Cyprus Trust Law: Popular Types of Trust
A trust is a relationship whereby property is held by one party for the benefit of another. A trust is created by a Settlor who transfers property (funds, assets, shares etc.) to a Trustee. The Trustee holds that property for the trust’s Beneficiaries. Cyprus Trust legislation is based on the English Trustee Act 1925 which is common law. It is also noteworthy to mention that Cyprus as a jurisdiction follows Common Law rulings. For further information on any points mentioned you can find the relevant case law in bold throughout the article.
There are a wide variety of trusts that can be set up in Cyprus. The choice of the type depends on the requirements of the Settlor and the desired objectives to be achieved (be it for commercial or personal reasons). The most popular trusts in Cyprus are as follows:
This is the most commonly used type in Cyprus due to the many advantages it provides. Some benefits include:
- The beneficiaries cannot be taxed on the trust fund, because they have no legal right in the trust fund initially.
- The beneficiaries cannot be subject to local exchange control regulations regarding compulsory repatriation of assets until the trustees exercise their discretion.
- Trustees have discretion over various interests under the trust, without the need to obtain all the beneficiaries the agreement of or asking the court to vary the terms of the trust. McPhail v Doulton .
- Anonymity: For Business Owners interested in the privacy arrangements of a discretionary trust, and for example also own shares in their company.
A Fixed Trust does not allow the Trustees any discretion when allocating assets to the Beneficiaries. An example of this type of trust is one which necessitates the Trustees to allocate any revenue of the trust property to a specific individual and subsequently distribute any capital to the Beneficiary as instructed in specified shares. Saunders v Vautier .
Trading Trust (For commercial use)
When a Trading Trust is established, typically the Trustee is a limited liability company (LLC). The trust has many trading options and functions and the generally the company’s employees manage its business. Anonymity is also a benefit here, as third parties do not see any existence of the trust as all documentation used is in the name of the Trustee’s company accordingly.
Purpose Trust (For commercial use)
As per the Cyprus International Trusts Law of 1992, a Purpose Trust can be used to accrue corporate remunerations for general commercial purposes rather than providing for a specified group of individuals as is standard for the creation of a valid trust. Cocks v Manners (1871).
- This type of trust is held for a purpose rather than for a Beneficiary.
- Available in modern offshore trust jurisdictions only.
- No time limit is typically imposed on purpose trusts.
Cyprus International Trust
A Cyprus International Trust is currently exempt from tax liabilities and can therefore be used for international tax planning purposes effectively. The use of this type of Trust as a vehicle for business structuring and tax planning is growing due to its flexibility in this respect.
Criteria to establish a valid International Trust:
- The Settlor cannot be a Cyprus tax resident in the current or previous year of its creation.
- No Beneficiary other than a charity can have permanent residency in Cyprus.
- There must be a minimum of one Trustee residing in Cyprus at all times.
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