Thursday, 29 July 2010
General
For the purpose of attracting foreign investors to create in international trusts in Cyprus, the International Trusts Law of 1992 has been passed and deals with the regularization of international trusts. This law is not a self-contained law on trust but it builds on the existing Cyprus Trust Law, which is based on the English Law. This Law offers freedom of movement of funds and it removes certain doubts as to whether the existing legislation could cover arrangements such as those, which are common in other jurisdictions.
An international trust may be described as a trust created by a non-resident settlor for the benefit of non-resident beneficiaries. A trust can still qualify as an international trust for the purposes of law even if the settlor, trustee or the beneficiaries are international business companies or international partnerships.
In order to establish an international trust:
There is no longer a requirement to inform the Central Bank of Cyprus and get their respective permission in respect of the trustee of the International Trust since Cyprus’s accession to the EU.
A trust will still qualify as an international trust even if the settlor or the local trustee or a beneficiary (or a combination of them) is a Cypriot international business company or partnership. The perpetuity rules do not apply to international trusts and they can remain in force for up to 100 years.
The Law confirms the validity of a trust created by any person who is of full age and of sound mind regardless of any provisions relating to Inheritance or Succession of the Law of Cyprus or the law of any other country. The International Trust is irrevocable unless a specific power of revocation is reserved in it and cannot be set aside by the settlor’s creditors unless and to the extent that the creditors can show that the trust was made with the intent to defraud them. The burden of proof of such intent lies with the creditors and an action against the trustees to avoid the trust, on grounds of fraud, must be brought within two years from the date when the relevant transfer of assets is made to the trust.
Under section 7 of the Law, the trustees of an international trust have extensive investment powers, which must be exercised with the prudence and diligence of a reasonable person.
Cyprus courts may amend the terms of international trusts or the powers of the trustees to manage the trust property if satisfied that the proposed amendment will be in the interest of the beneficiaries and will not adversely prejudice their interests.
Section 9 of the Law allows for the applicable law of the international trusts to be any foreign law (other than Cyprus law) provided that the new law recognises the validity of the trust and the interests of the beneficiaries. In the same way, an international trust in a foreign jurisdiction may be subject to Cyprus law.
International Trusts do not have to be registered with any Cyprus authorities but there is a fixed stamp duty of CYP 250 payable on their creation.
International Trusts and Asset Protection Planning
The most important provision of the Law is found in section 3 that allows the Cyprus trust to be used as an asset protection vehicle.
Looking at Section 3 in more detail:
3(a). A Cyprus non-resident of full age and capacity who sets-up a Cyprus international trust is deemed as having the capacity to transfer property. The section goes on to provide that no foreign law relating to inheritance or succession shall be capable to invalidate the trust or affect any transfer relating to the creation of the trust.
This section, read together with section 9, set out above, has the effect of rendering a Cyprus international trust immune from forced heirship and ‘claw-back’ rules. This is especially useful in civil law jurisdictions that have forced heirship rules applicable on death
3(b) . Cyprus International Trust is not void or voidable in the case of the settlor becoming bankrupt or insolvent
This provision will not apply if the court is satisfied that the trust was set up specifically for the purpose of defrauding the creditors of the settlor at the time of setting up the trust. The law will also not apply where there were claims on the assets prior to the creation of the trust.
The key test is whether, at the time of setting up the trust, the settlor had sufficient property to meet all his liabilities, other than the trust property. If this test is met and provided that the settlor did not anticipate bankruptcy at the time of setting up the trust then the intention to defraud cannot be proven.
The burden of proof is on the person alleging the fraud and the standard is the balance of probabilities. For the trust to be set aside, it must be the creditor and not any other party that was defrauded.
No definition of ‘creditor’ is provided in the Law and this remains a question of fact and interpretation by the courts.
3(c). Any claim under section 3(b) above must be filed within a two year period from the date of transfer of the property to the trust.
After the lapse of the two year period, no action can be brought against the trustees.
For the purpose of attracting foreign investors to create in international trusts in Cyprus, the International Trusts Law of 1992 has been passed and deals with the regularization of international trusts. This law is not a self-contained law on trust but it builds on the existing Cyprus Trust Law, which is based on the English Law. This Law offers freedom of movement of funds and it removes certain doubts as to whether the existing legislation could cover arrangements such as those, which are common in other jurisdictions.
An international trust may be described as a trust created by a non-resident settlor for the benefit of non-resident beneficiaries. A trust can still qualify as an international trust for the purposes of law even if the settlor, trustee or the beneficiaries are international business companies or international partnerships.
In order to establish an international trust:
- The settler must not be a permanent resident of Cyprus.
- No beneficiary other than a charity is a permanent resident in Cyprus.
- The trust property does not include any real property situated in Cyprus.
- There must be at least one trustee resident in Cyprus at all times.
There is no longer a requirement to inform the Central Bank of Cyprus and get their respective permission in respect of the trustee of the International Trust since Cyprus’s accession to the EU.
A trust will still qualify as an international trust even if the settlor or the local trustee or a beneficiary (or a combination of them) is a Cypriot international business company or partnership. The perpetuity rules do not apply to international trusts and they can remain in force for up to 100 years.
The Law confirms the validity of a trust created by any person who is of full age and of sound mind regardless of any provisions relating to Inheritance or Succession of the Law of Cyprus or the law of any other country. The International Trust is irrevocable unless a specific power of revocation is reserved in it and cannot be set aside by the settlor’s creditors unless and to the extent that the creditors can show that the trust was made with the intent to defraud them. The burden of proof of such intent lies with the creditors and an action against the trustees to avoid the trust, on grounds of fraud, must be brought within two years from the date when the relevant transfer of assets is made to the trust.
Under section 7 of the Law, the trustees of an international trust have extensive investment powers, which must be exercised with the prudence and diligence of a reasonable person.
Cyprus courts may amend the terms of international trusts or the powers of the trustees to manage the trust property if satisfied that the proposed amendment will be in the interest of the beneficiaries and will not adversely prejudice their interests.
Section 9 of the Law allows for the applicable law of the international trusts to be any foreign law (other than Cyprus law) provided that the new law recognises the validity of the trust and the interests of the beneficiaries. In the same way, an international trust in a foreign jurisdiction may be subject to Cyprus law.
International Trusts do not have to be registered with any Cyprus authorities but there is a fixed stamp duty of CYP 250 payable on their creation.
International Trusts and Asset Protection Planning
The most important provision of the Law is found in section 3 that allows the Cyprus trust to be used as an asset protection vehicle.
Looking at Section 3 in more detail:
3(a). A Cyprus non-resident of full age and capacity who sets-up a Cyprus international trust is deemed as having the capacity to transfer property. The section goes on to provide that no foreign law relating to inheritance or succession shall be capable to invalidate the trust or affect any transfer relating to the creation of the trust.
This section, read together with section 9, set out above, has the effect of rendering a Cyprus international trust immune from forced heirship and ‘claw-back’ rules. This is especially useful in civil law jurisdictions that have forced heirship rules applicable on death
3(b) . Cyprus International Trust is not void or voidable in the case of the settlor becoming bankrupt or insolvent
This provision will not apply if the court is satisfied that the trust was set up specifically for the purpose of defrauding the creditors of the settlor at the time of setting up the trust. The law will also not apply where there were claims on the assets prior to the creation of the trust.
The key test is whether, at the time of setting up the trust, the settlor had sufficient property to meet all his liabilities, other than the trust property. If this test is met and provided that the settlor did not anticipate bankruptcy at the time of setting up the trust then the intention to defraud cannot be proven.
The burden of proof is on the person alleging the fraud and the standard is the balance of probabilities. For the trust to be set aside, it must be the creditor and not any other party that was defrauded.
No definition of ‘creditor’ is provided in the Law and this remains a question of fact and interpretation by the courts.
3(c). Any claim under section 3(b) above must be filed within a two year period from the date of transfer of the property to the trust.
After the lapse of the two year period, no action can be brought against the trustees.