International trusts are instruments that if wisely used, may provide the ultimate tax planning tool to investors. Various jurisdictions are known for the beneficial tax treatment they have to offer to trusts registered therein, including Cyprus.
Cyprus throughout the years has progressed to become a successful international business centre. Its up-to-date legislation, tax system and excellent professional services are only a few of the benefits it has to offer to foreign investors.
The establishment of in international trusts in Cyprus depends upon the fulfilment of the following criteria:
- The settler must not be a permanent resident of Cyprus;
- The beneficiaries (with the exception of charities) are not permanent residents of Cyprus;
- The trust property does not include any real property situated within Cyprus;
- There must be at least one Cyprus-resident trustee at all times.
Cyprus international trusts are becoming widely known as international tax planning instruments. According to the Cyprus international trusts legislation, income and gains of international trusts that derive or are deemed to derive from sources outside the Republic of Cyprus are exempt from any taxes levied in country. Additionally, assets and property belonging to the international trust are not subject to estate duty. The instrument creating an international trust is subject to stamp duty amounting to CYP 250 (approximately $582). Moreover, interest received on foreign capital, deposited into a Cypriot bank account but deriving from non-Cypriot sources is tax exempt. Consequently, where trust money is deposited to a Cyprus bank, any interest earned is exempt from withholding tax. The same also applies to interest earned on income deposited to any other banking unit on a worldwide basis due to the fact that such income is not accruing in, derived from or received in the Republic.
Cyprus international trusts may also, in certain cases, benefit from the application of the provisions of the double tax treaties. Cyprus has to date concluded a wide network of double tax treaties, providing favourable tax benefits to persons classified as tax residents of the contracting states.
Cyprus trusts are common law trusts, compatible to the English trusts. To this extent, it should be noted that while trusts are not expressly included in the definition of a resident as per the provisions of the double tax treaties, and to that extent do not qualify as persons or bodies of persons, trustees may certainly claim the said benefits. Trustees both qualify as persons as well as residents for tax purposes. More specifically, from a residency perspective, corporate trustees are treated as tax residents of Cyprus if their management and control is exercised in Cyprus, while individual trustees are treated as tax residents of Cyprus if they reside in the country for a period exceeding 183 day in a year. To that extent, even though Cyprus international trusts are not subject to tax in Cyprus, the trustees are taxed on the trustee fee that they derive in exchange of their services. As such, the favourable tax benefits under certain double tax treaties may be available regarding any income and gains deriving from the trust.
Further to the above, it should be noted that a recent UK court case has come to confirm the application of the treaty benefits to trustees and effectively to the trust income and gains. In Smallwood v. HMRC, residency issues were raised and the place of effective managements of the trust was considered, in determining the jurisdiction competent to tax a gain made subsequent to a disposal of shares, taking into consideration the relevant double tax treaty provisions. Accordingly, it is crucial to ensure that at all times central management and control is maintained outside the jurisdiction where the beneficiaries are based, and to that extent sufficient substance is awarded to the trustees as to enhance their positioning within the trust.
Further to the above, international trusts can offer confidentiality, privacy, estate planning and asset protection, family wealth preservation, tax planning. With a suitable structure in place they may also offer financial protection from possible potential claims.
The wide benefits available with the use of Cyprus international trusts make them a valuable instrument in international tax planning. With the use of professional tax advice, organisation and structuring of investments can lead to tax mitigations for investors.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
