The main legal framework governing trusts in Cyprus is a combination of English Law i.e. the Principles of Equity and Statute Law i.e. The Trustees Law of Cyprus (Cap 193), which, is modelled on the English Trustee Act of 1925 and the International Trusts Law of Cyprus (Law 69(I) of 1992 as amended by Law 20(I)/2012).
A trust arrangement entails an obligation on the holder of property (the “trustee”) to manage the “trust property”, vested in him/her by its previous owner (the “settlor”) for the benefit of the “beneficiary”.
Types of Cyprus International Trusts
- Express private trusts
- Charitable Trusts
- Fixed Trusts
- Discretionary Trusts
In order to create a valid trust, the 3 certainties requirement needs to be satisfied:
- Certainty of Intention: demonstrate evidence of the Settlor’s express intention to create the trust
- Certainty of Subject Matter: demonstrate that the assets which will form the trust property are readily identifiable and tangible
- Certainty of Objects: the identity of all beneficiaries must be ascertained or ascertainable at the time of setting up the trust.
Main elements of the Cyprus International Trusts’ Law:
- The Settlor and the Beneficiaries must not be tax residents in Cyprus during the year preceeding the year of creating a CIT
- A CIT may be challenged only on defraud of creditor grounds with a 2-year limitation period
- Succession, heirship or other laws applicable in foreign jurisdictions or court judgments or orders or arbitral awards or decisions by foreign Competent Authorities do not affect the validity of a CIT or the transfer of property to the Trustee of a CIT
- The Settlor has the right to reserve many powers including, the powers to revoke or amend the trust, to instruct the Trustee, to appoint and remove trustees, the protector or the enforcer, to change the law regulating the CIT or the place of its administration etc.
- A CIT may last for an indefinite period
- The income of a CIT may be accumulated without limitations
- The law regulating a CIT may be changed to another foreign law
- The trustees of a CIT are bound by confidentiality and cannot disclose information or documents unless ordered by a Cyprus Court or required by law
- In the case of a CIT which is expressly governed by Cyprus Law, the provisions of the International Trusts Laws of Cyprus apply without reference to other applicable rules of conflict and as a matter of public order
Taxation of a Cyprus International Trust
Generally, Cyprus International Trusts are transparent for tax purposes. The trustee is not assessed on the income/ gains of the trust and is responsible for discharging the tax liabilities of the beneficiaries on their behalf.
In determining the basis of taxation of a beneficiary in Cyprus, it is important to consider whether or not the beneficiary is tax resident in Cyprus. In the case of a Cypriot tax resident beneficiary, income and gains of the trust earned from sources within and outside Cyprus are subject to tax in Cyprus in accordance with the provisions of the Cypriot tax legislation. Further details on the taxation of Cyprus tax residents in accordance with the legislation can be found here. Beneficiaries who are not tax resident in Cyprus are subject to tax only on income and profits sourced in Cyprus.
International Cyprus Trusts are liable to taxes such as VAT and stamp duty on their activities in Cyprus.
Capital gains tax applies only regarding gains from the disposal of real estate situated in Cyprus or shares of a company holding property situated in Cyprus.
No estate duty is payable by a Cyprus International Trust that was formed for the purposes of estate duty planning.
Trusts fall within the scope of double taxation treaties in the case where the other contracting state recognises trust structures and principles of equity and the trust itself meets the eligibility criteria set out in the treaty in question.