What is a trust?

The trust concept is even older that the concept of a limited liability company and starts in British middle age. The main idea is that one person , trust founder (Trustor / Settlor / Grantor), trust his property to another person, the Trustee, so this person could manage and operate this property for the benefit of a third person, the beneficiary.

Historically, this idea had nothing to do with the tax planning. For example a father who was afraid that his property could disappear after his death by his son, could found a trust and appoint as trustee the family lawyer to act for the benefit of his son. another most well known trust form is when the trust is founded by a "will" for the benefit of under age children. With such settlement , only the necessary funds are spend for the life support and education and after legal age the beneficiary receives a part for the growth of his own business. The rest of the property will be given for his own disposal only after the expiry date of the trust. Though no legal entity is formed when a trust is founded, the property can not be arrested in case of bankruptcy of the trustee. On behalf of the trust can be opened bank account, can be made investments and the trust has its own liabilities. The trustee invests trusted funds as he consider best but always in accordance with the terms and conditions of trust. As far as concern payments to the beneficiary, the dates of payment and installments are also agreed in the trust. In the end all the property and net income from the investments returns to the full disposal of the beneficiary.

Except the trust agreement the founder pass to the trustee a memorandum with all his wishes concerning property management and which is considered as the legal document in which trustee's obligations are indicated. A trust protector can be appointed. his functions are to control the trustee and if needed to change him with a more suitable person. There are special procedures for the change of the trustee as well as the change of beneficiaries.

At the present trust agreements are used both by physical or legal entities clearly for tax planning. By founding a trust in one of the tax free jurisdictions , in most cases it is possible to get free from taxation in country of residency of the founder and the beneficiary. this mostly concern property taxation as property passed by trust to another entity is legally not belong to the founder or the beneficiary. The same can be used for taxation on capital growth. Beneficiary's income from the trust agreement, they are usually taxed according the law in the country of residence.

The same , in principle , concern taxes on capital growth. Beneficiary's income from trust agreement, are usually taxed in accordance to the legislation of country of residence, but only after this income is actually paid to him. this condition allow to extend the time of payment and reinvest the profits. In some cases it is possible to avoid the inheritance taxes, but always take in mind , that the transfer of property to a foreign trust is taxed as donation. However, in every certain case, a detailed analysis of the tax legislation of all the countries , in which persons involved in the trust agreement are residents, must be done.

Trust agreements and personal Tax Planning

After adoption in 1992 of the law for International Trusts, Cyprus offshore Trusts became very popular and they are used in international Tax Planning. Government trust registration fees are only 250 CYP, and Cyprus International Trusts are free from any taxation in Cyprus. As international is considered a Trust founded by a non Cyprus resident in favor of non Cyprus residents beneficiaries, and manage and controls property registered in any country of the world except Cyprus. The only condition is that one of the Trusties must be Cyprus resident.

International Trusts can be used by physical entities for more advantageous tax planning. They can be formed under next conditions (always in accordance with the legislation of country of resident):

* physical persons, emigrated to a country of high taxation, can found a Trust to manage their property. The capital and the income from that property (under the founded trust), are not taxed in the country of residence , unless this income is paid to the beneficiary by the trusties.

* Physical persons, that have investments abroad and they don't wish to receive their income in country of residence, they can found a Cyprus International Trust for Foreign Investments abroad. Cyprus international Trust can be used together with Cyprus companies and receive the maximum profitability from Cyprus International Double tax treaties.