6 Other Uses 6.1 Unit Trusts 6.1.1 Moving now to the investment in business overseas through a unit trust, one may consider how a CIT can be used for such purposes. Taking into account that the trustee can have wide powers of investment pursuant to s.8 of the International Trusts Law, the trust may be the basis for such investments. If the sole object of the trust is the collective investment of funds of the unitholders, then the unit trust will be created under the International Trusts Law and will have to be recognised by the Central Bank of Cyprus to operate as an international unit trust scheme under the Collective Investment Scheme Law of 1999 and 2000. Otherwise, it will simply be a unit trust established under the International Trusts Law. 6.1.2 The sale of units is not subject to any tax in Cyprus because they fall under the definition given for securities under the Income Tax Law. In general neither gains from the disposal of securities nor dividend income will be subject to any tax. The unit trust in the form of a international collective investment scheme has, as its sole object, the collective investment of funds of unitholders, the units of which are, at the option of the unitholders, redeemed or repurchased directly out of the assets of the trust. 6.1.3 The unit trust scheme can be marketed to the general public and units may be issued to bearer, or limited to experienced investors, or take the form of a private international collective investment scheme. The proceeds of sale of any units of an international unit trust scheme, and any income in respect of the assets of an international unit trust scheme which are not distributed to the unitholders remain the assets of the international unit trust scheme. As in the case of a discretionary trust, the assets can be reinvested in accordance with the instrument creating the trust. Even though the international collective investment scheme is subject to tax in Cyprus, like any other entity resident in Cyprus, it is exempt from taxation on dividend income, and also on royalties, provided that the intellectual property rights are granted for use outside Cyprus, and also exempt from tax on the profits from the disposal of securities. 6.1.4 Additionally, there are no withholding taxes when dividends and interest are paid by international collective investment schemes to non-residents. Both the unit trust and the unit trust scheme have possibilities for extensive international tax planning offered to them from Cyprus’ widespread network of tax treaties. Trustees fall under the scope of the treaties – as already explained – and are able to claim tax treaty benefits, usually in the form of a zero or lower than normal withholding tax on dividends or interest earned in countries with which Cyprus has concluded tax treaties, and in respect of royalty payments, provided, of course, that the rights are granted for use outside Cyprus.
6 Other Uses
6.1 Unit Trusts
Moving now to the investment in business overseas through a unit trust, one may consider how a CIT can be used for such purposes. Taking into account that the trustee can have wide powers of investment pursuant to s.8 of the International Trusts Law, the trust may be the basis for such investments. If the sole object of the trust is the collective investment of funds of the unitholders, then the unit trust will be created under the International Trusts Law and will have to be recognised by the Central Bank of Cyprus to operate as an international unit trust scheme under the Collective Investment Scheme Law of 1999 and 2000. Otherwise, it will simply be a unit trust established under the International Trusts Law.
The sale of units is not subject to any tax in Cyprus because they fall under the definition given for securities under the Income Tax Law. In general neither gains from the disposal of securities nor dividend income will be subject to any tax. The unit trust in the form of a international collective investment scheme has, as its sole object, the collective investment of funds of unitholders, the units of which are, at the option of the unitholders, redeemed or repurchased directly out of the assets of the trust.
The unit trust scheme can be marketed to the general public and units may be issued to bearer, or limited to experienced investors, or take the form of a private international collective investment scheme. The proceeds of sale of any units of an international unit trust scheme, and any income in respect of the assets of an international unit trust scheme which are not distributed to the unitholders remain the assets of the international unit trust scheme. As in the case of a discretionary trust, the assets can be reinvested in accordance with the instrument creating the trust. Even though the international collective investment scheme is subject to tax in Cyprus, like any other entity resident in Cyprus, it is exempt from taxation on dividend income, and also on royalties, provided that the intellectual property rights are granted for use outside Cyprus, and also exempt from tax on the profits from the disposal of securities.
Additionally, there are no withholding taxes when dividends and interest are paid by international collective investment schemes to non-residents. Both the unit trust and the unit trust scheme have possibilities for extensive international tax planning offered to them from Cyprus’ widespread network of tax treaties. Trustees fall under the scope of the treaties – as already explained – and are able to claim tax treaty benefits, usually in the form of a zero or lower than normal withholding tax on dividends or interest earned in countries with which Cyprus has concluded tax treaties, and in respect of royalty payments, provided, of course, that the rights are granted for use outside Cyprus.
6.2 Investment in Overseas Businesses through a Unit Trust
Concerning capital gains from the sale of investment securities, the majority of the Cyrus treaties contain a capital gains clause, specifying that gains from the alienation of such property shall be taxable in the country where the alienator is tax-resident. Also, pursuant to the International Trusts Law, they are also exempted in the hands of the trustees. As a result, the trustees of a unit trust, or an international collective investment scheme, will not be subject to tax on capital gains in the country the gains were derived, but will be subject only to Cyprus taxation, which currently exempts such gains from tax.
For example, Investor A and Investor B, who wish to take a major stake in a foreign company. They expect their stake to increase substantially in value, and they will then realise their investment. However, the gain from such investment will be subject to capital gains tax in the foreign country and in the country of residence of the investor – this is assumed. To avoid the tax obligation, they put their money into a CTC in return for units, the CTC acting as trustee of an international unit trust. The trustee makes the investment in the foreign country and makes a gain on the sale of the foreign company. Is the gain subject to capital gains tax in the foreign country or Cyprus? Assuming that there is a tax treaty between the foreign country and Cyprus, pursuant to which the gains from the alienation of any property are taxable only in the contracting state of which the alienator is resident, there will be no capital gains tax in the foreign country, because the trustee – which is the alienator – can obtain such benefits, if he satisfies the two-test requirement in respect of person and residence. The trustee which is a CRC can obtain such benefits, for the reasons explained above.
Further, since the trustee is not subject to the payment of any tax in respect of foreign-source income, there will be no tax in Cyprus on any dividends from the foreign investment. In practice, the most common structure used in relation to the unit trust is that where the trustees of the unit trust are shareholders in an investment holding company, which will be the entity which makes and manages the investments. In such a case, all the benefits arising from the use of a CRC will be obtained. The use of a property unit trust is also beneficial in cases where the investors wish to invest in immovable property in a foreign country, and avoid the payment of capital gains tax in that country.
6.3 Non-Tax Planning Considerations
Moving on to the non-tax driven considerations that should not be ignored when considering the creation of a CIT. Section 11 of the International Trusts Law contains provisions preventing public authorities or trustees from disclosing any information to third parties in relation to the affairs of the trust, unless they are required to do so by a court order. It is of paramount importance that there are no registration or reporting requirements of any nature for the creation of the trust.
Furthermore, there is flexibility in adopting foreign law pursuant to s.9 of the International Trusts Law.
A foreign law may be adopted in the instrument creating the trust, provided that the foreign law would recognise the validity of the trust and the respective interest of the beneficiaries. The settlor may maintain full control over the management of the trust by forming a Cyprus company the shares of which may belong entirely to him, and he can also appoint Cypriot nominee directors. The Cyprus company could act as the sole trustee of the international trust to which the assets of the settlor were transferred.
Further, there are no exchange controls, and there is free movement of capital. Also, an individual – through the use of the trust – can arrange for assets to be inherited by persons who, due to the legislation of the individual’s country, would otherwise be excluded from the inheritance.
In particular, the CIT appears to be immune – to a large extent – from forced heirship claims: pursuant to s.3(1) of the International Trusts Law no domestic or foreign law relating to inheritance or succession invalidates the trust or affects in any manner the transfer or disposition relating to the creation of such trust.
Pursuant to s.5(1) of the International Trusts Law, an international trust may continue up to 100 years from the date on which it comes into existence, and a charitable or purpose trust may exist indefinitely.
Section 3(3) of the International Trusts Law provides a short limitation period for a creditor to challenge the trust: such action must be brought within two years from the day when the transfer or disposal of assets was made to the trust.