Taxation Of Cyprus International Trusts
2013-12-18 12:54:50 - Cyprus International Trusts (“CIT's”) have evolved considerably
since 1992 when they were formally introduced in Cyprus legislation. Cyprus acquired a "state of the art" international trusts regime allowing non-residents to establish trusts with excellent confidentiality, tax mitigation and asset protection features. The 1992 Law was not a self-contained law but it built on the 1955 Trustees Law, Cap.193 which is almost identical to the English Trustees Act
of 1925. In the past years, Cyprus international trusts proved to be popular among foreign investors, allowing them to hold their accumulated wealth through a trust jurisdiction offering stability and flexibility in terms of financial management as well as freedom from forced heirship rules applicable at their resident countries. While the 1992 Law was a good start to the Cyprus International Trusts regime in Cyprus, it gradually became dated, lacking in features that were available in other jurisdictions.
In March 2012, the Ministry of Councils passed a long-overdue amendment to the 1992 CIT Law, which made CIT's more flexible and attractive to foreign investors. The salient advantages of CIT’s such as confidentiality, asset protection and avoidance of forced heirships were significantly enhanced causing a surge of interest by foreign investors for the establishment of CIT's. In September 2013, the CIT Law was further amended to provide for the creation of a trust register to be maintained by the authorities supervising the providers of trustee services. This latest development has been welcomed by the trustee services community as it solidifies Cyprus’ position as a leading trusts jurisdiction attracting high net worth individuals from around the world.
The 2012 amendments to the CITs addressed and clarified issues related to taxation, given the flexibility to allow a beneficiary to become a Cyprus tax resident following the formation of the Trust. While trusts have originally been utilised to plan and preserve family wealth, in recent years and in Cyprus particularly, the tax regime applicable to trusts has transformed them into tax planning vehicles. Generally, Cyprus trusts are transparent in tax terms. The trustee is responsible for discharging the beneficiaries' tax liabilities on their behalf, but the income of the trust is not assessed on the trustee. Since neither settlors nor beneficiaries of international trusts could be Cyprus residents, the 1992 law had no requirement for detailed tax provisions.
The amending law of 2012 introduces a uniform tax regime applicable to all persons on the basis of the tax residency test. Income and profits of an international trust which are earned from sources within and outside Cyprus are subject to every form of taxation imposed in Cyprus in the case of a beneficiary who is resident. In the case of a non-resident beneficiary only Cyprus-sourced income and profits are subject to Cyprus tax.
These provisions ensure that there will be no discriminatory taxation available to anyone. Beneficiaries who are Cyprus tax residents will be subject to Cyprus tax on their worldwide income in the same way as any other Cyprus tax residents and non-resident beneficiaries will be subject to Cyprus tax only on Cyprus-sourced income.
The application of these provisions is clear and straightforward when all the beneficiaries of the trust concerned are non-resident or resident in Cyprus. Where there is a mixture of resident and non-resident beneficiaries it will be necessary to apportion the various sources of income between them.
In the meantime, preliminary discussions have taken place between the Inland Revenue Department, the Institute of Certified Public Accountants of Cyprus and other interested parties, and the following principles have been agreed:
The trustee will be responsible for the payment of any taxes due, for providing all relevant information concerning the trust and its beneficiaries as well as for compliance with anti-money laundering legislation. If any beneficiary is a Cyprus tax resident the trustee will be the person responsible for registering the beneficiary for Cyprus tax purposes if they are not already registered.
Insofar as taxation of the trust and its beneficiaries is concerned, the tax residency status of the beneficiaries will be the determining factor. The following taxation of trusts is applicable by the Inland Revenue Department under section 12(1):
If all beneficiaries are Cyprus tax residents the trust will be treated as a domestic trust and will be subject to Cyprus taxation on all income;
If all the beneficiaries are non-residents the trust will be considered as an international trust and will be subject to taxation only on Cyprus-sourced income;
If the beneficiaries are both resident and non-resident, taxation will be determined by reference to the scope of rights that the respective beneficiaries have in the trust. The tax treatment of the trust will be determined according to a simple majority test. If more than 50% of the rights adhere to beneficiaries who are Cyprus residents the trust will be treated as a domestic trust and will be liable to Cyprus tax on worldwide income. If more than 50% of the rights link to non-resident beneficiaries the trust will be treated as an international trust liable to Cyprus tax only on Cyprus-sourced income.
The main taxes on income in Cyprus are income tax and Special Contribution for Defence (SDC tax). Dividends and passive interest are exempt from income tax, but subject to SDC tax at 20% and 30% respectively. Rent received is subject to income tax and also to SDC tax at 2.25%. If a dividend is received from a Cyprus company the trustee should pay SDC tax on the one-fifth of the dividend attributable to the Cyprus-resident individual. Dividends received from overseas are not subject to taxation where the majority of beneficiaries are non-resident. When the trustee distributes the income, SDC tax will have to be deducted and paid over to the tax authorities on the amount attributable to the Cyprus resident beneficiaries. Similarly, in the case of interest and rents received the trustee will be responsible for paying SDC tax on Cyprus-sourced interest, and income tax and SDC tax on Cyprus-sourced rents received. Foreign-sourced interest is not subject to taxation, but if it is distributed to the Cyprus-resident beneficiaries the trustee will need to deduct SDC tax and pay it over to the tax authorities. For foreign-sourced rents, income tax and SDC tax will be payable only when and to the extent that the income is distributed to the tax resident beneficiaries.
International trusts will be liable to taxes such as VAT and stamp duty on their activities in Cyprus. Section 12(2) of the International Trusts Law states a fixed stamp duty on the establishment of an international trust. International trusts are subject to immovable property tax on property held in Cyprus irrespective of the residence of the beneficiaries.
The only gains subject to capital gains tax are gains on disposals of real estate situated in Cyprus and, to the extent that the gain is derived from the real estate holding, on disposals of shares in companies holding real estate in Cyprus.
The simplicity of establishing a CIT combined with the certainty of its operation by Cyprus law renders the CIT one of the most sought-out wealth management tools worldwide. Through the latest amendments to the CIT Law, Cyprus has achieved transparency and alignment with all EU and local anti-money laundering laws and regulations, while maintaining a legal system that offers asset protection to the highest degree. The new tax provisions provide a tax neutral environment allowing investors to take advantage of Cyprus's tax regime.