Cyprus International Trusts – a powerful wealth management and preservation tool
1 Introduction
The use of trust vehicles have long been used for the protection, maintenance and management of assets. Cyprus, as a common law jurisdiction1 with an aim of being and establishing itself as an attractive jurisdiction for investments and trust services has naturally embraced the use of trusts by implementing and enhancing its trust and tax legislation in line with modern investment and wealth protection requirements.
2 What is a trust
2.1 A trust is the relationship that is created when a natural or legal person or partnership (the settlor) transfers the legal title of specific property or assets (the trust property) to an individual or company (the trustee) to hold for the benefit of another (the beneficiary). This creates a separation between legal and beneficial ownership and the creation of a trust arrangement. The terms upon which the trust
property is vested onto and held by the trustee for the benefit of the beneficiaries are usually set out in a trust deed. Note that the settlor can also be the beneficiary and a beneficiary can be a trustee (although a sole trustee cannot be the sole beneficiary).
3 What are Cyprus International Trusts
3.1 Cyprus International Trusts (“CITs”) are trusts that are created in accordance with the International Trusts Law of Cyprus of 1992 (as amended) (the “Law”). The Law has allowed for an enhanced and re-developed legislative framework of international trusts in Cyprus providing wide powers and tools for wealth management, protection and preservation which did not exist for normal trusts in Cyprus (which are otherwise formed under the Cyprus Trustee Act of 1955).
3.2 For example, the assets settled under a CIT are shielded from interference by actions and events such as divorce, death/inheritance issues and separations. CITs are also exceptionally useful for the purpose of passing down assets for the benefit of future generations and the management of these assets in various, tax-beneficial manners.
3.3 It should be noted however that the Law is not a comprehensive codification therefore the Trustee Law 1955 (almost identical to English Trustee Act of 1925) applies to CITs save where this Law provides otherwise.
4 Conditions for setting up a CIT
4.1 A CIT is created when:
4.1.1 the settlor (natural or legal person or partnership), is not a resident of Cyprus during the calendar year prior to the creation of the CIT;
4.1.2 at least one of the trustees (natural or legal person or partnership) is a resident of Cyprus for the whole duration of the CIT (other than charitable trusts); and
4.1.3 no beneficiary (natural or legal person or partnership) is a resident of Cyprus during the calendar year prior to the creation of the CIT.
4.2 Following recent amendments to the Law, the settlor and beneficiaries are allowed to become residents of Cyprus following the creation of the CIT.
5 Recent modernising changes in the Law
5.1 The Law was modernised in 2012 so that CITs now provide wider investment powers for trustees, more power for settlors and have no perpetuity requirements.
5.2 The Law now provides that, subject to the terms of the trust, all matters for CITs (including: (i) disposition of property under such trust; (ii) validity and interpretation of such trust and the transfer; (iii) the management of the trust; and (iv) the powers of trustees/protectors/enforcers) shall be determined according to Cyprus laws, without reference to the laws of any other country.
5.3 In addition, the inheritance or succession laws of Cyprus or any other country shall not affect the transfer of trust property or the validity of the CIT.
5.4 Notwithstanding any contrary law of Cyprus (or any other jurisdiction), a CIT shall not be void or voidable in the event of the settlor’s bankruptcy or liquidation of his property or by any action against the settlor by his creditors. This is unless the Court is satisfied that the CIT was made with the intent to defraud the settlor’s creditors at the time of the transfer of his assets to the trust (the burden of proof lies with such creditors).
5.5 Also, any action against the trustee must be brought within two years from when assets were transferred to the CIT. Therefore, after the passing of two years, the transfer or disposition of assets to the CIT becomes, under Cyprus law, unassailable.
5.6 The Law also provides that a CIT or a disposition of trust property to or under a CIT shall not be void or voidable, nor shall the capacity of the settlor/trustee/protector/enforcer be questioned or their powers be deprived because:
5.6.1 the laws of another jurisdiction prohibit or do not recognise the concept of a trust; or
5.6.2 the trust or disposition: (i) (potentially) invalidated rights, obligations or liabilities of any person by the laws of another jurisdiction (i) by reason of a personal relationship to a settlor or beneficiary or
(ii) by way of right to inheritance; or
(ii) is (potentially) contrary to any law or judgment of another jurisdiction.
5.7 The above new provisions have been put in place to limit the circumstances under which any foreign law or foreign court can impugn a CIT and clarify the circumstances under which a CIT might be impugned as a matter of the law of the jurisdiction.
5.8 The recent amendments in the Law also introduced the role of “protectors” of CITs. Protectors are individuals other than the trustees, who have vested powers to offer trustees advice regarding their discretionary powers and the right to appoint or cancel the appointment of the trustees. Protectors can therefore be utilised by settlors and beneficiaries to achieve greater control over the trustees’ actions in relation to the trust assets.
6 Powers vested to / retained by the Settlor
6.1 The recent amendments in the Law have enhanced the role and rights of the settlor. The Law specifies that the granting to the settlor (either as settlor or in his capacity as protector or enforcer or otherwise) of any right or interest to the trust property or any of the below powers shall not affect the validity of the trust. The settlor therefore has uninhibited powers to (in accordance with the trust instrument setting the CIT):
6.1.1 revoke/amend the terms of the CIT;
6.1.2 advance/distribute/apply income or capital of trust property (or give instructions for this);
6.1.3 exercise the powers of director, issue binding directions as to appointment/removal of directors of companies wholly or partly owned by the trust;
6.1.4 issue binding instructions to trustee for management of trust property;
6.1.5 appoint/remove trustee, enforcer, protector or beneficiary or investment manager/adviser;
6.1.6 change the proper law and forum of administration of the CIT; and/or
6.1.7 limit the powers/discretion of trustees and requiring his consent for their exercise (i.e. negative powers).
7 Other features making a CIT an attractive trust instrument
7.1 There are a number of features of a CIT which make it a highly desirable vehicle for wealth management and wealth preservation:
7.1.1 the duration of the CIT is not subject to any time limitations;
7.1.2 the CIT is exempt from estate duty, inheritance tax, income tax, capital gains tax or any other taxes in Cyprus (provided that the CIT assets do not include immovable property in Cyprus);
7.1.3 accumulation of the trust income is uninhibited should the trust deed provide so;
7.1.4 there are no restrictions on the assets that the CIT can invest in or hold;
7.1.5 the governing law of the CIT can be changed during the CIT’s lifetime;
7.1.6 Cyprus courts have vested jurisdiction to hear disputes about CITs, in many cases to the exclusion of other courts – thus providing security to the settlor and beneficiaries of the venue of any dispute and the decreased likelihood of a foreign court claiming jurisdiction over CIT trust assets; and
7.1.7 the confidentiality of the settlor and beneficiaries is ensured with minimum registration requirements.
How we can help
Kaimakliotis LLC is a prominent law firm in Cyprus, providing quality legal, professional and advisory services to our clients around the world. Our lawyers have worked and trained in world-class international law firms, thus allowing us to offer unparalleled level of service.
Kaimakliotis LLC’s uses a commercial approach on advising on cross-border transactions and the most complex local transactions. Speed, responsiveness, legal accuracy and clarity are key to our service.
We can offer a broad range of legal services including trusts and private client services, including with respect to real estate, corporate and commercial.
Key Contacts
For further information, please contact:
Pavlos Kaimakliotis
Partner
Tel: +357 24 01 01 01
pavlos.kaimakliotis@kaimakliotis.com
Koula Fili
Counsel
Tel: +357 24 01 01 01
koula.fili@kaimakliotis.com
1 Section 29(1)(c) of the Courts of Justice Laws of Cyprus establishes Cyprus’ adoption of the common law and doctrines of equity.