Under the 1992 law, in order to prevent tax avoidance, permanent residents of Cyprus were prohibited from establishing international trusts. The concept of permanent residence was not defined in the 1992 law or elsewhere. It was unclear whether settlors could relocate to Cyprus after establishing a Cyprus International Trust, and the resulting doubt discouraged many from doing so.
Additionally, residents of Cyprus could not be beneficiaries of such trusts and international trusts were not allowed to own immovable property in Cyprus. Now the condition necessary for a trust to fall within the ambit of the International Trusts Law, is that both the settlor and the beneficiary should not be residents of Cyprus in the calendar year which precedes the year in which the trust was created.
The New Tax Regime
As a general rule Cyprus trusts are transparent in tax terms. The trustee is responsible for discharging the beneficiaries' tax liabilities on their behalf and the income of the trust is not assessed on the trustee.
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 or deemed to be earned from sources within and outside Cyprus are subject to every form of taxation imposed in Cyprus in case where the beneficiary is resident in Cyprus. In case the beneficiary is a non tax resident, only Cyprus-source income and profits are subject to Cyprus tax, if any. 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 resident and non tax resident beneficiaries will be subject to Cyprus tax, if any, only on their Cyprus-source income.
During the preliminary discussions between the Inland Revenue Department, the Institute of Certified Public Accountants of Cyprus and other interested parties, the following have been agreed:
- The trustee will be the responsible person for the payment of any taxes due.
- The trustee will be responsible for maintaining and gathering all the relevant information concerning the trust and its beneficiaries.
- The trustee will also be responsible for compliance with anti-money laundering legislation and procedures and for providing any such information to the Inland Revenue Department, when requested.
- If any beneficiary is a Cyprus tax resident, the trustee will be the person responsible for registering the beneficiary for Cyprus tax purposes if he is not already registered.
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. Rent received is subject to Income Tax and also to SDC Tax at an effective rate of 2.25% on gross rents. Section 12(2) of the International Trusts Law, as amended, provides for a fixed stamp duty of €430 on the establishment of an international trust.
Beneficiaries are subject to immovable property tax on property held in Cyprus irrespective of their residence. Further Capital Gains Tax is imposed on the gain realised on disposal of immovable property situated in Cyprus and on the gain realised from the sale of shares to the extent that this gain relates to the immovable property, held by such company, in Cyprus.