Overview
Cyprus trust law is largely based on the English Trustees Act 1925 and the doctrines of equity. Trusts are created for many important purposes — charitable trusts, forced heirship planning, provision for children and vulnerable adults, unit trusts, confidentiality, tax and gains planning, and asset protection. The law does not provide a comprehensive statutory definition of a trust; the principles were developed primarily through Cyprus case law.
In essence, a trust entails an obligation on the holder of property (the trustee) to manage that property (the trust property) for the benefit of another (the beneficiary). Legal title to the trust property is vested in the trustee by its previous owner (the settlor), and the property is managed in accordance with the settlor's instructions, usually set out in a trust deed (the trust instrument). Although the trustee holds legal ownership, the property does not belong to the trustee; the beneficial ownership rests with the beneficiaries.
Duration and Perpetuity
Under the 2012 Law, the previous restriction limiting a trust to a maximum duration of 100 years has been abolished. A Cyprus International Trust (CIT) established during or after the entry into force of the 2012 Law may now be of indefinite duration, and all restrictions on the duration of trusts have been removed.
Excluding express terms of the trust to the contrary, no distribution, payment, holding, or disposal of income or capital to another trust is invalidated merely because the other trust continues to be valid after the first trust ceases to exist. The perpetuity rules do not apply to charitable or purpose trusts, which may continue indefinitely.
Validity and the Three Certainties
The law confirms the validity of a trust created by any person of full age and sound mind, regardless of any provisions relating to inheritance or succession under the law of Cyprus or any other country. A CIT is irrevocable unless a specific power of revocation is reserved in the trust instrument, and it cannot be set aside by the settlor's creditors unless it can be proven that the trust was made specifically with the intent to defraud them. The burden of proof lies with the person seeking to set aside the trust, and any such action based on fraud is subject to a limitation period of two years from the date the assets are transferred.
Where Cyprus law is chosen as the proper law of the trust, its terms prevail over those of any other jurisdiction, including provisions relating to inheritance. The validity of the trust cannot be challenged on the basis that another jurisdiction does not recognise trusts or that the terms conflict with foreign law. For a valid trust to be created, three certainties must be established:
- Certainty of intention — there must be evidence of the settlor's express intention to create the trust, usually shown by the trust instrument (oral trusts are possible)
- Certainty of subject matter — the assets forming the trust property must be readily identifiable, such as money, property, or shares
- Certainty of objects — the identity of all intended beneficiaries must be ascertained or ascertainable at the time the trust is established
Parties to the Trust
A Cyprus International Trust typically involves several parties, each with a defined role:
- The settlor creates the trust and places the initial property under it
- The trustee (an individual or company) agrees to hold the trust assets in its name for the benefit of the beneficiaries, and holds legal title to those assets
- The beneficiaries hold beneficial or equitable title; save in cases of bare trusts, they generally have no say in the management of the trust property
- The protector, though not compulsory, may be appointed to restrict key powers of the trustee, such as the power to add beneficiaries
- The enforcer (who may also be the protector) has the duty of enforcing a trust established for a non-charitable purpose
Confidentiality and Reporting
The International Trusts Law prohibits the trustees, protector, enforcer, or any other person from disclosing information regarding the trust, the trustees, the settlor, or the beneficiaries. Disclosure is only permitted pursuant to a court order where it is of paramount importance to the outcome of specific criminal or civil proceedings.
Registration of a CIT is optional, further safeguarding confidentiality, and there are no reporting requirements in Cyprus for a CIT. The trust may hold shares in a Cyprus company through nominee shareholders who hold the shares on behalf of the real owner.
Taxation and Tax Benefits
Cyprus International Trusts offer significant tax advantages and create valuable tax planning opportunities. Broadly, all income and profits of an international trust are not taxable in Cyprus where the relevant conditions are met. Key tax benefits include:
- Income, gains, and profits from non-Cyprus sources are exempt from income tax, capital gains tax, special defence contribution, and any other Cyprus taxes
- Worldwide income, profit, and gains are taxable in Cyprus only where the beneficiary is a Cyprus tax resident; non-resident beneficiaries are taxed only on Cyprus-sourced income
- Dividends, interest, or royalties received by a CIT from a Cyprus company are not taxable and are not subject to withholding tax
- Trust capital received in Cyprus by a foreigner resident or retired in Cyprus from a non-resident trust is not taxable on the trustee
- There is no estate duty or inheritance tax in Cyprus
- A CIT may be used to distribute untaxed income in Cyprus to beneficiaries, such as family members
- Persons intending to migrate to a high-tax jurisdiction may obtain pre-migration tax advantages by protecting assets in a CIT
Asset Protection
A CIT may be used to protect assets from risks arising in tort, contract, or otherwise in relation to transactions entered into by the settlor. Such claims may include negligence, breach of contract, claims of spouses or former spouses, and breach of statutory duty.
A CIT, or a transfer of trust assets, may only be set aside by the settlor's creditors to the extent that it is proven to the satisfaction of the court that it was made with the intent to defraud creditors. The burden of proof lies with the creditors, who must show both the intent to defraud and that they were creditors at the time the trust was made. Any action must be brought within two years from the date the assets were transferred, and only in respect of those assets.
Prerequisites of a Cyprus International Trust
To qualify as a Cyprus International Trust, the following conditions must be satisfied:
- The settlor must not be a tax resident of Cyprus during the year preceding the year in which the trust is formed; there is no longer any prohibition on settlors relocating to Cyprus after establishment
- Beneficiaries may relocate to Cyprus after a year following the trust's creation
- The trust property may include all kinds of assets situated anywhere in the world, including real estate located in Cyprus
- At least one of the trustees must be a resident of Cyprus
Trustees and Beneficiaries
Trustees are appointed by the settlor. There are no rules as to how many trustees must be appointed, though it is advisable to appoint more than one. A trustee need not accept the appointment. The main duties of a trustee are to administer the trust property prudently and to comply strictly with the terms of the trust. Trustees generally cannot vary the terms of the trust, save where all beneficiaries are of full age and capacity, or where the court sanctions a variation in the best interests of beneficiaries who belong to protected classes. Any action in excess of a trustee's powers constitutes a breach of trust, for which the trustee is personally liable.
Beneficiaries have the right to enjoy their interest in the trust property. In the event of a breach of a private trust, beneficiaries may pursue a personal action against the trustees, follow the trust property or anything into which it has been converted (subject to the limits of the tracing remedy), or, where appropriate, institute criminal proceedings.
Settlor Reserved Powers
When relinquishing control to the trustees, the settlor may reserve powers specifically drafted into the trust instrument. Section 4A of the CIT law clarifies that the reservation or grant of any right, interest, or power to a settlor — whether as settlor, protector, enforcer, or otherwise — does not affect the validity of the trust nor delay its execution.
The powers that may be reserved include the power to revoke, vary, or amend the terms of the trust; to apply income or capital; to direct the appointment or removal of directors of trust-owned companies; to give directions on the purchase, retention, sale, management, or charging of trust assets; to appoint or remove trustees, enforcers, protectors, or beneficiaries; to appoint or remove investment managers; to change the proper law or forum of administration; and to require that certain powers be exercised only with the settlor's consent. In exercising these reserved powers, the settlor is not deemed to be acting in breach of trust, and no intention to defraud may be imputed.
Why Cyprus Has Become a Popular Trust Jurisdiction
Cyprus offers a compelling combination of features that have made it a leading trust jurisdiction:
- Complete tax exemptions for qualifying trusts
- A short two-year limitation period for challenging a trust
- No requirement for registration
- Complete confidentiality
- Low cost of establishment and administration
- Availability of competent professional trustees
- Flexibility in adopting foreign law and an indefinite permitted duration
- Stamp duty on the trust instrument of only EUR 430
Practical Uses of a Cyprus International Trust
A CIT is a flexible instrument that can serve a wide range of purposes, including:
- A vehicle for the management of funds by investment trust funds, banks, and similar institutions on behalf of clients
- Holding property that cannot personally be held, such as assets for a minor, until maturity
- Establishing collective investment structures for joint ventures
- Protection against high taxation for settlors resident in high-tax jurisdictions
- Protection against spendthrift beneficiaries, safeguarding family fortunes for future generations
- Managing pension schemes, benefit plans, and profit-sharing arrangements for employees
- Investing in overseas businesses while managing the remittance of profits and dividends
- Asset protection against expropriation, government claims, creditors, and freezing regulations
- Promoting charitable, religious, or artistic causes and establishing foundations
How ASC Can Help
ASC advises settlors and their advisers on the establishment and administration of Cyprus International Trusts, including drafting trust instruments, structuring asset protection and succession solutions, appointing professional trustees, and ensuring the trust achieves its tax and confidentiality objectives. Contact us to discuss setting up a Cyprus International Trust.