The 2012 Law:
The International Trusts (Amendment) Law of 2012, which was entered into force on 23 March 2012, generated a new type of trust, the “International Trust”. Additionally the new Law established a uniform tax regime applicable to such International Trusts, on the basis of tax residency. This opts to avoid discriminatory and over burdensome taxation. The main points regarding taxation of International Trust in Cyprus are set out below.
The International Trusts (Amendment) Law of 2012 s.12, provides uniformity regarding taxation and opt for a Taxation of International Trusts shall be carried out on the basis of a tax residency threshold. What does this mean? Effectively, every income and profits of an International Trust, irrespectively of whether this flows from sources within the Republic of Cyprus or from foreign countries, shall remain under the ambit of the Cyprus taxation schemes so long as the beneficiary is a resident of Cyprus. In the case of a non-resident beneficiary then he/she shall only be taxed on the basis of only his/her income and profits from sources in Cyprus. This stance is similar to the criteria in respect of taxable profits and tax residency. A more perplexed case might arise where there is a mixture of resident and non-resident beneficiaries. Then, it will be necessary to apportion the various forms and sources of income between them. For the time being there has been an announcement from The Inland Revenue Department claiming that it will issue guidance in order to simplify the position. In the meantime, preliminary discussions have taken place between the Inland Revenue Department, the Institute of Certified Public Accountants of Cyprus.
For the sake of convenience the principles have been agreed, inter alia:
- The trustee will be the person responsible for the payment of any taxes due.
- Maintenance of all the relevant information concerning the trust and its beneficiaries and compliance with anti-money laundering legislation shall be the trustee’s obligation.
- The trustee shall also disclose to the Inland Revenue Department, anything necessary.
- Registration of any beneficiary in case that person is a Cyprus tax resident for tax purposes, the trustee will be responsible for registering the beneficiary.
In establishing taxation of trusts the conclusive factor shall be the residency status of the beneficiaries. In determining the residency status, The Inland Revenue Department, adopts a threefold approach set out in the amending Law, where there are only Cypriot resident beneficiaries, only non-resident beneficiaries or beneficiaries both resident and non-resident respectively.
Benefits The taxation scheme involving International Cyprus Trusts is a favourable one; few of many practical benefits are enumerated below:
- Dividends Dividends, interest or other income received by a Trust from a Cyprus company are also neither taxable nor subject to withholding tax.
- Capital gain Gains on the disposal of assets of an International Cyprus Trust are not subject to capital gains tax in Cyprus. Therefore foreign individuals can set up an International Cypriot Trust in order to avoid capital gain tax in their own countries.
- No Estate duty An International Trust created for estate planning shall not be subject to estate duty in Cyprus.
International trusts will be liable to taxes such as VAT and stamp duty on their activities in Cyprus. Also, international trusts will be taxable on such Cyprus source gains. All other capital gains are exempt from Cyprus tax. However, the taxation of Trusts in Cyprus is now regulated under an investor-friendly, regime which is beneficial for anyone seeking to set such a trust.