TAX-FREE OFFSHORE TRUSTS
INTRODUCTION TO INTERNATIONAL TRUSTS
- Accumulation and maintenance trusts;
- Discretionary trusts;
- Fixed interest in possession trusts;
- Revocable trusts.
Criteria to establish an International Trust
- The Settlor must not be a permanent resident of Cyprus;
- No Beneficiary other than a charity is a permanent resident in Cyprus;
- The trust property does not include any real property situated in Cyprus;
- There must be at least one trustee resident in Cyprus at all times.
Duration of an International Trust - The duration of the trust may continue until the one hundredth anniversary from the date on which it came into existence and accumulation may continue for the duration of the trust. Purpose and charitable trusts may carry on indefinitely.
Change of governing law - The possibility of charging the law governing an international trust is expressly provided for in the new law. It allows a Cyprus trust governed by Cyprus law to be changed to a foreign law trust and permits a foreign trust to adopt Cyprus Law if such change is recognized by the law of the country concerned.
Confidentiality - Confidentiality takes a prominent position in the new law. The settlers, trustees and beneficiaries should not disclose information to third parties relating to international trusts, unless a Cyprus Court orders the information to be disclosed.
Taxation - The new law makes it abundantly clear that the income and gains of an international trust derived from sources outside Cyprus is exempt from all kinds of tax in Cyprus and no Cyprus estate duty is chargeable in respect of assets belonging to an international trust created in Cyprus.
Registration - It is expressly provided that an international trust is exempt from any obligation for registration.
EXAMPLES OF ADVANTEGEOUS USES
Obtaining confidentiality - Confidentiality is absolutely achieved, as there is no requirement to register or publish the financial results of an international trust. The Deed of the Trust is private to the parties concerned whereas when a person dies his Will becomes open to the public inspection in many overseas jurisdictions. A corporate trustee does not die and the continuity of the trust is not affected by the death of a settler.
Organizing Collective investment - Where several persons wish to make joint investments a trust can provide the basis of their co-operation and the sharing of the financial results of their joint venture.
Management Vehicle - Investment Trust Funds, banks, etc may through a structure of a trust and an international business company that acts as a trustee, manage funds for their clients.
Holding property that cannot personally be held - A minor may not be able to hold property in his own name but a trustee can often hold it for his benefit.
Protection against Spendthrifts - Trustees can protect family fortunes for future generations by safeguarding capital and avoid it being frittered away by spendthrift beneficiaries.
Promoting causes and charities - Through a Cyprus international Trust a person may provide for a charity, promote a religious or artistic cause, or establish a foundation to support a worthy project.
Protection of assets - Assets can be placed into an CIT to safeguard the interests of a beneficiary, e.g. sheltering the inheritance of a daughter from claims in case of divorce. Professional partnerships may also find that trust assists in providing custody for personal assets and safeguarding them from loss through litigation.
Managing profit sharing and pension schemes - Companies can provide pension schemes, benefit plans and profit sharing arrangements by using a trust with their employees forming the class of beneficiaries. The trust provides a most effective method for grouping and sharing benefits and it has the added advantage of being able to accommodate a rule book designed to suit each specific circumstance.
Power to transfer jurisdiction - Under the new legislation a CIT may be transferred to another country's jurisdiction and at the same time a trust established in another jurisdiction may be transferred to Cyprus. This facility will, without much expense or trouble, help settler wishing to relocate or benefit from the many advantages of Cyprus as a financial Centre.
ADVANTAGES OF CYPRUS TRUSTS
Divesting of personal assets - An individual who wishes to divest himself of personal assets for fiscal or other reasons can achieve this by transferring them to a Cyprus offshore trust.
Pre-migration arrangement - Individuals moving to a high-tax country may obtain fiscal advantages in their new country by placing funds in a Cyprus offshore trust.
Investing in business overseas - An individual who wishes to invest in business overseas but wishes to ensure that the profits and dividends received are not remitted to the country of his residence, may set up a Cyprus offshore trust to invest in overseas business.
Investment holding company - A trust can be used in one country to own an underlying investment holding company in another. This type of tax planning device has many advantages in providing the maximum possible protection for both settler and beneficiaries alike.
Confidentiality - An individual who wishes to keep anonymity can do this by setting up a discretionary trust which owns the shares in the company. This is a particularly useful and popular vehicle for carrying out trading and financial activities, particularly for residents of countries which do not recognize the concept of a trust.
Global estate planning - An individual, through the use of a trust, can arrange to be succeeded in inheritance by persons, who, due to the legislation of the individual's country, would otherwise be excluded from the inheritance.
Asset protection - Individuals from volatile parts of the world may wish to protect part of their fortune from high domestic inflation rates by converting it into strong currency assets, or individuals can protect their assets against possible expropriation laws, future claims of Governments, law suits or international blocking or freezing regulations overseas.
TYPES OF TRUSTS
Discretionary trusts - It is possible for a settler in Cyprus to establish a discretionary trust based on Cap 193 which states that the powers of trustees can be expanded by the settler in the trust deed.
Definition - A discretionary trust grants the trustees discretion to pay the income or capital of a trust fund to any or all of a particular class of persons defined in the trust deed. The trustee may also be given discretion in deciding when to pay any money to any of the members of the class. Thus, none of the beneficiaries has any right to be paid any money out of the trust fund, since the trustee may exercise his discretion and may postpone any such payment or even decide not to pay a particular beneficiary at all.
Advantages - A discretionary trust is the usual type of trust in Cyprus because of the many advantages it provides including the following:
- The beneficiaries cannot be taxed on the trust fund, because they have no legal right in the trust fund until the trustees exercise their discretion in their favour.
- Similarly, the beneficiaries cannot be subject to local exchange control regulations regarding compulsory repatriation of assets until the trustees exercise their discretion.
- No estate duty is payable.
- Since the beneficiary only has contingent interest, the trust assets are not available to his creditors, should he go bankrupt.
- The settler may through a Cyprus International Business Company controlled by his trust, become a trustee or its sole trustee thus effectively managing it.
- It is a flexible instrument, allowing trustees to vary the various interests under the trust, as and when circumstances change, without the need to have recourse to the procedures of variation of trusts (i.e. getting the agreement of all the beneficiaries or asking the court to vary the terms of the trust).
Fixed trusts - Another type of trust is a fixed trust which does not give the trustees any discretion when distributing the assets to the beneficiaries. An example of this type of trust is one which requires the trustees to distribute the income of the trust property to a particular individual during that individual's lifetime and thereafter distribute the capital to a named beneficiary or beneficiaries in specified shares.
Fixed and discretionary trusts - It is possible to have a combination of a fixed and discretionary trust. The trustees may have a discretion as to the distribution of income for a period of time, but are required to distribute the capital ultimately in fixed proportions. Conversely, they may be required to distribute the income to a specified person or persons in fixed proportions but may have discretion as to how to distribute the capital amongst a class of beneficiaries.
Trading trusts - Under a trading trust the trustee is usually a limited liability company which has powers to carry on business and the trust has trading functions and has employees to manage its business. Third parties are not aware of the existence of the trust as all documentation used is in the name of the trustee company.
Purpose trusts - The new International Trusts Law of 1992 provides a legal definition of a Purpose Trust. This can be a useful adjunct to corporate offshore planning and can be used to accumulate corporate earnings for general corporate purposes rather than for any defined group of individuals.
TAXATION OF TRUSTS
Income tax and other charges - The income and gains of an international trust derived or deemed to be derived from sources outside Cyprus is exempt from all kinds of tax in Cyprus and no estate duty is chargeable in respect of assets belonging to an international trust. The only charge which will be payable on to the revenue in Cyprus in respect of an international trust is a once and for all amount of about €450 in the form of stamp duty on the instrument creating the trust.
Interest - If the trust money is placed on deposit with a local bank in Cyprus the interest earned is exempt, because interest earned on foreign capital imported from abroad and deposited with a bank in Cyprus is exempt. Interest on deposits with Cyprus offshore banking units or with any bank around the world is also exempt, as it is not considered as income accruing in, derived from or received in Cyprus.
Retirement - An alien who creates an International Irrevocable Trust in Cyprus and retires in Cyprus is still exempt from tax if all the property settled and the income earned is abroad, even if he is a beneficiary.
ADMINISTRATION OF TRUSTS
Trustee services - Trustees in Cyprus manage the trust property and follow the settler's wishes as expressed to them in the letter of wishes. Costs There are no stamp duties on the settlement of property in a Cyprus trust. A stamp duty of €450 is payable on the formation of an international trust. A trust can be established within a few days and the cost of creating the trust will vary, according to the complexities involved, from €170 to about €1.700. The annual cost of administering the trust depends on the work involved and the time spent. The fee is not calculated as a percentage of the trust property.
SUITABILITY OF CYPRUS
Administration of trust - Trusts can be both established and administered.
Tax advantages - International trusts are exempt from all kinds of tax in Cyprus.
Tax treaties - There is a wide and increasing network of tax treaties.
Legal system - The legal system is a common law system with trust legislation and case law.
Stability - There is political and economic stability.
Professional infrastructure - Availability of excellent professional infrastructure; accounting, legal and banking.
Exchange control - Complete exemption from exchange control.
Confidentiality - There are no registration or reporting requirements for trusts established in Cyprus nor are the names of the trust or of the persons referred to in the trust deed disclosed. The only authority to be informed of the creation of an offshore trust is the Central Bank of Cyprus and only in cases where bank accounts are opened in Cyprus. Again no names are disclosed.
Flexibility - Cyprus law allows the removal of a trust from its jurisdiction and vice versa. In this way it provides the necessary flexibility if such transfer would be advantageous because of change of circumstances.
Registration - No requirement for registration of the trust under any law is imposed. On the contrary it is expressly provided that an international trust is exempt from any obligation for such registration.
Geographic location - Trust clients usually visit their trustees before conferring large sums of money on them and thereafter contact them. The geographic location and time zone of Cyprus as well as the availability of up-to-date telecommunications technology satisfy this criterion.
Government attitude - The Government encourages the establishment and administration of trusts in Cyprus which is evidenced by the new International Trusts Law of 1992.