3 Taxation in Cyprus 3.1 CIT 3.1.1 The CIT – which is considered as a see-through vehicle – is a zero-tax trust. It is not subject to any kind of taxation both in respect of local-source income or foreign-source income. The only charge payable in Cyprus in respect of the CIT is a fixed amount of €427.15 in the form of stamp duty on the instrument creating the trust. 3.2 CTC 3.2.1 Moving on to the taxation of the CTC, its taxation status distinguishes between local-source income and foreign-source income. 3.2.2 Concerning local-source income, the CTC is liable to tax on such income on behalf of the beneficiary, since the trustee is considered as the legal owner of the trust fund. 3.2.3 The tax liability of the trustee is imposed by s.31 of the Income Tax Law. This section provides among others that trustees, having the direction, control or management of any property on behalf of any person, shall be chargeable to tax in respect of such income derived from such property in such a manner – and to the like amount – as such persons would be chargeable if he had received such income. 3.2.4 It follows that the trustee of a trust with non-resident beneficiaries will be taxable on local-source income, but not taxable on foreign-source income. In relation to the income and profits of a CIT, this exemption from tax on income from foreign sources is specifically provided by s.12 of the International Trusts Law, which is reproduced in the Appendix below. In practice, this means that no tax is imposed neither in the hands of the trustees nor in the hands of the beneficiaries. 3.2.5 However, the CTC – which is a tax-resident of Cyprus – is subject to income tax on the trustee fees – at the rate of 10%, irrespective of the source of the trust income. Dividends and interest paid to non-residents are exempt from withholding tax, and royalties are also exempt if the income is derived from intellectual property which is exploited outside Cyprus. When paid to a trustee, all of whose beneficiaries are non-resident, such income enjoys the same exemption.
3 Taxation in Cyprus
The CIT – which is considered as a see-through vehicle – is a zero-tax trust. It is not subject to any kind of taxation both in respect of local-source income or foreign-source income. The only charge payable in Cyprus in respect of the CIT is a fixed amount of €427.15 in the form of stamp duty on the instrument creating the trust.
Moving on to the taxation of the CTC, its taxation status distinguishes between local-source income and foreign-source income.
Concerning local-source income, the CTC is liable to tax on such income on behalf of the beneficiary, since the trustee is considered as the legal owner of the trust fund.
The tax liability of the trustee is imposed by s.31 of the Income Tax Law. This section provides among others that trustees, having the direction, control or management of any property on behalf of any person, shall be chargeable to tax in respect of such income derived from such property in such a manner – and to the like amount – as such persons would be chargeable if he had received such income.
It follows that the trustee of a trust with non-resident beneficiaries will be taxable on local-source income, but not taxable on foreign-source income. In relation to the income and profits of a CIT, this exemption from tax on income from foreign sources is specifically provided by s.12 of the International Trusts Law, which is reproduced in the Appendix below. In practice, this means that no tax is imposed neither in the hands of the trustees nor in the hands of the beneficiaries.
However, the CTC – which is a tax-resident of Cyprus – is subject to income tax on the trustee fees – at the rate of 10%, irrespective of the source of the trust income. Dividends and interest paid to non-residents are exempt from withholding tax, and royalties are also exempt if the income is derived from intellectual property which is exploited outside Cyprus. When paid to a trustee, all of whose beneficiaries are non-resident, such income enjoys the same exemption.