Over time, the Republic of Cyprus has been developing an increasingly attractive legal and regulatory framework that favour the foundation of International Trusts, which thereby augments the potential for additional dynamic benefits. The Cypriot taxation system promotes Trusts and enjoys the benefits of Double Taxation Agreements with multiple states. Among others, no exchange control restrictions are imposed under the Cypriot taxation regime, the relocation of a Trust is feasible, and there is no registration or reporting requirement.
Asset protection, wealth management and estate planning are the financial services that can be exploited in an effective way under the Cyprus International Trusts (CITs), which could work as a will substitute and as means of preserving disclosure under the anonymity of the asset owner, securities and any other property which may be subject to the protection of the Trust.
Nonetheless, CITs are regularly used for the purpose of international tax planning. Noticeably, the accumulation of profits in another efficient and effective tax jurisdiction can be achieved as a result of using CITs.
Taxation of CITs in the Republic of Cyprus:
Any income of recognised CITs is not subject to any tax payments in the Republic of Cyprus for non-Cypriot residents. Additionally, the tax-neutral policy for CITs is applicable when the CIT does neither generate any Cyprus-based income nor have any tangible property in the Republic of Cyprus. The usual income taxation rules of the Republic of Cyprus apply otherwise.
Benefits from the Double Taxation Agreements of the Republic of Cyprus and the EU directive:
The Republic of Cyprus has made plentiful Double Tax Treaty (“DTT”) arrangements that are favourable to CITs, and has access to applicable EU directives, the benefits of which can be observed by the residents of the states with which an agreement has been made.
Nevertheless, Trusts are not stated in the legislative definition of a tax resident being eligible for DTT provisions verbatim, and respectively are not certified as persons or bodies of persons. Therefore, Trusts are usually not permitted for such DTT benefits.
On the other hand, trustees who are tax residents in the Republic of Cyprus and are qualified either as physical or legal persons, are recognised as ‘persons” who are entitled to DTTs and required to pay income taxes in the Republic of Cyprus.
Moreover, provided that the effective management of a Trust is resided in the country of the tax residency of the trustee, the expansion of DTT benefits to trustees is generally encouraged by the international case law. Therefore, both the residence of the effective management, and the control of the trust in the Republic of Cyprus are necessary. Caution should be exercised for avoiding any direct or implied sway of the Trust by the Beneficiaries and/or Settlor.
Considering the aforementioned factors, provided that the effective owners of the property associated with the Trust are residents of the Republic of Cyprus and manage the Trust effectively, they are usually expected to be eligible for obtaining DTT, and for enjoying the applicable benefits of the EU Directive.
However, if there are beneficiaries to the Trust, who are non-Cypriot residents, some jurisdictions may still not recognise the trustees as eligible candidates for obtaining the DTT and EU Directive benefits.
How to secure DTT and EU Directive benefits:
To obtain the DTT and EU Directive benefits with confidence, and to minimise the inherent risks that are unavoidably associated with this practice, a rigorous, effective and implementable plan should be taken into consideration. As the use of a Trust does not certainly guarantee treaty protection in all different circumstances, the use of an underlying company, which would be located in the Republic of Cyprus for tax purposes, could be a necessary step towards using the DTT and the EU Directive provision to the best advantage of the benefited activities. Such activities could be handed over to the aforementioned Cypriot company, which would in effect implement these activities. In line with this recommendation, such company would be chartered in Cyprus, and hence eligible for DTT and EU Directive benefits, as long as its effective management and control were located in the Republic of Cyprus (e.g. through its directors being Cypriot residents
Author: Maria Georgiou
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