The Law of Trusts in Cyprus
Cyprus has inherited its trust law from England so that the doctrines of equity on which trust law is based have long formed part of the Cypriot legal system. In 1955, Cyprus enacted the Trustees Law, Cap. 193 and that was still the basic structure that covered some of the principal aspects of the trust relationship. Thus, up to the date of independence in 1960 Cyprus trust law was to be found in its own domestic law referred to and to the doctrines of equity and case law in England. The strength of the English principles was enforced by the promulgation of section 29 of the Cyprus Court of Justice Law, 14 of 1960. In terms of this legislation the civil and criminal courts were expressly instructed to adhere to the common law and equity principles, “save insofar as other provision has been or shall be made by any law and so long as not inconsistent with the Constitution”. Indeed, in cases where Cypriot law has not made provision for a specific legal point, the courts of the Island have held that reliance may be placed on common law or equity law.
The New International Trusts Law 69 of 1992
- On 24th July, 1992 the legislative body of the Republic of Cyprus enacted into law a Bill providing for the formation and administration of offshore trusts. By this Law No. 69/92 which is called the “International Trusts Law” Cyprus modernises its existing legislation on trusts and offers considerable incentives for the establishment of trusts in Cyprus.
The new law accords with the proclaimed government policy to enhance further the attractions of Cyprus as an offshore jurisdiction and the range of facilities offered to private and institutional clients.
The new law does not attempt to introduce a new comprehensive code to govern all aspects of trust law. Instead it builds on the existing law of trusts in Cyprus and offers to non residents the possibility of creating a trust that will have certain features that were not available previously.
The specific provisions of the new Law may be briefly summarised as follows:
Definition of an International Trust
The Law defines an International Trust as being a trust in respect of which:
a) The settlor is not permanent resident of Cyprus (does not hold a Cypriot Passport);
b) No beneficiary (other that a charity) is a permanent resident in Cyprus:
c) The trust property does not include any real property situated in Cyprus and
d) At all times there is at least one trustee resident in Cyprus. Moreover a trust will still qualify as an International Trust even if the settlor, or the local trustee or a beneficiary (or any combination of those) is a Cyprus offshore company or partnership.
A Cyprus International Trust can be validly created by any non-resident who is of full age and sound mind under the law of his domicile, and no foreign law relating to inheritance or succession will invalidate the Cyprus trust. Moreover the International Trust will not be set aside by the settlor’s creditors in the case of the settlor’s bankruptcy liquidation unless and to the extent that the creditors can show that the trust was made with the intent to defraud them and the onus of proof shall be on them. This provision effectively allows the use of Cyprus International Trusts as asset protection vehicles.
An International Trust will be presumed to be irrevocable by the settlor or his lawful representatives unless a specific power of revocation is reserved in it.
An International Trust may remain in force for up to one hundred years not withstanding any statutory provision of Cyprus or any other country to the contrary. This provision is considered to be very advantageous. The rule against perpetuities does not apply to purpose and charitable trusts.
Accumulation of Income
The income of an International Trust can be accumulated for the whole of the perpetuity period.
The trustees of an International Trust have extensive investment powers which must be exercised with the prudence and diligence of the reasonable person.
Proper Law of the Trust
The law applicable to a Cyprus International Trust can be expressly changed to a foreign law provided that the new law recognises the validity of the trust and the respective interest of the beneficiaries; a trust established in a foreign jurisdiction may by its terms select Cyprus law provided that the foreign law itself recognises such a change. This provision ensures thereby flexibility which might be important in the event that a change in government fiscal or other policy makes it beneficial to change a trust’s location.
Variation of Trust
The Cyprus courts have powers to vary the terms of the trust on the lines of the English Variation of Trust Act, 1958. More specifically the courts upon application may amend or repeal the terms of the trust or the powers of the trustees to manage the trust if they are satisfied that the proposed arrangement shall be in the interest of the person on whose behalf the application is made and no substantial prejudice is caused to the interests of any other interested party.
International Trusts are exempted from the duty of registration under the provision of law. There is however, a fixed stamp duty of CY£250 payable on the creation of the trust.
Confidentiality and privacy of the constitution of International Trusts as well as their transactions and activities are assets which are highly prized and sought after. This aspect is a cornerstone of the new law which ensures that the trustee or any other person, including Officer of the Government and of the Central Bank of Cyprus, may not disclose to any person any information or documents in relation to:
* The name of the settlor or any of the beneficiaries;
* The consultations of the trustee regarding the exercise of his power, discretion or duties;
* The reasoning of any such specific exercise of power, discretion or duties or the elements supporting the aforesaid reasoning:
* The exercise of the power, discretion or the performance of the duties of the trustee;
* The accounts of the International Trust.
To the above secrecy of the affairs of the International Trust there are only two exceptions:
a) The Trustee is under an obligation to disclose all documents and information relating to the accounts of the trust, to a beneficiary or all documents and information related to a charitable trust, to a charitable institution which appears to be a trust instrument.
b) The Courts, before which criminal or civil proceedings are pending, may order the disclosure of documents or information relating to an International Trust, if they are satisfied that such a disclosure is substantially important for the outcome of the pending proceedings.
The above non-disclosure provisions of the new International Trust Law are quite unique in that they entrench in an almost absolute manner the secrecy and confidentiality of the trust affairs.
The income and the profits of an International Trust derived or deemed to be derived from a source outside Cyprus are completely exempted from income tax or any other imposed in Cyprus such as, capital gains, special contribution etc. The property of the trust is not subject to estate duty.
Trust income such as royalties, interest or dividends received from an offshore company is exempt from income tax in the hands of the trustees and the beneficiaries of an International Trust are also exempt from payment of income tax in respect of any money they receive from the trustees.
Apart from the above mentioned advantages the following further benefits are available to the Cyprus International Trusts:
a) The International Trust enjoys complete freedom from all exchange control provisions.
b) Most importantly, an International Trust may establish a Cyprus offshore company and thus take full advantage of the beneficial status of the offshore companies.
c) An International Trust may also establish a Cyprus offshore partnership the profits of which are not taxable in either the hands of the partners nor is tax payable by the partnership or may register an offshore branch in Cyprus, through a wholly or partly owned foreign company. The net profits of this offshore branch are either totally exempt from payment of tax where its management and control is outside Cyprus or are taxed at the rate of 4.25 per cent where its management and control is based in Cyprus.
d) Moreover an International Trust may be allowed to participate in local business and investments in accordance with the Laws and Regulations in force for the time being which govern the investments in Cyprus by non-residents, but in such case all income arising out from local sources will be subject to the normal tax rates.
The advantages of using a trust for regulating family and commercial affairs are well known to those accustomed with the English common law. It appears that the trust concept is also becoming popular with people familiar with civil jurisdictions and it is expected that the use of trusts will be further increased in the future. Cyprus as an expanding offshore centre has shown so far that it may become a considerable trust jurisdiction. This is also due to the fact that a Cyprus trust may in certain cases be used to obtain the benefit of an applicable double tax treaty or provide asset protection where this is required.