Express Trusts & the Cyprus International Trust

The origin of the trust concept has its roots from ancient times in the Roman law, but has been particularly developed and honed in the English legal system during the 12th and 13th centuries. The trust was formulated to protect family property, maintain and/or increase its value while its owner was off to fight in the Crusades.

What is a Trust?

The Law does not provide a comprehensive definition of trusts. The more common and simplistic definition is that a trust is a legal relationship created by a settlor who places assets under the control of a trustee who manages and controls the assets for the benefit of a beneficiary. What a trust basically does is to split legal and equitable title of the property, the legal title is vested in the hands of the trustee while the equitable title lays in the hands of the beneficiary.

Basic Structure of a Trust.

It is a fact that there is a substantial amount of different types of trusts and their complexity varies, but the most common structure of trust is as follows:

1. The Settlor is the person (natural or legal) who creates the trust. He is the owner of the property and settles the property under trust for other persons (beneficiaries- a settlor can also be a beneficiary)

2. The Trustee is the person (natural or legal) who assumes management and control of the settled property under the terms of the Trust Deed or Letter of Wishes (Intent) which was previously established by the settlor.

3. The Beneficiary is the person (natural or legal) that has the beneficial or equitable title to the trust assets

4. The Protector is a person other than the trustee to whom powers can be vested into. The purpose of a Protector is to check and balance the powers of a trustee and could even have a veto to the decisions trustee. It is the person that has the power to restrict key powers of the trustee, such as the power to add beneficiaries to the trust (it is not mandatory to appoint a Protector)

Creation of a Trust.

For a valid trust to be created the following must be present:

1. The Settlor must be of full age and of sound mind

2. Certainty of Intention: For a trust to be created there needs to be a clear and express intention of the settlor to formulate a trust. The most substantial way this can be achieved is through a carefully planned trust instrument (Trust Deed). Even though trusts can be created orally it is much more common today to utilize a Trust Deed.

3. Certainty of Subject Matter: The trust assets must be readily identifiable otherwise the trust is voidable for uncertainty. This means that the property is clearly separated from other property so as to be certain exactly what the trust assets include.

4. Certainty of Objects: A valid trust must include beneficiaries whose identity is ascertained or ascertainable at the time of setting up a trust. This suggests that all beneficiaries must be known or can be in a group of people that can be ascertained when needed to identify the beneficiaries of the trust.

A trust may be created by the owner of property upon his death, by a testamentary disposition of the property into the trust accompanied by a letter or wishes but it is more appropriate and common that the trust is created during the lifetime of the owner of the property by a trust instrument/deed. A trust created through a testamentary disposition would not avoid inheritance laws or taxes where applicable, whereas a disposition of the trust property during the Settlor’s lifetime avoids such problems.

Types of Trusts

The 3 Main types of Trusts

Express trusts are those created by the express clear intention of the settlor (intentionally), or the express and clear declaration of the person to whom the property is vested, the trustee, to the benefit of a particular beneficiary or for a purpose.

Resulting trusts are implied by the court – they are not created intentionally by the settlor. In this type of trust the beneficial interest in the property comes back (results) to the person, (settlor), who provided the property or to his estate and for this reason are classified as resulting trusts.

Constructive trusts arise by operation of law. Such trusts are created irrespective of the intention of the parties in order to satisfy the demands of justice. When property is held by a person in such circumstances which constitutes an abuse to hold it or creates injustice, then Equity converts the holder into a constructive trustee for the benefit of the person the property should be.

Express trusts-Commonly used in Cyprus

Discretionary Trust. Under this type trust, the trustees have discretionary powers over when, how much and if the beneficiary (class of beneficiaries) is to receive/enjoy any benefit, share or interest over the trust property. The beneficiaries may be defined according to name or reference to a class (i.e. the settlor’s children) or simply left to the full discretion of the trustees. Usually, the settlor indicates to the trustees his wishes for the disposal of the trust property by means of a Letter of Wishes.

Should the settlor wish to give a more positive guidance than relying on a Letter of Wishes, it is possible to include a third party in the trust deed known as the “protector” .The protector’s role is to prevent the trustees from exercising their discretion in certain circumstances.

The trustees will usually exercise their discretion with the prior consent of the protector or nominator.

Fixed Trust. Under a fixed trust, the trustees have no discretion in distributing the trust assets to the beneficiaries. For example, under such a trust the trustees are directed to distribute the income to a designated individual for a fixed period of time and thereafter distribute the capital of the trust to a specific beneficiary or beneficiaries.

Fixed and Discretionary Trust. This type of trust gives discretion to the trustees over the distribution of income for a period of time. However, they may be required to distribute the income to a specified individual or individuals in fixed amounts, while maintaining discretion over the distribution of the capital amongst a class of beneficiaries.

Purpose trusts. Trusts which have no – beneficiaries, but instead exists for advancing some non-charitable purpose of some kind. A charitable trust in effect, is a purpose trust for charitable purposes.

Cyprus International Trust

The Cyprus International Trust (CIT) when introduced in 1992 was and still is one of the most modern and advanced legal concepts of International Trusts globally. The 1992 Law was an attempt by the Cyprus Republic to attract investors and modernize the Trust Law which was built on the 1955 Trustees Law, Cap. 193.

A CIT is defined as “a trust created by a non-resident settlor for the benefit of non-resident beneficiaries.

Conditions for creating a valid CIT.

To create a valid Cyprus International Trust the following condition must be met:

1. The settlor must not have been a resident of the Republic of Cyprus during the year preceding the year of the creation of the trust.

2. At least one of the Trustees is a permanent resident of Cyprus

3. None of the beneficiaries may be resident of Cyprus the calendar year preceding the year of the creation of the trust.

4. The three certainties must be met

5. The settlor must be of full age and of sound mind

6. The definition of resident has the same meaning as Tax resident and is established by the Income Tax Law. “An individual is resident in Cyprus, if he/she resides therein for a period or more which in aggregate exceed 183 days. A company is resident in Cyprus, if its management and control are exercised in Cyprus”.

Benefits of Cyprus International Trusts.

There are numerous benefits of creating a CIT. The list below identifies the most important:

A. General Benefits

• Ideal for high income, high net worth individuals (net worth of approximately €350,000 is a starting where the benefits of establishing a CIT outweigh the costs)

• Ideal for complicated family structures (inheritance planning)

• The same person can be a settlor, a trustee (as a sole director and shareholder of a Cyprus company) and beneficiary.

• A CIT may continue in perpetuity

• A CIT may form a Cyprus company or partnership and hold shares in such investment and enjoy the benefits (dividends)

B. Tax Benefits

CITs in Cyprus are tax transparent which means that they are not subject to tax provided that the Beneficiaries are not Cyprus tax residents and that the trust assets do not include immovable property located in Cyprus. In the case where the beneficiaries are indeed resident of the Republic then only the income which is earned from sources within Cyprus is subject to income tax. Beneficiaries who are not tax residents are only liable for income tax purposes for Cyprus sourced income. If the beneficiaries are imposed with any taxes it is the responsibility of the trustees to ensure that the taxes are paid.

• Income, gains and profits are exempted from income tax, capital gains tax or any other taxes in Cyprus

• There is no inheritance tax in Cyprus

• May be used to reduce or eliminate inheritance tax of the settlor.

• May be used to distribute untaxed income in Cyprus to the beneficiaries, i.e. family members

• There is no obligation to file and submit financial statements or tax returns.

• Dividends, interest or royalties received by an International Trust from a Cyprus international business company are not taxable and not subject to any withholding tax.

• Possibility to fall under double tax treaties

• Pre-migration arrangement- protect assets for individuals moving to high tax countries

• Settlors and beneficiaries deciding to become Cyprus tax residents after the creation of the express trust may opt to become non-domicile tax residents for 17 years and will not pay defense tax on passive income such as dividends and rents received from abroad and distributed through the trust

C. Asset Protection

Arguably the most important advantage of a CIT is its usage as an invaluable tool for asset protection. It is a fact that through the creation of a trust, the beneficial and legal title is split. The legal title is bestowed in the hands of the trustee whilst the equitable title is attached to the beneficiaries. The property transferred to the trust is no longer considered to be the property of the settlor and therefore it is out of reach of future or potential creditors, litigators etc.

An important aspect of CITs one must have in mind is that the trust should be used as precautionary measure. It is usually simpler to equate the CIT with an insurance plan. You want to protect yourself before your house is already flooded, this concept is the same with CITs. It is more beneficial and safer to create a CIT prior to any creditor claims. The CIT is a powerful shield that can be used against any potential creditors, inheritance laws of other jurisdictions, claims of negligence, and claims of breach of contract and so on.

Important asset protection features of the CIT law:

1. The Law suggests that no foreign law relating to inheritance is capable of invalidating the trust and this has effect of making the CIT immune from forced heirship and claw back rules of other jurisdictions.

2. Furthermore, the trust is not void or voidable if the settlor becomes bankrupt or insolvent.

3. The only way of setting aside the trust is if the trust is deemed to be specifically created to defraud the settlor’s creditors. The onus of proof falls on the creditors.

4. No action or claim can be brought against the trustees of the CIT after the lapse of a two-year period from the date of settlement of the property to the trust. Arguably after the trust matures no claim can be brought against it that will be able to put at risk the trust property.

D. Confidentiality and Reporting

Confidentiality is of particular importance in regards to international trust regimes. The trust law regime in Cyprus has managed to balance global requirements of transparency with the confidentiality requirements of a trust.

Prior to 2013 a CIT had no reporting requirements and registration of the trust was optional. Pursuant to an amendment of the CIT Law however, all CITs must now be registered to one of the supervisory authorities (Cyprus Bar Association, Cyprus Securities and Exchange Commission and the Institute of Certified Public Accountants of Cyprus).

The Registers of the trusts include the following information:

a. The name of the trust

b. The names of the trustees

c. The date of creation of the trust

d. The date of any change in the law governing the trust

e. The date of termination of the trust

This information is not available to the public and are only available for inspection by the supervisory authorities.

It is evident that legislators in Cyprus have succeeded in balancing between the need of privacy and the need to of accountability and transparency of the financial sector.

The disclosure of beneficiaries – obligation as per the 5th AML directive

The 4th AML Directive increased the transparency around beneficial ownership of companies and trusts and how the specific legal entities and obliged entities should keep updated records on this information. The 4th AML Directive suggested that information on beneficial ownership should be accessible to competent authorities and financial intelligence units and member states should ensure that this information was stored in a central register outside ‘the company’ in full compliance with European Union Law.

The 5th AML Directive aims to allow greater public scrutiny; it introduced a scheme to allow public access to the information stored within these public registers. This means that the general EU public will be granted access to beneficial ownership information such as name, date of birth, country of residence and nationality. The 5th AML Directive also expanded this scope to include trusts and other similar legal arrangements with the additional requirement that the information will be accessible to any “natural or legal person who can demonstrate a legitimate interest”.

Creation & Maintenance of a Trust Registry

Following the transposition of the 5th AML Directive into national law, CySec is responsible for the creation and maintenance of the Trusts’ Registry in which information as to the UBOs of express trusts and other legal arrangements must be included. CySec will issue a relevant circular that will explain in detail the correct procedure of maintaining and updating the Trusts’ Registry. The registration of express trusts in the Trusts’ Registry is obligatory.

Trustees’ obligations

The obligation to register and keep update information on an express trust is vested in the hands of the trustee and the application for registration is also made by the trustee.

The trustee of an express trust needs to maintain adequate, precise and updated information as to the UBOs of the trust which are identified as follows:

1. Settlors;

2. Trustees;

3. Protectors, if any;

4. Beneficiaries or the classes of persons for the benefit of which the trust has been set up;

5. Any other physical person who exercises control over the trust through direct or indirect ownership or with other means.

Any amendments or changes to the information submitted to Cysec must be updated within reasonable time (this will be detailed in the CySec circular) by the trustee.

Powers and obligations of CySec

Pursuant to the AML Law, CySec may:

1. Approve or reject an application for registration in accordance with the conditions of the circular;

2. Remove a registered express trust from the Trusts’ Registry in the event that the conditions for registration are not fulfilled or in the event that the trust is no longer effective;

3. Postpone the registration of an express trust in accordance with the conditions of the circular;

4. Impose monetary penalties for failure to submit the required information for registration;

5. Impose monetary penalties or suspend or delete the registration of an express trust in the following cases:

   1. for failure to comply with the provisions of the AML Law or the circulars issued by CySec;

   2. for submission of false or misleading information or for not disclosing essential information.

Following the removal of a registered express trust for the reasons stated above, CySec is obliged to maintain in the Trusts’ Registry information as to the said trust or other legal arrangement and its UBOs for a period of ten (10) years from the date of deletion.

Access to the Trusts’ Registry

CySec may grant access to the Trusts’ Registry:

1. to the Supervisory Authority, Unit, Customs and Excise Department, Tax Department and Police without any limitations;

2. to obliged entities for due diligence purposes and identification of their clients upon payment of respective fee;

3. to legal or physical persons that can demonstrate legitimate interest in accessing the registry and proving the same through relevant procedure to be implemented, upon payment of respective fee;

4. to legal or physical persons in relation to a trust which holds or owns a controlling interest in a company that is not incorporated in Cyprus upon the written request of the said persons and payment of respective fee;

The information accessible to the categories b - d above are limited to:

1. The name of the beneficiary;

2. The month and year of birth;

3. The country of residency;

4. The nationality of the beneficiary; and

5. The type and extend of the rights they have in the express trust.

Legitimate interest as defined by the directive can be established when the applicant shows that its interest to know the information listed above (a-e) is directly related to the prevention of legalization of funds derived from illegal activities and terrorist financing based on the facts and information and is decided by CySec case-by-case. The definition is narrow and therefore it will difficult for someone to prove the aforementioned requirement in order

Following an application for access to the Trusts’ Registry, CySec may:

1. approve application for disclosure or reject it;

2. specify the procedures for applying, approving or rejecting the applications, for accessing the Trusts’ Registry and procedures as to the type of information for which access will be granted.

Five (5) years after the date of removal of a registered express trust, access to the information contained in the Trusts’ Registry is permitted only in the course of administrative or criminal enquiry conducted by the Supervisory Authority, Unit, Customs and Excise Department, Tax Department and the Police.

CySec may not grant access to information in relation to the UBOs of express trusts, in part or in whole, only in exceptional circumstances and following a detailed assessment of the exceptional nature of the facts, if:

1. such disclosure would expose the UBO to a disproportionate risk of fraud, kidnapping, blackmail, extortion, harassment violence or intimidation; or

2. the UBO is a minor or legally incompetent.

The above exception does not apply in the case that application for access is made by:

1. obliged entities that are credit and financial institutions;

2. by the responsible Supervisory Authority, Unit, Customs and Excise Department, Tax Department and the Police.

Conclusion

The Cyprus International Trust law when introduced in 1992 was one of the most modern and advanced legal concepts of International Trusts globally. The amendments of 2012 have raised Cyprus to the status of a reputable international trust jurisdiction with very attractive features. CITs provide exceptional protection fit for family and business structures alike providing the correct solution for each investor.

The trust law regime in Cyprus has managed to balance global requirements of transparency and harmonization necessity through EU directives with the confidentiality requirements of an international trust.

*DISCLAIMER: This article and its publication are intended to provide a brief introduction and act as a general guide of the subject of express local trusts and CITs. This is provided for information purposes only and cannot be utilized as a substitute for professional advice. This document does not represent a legal opinion and each natural or legal person seeking to create a CIT or other express trust should seek independent advice based on the particulars of its case. No responsibility is accepted by the author or the publishers for any loss suffered from acting or refraining from acting based on the contents of this publication.

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