The Anglo-Saxon trust has features in common with the usufruct, the fiduciary arrangement, the fidei commissum, bailment, contract and agency. Forced heirship rules in civil law countries limit the power of nationals to use trusts, though it seems that a trust not violating these rules may be freely used. The provisions of the Hague Convention of 1984 are widely recognised, even though only four countries have signed it. The Convention provides that the trust fund is a separate fund, the trustee may sue and be sued and the trustee may appear before a notary. The trend is for tax authorities in civil law countries to accept a trust as separate and different from the usufruct etc. Generally, tax authorities will ignore a trust if the transfer is conditional or the trust revocable. In other cases, the gift tax and income tax treatment varies, but a beneficiary should not be taxed on income he does not receive. For wealth tax, however, the receipt of income may attribute a notional capital amount to the recipient. In the main, the irrevocable discretionary trust can be a useful vehicle for clients in continental Europe.
For tax planning, a tax-exempt trust may not be essential. A U.S. or Canadian trust permits deduction of income paid to beneficiaries and a U.K. or Irish trust may be on a remittance basis.
A Cyprus corporate trustee is a resident of Cyprus for treaty purposes. It is the recipient of the income: in some treaties this is enough. But is it the “beneficial owner” of the income? This is a difficult question, but it seems that it is, so long as it is not bound to hand over the income to another – e.g. a life tenant. Whether the Cyprus authorities will in practice so certify is another question. But note that this “beneficial ownership” is not a requirement of all treaties to which Cyprus is a party.
The principal uses of the Cyprus treaties are in connection with joint ventures in Russia and Eastern Europe, as well as in China, for holding structures, operating companies without a permanent establishment in the treaty country, for shipping companies, for employment companies, and for owning real estate in France (so long as “beneficial ownership” is declared).
¹ Section 911 IRC has been amended by the 1997 Taxpayer Relief Act so that the earned income exclusion has been increased in five annual instalments of $2000 per annum to reach a total of $80,000 per annum by the year 2002.
Author: Roy Saunders (updated 1998)
