So, then, what is a trust?
Trusts have been created for many reasons, in an effort to reduce tax liabilities, to alter the devolution of assets on death, to avoid the inconvenience and publicity of probate and to protect assets from actual or potential creditors. The popular “asset protection trust” was launched by legislators wishing to attract investors to their local market. In this context, the main advantages of an asset-protection trust refer to the specific planning advantages which accrue in the context of the Cyprus domicile.
In the most simple terms, trustees, who get no benefit from the trust, are required to hold property of which they are the legal owners for the benefit of other persons, known as “the beneficiaries” and for reasons of tax mitigation which can be achieved through the establishment of a limited liability company in a low tax or zero tax jurisdiction. But while a corporate structure may achieve some of the tax planning objectives of the owner, it is not as “personalised” or as “tailored” a solution to the owner’s objectives as a trust.
The International Trusts Law 69/92 enacted in 1992 with the aim of providing incentives for the establishment and administration of trusts in Cyprus by non-residents. The latter has enabled the creation in Cyprus of “International Trusts”. The Exchange Control and Income Tax laws exempt such trusts from income tax, capital gains tax and estate duty tax, making International Trusts a very attractive tax planning vehicle for the non-resident investor.
Briefly, the essential elements of an International Trust are that: the settlor is not a permanent resident of Cyprus (a Cyprus company owned by a non-resident will qualify as a settlor); the beneficiary is likewise not a permanent resident (charitable institutions are an exception); the trust property does not include any immovable property in Cyprus; a minimum of one trustee is resident in Cyprus.
Trusts are widely used for the protection of assets from the claims of actual or potential creditors. To a large extent, the asset-protection use of a Trust has developed as a response to litigation in the United States because of the large awards of damages handed down by juries in civil law cases. In Cyprus, the International Trusts Law 69/92 makes specific provision to asset protection trusts. It provides that notwithstanding the provisions of any bankruptcy or liquidation laws in Cyprus or in any other country, and notwithstanding the fact that the trust is voluntary and without consideration, unless it is proven to the Court that the trust was made with intent to defraud persons who, at the time when the payment or transfer of assets was made to the trust, were creditors of the settlor, the trust shall not be void or voidable. The law specifies that the burden of proof of such an intent on the part of the settlor lies with the creditors seeking to annul the transfer made to a Cyprus International Trust. Moreover, such an action must be instituted by the creditors within two years from the date of transfer or disposal of the assets to the trust.
There are a number of other reasons to create a trust, the most popular of which are Inheritance Laws, Tax Planning, Double Taxation Treaties, Limitation of Benefits Articles. Also, an international trust is irrevocable; the rules against perpetuities does not apply to international trusts which may last for a hundred years and in the case of charitable or purpose trusts may continue in force indefinitely; accumulation of income is valid for any period for the entire duration of the trust and there is no limitation on the kind of investments in which the assets of an international trust may be put. Nor the government, nor the Central Bank of Cyprus may disclose to anybody any information pertaining to the identity of the settlor, the beneficiaries, the trustees and their duties, or the accounts or assets of the trust. Only a court may order the disclosure of information or the presentation of documents pertaining to the above in civil or criminal proceedings, and to do so, disclosure must be deemed very important to the outcome of the case.
The trust, whether used to protect assets from claims, to determine inheritance shares, or for a combination of reasons, is an invaluable tool for flexible and effective estate and tax planning.
Provided that the correct professional advice is sought and obtained, trusts can maximize the tax benefit of prudent investors and organise their business matters in a way which best suits their particular circumstances and needs. Once the question of choice of the place of residence of the trust for the purposes of taxation and the governing law are settled in a satisfactory manner, taking into account the “relatedness” of the chosen domicile, then a Cyprus International Trust can prove a most efficient means of organising and protecting the business and assets of settlors worldwide.