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Home » Offshore Company » What is an Offshore Trust and How do I set up a trust in Cyprus?

A Trust is an agreement which is entered when the person establishing the Trust.

– the Settlor – transfers his assets, or a part of them, to an independent third-party asset controller
– the Trustee – on the understanding that following the agreement, the assets will legally belong to the Trustee, and the Trustee will manage the assets, while the Beneficiary or Beneficiaries will continue to enjoy the profits earned by the assets.

They also appoint or can appoint, a so-called Protector who provides the Trustee with advice and instructions if the Settlor is prevented from doing so.

The institution of the Trust in the United Kingdom has a tradition dating back some 1000 years. It was developed in the Middle Ages, at the time of the Crusades, when the king summoned his lieges, who, obedient to the wishes of their sovereign, followed him to the Holy Land.

Their wealth and assets, however, remained in England, albeit now unmanaged and unsupervised. And, in the Middle Ages, this wealth usually meant physically enormous assets, which required daily management and handling. In many cases, the management and protection of assets could not be entrusted to family members (disputes between brothers, a young and inexperienced spouse, etc.), so the asset-holder was forced to look for a person who could fulfil the role until he returned and took charge once more of his affairs.

The institution and tradition of the Trust continued to thrive and develop over the centuries, and, in particular, during the Victorian era. There was always some kind of assets which required management, and thus there were always entrepreneurs ready to take on the role.

All of this, of course, could not escape the notice of the legislators, and laws related to Trusts were introduced not only in England, but in numerous countries which adopted English law, such as the USA and Australia, as well as the countries of the former British empire and the territories which even today fall under the jurisdiction of the United Kingdom, though have independent legislation (Isle of Man, Gibraltar, British Virgin Islands etc.).

The principle of the Trust has remained unchanged throughout the centuries. At most, it is legislation and the enormous number of cases relating to lawsuits that have turned the thousand year-old institution into one of the most refined tools in asset planning.

Who are the main players in an Offshore Trust?

Settlor: this is the person who initiates the establishment of the Trust, and transfers his assets to the Trustee, on the understanding that the assets are then no longer the Settlor’s, but the Trustee’s. Generally, the Settlor tends to be a natural person, but it can also be a company.

Trustee: the future owner and manager of the assets, who holds and handles the assets in accordance with the agreement, and, in the event of certain circumstances, divides the assets up between the beneficiaries. The Trustee can be a natural person, but nowadays it is more usual for this role to be filled by a company specialising in this field; these companies tend to be legal offices, banks, notaries public etc.

Beneficiary: these are the people who enjoy the profits of the assets placed in Trust. These are usually natural people, and generally include the Settlor all the while that he is still alive. In most cases the beneficiaries are the Settlor’s close family members (spouse, children), and other people named by the Settlor in the Declaration of Trust (brothers, friends etc.). The beneficiaries could, however, be companies or other organisations, in accordance with the wishes of the Settlor.

Protector: this is the person who provides the Trustee with instructions regarding the management of the assets if the Settlor becomes incapacitated or dies. In many cases, the role of the Protector is extremely important, as he is the one who knows the situation and peculiarities of the Settlor’s assets better even than the Trustee, so is able to give the best advice as far as the handling of the wealth is concerned. From this it is clear that there must be a relationship of complete trust between the Settlor and the Protector. Thus, the Protector can be a close friend, a private lawyer or a trustworthy business partner.

The assets placed in Trust: The assets placed in Trust can be practically any movable property or real estate, or any goods, material or immaterial. Generally, there are no restrictions on the assets of the Trust, but the legal transfer of the assets can be a lot more complicated. This is particularly the case when, for example, a piece of real estate has to be transferred to the Trustee, or when the Trustee legally takes possession of a racehorse.

Declaration of Trust: Early Trusts were not recorded in writing, and even today it is legally possible to establish a Trust without preparing any formal documentation. If the formal requirements are all in place, then the parties can form a Trust by entering a verbal agreement. Nowadays, however, most Trusts are formed in writing. The parties set down the regulations for the establishment and operation of the Trust in the Declaration of Trust, a document drawn up specifically for the purpose.

Letter of Wishes: this is a one-sided declaration, in which the Settlor sets down the principles according to which the Trust should be organised, and how it should be operated (who the beneficiaries are etc.).

How does the Trust work?

When the Trust is established, the Settlor transfers his assets to the Trustee, who, from that point, administers and manages the assets; the transfer in this case is not for money, as this is not a purchase, but, legally speaking, a type of gift.

Although the Trustee becomes the holder of the assets, the duality of ownership remains, as the legal system also recognises the Settlor’s ownership rights.

However, once the Settlor has transferred the assets, he can declare: “Those assets are no longer mine.” The regulations for the establishment and operation of the Trust are set down in the Declaration of Trust.

The beneficiaries are also named here, and typically the Settlor stipulates that while he is alive, he will also be a beneficiary. In the event of his death, however, the assets and/or the profit from the assets, must be transferred to the Beneficiaries named in the Declaration of Trust, in accordance with the conditions defined.

In the event of the unfortunate and tragic death of the Settlor, it is the job of the Trustee to arrange matters in accordance with the Declaration, and to see to it that the assets are transferred to the beneficiaries, and that this is done correctly.

It may be, for example, that the Settlor stipulates certain conditions relating to the transfer; for instance, children must come of age or must complete university studies, or his widow must remarry etc.

What are the main reasons for establishing an Offshore Trust?

The Offshore Trust is one of the most important tools in modern-day asset protection. The uses of Trusts have become very varied, as it offers a solution to many of the problems which arise during the management, handling and protection of assets. Some of the reasons for establishing a Trust are as follows:

The secure deposit of assets. It may be particularly important for residents of areas which are politically unstable to have their assets held and managed by a person resident in a stable area. This is even more important in cases where foreign exchange restrictions exist in parallel with political instability.

Protection of private assets from claims by creditors, lawyers specialising in damages, and divorced spouses. As the assets are no longer the property of the Settlor once the Trust has been established, claims of this nature will be fruitless as the Settlor officially has no assets to claim against: he is no longer the owner, and the Trustee can not be the subject or defendant in such a case.

Discreet asset holding. In numerous cases the Settlor is in a position where it is not desirable to show the true extent of his wealth, as this may lead to certain negative consequences and judgements.

Inheritance and capital gains taxes. In many countries with developed tax systems, asset holders can be hit with significant capital gains taxes on their growing wealth even during their lifetime, while upon the death of the asset holder, his heirs are required to pay exorbitantly high inheritance taxes (in some cases up to 50 %). However, if the Settlor handed over his assets to a Trustee while he was still alive, his heirs will not be subject to inheritance tax upon his death.

Read more about. What is the Purpose of Offshore Trust? here

What is meant by the term offshore Trust?

So far, we have been following the tradition and model of the classic Anglo-Saxon Trust. The offshore Trust is a specialised version of this, in which the Trustee is resident in a jurisdiction whose laws generally do not place any taxation requirements on the assets of Trusts established according to the laws of the jurisdiction.

This requirement applies not only to the assets themselves, but also to growth in the assets, profits arising from the assets, and inheritance. It is important, therefore, for an offshore Trust to be established in such a jurisdiction, as any advantages to be gained through taxation, or rather lack of taxation, can only be achieved if this is the case.

Furthermore, it is only worthwhile if the Settlor is resident in a jurisdiction where the taxes and duties mentioned above are very high.

Which are the most popular centres in Europe for offshore Trusts?

Although this list is by no means complete, it can be said that the legislation and judicial practice in Alderney, Guernsey, Jersey, the Isle of Man, Gibraltar, Malta, Cyprus, and Liechtenstein make it possible for offshore Trusts established in these jurisdictions to offer the maximum security and convenience to the beneficiaries of those Trusts.

What are the most important considerations when choosing the jurisdiction in which to establish a Trust?

Political and economic stability.

The legal system must follow the traditions of Common Law (Anglo-Saxon law); this is necessary both from the point of view of the written Trust laws and the use of case laws.

Exemption from tax on the Trust assets, gains of the assets and in the case of inheritance.

The jurisdiction must have a suitable infrastructure, capable of serving the needs of investors from various different countries. In this sense, infrastructure means primarily the necessary experts, lawyers, bankers, financial advisers, accountants and notaries to deal with this area of business; in short, the people who participate in the establishment and management of Trusts. It is not just the professional expertise which counts, but, in certain cases, the approach of people and their attitude towards clients can be just as important.

An advantageous regulatory environment – this means that the local financial controller can work efficiently, and that laws and regulations relating to secrecy are strongly adhered to and enforced.

Good telecommunication possibilities, and maybe easy to reach, both of which facilitate the management and handling of assets, particularly when decisions have to be taken and acted upon regularly.

What is a “Trust of Shares”?

The Trust of Shares is a special type of Trust, where the assets of the Trust are comprised solely of shares; the Settlor transfers these shares to the Trustee, who takes possession of the shares not only in theory, but physically as well. Trusts established in this way have no assets other than the shares placed in the Trust. These shares are usually shares in offshore companies, which form part of the wealth of the Settlor, which is held as money deposited in bank accounts.

Basically, therefore, the only asset of a Trust established in this way is money held in bank accounts, which is officially the property of the Trustee, while the person managing the account(s) is very often the Settlor himself, or the beneficiaries. Briefly then, it can be said that the Trust of Shares is a simplified form of Trust, as the assets involved only take the form of money in bank accounts, and only formally appear as the property of the Trustee, given that the person managing the account usually remains the Settlor himself while he is alive, or the people appointed by him.

Why choose Cyprus for establishing a Trust?

If we look at the international requirements for the support of offshore Trusts in order, then it can be seen that Cyprus passes with flying colours and satisfies all of the conditions generally required for the establishment of international trusts.

Political and economic stability. The Republic of Cyprus has been an independent country since 1960. Political life in Cyprus is stable, and the principles of parliamentarism are followed to the letter. The economy is at a level that many EU members would envy, as the rate of inflation is very low, while at the same time there is hardly any unemployment on the island, and, in fact, as a result of the growth in the tourist industry, many foreigners are also employed.

Anglo-Saxon type legal system. Cyprus, as a part of the former British Empire, follows the traditions of common law, in both its old legislation and in the introduction of new laws. The influence of the Anglo-Saxon legal system is further reinforced by the fact that a significant number of Cypriot lawyers study in England, or rather the United Kingdom.

Tax exemption. There are no taxes on assets placed in Trusts in Cyprus, on the growth of those assets, on profits arising from the assets or on inheritance, provided that the beneficiaries are not residents of Cyprus.

Suitable infrastructure. The lawyers, accountants, auditors, financial advisers and bankers participating in financial life in Cyprus are highly prepared experts, who, through both their professional training and human approach, deal with all demands directed to them with a totally client-orientated attitude. All professionals speak English, with many also having knowledge of at least one other foreign language.

Suitable regulatory environment. The Cyprus offshore trust is a well-regulated institution legally. Prior to the establishment of a Trust, permission is required from the Central Bank of Cyprus, which means that in practice it is not possible for something which is against the law in Cyprus, or damaging to the client, to be established.

Good communications and links with the rest of the world. Cyprus has a telecommunications system equal to those of the most developed countries, and this system is also available to the general public. Although Cyprus is an island, the telecommunications are comparable to those of any major city, such as Tokyo, New York or London. The transport network is excellent; there are several flights each day to and from Europe and North America, as well as to many countries in the Arab world.

What are the most important characteristics of the Cyprus Trust?

The Settlor must not be resident in Cyprus.

At least one of the Trustees must be permanently resident in Cyprus.

The beneficiaries must not be residents of Cyprus.

Generally, the assets of the Trust may include any movable or fixed objects, with the exception of real estate in Cyprus, and anything else which the Central Bank of Cyprus may stipulate.

Cyprus Trusts may be established for a maximum period of 100 years from the date of establishment; in the case of Trusts established for charitable purposes, however, there are no restrictions on the duration of the Trust. At the end of the 100 years, the assets must either be divided between the Beneficiaries, or disposed of as defined earlier.

According to the legal regulations in Cyprus, Cyprus Trusts may be transferred to other jurisdictions, just as Trusts established in other jurisdictions may be transferred to Cyprus. It is important that this possibility be included in the original foundation documents of the Trust. It is also a requirement, in cases where Cyprus Trusts are transferred to other jurisdictions, that the legislation of the new jurisdiction recognises the validity of the Cyprus Trust as well as the rights of the beneficiaries. In cases where Trusts are transferred to Cyprus from another jurisdiction, the laws of the original jurisdiction must permit the transfer of the Trust from that jurisdiction.

According to the regulations regarding international Trusts, neither the Trustees, nor the government, nor the Central Bank may publish information regarding Trusts, unless they are ordered to do so as a result of a decision taken by a civil or criminal court.

Neither the assets of the Trust, nor the beneficiaries are subject to tax in Cyprus with regard to income arising from the growth of the Trust assets or its profits. Similarly, income arising from the inheritance of the assets is not taxable in Cyprus. As a brief summary, in practice no taxes arise in Cyprus in relation to Trusts, other than the 250 Cyprus pound registration duty.

A Trust can only be established with the prior permission of the Central Bank of Cyprus. Permission for the establishment of the Trust is granted if the following conditions are met:

The assets of the Trust, with the exception of the shares of offshore companies and deposits placed in Cypriot commercial banks or their branch offices, must be situated outside Cyprus,
The Settlor and Beneficiaries must not be residents of Cyprus,
The Trust may receive no income of a Cypriot source, other than from deposits opened in Cyprus and incomes arising from shares,
The fees payable to the Trustees, and any other similar fees, must be converted to Cyprus pounds through an officially authorised financial institution,
The Central Bank of Cyprus has the right and possibility to examine any of the documents of the Trust, and will have access to any information it may require during the examination,
The Trust is subject to Cypriot law.

What guarantee is there that the Trustee will not steal my money?

Whether intentionally or not, the above question invariably arises. From one point of view, the answer could be that there is no guarantee, as the Trustee becomes the owner of the assets, and can do what he wants with them. I either trust him or I don’t. This argument could undoubtedly be true, if we didn’t take a closer look at the documents which are prepared when the Trust is established.

The first and most important of these is the Declaration of Trust. This document sets down quite clearly who is entitled to what part of the assets. This document does not just gather dust in the safe of the lawyer’s office; a copy is deposited in the bank in which the offshore company holds its account. Thus, the bankers also know exactly who the Trustee is holding the assets for, and who the beneficiaries are.

If the Trustee does manage the bank account of the offshore company, then he can not have access to the money while the Settlor is alive. Even if he does manage the account, he can only initiate transfers from the company’s account in accordance with pre-arranged instructions, and there will also be a written record of this.

Upon the death of the Settlor, the regulations of the Declaration of Trust come into force, and the bankers are able to check this too, as a copy was deposited with them in advance.

It can be seen from this, that the possibility of the Trustee truly gaining access to the assets are regulated as effectively as is possible; he can not act arbitrarily with possessions placed at his disposal by other people.

What must I do in order to establish a Trust in Cyprus?

It is not possible to give a simple answer to the above questions which would cover all cases. In all cases where a Trust is to be established, we insist on meeting the person or people establishing the Trust; during the course of a personal interview we have to be convinced of the intentions of the client, and, at the same time, have to be able to prove to the beneficiaries that our company is capable of meeting their requirements.

We would like to emphasise that we deal exclusively with the establishment of the Trust of Shares type of Trust introduced above, that is, where the assets of the Trust consist entirely of the shares of an offshore company, which, in turn, is only used to hold financial resources.
In our opinion, it is not possible to give thorough information in this short brochure, which is designed rather to provide some food for thought. Therefore, if you have any questions on this subject, please feel free to contact any one of MouxtiBay offices, where our colleagues will be at your disposal.

How much does it cost to establish and maintain a trust?

It is not possible to give a simple answer to the above questions which would cover all cases. In all cases where a Trust is to be established, we insist on meeting the person or people establishing the Trust; during the course of a personal interview we have to be convinced of the intentions of the client, and, at the same time, have to be able to prove to the beneficiaries that our company is capable of meeting their requirements.

We would like to emphasise that we deal exclusively with the establishment of the Trust of Shares type of Trust introduced above, that is, where the assets of the Trust consist entirely of the shares of an offshore company, which, in turn, is only used to hold financial resources.

In our opinion, it is not possible to give thorough information in this short brochure, which is designed rather to provide some food for thought. Therefore, if you have any questions on this subject, please feel free to contact any one of MouxtiBay offices, where our colleagues will be at your disposal.