4 Use in Tax Planning 4.1 The taxation status of the international trust is only one of the factors which constitute a CIT as beneficial for tax planning purposes. Indeed, the interplay between various international tax considerations and the application of tax treaties is the outcome of the continual growth of the use of a CIT in tax planning. 4.2 One may wonder how the trust income can obtain the benefit of the tax treaties to which Cyprus is a party. Can the CIT obtain the benefits of the tax treaties concluded by Cyprus? Or, alternatively, can the CTC reap the benefits of the treaties? In order for the claimant to take advantage of tax treaties concluded by Cyprus – following the OECD Model Agreement for the Avoidance of Double Taxation – it is required to establish two pre-requisites. 4.3 Firstly, that it is a person and, secondly, that it is a resident of one or both treaty states. Taking the first pre-requisite, it may be claimed that a trust falls indirectly within the definition of person given under Article 3(1)(a) of the OECD Model. Deriving from the definition of person, it may be argued that a trust falls under the category of “body of persons”. Moreover, the tax treaties concluded by Cyprus with Canada and the United States expressly refer to the trust in the definition given to a person. 4.4 Progressing to the second pre-requisite – that of residence – pursuant to Article 4 of the OECD Model, a “resident” is any person liable to tax under local legislation. In Cyprus the taxable person is not the trust but the trustee, and therefore, even if a trust satisfies the first pre-requisite, it cannot satisfy the second. 4.5 The question now to be examined is whether the CTC can obtain the benefits of the tax treaties. Taking into consideration the two pre-requisites to be established, it is indisputable that the CTC can satisfy both requirements. In relation to the first requirement – that of “person” – the CTC, which is a company itself, falls under the definition of a person given under Article 3(1)(a) of the OECD Model. In respect of the second pre-requisite – that of residence – the CTC is a person resident in Cyprus pursuant to Article 4 of the OECD Model, because it is liable to tax under local legislation. 4.6 Evidence that the Cyprus corporate trustee is liable to tax under local legislation is provided in general by proof of payment of tax on trust fees. However, in those tax treaties concluded by Cyprus which adopt in its entirety Article 4(1) of the OECD Model, for example, pursuant to Article 4(1) of the Cyprus-Austria tax treaty, any person who is liable to tax in that State only on local-source income is not considered to be resident. It is true that foreign source income received by the CTC in its capacity as trustee of a CIT is not subject to tax, but the CTC does not enjoy any general exemption from tax on income beneficially received for itself, and would thus have to pay tax on their trustee fees. 4.7 Having established that the CTC falls within the scope of the tax treaties, the question raised is to what extent can the CTC obtain the double tax benefits to which Cyprus is a party? Dependent upon the provisions of each treaty concluded by Cyprus, the double tax benefits are given either to residents who are beneficially entitled to the particular type of income, or to residents who are simply recipients of that particular type of income or capital. However, the anti-avoidance requirement relating to withholding tax provides that withholding tax limitation shall not apply when an intermediary, such as an agent or nominee, is interposed between the beneficiary and the payer. 4.8 Is it possible for the CTC to obtain the double tax benefits in the case of a beneficial ownership requirement? Some source countries, whose legal systems do not endorse the distinction between legal and beneficial ownership, may accept that the legal right to receive income in its own name would be a sufficient criterion for enabling the trustee to obtain the treaty benefit. However, the trustee may not be considered as a mere agent or nominee, since it is the legal owner of the trust income itself. Even if the trustee is considered as a mere agent, the anti-avoidance provision in respect of beneficial ownership may be overcome if an intermediary company is set up between the recipient and the paying company, in a jurisdiction with which both the paying and the recipient company has a tax treaty, but whose treaty with the recipient country does not contain the anti-avoidance provision for beneficial ownership, as it is the case with the Eastern European treaties concluded by Cyprus . 4.9 One essential issue for consideration is whether the CTC may fall outside the scope of the tax treaties concluded by Cyprus containing Limitation on Benefits articles with regard to companies entitled to any special tax benefit. An example of such provision is given under Article 29(3) of the Austria-Cyprus tax treaty. Given that there are such limitation clauses in some particular treaties, can the CTC be considered as entitled to any special tax benefit by reason that the foreign-source income is not subject to taxation in the hands of the trustee? The answer is a simple no: the CTC is not entitled to any special tax benefit in respect of its income. The general rule is that Cyprus does not tax foreign income destined for foreign beneficiaries, and this is applied to all trustees (individual or corporate) . The Limitation on Benefits Article was targeting the old Cyprus International Business Companies, with their preferential tax rate of 4.25%; all companies are now taxed uniformly.
4 Use in Tax Planning
The taxation status of the international trust is only one of the factors which constitute a CIT as beneficial for tax planning purposes. Indeed, the interplay between various international tax considerations and the application of tax treaties is the outcome of the continual growth of the use of a CIT in tax planning.
One may wonder how the trust income can obtain the benefit of the tax treaties to which Cyprus is a party. Can the CIT obtain the benefits of the tax treaties concluded by Cyprus? Or, alternatively, can the CTC reap the benefits of the treaties? In order for the claimant to take advantage of tax treaties concluded by Cyprus – following the OECD Model Agreement for the Avoidance of Double Taxation – it is required to establish two pre-requisites.
Firstly, that it is a person and, secondly, that it is a resident of one or both treaty states. Taking the first pre-requisite, it may be claimed that a trust falls indirectly within the definition of person given under Article 3(1)(a) of the OECD Model. Deriving from the definition of person, it may be argued that a trust falls under the category of “body of persons”. Moreover, the tax treaties concluded by Cyprus with Canada and the United States expressly refer to the trust in the definition given to a person.
Progressing to the second pre-requisite – that of residence – pursuant to Article 4 of the OECD Model, a “resident” is any person liable to tax under local legislation. In Cyprus the taxable person is not the trust but the trustee, and therefore, even if a trust satisfies the first pre-requisite, it cannot satisfy the second.
The question now to be examined is whether the CTC can obtain the benefits of the tax treaties. Taking into consideration the two pre-requisites to be established, it is indisputable that the CTC can satisfy both requirements. In relation to the first requirement – that of “person” – the CTC, which is a company itself, falls under the definition of a person given under Article 3(1)(a) of the OECD Model. In respect of the second pre-requisite – that of residence – the CTC is a person resident in Cyprus pursuant to Article 4 of the OECD Model, because it is liable to tax under local legislation.
Evidence that the Cyprus corporate trustee is liable to tax under local legislation is provided in general by proof of payment of tax on trust fees. However, in those tax treaties concluded by Cyprus which adopt in its entirety Article 4(1) of the OECD Model, for example, pursuant to Article 4(1) of the Cyprus-Austria tax treaty, any person who is liable to tax in that State only on local-source income is not considered to be resident. It is true that foreign source income received by the CTC in its capacity as trustee of a CIT is not subject to tax, but the CTC does not enjoy any general exemption from tax on income beneficially received for itself, and would thus have to pay tax on their trustee fees.
Having established that the CTC falls within the scope of the tax treaties, the question raised is to what extent can the CTC obtain the double tax benefits to which Cyprus is a party? Dependent upon the provisions of each treaty concluded by Cyprus, the double tax benefits are given either to residents who are beneficially entitled to the particular type of income, or to residents who are simply recipients of that particular type of income or capital. However, the anti-avoidance requirement relating to withholding tax provides that withholding tax limitation shall not apply when an intermediary, such as an agent or nominee, is interposed between the beneficiary and the payer.
Is it possible for the CTC to obtain the double tax benefits in the case of a beneficial ownership requirement? Some source countries, whose legal systems do not endorse the distinction between legal and beneficial ownership, may accept that the legal right to receive income in its own name would be a sufficient criterion for enabling the trustee to obtain the treaty benefit. However, the trustee may not be considered as a mere agent or nominee, since it is the legal owner of the trust income itself. Even if the trustee is considered as a mere agent, the anti-avoidance provision in respect of beneficial ownership may be overcome if an intermediary company is set up between the recipient and the paying company, in a jurisdiction with which both the paying and the recipient company has a tax treaty, but whose treaty with the recipient country does not contain the anti-avoidance provision for beneficial ownership, as it is the case with the Eastern European treaties concluded by Cyprus .
One essential issue for consideration is whether the CTC may fall outside the scope of the tax treaties concluded by Cyprus containing Limitation on Benefits articles with regard to companies entitled to any special tax benefit. An example of such provision is given under Article 29(3) of the Austria-Cyprus tax treaty. Given that there are such limitation clauses in some particular treaties, can the CTC be considered as entitled to any special tax benefit by reason that the foreign-source income is not subject to taxation in the hands of the trustee? The answer is a simple no: the CTC is not entitled to any special tax benefit in respect of its income. The general rule is that Cyprus does not tax foreign income destined for foreign beneficiaries, and this is applied to all trustees (individual or corporate) . The Limitation on Benefits Article was targeting the old Cyprus International Business Companies, with their preferential tax rate of 4.25%; all companies are now taxed uniformly.