Wealth Management and Succession Planning: The Modern Appeal of Cyprus International Trusts
“Someone’s sitting in the shade today because someone planted a tree a long time ago”
Warren Buffet
Wealth management and succession planning are timeless pillars of financial stability, as vital today as they have been throughout history. The need to protect, manage, and transfer assets efficiently transcends generations, reflecting the age-old wisdom of preparing for the future. Effective succession planning ensures that family wealth is preserved, grown, and seamlessly passed down, securing the financial well-being of future generations. It addresses the complexities of modern family structures, safeguards against uncertainties, and provides a clear roadmap for asset distribution. By establishing robust financial structures, such as international trusts in Cyprus, families can maintain their legacy, uphold their values, and ensure that their hard-earned assets continue to benefit their descendants for years to come.
Cyprus is an attractive jurisdiction for establishing international trusts due to its favorable legal framework, tax advantages, and strong confidentiality provisions. Below, we provide an overview of the key aspects of setting up and managing a discretionary trust in Cyprus.
The legal framework governing trusts in Cyprus is based on the Trustees Law, Cap. 193, which draws heavily from the English Trustee Act of 1925, and the International Trusts Law, No. 69(I)/92 (as amended) (the “International Trusts Law”). Additionally, Cyprus has ratified the Hague Convention on the Law Applicable to Trusts and on their Recognition, which addresses conflict of law issues and sets rules for the recognition of trusts across jurisdictions. Contract law, common law and principles of equity also apply, provided they do not conflict with local statutes.
Types of Cyprus International Trusts (CIT)
Cyprus offers various types of international trusts under the International Trusts Law, each serving different purposes:
Express Trusts: Created by the settlor's clear intention or declaration, including private, charitable, fixed, and discretionary trusts.
Resulting Trusts: Implied by the court, where the beneficial interest returns to the settlor or their estate.
Constructive Trusts: Arising by operation of law, to address situations of abuse or injustice.
Trusts can also be classified based on their purpose (e.g., charitable or purpose trusts) or the discretion granted to trustees (e.g., fixed or discretionary trusts). Trusts may be created during the settlor's lifetime (inter vivos) or upon death (by will).
Discretionary Trusts
A discretionary trust is a type of trust where the trustee has the power to decide how the trust's income and/or capital is distributed among the beneficiaries. Unlike fixed trusts, where beneficiaries have a predetermined entitlement to the trust's assets, discretionary trusts provide flexibility for the trustee to allocate funds based on the needs and circumstances of the beneficiaries. Discretionary trusts are the most common type of international trust in Cyprus due to their numerous advantages:
Flexibility: Trustees can adapt the distribution of income and capital to meet the changing circumstances of the beneficiaries. This makes them ideal for long-term financial planning and asset protection.
Beneficiaries: Beneficiaries do not have a fixed entitlement to the trust assets. They are considered for distributions based on the trustee's discretion.
Asset Protection: Assets in a discretionary trust are generally protected from creditors because beneficiaries do not have an enforceable right to the trust assets until the trustee exercises their discretion. A Cyprus International Trust can protect assets against future claims by governments or creditors, expropriation, and claims from spouses or former spouses.
Family Wealth Management and succession planning: Ideal for high net-worth individuals with extended or complicated family structures for asset succession planning and inheritance purposes.
Tax Planning: Discretionary trusts can offer significant tax planning advantages. Beneficiaries are taxed based on distributions received, and income, gains, and profits from non-Cyprus sources are exempt from taxes in Cyprus. There are no estate duties or inheritance taxes, and specific tax exemptions apply to Cyprus International Trusts.
Confidentiality: The trustee's discretion enhances privacy and security, ensuring that beneficiaries’ information remains confidential.
Requirements for a Trust to Qualify as a CIT
To qualify as a Cyprus International Trust, the following statutory requirements must be met:
Settlor's Residency: The settlor must not be a permanent resident of Cyprus during the year preceding the establishment of the trust. A resident of Cyprus is defined as a person who resides in Cyprus for at least 183 days in any one tax year or a legal person whose management and control is exercised in Cyprus.
Beneficiaries' Residency: Beneficiaries must not be permanent residents of Cyprus during the year preceding the establishment of the trust. Relocation to Cyprus the year after establishing the trust is permitted.
Trustee's Residency: At least one trustee must be a permanent resident of Cyprus.
Establishing an International Discretionary Trust in Cyprus
Key steps to establish an international discretionary trust in Cyprus include:
Settlor and Beneficiaries: Define classes of beneficiaries instead of specific persons or entities.
Trust Deed: Draft a comprehensive trust deed outlining the terms and conditions of the trust, including the trustees' powers and the beneficiaries' entitlements.
Trustees: Appoint at least one Cyprus-resident licensed trustee.
Protector: Optionally appoint a protector to safeguard the trust's assets. The protector can oversee the trustee but cannot interfere with the trustee's duties.
Assets: Transfer assets into the trust, registering legal title in the trustee's name while beneficiaries hold the beneficial interest. This separation of legal and beneficial ownership is a key feature of the trust structure.
Letter of Wishes: The settlor may provide a non-binding Letter of Wishes to guide the trustee in managing the trust.
Certainties Required for Valid Trust: Ensure the three certainties—intention, subject matter, and objects—are present.
Trust Registry: The law requires resident trustees to register all Cyprus International Trusts with one of the three Competent Authorities: the Cyprus Securities and Exchange Commission (CySEC), the Institute of Certified Public Accountants of Cyprus (ICPAC), or the Cyprus Bar Association.
Regulatory Compliance: Comply with relevant Cyprus and EU regulations, including anti-money laundering and counter-terrorist financing laws.
Key considerations
When establishing a discretionary trust in Cyprus, consider the following:
Tax Implications: Understand the tax implications in both Cyprus and your home country. While Cyprus offers favorable tax treatment, beneficiaries' tax liabilities will depend on their jurisdiction of residence.
Trustee Selection: The administration or management of trusts, including the undertaking or provision of trustee services, irrespective of where the trust was established or where the services of administration, investment, or disposal of the trust assets are exercised, once such services are offered in or from Cyprus, are regulated activities. These activities may be offered only by licensed legal persons pursuant to a licence granted by their respective regulating authority, which is the Cyprus Securities and Exchange Commission for trustee service companies, or the Cyprus Bar Association for lawyers, or the Institute of Certified Public Accountants of Cyprus for accountants.
Duties of the Trustee: Trustees must administer the trust property prudently and in accordance with the trust deed. Any breach of these duties can result in personal liability.
Confidentiality: Trustees must maintain strict confidentiality regarding the trust and the identity of the settlor and beneficiaries. Disclosure is only possible under a court order.
Disclosure to UBO Registry: Submit required information to the UBO Registry in accordance with EU AML rules. The UBO Registry is held by the Registrar of Companies and is not accessible by the public. Required information includes:
Name of the trust
Registration number (if any)
Country of jurisdiction
List of natural persons with statuses such as settlor, trustee, beneficiary, protector, and any other natural person exercising ultimate control.
Cyprus offers a robust and favorable environment for the establishment and management of international discretionary trusts. Leveraging Cyprus' legal framework, tax advantages, and confidentiality provisions can effectively protect and manage assets for the benefit of chosen beneficiaries.
More Information
For more information relating to the establishment or management of a Cyprus international trust, please contact Aptus Legal by clicking here or send an email to info@aptuslegal.com. Our team is ready to help you navigate this process and achieve your wealth and succession planning objectives.