Performance benchmark

On 9 March 2012 the House of Representatives passed an amendment to the 1992 Cyprus International Trusts Law modernising the legal framework for the set up and operation of Cyprus International Trusts (CITs).

The 1992 law was a benchmark piece of legislation for Cyprus, introducing the international trust concept and ?earning the island the reputation as a professional and respected trust centre. However, the passage of two decades has necessitated the update and clarification of the law to keep Cyprus at the forefront of trust jurisdictions.

The amendments introduce a new and improved state of affairs for settlors who choose Cyprus to settle their assets while enhancing trustee protection and clarifying previously ambiguous provisions of the law. Importantly, the ban on investments in immoveable property in Cyprus has now been lifted, the settlor residency requirements have been amended to provide for settlors (and beneficiaries) who decide to take up residence in Cyprus subsequent to establishing a CIT, and trustees’ powers of investment have been extended. There continues to be no registration or filing requirements for CITs.

Time frame

The key amendments are set out below.

Residency. The 1992 law restricted the settlement of international trusts to settlors who were non-Cyprus resident. This created a state of confusion for persons who met this criterion at the time of setting up the trust, but subsequently considered relocation to Cyprus with the result that such persons were dissuaded from becoming residents of Cyprus. The amendments provide that a settlor may be a resident of Cyprus, provided that, at the time of creation of the trust and for a year thereafter, such settlor was a non-Cyprus resident.

A time limit to the restriction has therefore been introduced, allowing the free establishment in Cyprus after the lapse of a year from the creation of the trust. The same rule has been extended to cover beneficiaries, who, under the previous regime, were similarly dissuaded from taking up residence in Cyprus.

Moreover, to remove ambiguity, the definition of residence has been expressly aligned with the definition contained in the income tax laws. In accordance with this definition, a resident individual will be a person residing in Cyprus for over 183 days in a given tax year, while a resident company will be a company which is ‘managed and controlled’ in Cyprus.

Settlor reserved powers. A new section 4A permits a settlor to reserve powers, to retain a beneficial interest in the trust property and to act as protector or enforcer of the trust. The list of powers which may be reserved are extensive and include, inter alia: the power to revoke, vary or amend the terms of the CIT; to be appointed as a director of an underlying company wholly or partly owned by the trust; to give binding directions to the trustee in connection with the trust property; to change the governing law of the CIT; and, to appoint or remove any trustee, enforcer, protector or beneficiary.

Furthermore, the settlor may require that the trustees’ powers be exercisable only with the previous consent of the settlor or that of any other person specified by the CIT.

These amendments were introduced specifically to address the concerns of settlors, particularly from civil law jurisdictions, who are accustomed to exerting full control over their assets and for whom the creation of a trust involves a considerable leap of faith. They follow suit to the amendments of other trust jurisdictions, notably Jersey and the BVI.

Article 2 of the Hague Trusts Convention provides that “the reservation by the settlor of certain rights and powers is not necessarily inconsistent with the existence of a trust”. However, it should be pointed out that a settlor of a CIT should be cautious and should not reserve extensive powers to himself. A conservative approach is recommended to ensure asset protection, tax optimisation, and to support a finding for the intention to create a genuine trust in the first place.

Applicable law

Governing law. The amended choice of law clause provides that any disputes arising with relation to a CIT shall be determined in accordance with the applicable laws of Cyprus, excluding therefore the laws of any other jurisdiction. Importantly, the law clarifies that the inheritance laws of any other country will not be enforceable in the Cyprus courts, providing that succession laws of other jurisdictions will not invalidate the provisions of a CIT.

Note that the choice of law clause, while highly recommended, is not necessarily conclusive on the issue of either succession or jurisdiction.

Duration of CITs. With the express exception of charitable trusts and purpose trusts that were allowed to exist in perpetuity, the 1992 law contained a cap of 100 years for the duration of a CIT. The newly introduced amendments remove this cap by providing that henceforth, and subject to the terms of the CIT, there will be no time limit restricting the validity and enforceability of a CIT and that the rule against perpetuities or remoteness of vesting will not apply to a CIT or to any advancement, appointment, payment or application of property from a CIT.

Investment powers of trustees. The amendments to the 1992 law consolidate and extend the powers of investment of the trustees, empowering them for the first time to invest in immoveable property situated in Cyprus.

Charitable purposes. The definition of charitable purposes has been aligned with the UK public benefit test by clarifying that CITs will be deemed to be charitable where their main objective consists in achieving one or more of a variety of purposes (see below). In keeping with the 1992 legislation, it is not a requirement that beneficiaries of charitable CITs be non-Cyprus resident.

• The prevention or alleviation of poverty
• The promotion of education
• The promotion of religion
• The promotion of health or salvation of life
• The promotion of the development of citizens and of the community
• The promotion of art, culture, heritage or science
• The promotion of amateur sports
• The promotion of human rights, dispute settlement or reconciliation or the promotion of religious or national harmony or equality and individuality
• The promotion of the protection or development of the environment
• The relief requirements of young or advanced age, ill health, disability, economic hardship or other disadvantage
• The promotion of welfare and protection of animals
• Any other reason for the benefit of the general public

Modern requirements

The recent amendments to the 1992 law retain the attractive features of the existing legislation, such as asset protection, while taking an extra step to enhance flexibility and adapt to the modern requirements of investors. Restrictions and limitations contained in the 1992 legislation have been abolished and settlors and trustees are granted wide-ranging powers to settle and invest respectively, as they see fit.

While the changes are welcome and are expected to boost the popularity of Cyprus as a modern and investor-friendly jurisdiction, caution should be exercised in the formulation and administration of a CIT. This is to ensure not only the validity and enforceability of such provisions, particularly in the jurisdiction of residence or domicile of the settlor or beneficiaries (where this is not Cyprus), but also to ensure the favourable tax treatment of the CIT.

Clarification of the taxation implications of these amendments is expected to follow through circulars of the tax authorities and, where necessary, through alignment of the relevant sections of the Cyprus tax legislation. In the meantime, great care should be taken to not abuse the facilitative provisions of the new amendments so as to jeopardise the use of a CIT for tax, succession and asset protection purposes.

Emily Yiolotis is head of Harneys’ Cyprus office and tax and regulatory practice head