Cyprus International Trusts Law and amendments
The Cyprus International Trusts Law of 1992 (Law No. 69(I)/1992) remained unaltered since its enforcement back in 1992. Realising that trusts have the potential of being used as the channel for foreign investments in or through Cyprus, legislature examined the concerns and attempted to improve the already existing legal framework in such a way so that to achieve the boosting of such investments.
The Cyprus House of Representatives voted in favour of the Bill for the much anticipated reform of the Cyprus International Trusts Law of 1992 and the amendments were published in the Official Gazette on 23/3/2012. These amendments have been introduced by Law No. 20(I)/2012 and have indeed introduced some novel provisions designated to make Cyprus a more attractive centre for the establishment of international trusts.
It should be noted that on 5/9/13 the Law Regulating Companies Providing Administrative Services and Related Matters of 2012 (Law 196(I)/2012), as amended by Law No. 190(I)/2013 made it obligatory for a register of trusts to be kept in Cyprus, provided certain criteria is fulfilled.
The amendment has been reflected in the International Trusts Law of 1992, as amended, by the analogous deletion of the section which provided for the non-obligatory registration of international trusts.
The International Trusts Law of 1992, as amended, has been welcomed by the Cyprus legal and business sector since it is a step forward in rendering Cyprus a more competitive trust jurisdiction and it further upgrades Cyprus as an international economic centre.
The conditions necessary for a trust to fall within the ambit of the International Trusts Law of 1992, as amended, are as follows:
1) The settlor, whether a natural or legal person, is not a resident of Cyprus in the calendar year which immediately precedes the year in which the trust was created;
2) At least one of the trustees, during the whole duration of the trust, is a permanent resident of Cyprus;
3) No beneficiary, whether a natural or legal person, other than a charitable institution, is a resident of Cyprus in the calendar year which immediately precedes the year in which the trust was created.
Major changes to the International Trusts Law
Residency Status of Settlors, Beneficiaries and Trustees
Section 2 of the 1992 Law, as amended, provides that the settlor should not be a Cyprus resident in the year, immediately preceding the year of the establishment of the trust.
Under the old 1992 Law, it was not clear whether a settlor could reside in Cyprus after forming an International Trust and this uncertainty discouraged the settlors from relocating. The amendments to Section 2 clarify when a person/s can reside in Cyprus and still be eligible as a settlor under an International Trust. The same applies to beneficiaries; namely the beneficiary should not be a Cyprus resident in the year preceding the year of establishment of the trust. The only exception is that of a charitable trust where the beneficiaries could be Cyprus residents at any given time.
Regarding the trustees, it should be noted that at least one of the trustees should be resident of Cyprus during the whole duration of the Trust. This requirement of residency ensures that the Cyprus courts have effective jurisdiction over the trust.
Validity of International Trusts
A Settlor who transfers or who in whatever manner endows assets to an international trust shall be deemed to have the capacity to do so if at the time of such transfer, such person is of full age and of sound mind under the laws of the country of which he/she is a permanent resident.
All matters relating to a Cyprus International Trust shall be determined in accordance with the applicable laws of the Republic of Cyprus. Anything relating to the validity, interpretation or effect of any trust or transfer shall be governed by the Laws of Cyprus. The same will apply to the fiduciary powers and duties of trustees. This is the case, unless of course the governing or applicable law of the trust is non-Cypriot/foreign law, which recognizes international trusts. The applicable law is chosen by the settlor (Section 12A).
The new Law (Section 3) provides that no International Trust would be considered void or voidable due to the fact that the legal provisions that are in force in any jurisdiction prohibit or do not recognize the Trust. Importantly the new Law clearly states that the inheritance laws of any other country will not be enforced by the Cyprus courts confirming thus that the inheritance provisions in succession laws of foreign countries will not apply to risk or upset the validity or enforceability of a Cyprus International Trust.
Powers of the Settlor
Section 4A was added to the new Law, extending the powers of the settlor.
The settlor may retain power and control over the trust also by appointing himself as either the protector or the enforcer of the trust.
The settlor may now revoke or modify the terms of the international trust as well as instruct on the transfer, distribution, payment or transfer of income or capital from the trust property or the issue of binding instructions and/or directions with regards to the above.
The settlor may also appoint or remove a trustee, a beneficiary or a director of any of the companies that belong to the trust or the settlor can act as a director himself and a settlor may also issue binding instructions to trustees in relation to the exercise of any power.
Where any power is reserved by or granted to the settlor as above no intention to defraud may be imputed to the settlor in the event that the international trust was made with the intent to defraud the creditors of the settlor at the time of the transfer of his assets to the trust (Section 4A(4)).
Changing the applicable law of the international trust
As aforementioned another important change introduced by the New Law is the fact that the settlor can now choose the law that will govern the trust and change such applicable law or the forum of administration of the trust at a later stage. This is a very important option which is now to be found in most modern offshore trust laws as it allows the law of a Cyprus trust to be changed to a foreign law, permitting essentially a foreign trust to adopt foreign law.
Variation of an international trust by the Court
Section 10 of the Law provides that the courts have the power to approve a variation of the terms of a trust. Without prejudice to the powers of the court, an international trust may be varied in any way provided by its terms.
Duration of Trust
Under the old 1992 Law, an international trust could be valid for up to 100 years from the date of its establishment, with the exception of charitable and purpose trusts which were permitted to exist in perpetuity. The new Law abolishes all restrictions on the duration of trusts and therefore there shall be no limitation regarding the life of an international trust, which remains valid and enforceable in perpetuity.
With regards to an International Trust which was established during or after the entry into force of this new Law, it is provided that there is no limit in the period over which a trust may continue to be valid and enforceable.
Accumulation of Income
Notwithstanding anything to the contrary contained in the terms and conditions of the trust, no concession, distribution, payment, holding or disposal of the income or capital of the trust to another trust is invalidated solely on the ground that the other trust continues to be valid and enforceable after the date on which the former trust must come to an end.
Definition of Charitable Institutions
The new Law redefines charitable institutions. According to Section 7, International Trusts are considered as charitable institutions where the trust has as a main objective to achieve one or more of the following purposes:
a. Prevention or alleviation of poverty;
b. Promotion of education;
c. Promotion of religion;
d. Promotion of health or salvation of life;
e. Promotion for the development of citizens and of the community;
f. Promotion of art, culture, heritage or science;
g. Promotion of amateur sports;
h. Promotion of human rights, dispute settlement or reconciliation or the promotion of religious or national harmony or equality and individuality;
i. Promotion of the protection or development of the environment;
j. Relief needs arising from young or advanced age, ill health, disability, economic hardship or other disadvantage;
k. Promotion of the welfare and protection of animals; and
l. For any other reason for the benefit of the general public or which is consistent with paragraphs (a) – (k) above.
Power of Trustee to invest in movable & immovable property
A Trustee may at any time invest the whole or any part of the trust fund. Section 8 of the 1992 Law has been amended. The Trustee may now hold, maintain or invest in movable property in Cyprus and abroad, including investments in shares in companies registered in Cyprus and in immovable property located in Cyprus or abroad.
The new Law recognizes the already existing powers of Trustees; some of the most important powers are:
- To make capital distribution;
- To employ;
- To borrow;
- To mortgage;
- To guarantee;
- To invest/lend money;
- To make payments for/on behalf of beneficiaries; and
- To advance money to another trust
Moreover the trustee may vary the investment or retain it in its original state, as long as he exercises the diligence and the prudence that a reasonable person would be expected to exercise when embarking upon such investments.
Tax Advantages of International Trusts
International Trusts are ideal for asset protection, inheritance and tax planning. The benefits arising from the use of such trusts distinguish Cyprus as one of the most advantageous trust jurisdictions. According to Section 12 of the Law, if the beneficiary of such Trust is a resident of Cyprus then the income or profits of such trust which arise in and out of Cyprus will be taxed in Cyprus.
Additionally, in case the beneficiary is not a resident of Cyprus, then the income or profits of such trust that arise within Cyprus are taxed according to the tax laws of Cyprus. In effect any income or profits of such trust that arise outside Cyprus are not taxed in Cyprus.
It should further be noted that the definition of a resident of Cyprus has the meaning attributed to the term under the Income Tax Laws.
The instrument creating an international trust is subject to a stamp duty flat rate of approximately Euro 430.
Confidentiality relating to international trusts
Confidentiality and secrecy are still preserved under the new Law and the Trustee, the Protector or any Governmental body is not entitled to disclose information or documents relating to:
- The identity of the settlor,
- The identity of the beneficiaries,
- The trustees, and
- The property of the Trust,
unless the above are ordered by the courts of Cyprus.
Where there is a request which is submitted by a beneficiary to the trustee for the disclosure of the accounts of an international trust or of any documents or information relating to the trustees, which form part of the said accounts, the trustee shall have the power to disclose such accounts, documents or information to the beneficiary, only if in his opinion such disclosure is necessary and ensures the bona fide interests of the trust.
The court may issue an order for the disclosure of information or documents referred to in the list on the application by a litigant or by a party in a civil or criminal proceeding, depending on the circumstances of the case. The court will only do so if it is satisfied that such disclosure is of paramount importance to the outcome of the case.
This Section of the new Law serves to remind settlors, trustees and beneficiaries that a trust relationship is a highly confidential one and information should not be disclosed to any third party, unless a Cyprus court orders for such information to be disclosed.
Obligation to keep a Register of Trusts
As from 5/9/13, in accordance with Law No. 190(I)/2013 aforementioned, any Cyprus resident trustee of a trust governed by Cyprus Law is obliged to notify the relevant competent authority (Cysec, Cyprus Bar Association and the Institute of Certified Public Accountants of Cyprus) within 15 days from the creation of such Trust with the below information:
- The name of the trust
- The name and full address of the trustee(s) at all relevant times
- The date of establishment of the trust
- the date of any change in the law governing the trust to or from Cyprus Law and
- the date of termination of the trust.
It should be noted that service providers establishing trusts are obliged to keep documentary evidence of the identity of the settlor, the trustee(s), the beneficiaries and others associated with the trust as well as information on the activities of the trust and keep this information available for inspection by the relevant competent authority on such request.
The amendments introduced by Law No. 20(I)/2012 apply to all international trusts irrespective of their date of formation.