The use of the Trust as a vehicle of prudent international tax planning, and business structuring is constantly growing. Trusts have been created for many reasons, in an effort to reduce tax liabilities, to alter the devolution of assets on death, to avoid the inconvenience and publicity of probate and to protect assets from actual or potential creditors. As the title of the present article focuses on the popular “asset protection trust”, special attention will be paid to this “product” launched by legislators wishing to attract investors to their local market. In this context the article will outline the main advantages of an asset-protection trust, referring to the specific planning advantages which accrue in the context of the Cyprus domicile. A note of caution will also be sounded in respect of jurisdictions which have drafted particularly “settlor-friendly” asset-protection provisions in an effort to attract investors – the experience of the Cook Islands is illuminating and one to guard against.
Concept of a trust
In the most simple terms, under a trust, trustees, who get no benefit from the trust, are required to hold property of which they are the legal owners for the benefit of other persons, known as “the beneficiaries”. Even before the times of the Conquest, the device of the Trust was popular: it enabled a landowner to evade some of the feudal dues which fell on the person seised of land. But while even from these early days the trust was utilized for reasons of tax mitigation, there are today other, possibly more compelling reasons for creating a trust. Tax mitigation can be achieved through the establishment of a limited liability company in a low tax or zero tax jurisdiction. But while a corporate structure may achieve some of the tax planning objectives of the owner, it is certainly not as “personalized” or as “tailored” a solution to the owner’s objectives as a trust.
Trust Law in Cyprus
Cyprus Trust Law is based on:
a. The Trustees Law (Cap 193) which largely adopts the text of the English Trustee Act 1925; b. equity and case law in England; c. The International Trusts Law 69/92 enacted in 1992 with the aim of providing incentives for the establishment and administration of trusts in Cyprus by non-residents.
The latter has enabled the creation in Cyprus of what we call “International Trusts”, that is, trusts set up under the provisions of the International Trusts Law. The Exchange Control and Income Tax laws exempt such trusts from income tax, capital gains tax and estate duty tax, making International Trusts a very attractive tax planning vehicle for the non-resident investor. Briefly, the essential elements of an International Trust are that:
The settlor is not a permanent resident of Cyprus (a Cyprus IBC will qualify as a settlor);
The beneficiary is likewise not a permanent resident (charitable institutions are an exception to this rule);
The trust property does not include any immovable property in Cyprus;
A minimum of one trustee is resident in Cyprus (a Cyprus IBC or partnership is considered a resident trustee).