After 20 years it had become increasingly obvious that the Cyprus International Trusts Law (the CIT Law) was in urgent need of reform.  Provisions that had been perfectly viable in the early 1990s had lost their competitive edge – and had become increasingly at odds with European Commission regulation.

As well as removing various shortcomings (e.g., governing jurisdictional protection, trustee responsibilities and trust duration) and bringing the law into line with English trust law and European Commission legal standards, the amending law removes many of the perceived weaknesses of the CIT regime in comparison with other jurisdictions.

In an attempt to prevent tax avoidance, the use of CITs had previously been restricted solely to non-resident settlors and beneficiaries – with the result that foreigners establishing a CIT were deterred from taking residency in Cyprus.

The amending law introduces a definition of residency and revises the definition of a CIT whereby (i) the settlor is not a resident of Cyprus in the calendar year preceding the year in which the trust is established; (ii) at least one of the trustees is a Cyprus resident throughout the trust period; and (iii) none of the beneficiaries (with the exemption of a charitable foundation) is a resident of Cyprus in the calendar year preceding the year in which the trust is established.  Now, a settlor and beneficiaries may take up residency in Cyprus at any time following the trust’s creation, while the amending law applies to all CITs irrespective of their time of incorporation.
Perhaps more significantly, under the amending law the prohibition of a CIT from holding immovable property on the island is now lifted.  Trustees can now invest in movable and immovable property in Cyprus and abroad, including shares in Cyprus companies.  This amendment is particularly important since it is expected to contribute to the revival of the Cyprus real estate sector.

A new provision is introduced expressly providing that any issues arising in relation to the CIT Law shall be determined by the laws of Cyprus without reference to the law of any other jurisdiction: a major step forward in terms of asset protection. Furthermore, the laws of Cyprus or the law of any other jurisdiction in relation to inheritance or succession shall not affect in any way the validity of a trust or any transfers or dispositions thereto.

In addition, a new section is introduced, giving the settlor of a trust far greater authority to retain rights over, or interest in, the trust property and to act as a protector or enforcer of the trust without these affecting the validity of the trust.  The amending law now also protects CITs from unsubstantiated foreign legal claims, provided these include a choice-of-law clause in favour of Cypriot law.

The amending law also introduces wider investment powers for trustees, enabling them to act as the absolute owners of the trust property.  A settlor may now reserve the power to revoke, vary or amend the terms of the trust, and may act as a director of a company belonging to the trust.  A settlor may also give binding directions to the trustee in connection with the trust property and may appoint or remove any trustee, enforcer, protector or beneficiary.

The 1992 CIT Law provided for a maximum duration of 100 years from the date of a trust’s creation, with the exemption of charitable and purpose trusts.  Now, trusts that are created from the effective date of the amending law onwards may, subject to the terms of the trust, remain in force indefinitely.

The amending law provides that the worldwide income and gains of a CIT shall be taxed in Cyprus to the extent that the beneficiary is a Cyprus tax resident. Furthermore, a non-resident beneficiary shall only be subject to Cyprus tax on Cyprus-sourced income.  In line with the above, a CIT with non-Cyprus resident beneficiaries and income from non-Cyprus sources continues to be exempt from Cyprus tax.

In a separate development, the long-discussed and deliberated upon Regulation of Company Services Providers Bill of 2012 is scheduled to be tabled before the House of Representatives very soon.  The bill focuses on regulating corporate service providers and trustees in an effort to harmonise Cyprus with the relevant EC Directives.  The responsibility for this law and related regulation of fiduciary service providers is now vested with the Cyprus Securities and Exchange Commission (CySec).

These two initiatives together will go some way to boosting confidence in Cyprus as a viable destination for international trusts, and have been universally welcomed in further developing the island’s reputation as an international financial centre.