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04 March 2021
The EU Anti-tax Avoidance Directive (2016/1164/EU) has been transposed into Cypriot legislation and is:
Given the strengthening of the rules on corporate tax avoidance, individuals must consider better estate protection strategies and undertake legitimate tax and tax avoidance planning. Cyprus trust legislation allows for the establishment of trusts with advantageous tax regime and asset protection features. Family trusts are deeply embedded in estate planning, but the Cyprus holding company may also be utilised as a family investment company (FIC) as an alternative to a family trust. Therefore, is the FIC an ideal alternative tax and succession estate planning structure?
Characteristics of FICs
An FIC is a private company that invests rather than trades. In particular, an FIC holds the family's long-term investments (eg, share portfolios or property) and the shareholders and directors are typically members of the family. For example, parents, being the original asset owners, often set up an FIC with at least two classes of share; the parents typically hold a class of shares with voting rights but no rights to dividends or any return of capital, whereas the children hold the other class of shares with no voting rights but full entitlement to dividends and any return of capital (on the necessary corporate approvals). The parents are usually the directors of an FIC although a third party may also act as a director on the approval of the parents, especially where the parents do not reside in Cyprus. An FIC, as any other Cyprus holding company, will be governed by the memorandum and articles of association, which will be publicly available, and any agreement made by the shareholders, which has the benefit of being private.
An FIC's governing documents should be tailored to meet individual circumstances and include provisions covering, among other things:
Establishing an FIC
By way of an example, Mr and Mrs E are UK nationals who have decided to relocate or spend significant time in Cyprus after the Brexit transition period and establish an FIC as an asset protection tool or family investment vehicle. The FIC can be fully incorporated with 100% foreign ownership as no restriction exists on the nationality or residency of the company's shareholders.
In establishing an FIC in Cyprus, the following criteria should be met:
Advantages of FICs
The key advantages of setting up an FIC are as follows:
Further, companies established in Cyprus can enjoy tax credits for withholding tax on income received in Cyprus, representing a type of tax relief. These credits also apply to other taxable income.
A UK family that wishes to preserve and invest family wealth for its children can, provided that it meets these requirements, relocate to Cyprus and establish an FIC which will have the above advantages. Moreover, foreign entrepreneurs may feel more comfortable employing individuals from their own country due to language barriers and cultural differences.
Finally, incorporating a company in Cyprus is straightforward and quick and opening a corporate bank account is generally easy.
Family trusts are controlled by the trustees who may or may not be members of the family. The trustees will hold the assets of the trust fund for the benefit of the beneficiaries following the settlor's wishes. According to the traditional trust structure, the trustees will have discretionary power. This implies that the trustees will have discretion over whether payments are carried out and the amount and recipient of such payments. However, such matters are regulated through the trust deed itself and the letter of wishes. Also, the trust deed will govern the trustee's powers and responsibilities and such document is private, accessible only to the individuals concerned. The trust will be governed by the International Trusts Law (69/1992). The procedure for establishing a Cyprus international trust is remarkably straightforward and can be arranged relatively quickly.
Establishing a family trust
At present, trusts established, construed and governed by Cyprus law should be registered with the Cyprus Bar Association, the Institute of Certified Public Accountants of Cyprus or the Cyprus Securities and Exchange Commission according to Section 25A(1) of the Fiduciaries Law, as amended in 2013.
According to Article 2 of the International Trusts Law, for a trust to qualify as an 'international trust', the following conditions must be satisfied:
The family trust has traditionally been viewed as the default option for estate planning and asset protection. An FIC is essentially a private company limited by shares which may be employed as an alternative to a family trust. FICs are flexible and can be tailored to meet a family's particular circumstances or requirements; they can create different classes of share which allow family members to have different rights of control, income and return of capital with the ability to change the structure over time. The question of which one to opt for depends on individual family circumstances, objectives and investment strategies. The good thing is that families have the option of setting up a trust or an FIC and can choose the best option based on their overall way of life. If a family is looking to combine asset protection, low tax and relocating to Cyprus, either of these vehicles would be suitable.
For further information on this topic please contact Angelos G Paphitis or Andrea Psara at A G Paphitis & Co by telephone (+357 25 73 10 00) or by email (email@example.com or firstname.lastname@example.org). The A G Paphitis & Co website can be accessed at www.agplaw.com.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
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