Cyprus International Trust - A Guide To Estate Planning And Asset Protection

Republic of Cyprus is a reputable international financial centre offering attractive opportunities for establishing and operating trusts, supported by a robust legal framework and a recently amended International Trusts Law (as defined below) that ensures maximum protection and flexibility for trust structures. With a well-developed professional services sector and cost-effective support infrastructure, Cyprus stands out as a prime jurisdiction for both individuals and corporations seeking to meet diverse financial, asset protection, and succession planning objectives. Drawing from the principles of English equity jurisprudence, Cyprus allows the creation of various trust categories, including fixed trusts, discretionary trusts, and charitable trusts, each tailored to address specific needs while benefiting from favourable tax incentives.

The legal framework governing trusts in Cyprus encompasses both domestic or local trusts, regulated by the Trustee Law (Cap. 193) (the "Trustees Law"), and Cyprus International Trusts ("CIT"), governed by the International Trusts Law No. 69(I)/92 (the "International Trusts Law"). Pursuant to the provisions of the Courts of Justice Law No. 14/60, the "principles of Equity" and "Common Law" are incorporated into the Cyprus legal system, provided that they do not conflict with any domestic legislative provisions.

A local trust in Cyprus is established when either the settlor or any of the beneficiaries are residents of Cyprus. In contrast, a CIT is formed when both the settlor and beneficiaries are non-residents of Cyprus during the calendar year immediately preceding the trust's creation. Under International Trusts Law, an individual is deemed a resident if physically present in Cyprus for at least 183 days within a calendar year (as defined in detailed below). CITs are particularly advantageous for foreign investors, offering asset management flexibility and robust legal protection. Notably, neither the settlor nor the beneficiaries are required to be Cypriot residents, ensuring broad international appeal. The sole residency requirement is that at least one trustee must be a permanent resident of Cyprus, ensuring compliance with local regulatory obligations.

Mostly, in relation to local trust the Trustees Law, the Common Law and the Principles of Equity, is applied and to CIT the provisions of The International Trusts Law are applied. In case there is any inconsistency between the provisions of The Trustees Law, Common Law or the Principles of Equity and the provisions of the International Trusts Law, the provisions of the International Trusts Law prevail as to CIT as being a special law regulating particular type of trusts.

DEFINITION AND NATURE OF CIT

A CIT or local trust may encompass any type of assets, whether movable or immovable. Additionally, assets situated outside the Republic of Cyprus may also be settled under a Cyprus trust, provided that the trust is capable of being recognized and enforced in the relevant jurisdiction.

Whereas the trusts such as CIT is a legal arrangement whereby the settlor transfers the ownership of assets to a specified person called as "trustee", who hold, administers and assumes the responsibility of managing it for the ultimate benefit of another party, known as the "beneficiary(ies)", in accordance with the terms of the trust instrument or deed.

"Settlor" also known as the Grantor or Trustor, who retains the authority to define the terms and conditions governing the trust and prescribe the powers, duties and discretions of the trustees of the trustees.

The trust in order to be valid, the settlor, who is transferring the property to the trustee, must possess the legal capacity to do so, namely, at the time of the transfer, settlor must be of legal age and mentally sound as per the law of the country of residence.

A trust, regarded as one of the most significant legal concepts developed by the Principles of Equity and a cornerstone of English jurisprudence, was established to mitigate the rigidity of Common Law and statutory provisions. Its essence lies in the division of ownership of the trust property between the trustee, who holds legal title, and the beneficiary(ies), who hold equitable interest, with the trustee being legally obligated to manage the property in the best interests of the beneficiary(ies). Due to the diverse types and methods of creating trusts, no comprehensive statutory definition exists. However, considering Common Law, Equity principles, and judicial interpretations, a trust can be defined as a legal relationship arising expressly, impliedly, or constructively, whereby a trustee is compelled to hold property — real or personal, under legal or equitable title either for the benefit of specific beneficiaries, regardless of whether the trustee is also a beneficiary, or for a particular purpose, as in the case of purpose trusts, which must benefit beneficiaries or serve the trust's designated objectives. In simpler terms, a trust is a relationship wherein a person vested with property is bound in the Principles of Equity to hold and manage it for the benefit of another or for a purpose other than their own.

Pursuant to the provisions of the International Trusts Law, a trust established in Cyprus qualifies as a CIT if ALL of the following conditions are met:

1. The settlor must not have been a permanent resident of Cyprus during the calendar year immediately preceding the creation of the trust.
2. At least one trustee must be a permanent resident of Cyprus.
3. The beneficiaries must not have been residents of Cyprus during the calendar year immediately preceding the creation of the trust.

For the purposes of the aforementioned criteria, the term "resident of Cyprus" is defined in accordance with the provisions of the income tax laws of Cyprus, referring to any individual who is considered a tax resident of Cyprus, including those who reside in Cyprus for more than 183 days within a calendar year.

CLASSIFICATION OF TRUSTS

The trust may be classified into various categories, including but not limited express trusts, resulting trust, charitable trust, Implied trust, fixed trust, and discretionary trust with the key distinction being factor given to the trustee in distributing trust assets to beneficiaries, based on the terms set out in the trust deed.

• Express trust is a type of trust which is created by a clear and unequivocal intention of the settlor, either in a written instrument or by an express statement and clear declaration of the person to whom the property is vested, the trustee, to the benefit of a particular beneficiary or for a purpose.
• Resulting trust is a type of trust that are implied by the court, that is not created intentionally by the settlor. where the beneficial interest in the property essentially revert to the person who originally transferred or provided the assets, based on the inferred intention of the settlor.
• Constructive trust is a type of trust that arises by operation of law irrespective of the intentions of the parties and is imposed by Equity to prevent unjust enrichment and to uphold the principles of justice and fairness. When property is held by a person in such circumstances which constitutes an abuse to hold it or creates injustice, then Equity converts the holder into a constructive trustee for the benefit of the person the property should be.
• Charitable trust is a type of trust that established for a public purpose, such as relief of poverty, education, or religion.
• Implied trust is a broader category consist both resulting trusts and constructive trusts, wherein the trust is not established through the express intention of the settlor, but by the court's judicial interpretation to achieve equity and fairness and both are considered "implied" as they are not explicitly stated in the trust document but are inferred from the circumstances.
• Purpose trusts are trusts that do not have identifiable beneficiaries but are established to advance a specific non-charitable purpose. Notably, a charitable trust is a type of purpose trust dedicated exclusively to charitable objectives.
• Fixed trust is a trust wherein the settlor expressly determines and defines the shares or interests of the beneficiaries in the trust property and the trustee is bound to make a distribution of the trust property to the beneficiaries in a fixed or predetermined manner, as set out in the trust deed. The fixed entitlement may be a specified fraction or a percentage.
• Discretionary trusts are those trust where the trustee has vested with the discretion to determine which beneficiaries shall receive distributions and in what amount accordance to relevant criteria set out in the trust deed by the settlor in discretionary trusts the beneficiaries only have contingent rights to the trust property. They cannot claim the trust property at any time. The allocation of the trust property is entirely at the discretion of the trustee. Discretionary trusts can only arise as express trust.

THE ROLES AND ADMINISTRATION OF CIT

In the establishment and administration of CIT several roles are defined in the legal framework which is as follows: -

1. Settlor

The settlor may be an individual or an entity that creates the trust by transferring the assets into the trust and define the terms of management, administration, and distribution to govern the trust. As per International Trusts Law, a settlor must not be a resident of the Republic of Cyprus during the calendar year immediately preceding the establishment of the trust. The settlor may reserve for himself certain powers and such reservation of rights that do not affect in any way the validity of the trust or the execution of it. Such powers may include any one of the following:

1. to revoke, amend the terms of the trust;
2. to grant, distribute, pay or dispose in any form, of income or capital of the trust or give instructions as to the above;
3. to exercise the powers of a director or officer or give binding instructions regarding the appointment or removal of any director or officer of any company, which is owned wholly or partly by the trust;
4. to give binding instructions to the trustee in relation to the purchase, retention, sale, administration, financing, pledging or encumbering of the trust property;
5. to appoint or remove any trustee, trust enforcement supervisor, protector or beneficiary;
6. to appoint or remove any investment manager or investment advisor;
7. to change the applicable law which governs the trust or the forum of administration of the trust;
8. to restrict the exercise of any power or discretion of the trustee demanding that these are exercised only with the consent of the settlor or any other person expressly referred to in the terms of the trust.

2. Trustee

A trustee may be an individual or legal entity entrusted with the custodianship, administration, and management of the trust assets, ensuring that the trust is managed in accordance with the terms set forth in the trust instrument. In accordance with Trustees Law and International Trusts Law, at least one trustee must be a permanent resident of Cyprus during the calendar year immediately preceding its establishment, except in the case of charitable institutions.

A trustee appointed to administer a trust is subject to fiduciary duties, requiring them to act in the best interests of both the trust and its beneficiaries. These fiduciary obligations include, inter alia, the duty to act in good faith, exercise reasonable care and skill, and maintain impartiality in all dealings. Pursuant to the provisions of the Trustees Law and International Trusts Law, trustees are entrusted with various duties and discretionary powers relating to the day-to-day management, preservation, and investment of trust assets. They are also responsible for distributing any income or capital derived from such management and investments to the beneficiaries, in accordance with the provisions of the trust deed. Furthermore, depending on the nature of the trust assets and the management required, trustees are subject to record-keeping obligations, including maintaining accurate accounts, filing tax returns, discharging any applicable taxes and expenses, and ensuring compliance with all relevant legal and regulatory requirements.

3. Beneficiary(ies)

Beneficiaries are the individuals or entities that are entitled to benefit from the trust. The trust deed defines who are the beneficiaries and they may receive income, capital, or other benefits from the trust as defined by the settlor. Beneficiaries may be fixed, class or Discretionary. In Fixed Beneficiaries the name of individuals or entities is written in the trust deed, in class, a class of Beneficiaries is defined such as blood relatives of the settlor and in discretionary, the trustee has the authority to exercise discretion in selecting beneficiaries and determining the extent and manner of distributions, in accordance with the provisions of the trust instrument.

4. Protector

In certain trust structures, the settlor may appoint a protector whose primary role is to oversee the trustees and ensure that the trust is administered in accordance with the settlor's intentions. The protector is typically vested with specific powers, including the authority to remove or replace trustees and to approve or veto certain trustee decisions. This role provides an additional layer of oversight and control, offering the settlor greater assurance, particularly in complex or long-term trust arrangements spanning multiple generations.

5. Manager or Investment Advisor

A manager or investment advisor may be appointed to oversee the trust's investment strategy. While the trustees retain ultimate responsibility for the management and administration of the trust's assets, the manager provides specialized expertise in financial portfolio management. This appointment is particularly advantageous when the trust holds substantial or complex financial investments, ensuring that assets are managed prudently to achieve the trust's objectives.

Presented below is a simplified diagram that depicts the operational structure and key roles within a CIT:

SETTING UP A TRUST

Procedurally, the creation of a trust requires the execution of a trust deed, which must set out all provisions relating, inter alia, to the exercise of the trustee's powers and duties regarding the management and distribution of the trust assets. The trust deed may be supplemented by a Letter of Wishes, wherein the settlor may outline their preferences and instructions concerning the distribution of the trust assets. Following the execution of the trust deed, the trust must be registered with the designated registers maintained by the Cyprus Bar Association or the Cyprus Securities and Exchange Commission ("CySEC"), as applicable. Additionally, all relevant procedures before the competent authorities must be completed to ensure that the legal title of the trust assets is duly transferred to and vested in the trust.

The trust deed establishing under the CIT normally includes, but not limited to, the following clauses:

• Clarifications as to the trust property, income and capital;
• The duration of the Trust, if any;
• Statement as to who are the beneficiary(ies);
• The powers and duties of the trustee, protector and trust enforcement supervisor;
• A provision as to the reserved powers of the settlor, if any;
• A provision as to the applicable law governing the trust;
• A provision as to the way the trust may be amended;
• A provision as to the ultimate default trusts;
• Provisions as to the liabilities of the trustee, the retirement of the trustee, the appointment of new or additional trustee, the indemnity of retiring trustee and protector, withdrawal, retirement and appointment of protector and remuneration for the trustee and other officers;
• A provision for the preparation of accounting records; and
• Confidentiality and non-disclosure issues.

VALIDITY OF CIT

An international trust shall be valid and enforceable irrespective of the settlor's bankruptcy, liquidation, or any legal proceedings initiated against the settlor by creditors, notwithstanding any provisions of the laws of the Republic of Cyprus or any other jurisdiction. This protection applies even if the trust is voluntary, established without consideration, or created for the benefit of the settlor, the settlor's spouse, or children. However, an exception shall apply if it is proven to the satisfaction of the Court that the trust was established with the intent to defraud the settlor's creditors at the time of the transfer or disposition of assets to the trust. The burden of proof in such cases shall rest upon the creditors.

Any legal proceedings against a trustee of an international trust, arising under the provisions of subsection (2), must be initiated within a period of two years from the date of the transfer or disposal of assets to the trust.

DURATION AND REVOCATION OF CIT

Under Trustees Law and International Trusts Law, a local Trust can exist for life in being plus 21 years (i.e the maximum duration of the Trust is until the life of the last beneficiary plus 21 years). The CIT may remain in effect for a maximum period of one hundred (100) years from the date of its establishment. Unless the trust shall automatically terminate or an earlier termination is provided in the trust deed or occurs due to other applicable legal grounds.

However, certain trusts are not subject to this limitation. charitable trusts or trusts established for specific purposes as recognized under Trustees Law and International Trusts Law. Such trusts are granted the unique ability to continue in perpetuity, without any statutory time constraints. This exemption intent to promote philanthropic and non-commercial objectives, ensuring that such trusts can fulfil their intended purposes indefinitely.

Under Trustees Law and International Trusts Law, a trust may include a provision that prevents the distribution of income is legally valid for any period within the duration of the trust. This allows the settlors to structure their trusts in a manner that aligns with long-term estate planning, asset protection, and wealth preservation strategies. The flexibility afforded by this principle ensures that trust income can be accumulated over an extended period, allowing for strategic financial planning and intergenerational wealth transfers without being subject to rigid distribution requirements.

Unless a trust instrument grants a power of revocation, an international trust established in Cyprus is considered irrevocable.

BENEFITS OF CIT

1. Tax Benefits: Income, gains and profits arises from non- Cyprus sources are exempt from income tax, capital gains tax, special defence contribution or any other taxes in Cyprus. However, where a beneficiary is a Cyprus tax resident, the income, profit and gains earned globally is taxable in Cyprus. Beneficiaries who are non-residents of Cyprus are taxed only on Cyprus-sourced income in accordance with the Cyprus income tax laws. Cyprus does not impose estate duty or inheritance tax in Cyprus.

2. Asset Protection: It serves as an asset protection, shielding assets from potential risks arising from tortious liability, contractual obligations, or other financial exposures related to the Settlor's transactions which may arise on negligence, breach of contract, matrimonial claims from spouses or former spouses, expropriation, and breaches of statutory duty. Under Trustees Law and International Trusts Law the transfer of assets can only be set aside by creditors if it is proven before a court of law that the trust was established with the intent to defraud them. The burden of proof rests solely on the creditors.

3. Confidentiality and reporting: CIT provides privacy and protection for all parties involved. There are no reporting requirements, other than the registration of the trust to the Cyprus Bar Registry or CySEC Registry, which are not accessible to the public. Cyprus imposes no obligation to disclose the trust deed, the identities of the settlor, trustees, or beneficiaries to any public authority.

4. Complicated family structures/managing family wealth: CIT is an effective legal instrument for high-net-worth individuals, particularly those with complex family structures, such as divorced spouses and children from multiple marriages. The flexibility and confidentiality offered by a CIT enable wealth management with the unique needs of diverse family arrangements. A CIT can be used as a vehicle for pooling income and assets that could be used for investment purposes.

5. Estate Planning: A CIT offers an effective mechanism to circumvent the application of succession law concerning the distribution of the settlor's estate. Under Cyprus law, the principle of "forced heirship" imposes restrictions on the disposition of assets through a will, ensuring that certain close relatives of the testator cannot be excluded from inheritance. However, where a trust is established inter vivos (i.e., during the settlor's lifetime), the settlor may include provisions in the trust deed specifying the distribution of their estate upon death, in accordance with their wishes. Notably, the rules of succession law of Cyprus, including the forced heirship regime, do not apply to assets settled in the trust.

6. Flexibility and Control: A settlor can retain a level of control over the trust, including the ability to change trustees, modify trust terms, or even revoke the trust in certain circumstances. Additionally, the trust structure can be adapted to suit the specific needs and goals of the settlor, making it ideal for:

• Family wealth management
• Succession planning
• Protection of vulnerable individuals (such as minors or incapacitated beneficiaries)
• Philanthropic purposes

This flexibility is key for individuals who wish to ensure that their assets are managed in a way that aligns with their long-term objectives.

7. Perpetuity: In many jurisdictions the trust is formed for limited duration but a CIT can be formed for indefinite duration, ensuring long-term asset protection and management across generations.

8. Organizing Collective Investments: A trust can serve as a framework for individuals seeking to pool their resources for joint investments, facilitating cooperation and the equitable distribution of financial returns from their ventures.

9. Management Vehicle: Financial institutions, including investment trust funds and banks, may utilize a trust, with an international business company acting as trustee, to manage funds on behalf of clients, ensuring professional administration and compliance with regulatory requirements.

10. Holding Property on Behalf of Minors: As minors may be legally incapable of holding property in their own name, a trustee can hold and manage such property on their behalf, ensuring its preservation and use for their benefit.

EXCLUSIVE JURISDICTION OF CYPRUS COURTS

The Cyprus courts retain exclusive jurisdiction over matters concerning a CIT, provided certain conditions are met. Jurisdiction is established if the governing law of the trust is expressly defined to be the law of Cyprus, if at least one trustee is a resident of Cyprus, if any trust asset is located within Cyprus, if the trust is administered in Cyprus, if the parties have expressly agreed to submit to the jurisdiction of Cyprus courts, or if the trust deed stipulates that any disputes shall be resolved by the Cyprus courts.

Where a foreign court issues a judgment concerning a CIT on matters falling within the exclusive jurisdiction of Cyprus courts, such a judgment may not be enforceable in Cyprus if it is deemed to be contrary to public policy. This provision reinforces the legal certainty and autonomy of CIT, ensuring that disputes and interpretations remain within the purview of the Cypriot legal system.

However, in the case of Arip xxx v. xxx Trustee Services Ltd and Others (Court Case No. 5/18, District Court of Larnaca, dated 24/10/2018), the issue before the court concerned the enforcement of an English judgment pertaining to immovable property located in England, which was owned by a CIT.

The court was required to consider the applicability of Article 12B of the International Trusts Law in the context of enforcing a judgment against a CIT in another Member State, where such Member State had exclusive jurisdiction over the subject matter. The argument advanced was that Article 12B should apply despite the existence of exclusive jurisdiction in the foreign court.

However, the court ruled that, pursuant to Article 24 of Regulation (EU) No. 1215/2012 on the recognition and enforcement of judgments in civil and commercial matters, the courts of England retained exclusive jurisdiction over disputes concerning immovable property situated within England. Consequently, the provisions of Article 12B of the International Trusts Law could not override the EU Regulation. The court held that the EU Regulation took precedence over national trust law provisions in matters of jurisdiction and enforcement.

CONCLUSION

Leveraging a CIT within trust structures offers a strategic avenue to enhance asset growth, ensure regulatory compliance, and optimize tax efficiency. By pooling resources under a professionally managed investment vehicle, trustees can diversify holdings, mitigate risks, and align with beneficiaries' long-term financial objectives. The flexibility and cost-effectiveness of CIT make them particularly advantageous for high-net-worth individuals and families seeking robust wealth management solutions. When integrated into trust frameworks, CIT not only streamline administrative processes but also foster sustainable wealth preservation, reinforcing the trust's ability to meet both present and future financial goals.

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.