The use of Cyprus International Trusts in international business planning is becoming as widespread as ever before, but is becoming even more popular with investors from Russia and other Eastern European countries. The most important reasons for this popularity are examined below.
Characteristics of a Cyprus International Trust
In brief a trust exists in relation to identified assets whereby the owner of these assets (the “settlor”) creates a trust by appointing a trustee to hold and manage these assets in its name for the benefit of certain other persons (the “beneficiaries”). The settlor may also appoint a person (the “protector”) to act as a guardian to ensure that the trustee will exercise its discretion with the prior consent of the protector.
Cyprus International Trust is characterized by the following:
- The settlor is not a permanent resident of Cyprus;
- No beneficiary (other than a charity) is a permanent resident of Cyprus;
- The trust property does not include any immovable property situated in Cyprus;
- At all times, there is at least one trustee resident in Cyprus;
- The trust remains valid for up to 100 years, unless it is a charitable or purpose trust that may continue indefinitely;
- Income can be accumulated for the whole duration of the trust.
Benefits of using a Cyprus International Trust
- No taxation – exemption from all taxes in Cyprus.
- Confidentiality – there is no duty to register and/or prepare and file accounts or tax returns according to the Law, and therefore neither the settlor nor the beneficiaries are anywhere disclosed. In fact, the Law prohibits any trustee or any other third party from disclosing anywhere such information except under a disclosure order by a Court in Cyprus.
- Flexibility – the applicable Law allows relocation of jurisdictionand vice versa, provided that the Law of the new jurisdiction recognizes the validity of the trust and the respective interests of the beneficiaries.
- Protection - the trust remains valid even if the settlor becomes bankrupt, unless it is proven that the trust was made with the intent to defraud the creditors of the settlor at the time of the transfer.
- Retirement - a foreigner who retires in Cyprus and creates a Cyprus International Trust is still exempt from tax if all the property settled is out of Cyprus and the income is earned abroad, even if he is a beneficiary.
Uses of a Cyprus International Trust
- Protection of wealth: ensuring that persons that cannot be trusted with the management of the settlor’s estate (ie. minors, handicapped persons, etc.) are well provided for, even after the settlor’s death.
- Inheritance/ estate planning: for distribution of the settlor’s estate according to his wishes, which may not comply with his/her local inheritance Law.
- Asset protection: as long as the trust is not created with the intention to defraud settlor’s creditors, assets settled are protected in case the settlor becomes bankrupt in the future.
- Protection of assets, such as assets acquired while working abroad by expatriates who settle these into a trust before repatriating.
In practice: Cyprus International Trusts and Russia
Applying the above mentioned benefits and uses of a Cyprus International Trust to the case of Russia, and as per opinions publicly expressed by various Russian experts with regards to the tax and legal implications in Russia for the use of Trusts in general, the following can be highlighted as the main drivers of their popularity.
Protection of wealth and asset protection: a Cyprus International Trust provides a robust protection against not only creditor claims but also matrimonial claims. If spouses have segregated property in accordance with pre or post-nuptial agreements, they can transfer their individual assets to a Trust without too many technical formalities.
Inheritance/estate planning: due to the fact that the Russian law does not include any rights or duties inseparably connected with the personality of the deceased, if a Russian individual makes a bona fide transfer of all of his/her assets to a trust, he/she will cease to own these assets and they will cease to be part of the inheritance as defined by the Russian law. This means that any “forced heirship” provisions (obliging the settlor to distribute his/her assets in accordance with set rules with regards to the identity of beneficiaries and the portion of the fortune assigned to each of them) are bypassed, enabling the investors to dispose their assets as they wish.
Tax optimization: this is better understood if the whole process is split up in three stages, as follows:
- Transfer of assets to a Trust: it is unlikely that any Russian tax will arise on transfer of the assets to the Trust, either on the settlor, the Trust itself or the beneficiaries.
- Ongoing basis: on an ongoing basis a Trust can only be subject to tax in Russia if it has a permanent establishment in Russia or if it receives passive income (dividends, interest, royalties, etc.) from Russia. The latter is the most probable case of taxation arising in Russia, in the form of withholding tax, but this can be reduced through the imposition of a holding company between the Trust and the Russian operational company making the transfers. Such a company is also known as “consolidation vehicle” because it groups all the assets of the Trust under its auspices. Considering the preferential terms provided by the Double Tax Treaty between Cyprus and Russia, a Cyprus company can form an ideal consolidation vehicle. Taking in to account that Cyprus is a member of the EU, imposing a Cyprus company in the structure, will also have the benefit of providing access to all EU Directives, which can make a significant difference in case the Trust has investments also in the EU.
As for the settlor, the fact that upon transfer of the assets he ceases to be their legal owner, will relieve him from any tax liabilities in respect of income or gains generated by those assets.
- Transfer of income and/or assets to beneficiaries: a Russian resident beneficiary will be subject to Russian income tax on any distributions to be made by the Trust, probably even those of capital (i.e. the assets themselves), since there is no distinction in the Russian law between taxation of income and capital and taxation of distributions from Trust is not covered by specific provisions in the Russian tax laws.
Due to the personal nature of the Trust relationship, the great powers which can be conferred to the Trustees, the significance of the assets settled and the importance of the purposes for which such a vehicle is created, the need to get the structure right before implementation as well as to express this properly in the Trust Deed and related documentation is vital. Especially in the case of Russia, where the common law concept of trust is alien, the suitability of a Trust to the specific circumstances of an investor as well as the understanding and application of the concept by the Russian authorities at the time of inception, should always be checked with a qualified local professional.
George Savvides, Partner
George Savvides, Partner, Fiducenter, Cypus