Taxation of Cyprus Trusts
A Trust is a legal arrangement under which an owner of assets, The Settlor, transfers to an other person, The Trustee, the legal ownership of the asset. The trustee accepts the asset and undertakes the obligation to hold and deal with the asset for the benefit of the persons named by the Settlor. These persons for whose benefit the trust is created are Beneficiary(ies). The Settlor may also appoint a protector whose function is to oversee the trustee and veto certain decisions which the Settlor believes are of particular importance and value for the beneficiaries.
Cyprus International Trusts are very popular among international families, not the least so because of the attractive tax advantages they offer.
A Trust is not a separate legal person and has no tax obligations on its own merit. Where the assets held by the Trustee on the terms of the trust generate income, this income is taxed as per the tax status of the beneficiary.
For example, income of the Trust with a Beneficiary who is tax resident in Cyprus is taxed as per the tax status of the Beneficiary, that is, on the worldwide income. This means that the beneficiary must pay taxes imposed by the Income tax Law, The Special Defence Contribution, and the Capital Gains Law as the case maybe.
When the Beneficiary is not tax resident in Cyprus taxation is imposed only on the Cyprus source income when the income is of the type that is subject to tax in the hands of non-residents. This rule offers a substantial benefit to use Cyprus International Trusts to hold shares in Cyprus companies for beneficiaries who are resident overseas. As an example, dividend from a Cyprus company is not taxable in the hands of a non-resident. Likewise, where a Cyprus International Trust provides interest-bearing loans, interest from a Cyprus payer is not taxable in the hands of a non-resident. However, rental income of the trust will be taxed the normal way like any other tax resident person. If the trust holds intellectual property, the royalties emanating from the use of the rights within Cyprus will be taxed at a withholding of 10% or 5% for cinematograph films.
Our team of experienced Cyprus tax experts and Trust and Estate Practitioners is happy to discuss your particular case and advise you on the taxation of trust in your particular case.