the trust property and not the individual beneficiary(ies), the trust assets are protected from future claims from governments, competent authorities and creditors alike who are unable to repossess the trust property for the settlement of debts (unless assets were contributed to the trust with the intention of defeating creditors). Family trusts are useful in this regard, as trust property is more likely to be excluded from a property settlement in the case of divorce because trusts act to assign the legal use and enjoyment of assets to predetermined beneficiaries. This is especially significant in the case of estate planning, where trusts can be considered as being immune to forced heirship, where inheritance laws in a settlors jurisdiction predetermine certain beneficiaries and exclude others, as a trust will defeat such laws.

Tax Advantages

Cyprus International Trusts provide significant possibilities for international tax planning and estate planning.

Interesting fact: Such trusts are exempt from income tax, capital gains tax, estate duty and may hold shares in a Cyprus company without any liability to tax on dividends received.

The source of income of a CIT is decisive for the imposition of taxes which are levied at the beneficiary level. Irrespective of whether trust income is sourced within Cyprus or from overseas, such income will be taxable in Cyprus where the beneficiary is tax resident. Effectively, where the beneficiary is a non-Cyprus tax resident they are exempt from taxation, provided they do not derive income from Cyprus.

For instance:

  • Dividends, interest or other income received by a CIT from a Cyprus company is not taxable nor subject to withholding tax.
  • The disposal of assets of a CIT, provided they do not include the disposal of immovable property situated in Cyprus or shares of a Cyprus holding company, are not subject to capital gains taxation. Indeed, it is common for foreign individuals to set up a CIT in order to escape capital gains taxes in their countries of residence, as a CIT can own property located abroad.
  • No estate duty tax is imposed in Cyprus which is beneficial for CIT’s created for the purpose of estate planning.

Difficult to void – There is a two-year limitation period for challenging a CIT with the only recognized basis being the defrauding of creditors in the case of the settlor’s bankruptcy. As such, the high burden on proof is placed on the claimant to prove to the court that the CIT (or the transfer of assets to the CIT) was made with the intention of defrauding the settlor’s creditors and can easily be overturned, provided the settlor can prove sufficient disposable assets at the time of CIT creation.

Indefinite Duration – Following the 2012 amendment of the International Trusts Law, CIT’s formed during or after the coming into force of the amendment to the law, have no limit on their validity or enforceability.

Conclusion:

Undoubtedly, there are several undisputable advantages with respect to Cyprus International Trust formation. The simplicity of registration, the minimum requirements for the parties to be involved in the trust structure, the clear legal framework governing trusts laws and tax benefits should all be considered by a settlor or investor looking to establish a trust in Cyprus.

Though, confidentiality is affected, it is not completely severed with the trust registry not been open to the public and the need to demonstrate a legitimate interest, which is likely to be a difficult hurdle to overcome. It is clear, that trust formation stands as a viable method of maintaining confidentiality in the case of company, whereby trusts can be registered as shareholders in corporate entities, thereby avoiding public access to UBO’s identities through the Companies Register. Families may choose to place property on trust, to provide for their children and avoid complex divorce settlements. Investors may choose to create a trust to ensure their assets are properly managed and structured by reputable wealth advisors in the capacity of trustees. While trustees do have a number of far-reaching powers in the context of their position, there are ways to input restrictions and ensure the interests of beneficiaries are properly met. Our professional team at C. Pilyugin & Co LLC will gladly consult interested persons on matters related to taxation of trusts, propose trust structures in line with client business and personal goals and provide trustee services, where required. We will ensure that everything is accurately documented and conditions are fulfilled.

The information provided above by C. Pilyugin & Co LLC is intended for general information purposes only and should not be construed as professional or legal advice in any sense. It is advised that readers should refrain from acting only on the basis of the above information without first obtaining legal or professional advice on the subject.

Our professional team at C. Pilyugin and Co LLC will guide applicants through the whole process, starting from preparing the required applications and gathering documentation to satisfy the quality criteria to seeking out appropriate property for Applicants, based on their preferences and objectives for investment under the Cyprus Permanent Residence – Fast Track Immigration Permit (Regulation 6(2)).

Please send an email to [email protected] or fill out the form below to book a consultation with us.

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