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Cyprus and International Trusts

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Introduction

Trusts are often used in connection with running a small business. A trust is not a separate legal entity in the same way that a company is. In simple terms it is a business structure where a trustee (a company or individual) carries out the business on behalf of the members of the trust. A trust is set up through a trust deed. The trustee is under an obligation to act in accordance with the trust deed and to act in good faith to the beneficiaries.

There are various types of trusts including;

  • Discretionary trusts - where the trustee has discretion when distributing funds to the beneficiaries. The most common example is the family trust.
  • Unit trust - were unit holders have a number of units in the trust. Distribution from the trust is on the basis of the number of units held.
  • Hybrid trust - this is a combination between a unit trust and a discretionary trust.

Initial property may be gifted to the trust by the settlor. Trusts may raise capital by inviting the public to acquire units, in the case of a unit trust. Unit trust can be private or publicly listed.

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Advantages

  • Allows for income streaming; varying distributions to beneficiaries for optimal tax planning.
  • Limited liability.
  • Provides asset protection advantages, as a trust is not a legal entity. As such it cannot own assets, and legal ownership lies with the trustee of the trust. Assets held by a trust are protected from the individual liabilities of the beneficiaries.
  • The death of a trustee or beneficiary does not result in the cessation of the trust.

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Disadvantages

  • Distribution of tax losses is trapped in the trust unless the trust deed specifically states that a beneficiary is entitled to both the revenue and corpus (capital) of the trust income.
  • Establishment costs (although they may be minimised by using a pro forma trust deed, but a solicitor is still needed) and administration costs etc. will also be incurred.

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Limit of Liability

Trustees are personally liable for the debts involved in administering the trust. These obligations are generally met from the income and assets of the trust. Where trust assets are insufficient to meet the debts of the trust, beneficiaries may, in certain circumstances be personally liable to meet the shortfall to the extent of their interest in the trust.

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Taxation

Income of trust is assessed in the name of the trustee (in the same manner and amount as the trustee would be assessed on if the trustee had received the income personally). Tax rates which apply to trust income where the trustee is an individual are as per individual tax rates. Beneficiaries are liable for the income tax but assessment is raised in the name of the trustee.

  • Trustee companies are taxed at the company tax rate of 12.5%.
  • Beneficiaries are liable for Special Defense Contribution (SDC), on dividends at 17%, and on interest earned at 30% for income arising from Cyprus.
  • Cyprus International trusts are not subject to taxation (under certain conditions)

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Relevant Law

Local trusts were governed by the Cyprus trustees Law (Cap 193) enacted 1992 which is a copy of the English Trustees Law of 1925.

The primary legislation which now governs trusts is the

  • International Trust Law of 1992. [ITL]
  • the general principles of equity and the common law; and
  • the Trusts Law as it applied in England in 1960

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