Бумажные и Интернет СМИ  GSL website, 2012, Йоргия Папа

Cyprus international trusts: a technical analysis of the 2012 amended law


Following an extensive and intense public consultation, the amended Law on Cyprus International Trusts (20 (I) of 2012) was approved by the Parliament of the Republic of Cyprus and came into force on the 23rd of March 2012. When the Law was first enacted back in 1992, it was considered a model piece of trust legislation. However the rapid changes in the commercial and business environment as well as the diverse effects of globalization, have created new needs and demands. Thus although the foundations of the old Law have remained unchanged, providing a solid and sound basis for regulating Trusts, amendments have been introduced refining and updating the Cyprus International Trusts Law so as to correspond to the needs of the modern business economy.

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The Cyprus International Trust Law is now in the forefront of trust legislation and is once again considered amongst the most forward-thinking and advanced trust regimes in the world.

The definition of a Cyprus International Trust and other important definitions

Under the law of 1992, in order for a Cyprus International Trust to have been able to be established, both beneficiaries and settlor should have been non-residents. The purpose of this limitation was to prevent tax avoidance by Cyprus residents by limiting the scope of application of a Cyprus International Trust. Nevertheless, this created a high level of uncertainty as regards non-resident settlors/beneficiaries who wished to relocate to Cyprus.

A new definition of what constitutes a Cyprus International Trust has been introduced, in order to cast light to this grey area of the law.

Now an International Trust means a trust in respect of which the settlor/ beneficiary is not a resident of the republic during the calendar year immediately preceding the creation of the trust. The non-resident settlor/beneficiary can reallocate to Cyprus following the establishment of the International Trust.   What is more, at least one of the trustees must be resident in the Republic of Cyprus during the whole duration of the trust.  

It should be noted that the term of beneficiary has also been expanded and it now includes persons not yet born at the time of creation of the trust (unborn beneficiaries).

Other important definitions that have been included in the new Law are the definitions of ‘creditor’ and ‘intend to defraud’.  ‘Creditor’ means any legal or natural person or persons to whom the settlor owes a debt or other obligation at the time when a trust is created whereas ‘intend to defraud’ means the intention of a settlor to dishonestly avoid any obligation which he owes to a creditor.

Governing Law and validity of a Cyprus International Trust

Article 3(1)(A) of the new Law makes clear that any ambiguity or uncertainty arising in relation to the validity of a Cyprus International Trust shall be determined in accordance in with the Laws of the Republic of Cyprus without reference to any foreign law. The section states that the validity, interpretation or effect of any trust, the management of a trust, the existence and extent of any operations in relation to the trust and the powers, obligations or duties of trustees, protectors or enforcers shall be determined with reference to the laws of Cyprus without any reference to the laws in force in any other jurisdiction.

The Article additionally states that the inheritance laws in force in Cyprus or in any other jurisdiction will not affect in any way the transfer or disposition or validity of any international trust offering further protection in relation to asset protection concerns.

Article 3(4) provides a welcomed protection where the Cyprus International Trust is affected by provisions existing in other jurisdictions.  A Cyprus International Trust will not be considered void, voidable or liable to be set aside by reason that the applicable laws of another jurisdiction prohibit or do not recognize the concept of a trust. What is more, an International Trust will not be considered void, voidable or liable to be set aside because the law in another jurisdiction invalidated or eliminated the rights , claims, interests, obligations or liabilities conferred or imposed on any person by reason of a personal relationship to a settlor or any beneficiary or by way of a right to inheritance.

Reserved Powers of the Settlor

The new Article 4 A, introduced by the new Law, expands and safeguards the powers of the settlor.  The settlor is entitled to reserve any right, power as well as any interest in the trust property without this affecting the validity of the trust. The newly included reserved powers give the settlor a longed for flexibility. The settlor has now the right to:

  • Revoke or amend the terms of a trust;
  • To advance , distribute , pay or otherwise apply income or capital of the trust property or to give directions regarding these matters;
  • To act as a director or an officer or to give directions as to the appointment or removal of directors or officers;
  • To issue binding directions to the trustee in relation to the purchase, retention, sale, management, lending, pledging or charging of the trust property
  • To appoint or remove any trustee, enforcer, protector, beneficiary, investment manager or investment adviser;
  • To change the proper law of the trust or the forum of administration of the trust; and
  • To limit the powers or discretion of any trustee by requiring that they are only exercised with the consent of the settlor.
Duration of a Cyprus International Trust

Under the previous law of 1992, a trust could only exist for a period of 100 years whereas charitable trusts and non-charitable purpose trusts were allowed to exist in perpetuity.

The new Law states in section 5 that there is no longer any limit on the period for which a trust continues to be valid and enforceable and that no rule against perpetuities or remoteness of vesting or any analogous rule applies to a trust.

Therefore, an International Trust can now exist indefinitely.

Charitable Trusts

Section 7 of the Law has also been amended and it now provides an extended and comprehensive definition of charitable trusts.   A Cyprus International Trust shall be considered a charitable trust where a trust has as its main purpose:
  • The prevention or relief of poverty;
  • The advancement of education;
  • The advancement of religion;
  • The advancement of health or the saving of lives;
  • The advancement of citizenship or community development;
  • The advancement of the arts, culture, heritage or science;
  • The advancement of amateur sport;
  • The advancement of human rights, conflict resolution or reconciliation or the promotion of religious or racial harmony or equality and diversity;
  • The advancement of environmental protection or improvement;
  • The relief of those in need by reason of youth , age, ill-health, disability, financial hardship or other disadvantage;
  • The advancement of animal welfare and protection of animals;
  • Any other purposes beneficial to the public in general.
Investment Powers

Although the Law of 1992 granted wide investment powers to trustees, the amended Article 8 reinforces the power of trustees by allowing the trustee to invest the whole or any part of the trust property as he would have done so had he been the absolute beneficiary of the assets of the trust.  The trustee is now expressly required to comply with the anti-money laundering laws of Cyprus.

The new Law also clarifies that any kind if investment is permitted whether in Cyprus or abroad, including investments in any movable property as well as investments in shares or immovable property.

Guidance to Trustees by the Court

Article 11 of the amended Law authorizes trustees to resort to Court for directions and guidance in matters relating to the regulation of the International Trust.  The Court may issue an order concerning: the execution or the administration of any trust; the trustee or protector of any international trust, including an order regarding the exercise of any power or discretion; the beneficiary; declaring the validity of the trust; and annul or vary any order or declaration.

Taxation

International Trusts have under the previous law enjoyed a favorable and beneficial tax treatment, a treatment that has been safeguarded and promoted by the new Law as well.

The new law clarified ambiguities of the previous law by implementing a uniform taxation system which will apply on all beneficiaries. A beneficiary who is a Cyprus tax resident will be subject to every form of taxation imposed in Cyprus whereas a beneficiary, who is not a Cyprus tax resident, she/he will be subject to taxation on the income and profits earned in Cyprus.

Accordingly, a Cyprus international trust will be exempted from taxation where the beneficiaries are not tax-resident in Cyprus and where there is no income from Cyprus sources.   

The Cyprus Inland Revenue Department has announced that it will soon issue detailed guidelines as regards the taxation of International Trusts so as to remove any uncertainties or ambiguities.

Conclusion

The much anticipated reform of the Cyprus International Trust is now a reality and it has once again rendered Cyprus as the ideal jurisdiction for forming an International Trust. The new concrete Articles provide more certainty and remove any weaknesses found in the previous law whereas a beneficial tax treatment continues to apply to all International Trusts in Cyprus.

The Cyprus International Trust Legislation is now a modernized, up to date, flexible and tax beneficial piece of law.

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