Cyprus International trust – A multifaceted tool

Trusts initially appeared within the legal scene as a special property ownership vehicle, in the sense that the legal title of property is bestowed upon the so called ‘trustee’ who is bound to act in accordance with the wishes and instructions of the ‘settlor’ (if any) and in the best interests of the ‘beneficiaries’.  Gradually, and especially, following the enactment of the International Trusts Laws of 1992-2013 (69(I)/1992) as amended, trusts have been transformed into a robust tool for asset protection, effective planning and wealth management, both in connection with business and family purposes.

Within the family context, a trust can be created for the benefit of a beneficiary who upon the time of formation of the trust cannot have an absolute interest in the trust property due to infancy, mental illness or other legal incapacity; a trust can be created for a person who has not reached adulthood or has not even been born yet.

Trusts are used within the context of employment with regards to pensions and employee share-ownership schemes as they render possible the management of large funds for the benefit of numerous scheme members.  They are also used as a mechanism for the protection of assets within the context of commercial transactions, with lenders transferring loan monies on trust until a transaction is fulfilled or security is obtained so as to guard against an insolvency event of the borrower.

The Cyprus International Trust possesses some particularly attractive features which in recent years have rendered it a much more popular option than companies and the rigorous regime which accompanies their life cycle, or even than local trusts:

  • Constitution– in order for a Cyprus International Trust to be set up, the settlor and the beneficiaries should not be Cyprus tax residents during the calendar year preceding the year of establishment of the trust, something that gives them the option and flexibility to relocate to Cyprus after the trust is constituted.
  • Confidentiality– only limited and specific information may be disclosed in connection with the trust or trust property and such disclosure must be sanctioned by court (or via regulatory filings), rendering it difficult for third parties to compel the trustees to disclose any information.
  • Other legislative context– inheritance or succession law in Cyprus or abroad does not affect in any manner either the validity of the trust or the transfer or other disposal of trust property.
  • Creditors – trusts are immune from creditors’ claims against trust property in the case of bankruptcy or liquidation of the settlor or in the case of commencement of legal action against the settlor unless the trust has been used as a vehicle to defraud creditors, rendering it difficult for a trust to be declared void and set aside.  Further, if action commences against the trustee, it should be made within two years from the date of property disposal.
  • Taxation – income derived from sources outside Cyprus is not taxable in Cyprus, as long as the beneficiaries of the trust are not Cyprus tax residents.
  • Duration– the equitable rule against perpetuity does not apply to Cyprus International Trusts rendering them valid and enforceable for an unlimited period of time.

Taking the above into consideration it comes to no surprise that Cyprus International Trusts have attracted much attention in recent years.  Trusts provide certain lucrative benefits compared to companies, for example lack of strict reporting regime, although it is advisable to keep accounting records. Moreover, with the transposition of the 5th AML Directive into Cyprus law, Cyprus International Trusts may become a more popular option for wealthy individuals and companies.