The concept of a trust is an arrangement whereby property is transferred from one person (the “settlor”) to another person (the “trustee”) who holds the property for the benefit of a specific person or persons (the “Beneficiaries”) or for specific purposes. The trust instrument sets out the terms and conditions under which the trustee holds the trust assets and outlines the rights of the beneficiaries. The trust is legally represented by the trustee.
Cyprus trust legislation expressly adopts common law and equitable principles of English Law, but within its own constitutional architecture. The first trustee legislation was established in 1955 with the enactment of the Cyprus Trustee Law Cap. 193 (which was modelled on the England and Wales Trustee Act 1925) to govern trusts established in Cyprus (a former British colony). In 1992 the Cyprus International Trust Law (“ITL”) was enacted, which regulates the establishment and administration of Cyprus International Trusts (“CITs”). The ITL was comprehensively amended during 2012 to add further flexibility and competitive advantage to CITs in line with the modern reserved powers trust legislations enacted in most offshore jurisdictions. The ITL (as amended) ensures that settlors and beneficiaries enjoy the highest possible degree of protection and reinforces the already formidable asset protection features of the CIT.
The settlor and any kind of beneficiary may now be a resident of Cyprus but not in the calendar year prior to setting up the CIT (the settlor can also be a beneficiary). In case of purpose trusts (established for the benefit of an object instead of a beneficiary) there must be an enforcer appointed and the distribution of trust property on cessation must be clearly defined. At least one trustee must be a permanent resident of Cyprus for the duration of the trust (duration restrictions of which have now been abolished). The beneficiaries possess the rights and remedies ordinarily found in a common law jurisdiction.
The ITL permits the appointment of a protector, who can limit the powers of the trustee subject to his consent or for the same to be exercised in accordance with his directions. The settlor may also reserve to himself wide powers as enforcer or protector of the trust.
The ITL confers wide powers of investment upon the trustee as an absolute beneficial owner; opening up the possibility of investing in movable and immovable property both in Cyprus and overseas, including shares in companies incorporated in Cyprus.
The ITL (as amended) grants the following benefits for CITs:
- A CIT is exempted from Cypriot taxes where none of the beneficiaries other than a charitable body is a resident of Cyprus.
- CIT details required to be registered in the trusts registry of the competent fiduciary regulators are confined to the name of the CIT and the trustee, the date of its establishment and the proper law.
- Confidentiality is granted on potential beneficiaries, as customer due diligence is required to be performed only on beneficiaries with an immediately secured right of present or future deployment, which cannot be taken away by any third party (a “vested interest”).
- A CIT may be used as an estate planning vehicle as there is no longer any estate duty in Cyprus.
- The ITL (as amended) permits the migration of trusts from one jurisdiction to another. This flexibility is important in cases where a change in circumstances may render such a transfer advantageous or necessary for the protection of the trust assets.
- The ITL provides that Cyprus law exclusively governs any matter relating to the validity or administration of a trust, the trustee’s fiduciary powers and duties, and the powers and duties of any protector; thus disregarding the laws of another jurisdiction which may not recognise the concept of trusts. The ITL also protects CITs from foreign judicial claims and forced heirship rules.
- The court may enforce trusts on behalf of beneficiaries. Furthermore, the court may appoint and replace trustees, as well as provide authorisation, indemnification and directions in certain circumstances.
- The ITL provides for creditor protection whereby an untainted settlement (CIT) made more than two years before bankruptcy is not returned to the bankrupt settlor’s creditors where it is shown that the bankrupt was solvent following the settlement. In these cases, the burden of proof rests on the bankrupt. The CIT, however, requires a creditor claimant to prove on the balance of probabilities that at the time of settlement the settlor was trying to defraud him. Such proceedings are out of time if brought more than two years after the date of transfer of the relevant property.
Under the modern Cyprus trust legislation, there are several types of trusts available:
- Fixed Trust, which confers a fixed entitlement on the beneficiary, thus removing the trustee’s discretion when exercising dispositive powers.
- Protective Trust, which provides the beneficiary with a lifetime interest becoming effective upon the occurrence of a certain event (i.e. settlor’s death, bankruptcy).
- Discretionary Trust, which provides the trustee with the discretion to make distributions to the beneficiaries on its own judgement. The settlor can indicate his wishes by means of a letter of wishes for the consideration of the trustee and has the possibility to appoint a protector.
The latter is the most common type of trust used in Cyprus. The terms of a so called plain vanilla discretionary CIT typically confer upon the trustee all the same powers in relation to the trust property as a natural person acting as the beneficial owner of such property. Therefore, in the eyes of the law, the trustee is considered the sole controlling person of the trust fund. In addition, the trustee owes fiduciary and other duties of care and skill to the beneficiaries, which are enforced by common law and the ITL. A discretionary CIT established in in the absence of substantial powers reserved by the settlor or conferred upon the protector can confer a wide range of benefits to the settlor and beneficiaries.
From a tax perspective, it relieves the other parties of the trust from any adverse tax consequences which would arise if they were to be considered controlling persons – hence avoiding having the trust fund taxed in accordance with the provisions of the settlor’s (or protector’s) onshore jurisdiction of tax residence. It ensures asset protection against spendthrift beneficiaries, as potential beneficiaries without a vested interest cannot force the trustee to make a distribution which would not be deemed to be in the best interest of the beneficiaries as a whole. Furthermore, provided the CIT is untainted and not created for the purpose of defrauding creditors, creditor protection is also achieved as the trust fund cannot be attached to settle creditor claims against the settlor. Finally, confidentiality may be preserved for potential beneficiaries until such time a distribution is made to them.
The reform of the ITL and the benefits associated with modern reserved powers places Cyprus as one of the most modern, favourable and flexible trust jurisdictions.
Haris Pefkaros – Vistra (Cyprus) Ltd Member of the CFA AML & Compliance Affairs Committee