Cyprus. 2. Anti-money laundering and antiterrorist

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1 Cyprus Information provided by Elias A. Neocleous Andreas Neocleous & Co, Neocleous House, 199 Arch Makarios III Avenue PO Box 50613, CY Limassol, Cyprus. Tel: , Fax: info@neocleous.com The year 2002 was momentous for Cyprus. In July a series of wide-ranging tax reforms was enacted, whose main feature is the integration of corporation and withholding taxes with income tax on distributed profits. The new laws demonstrate an innovative approach while continuing to encourage foreign participation in the economy of Cyprus and to maintain a favourable environment for all forms of business activity.they make no changes to the present regime for the taxation of trusts in Cyprus. In December Cyprus was invited to join the European Union as a full member, and its accession is likely to take place on 1st May Meanwhile the process of harmonising its laws and practices with the acquis communautaire of the EU goes on; the tax changes are evidence of compliance with the EU Code of Conduct for Business Taxation in the avoidance of any measures involving harmful tax competition. These developments illustrate the determination of Cyprus to make the most of its strategic geographical location and to maintain its competitive position as a reputable business and financial centre in an increasingly globalised commercial environment. As a trust jurisdiction, it combines the English doctrines of equity with its own trust legislation, both local and international in scope, to dovetail with its enviable range of double taxation treaties. 1. Trust law In 2002 two laws relating to financial services and investments were passed, the Financial Services Enterprises Law (148(I) of 2002) and the Invitation to Public Participation in Financial Investments Law (149(I) of 2002). They are intended to regulate investment services by licensing the providers of such services and imposing on them a framework of operating rules and standards of professional conduct, and to protect investors by creating a compensation fund. The laws contain financial penalties for violations. Codes of conduct under the Financial Services Enterprises and Invitation to Public Participation in Financial Investments Laws will be introduced. Cypriot trust law is found in its statutes (the Trustee Law of 1955 (Cap.193) (the Trustee Law) and the International Trusts Law (69(I) of 1992) (the International Trusts Law), in particular), its case law (very limited) and the doctrines of equity (Section 29 of the Courts of Justice Law (14 of 1960) instructed the civil and criminal courts to adhere to English Map reproduced with kind permission of Andreas Neocleous & Co., Cyprus common law and equitable principles save in so far as other provision has been or shall be made by any law and so long as not inconsistent with the Constitution ). 2. Anti-money laundering and antiterrorist provisions Cyprus is not a member of the FATF. It has never been on any FATF list of non-cooperative jurisdictions or jurisdictions known to be serious money laundering risks. Indeed, the FATF has commented that Cyprus has a comprehensive antimoney laundering system which goes beyond the EU Council Directive 91/308/EEC on the prevention of the use of the financial system for money laundering. Money laundering law in Cyprus derives mainly from the Prevention and Suppression of Money Laundering Activities Law (61(1) of 1996) (the 1996 Law) (as amended by Laws 25(1) of 1997, 41(1) of 1998, 120(1) of 1999 and 152(1) of 2000), which implements the relevant European Convention ratified in Trustees and their advisors may come within its scope. The 1996 Law imposes on any person, who has knowledge or reasonable suspicion that another person is involved in a predicate or laundering offence and who acquires such knowledge or reasonable suspicion in the course of his occupation, work or business, a duty to report such information to a police officer or to the special unit responsible for combating laundering offences. Failure to report such information is a criminal offence. The 1996 Law also provides that any person involved in the provision of financial services must adopt various identification and record-keeping procedures as well as other internal control mechanisms to ensure that no laundering offence is committed. TRUSTS & TRUSTEES World Trust Survey May

2 3. What measures are there to combat the abuse of trusts to procure the concealment of assets? Any concealment which amounts to a false representation of fact, made knowingly or without belief in its truth or recklessly, with the intent that it will be acted on by the person deceived, is actionable under the Civil Wrongs Law of 1933 (Cap.148) as amended, provided that it was intended to and did deceive the plaintiff and that he has acted on it and has thereby suffered damage. The abuse of trusts to conceal money or other assets became an offence in relation to money laundering under the 1996 Law (see 2 above). It is also an offence now in relation to terrorist financing (see 19 below). In advance of the issue by the OECD in June 2000 of its report entitled Progress in Identifying and Eliminating Harmful Tax Practices Cyprus formally committed itself to eliminate harmful tax practices by the end of 2005 and to embrace international standards of transparency, exchange of information and tax competition. Cyprus was a member of the OECD s Global Forum Working Group which developed the model agreement for effective exchange of information in tax matters that was released in April In the model agreement, information on settlors, trustees and beneficiaries in the case of trusts is among the information which the competent authorities of every party to such an agreement must have the authority to obtain and provide on request for certain specified purposes. 4. Asset protection trusts The International Trusts Law enables a non-resident of Cyprus to create an international trust and transfer property to it without any interference by the settlor s creditors unless it is proved that the trust was set up with intent to defraud those creditors at the time of the transfer of the property. It is well-established by case law under the Fraudulent Transfer Avoidance Law of 1886 (Cap.62) that the settlor s insolvency after any transfer has no effect on the issue of fraudulent transfer. A Cypriot international trust may be void or voidable if the settlor s creditors can prove that it was made with intent to defraud them when assets were paid or transferred to the trust. There is a legal presumption against fraud which must therefore be proved. Privilege may be waived by the person entitled to claim it eg, a party to an action or a witness, or by the court. 5. Shams The maxim that equity looks to substance, not form, and the body of Cypriot trust law, whether of local or international application, will enable the parties to a Cypriot trust that has been properly and validly created to resist any claim that it is a sham, namely a trust which is not really a trust at all and was never intended to be a trust, but is actually some other legal arrangement, such as an agency or a nomination, or merely an empty pretence. The transfer of any property to the purported trustees Advocates & Legal Consultants Neocleous House 199, Arch Makarios III Avenue P.O. Box 50613, Limassol Cyprus Telephone Fax info@neocleous.com Web site: Incorporation and Management of Companies, Fiduciary and Management Services, Wills and Estate Planning, Creation and Administration of Trusts, International Tax Planning Advice, Banking, Insurance, Shipping Finance, and General Practice. Other Offices: Moscow, Budapest, Kiev, Prague Please contact: Andreas E. Neocleous, Elias A. Neocleous 54 TRUSTS & TRUSTEES World Trust Survey May 2003

3 will be rendered ineffective to pass title and the transaction will be set aside. The trustees will never have been more than nominees or bare trustees, holding the property on a resulting trust for the settlor who remains the sole beneficial owner. Any action of the trustees that has been inconsistent with the continued beneficial ownership of the settlor will have been unlawful and the trustees will have to make good losses caused by distributions to beneficiaries other than the settlor, unless they can demonstrate that they were not aware that the settlor lacked the necessary intent and they were not knowing participants in the sham. 6. Forced heirship Local trusts: There are no provisions relating to this matter in the Trustee Law and there is no case law about it. It seems likely that a Cypriot trust will not be defeated by a forced heirship claim in the Cypriot courts, especially where the trust assets are situated in Cyprus. International trusts: The International Trusts Law expressly provides that no foreign law relating to inheritance or succession shall invalidate an international trust or affect, in any way, any transfer or disposition relating to the creation of such a trust. Article 1 of the 1976 Convention on the Recognition and Enforcement of Foreign Judgments in Civil and Commercial Matters, which was ratified by Cyprus, clearly states that the provisions of the Convention do not apply to decisions concerning the capacity of persons or questions of family law, including personal or financial rights and obligations between parents and children or between spouses, and questions of succession. The combined effect of the International Trusts Law and the 1976 Convention, therefore, seems to be that Cypriot international trusts are immune from forced heirship claims. 7. Protectors There is no specific provision either in the Trustee Law or in the International Trusts Law. There is no case law but English common law is applicable. Much depends on the trust instrument and the letter of wishes, if any. The role of the protector is usually fiduciary, to protect the trust from various hazards, whether relating to trustees or beneficiaries or to trust arrangements. This means that the protector must independently and consciously consider whether or not to exercise a fiduciary power, must not exercise it perversely against any sensible expectation of the settlor and cannot release it unless otherwise provided by the trust instrument. Usually the protector s consent is required before the trustees can carry out certain acts and in some cases the protector is given power to appoint or remove the trustees. 8. Purpose trusts Local trusts: Charitable purpose trusts and a few anomalous fixed category purpose trusts (eg, for maintenance of family tombs) are permitted. International trusts: The International Trusts Law provides that purpose trusts are valid and enforceable either by the settlor (or his personal representatives) or by the person named in the trust instrument as having the right to enforce the trust. Such a person may also be a beneficiary under the trust. 9. Tracing of trust assets If the trustee has mixed trust money with his own or has made a purchase partly with his own and partly with trust money, then, if the mixed fund can be traced, the beneficiaries will have a first charge on the traced assets as security for their claim. Tracing ends when no traceable product of a trust can be found or is found in a bona fide purchase for value without notice or in someone who establishes a defence of innocent change of position. 10. Attacking trusts Remedies of this sort are limited. Where the trust has unjustly benefited, an equitable claim lies against the trust assets. The courts will give effect to a provision in a trust deed that the trust fund be liable. Direct recourse to assets is possible where the trustee can (and does) grant a charge over specific or fluctuating trust assets. 11. Foundations (i) Although a Cypriot trust and its trustee(s) have no separate legal personalities, the Clubs and Institutions Law (57 of 1972) enables a foundation to be established with its own identity. The Charities Law of 1925 (Cap.41) provides that where the trustees of a charity for educational, literary, scientific or public charitable purposes obtain a certificate of registration from the Council of Ministers, the trustees become a body corporate with a separate legal personality. (ii) In the absence of any authority it is unclear how a foundation set up in another jurisdiction would be treated by the Cypriot courts, but most probably it would depend on compliance with the formal and substantive requirements of the proper law of the foundation. A charitable foundation which has been properly declared and recognised will not be liable to pay tax. 12. Conflict and Since a trust is not a legal entity, its residence for some purposes is regarded as the place of residence of the trustees. Local trusts: The Trustee Law gives a court the power to appoint a new trustee where a trustee remains out of Cyprus for more than one year. Consequently, it is doubtful whether the court may appoint non-resident trustees. International trusts: The International Trusts Law states that if the terms of the trust instrument so provide, the proper law of the trust may be changed from or to the law of Cyprus, provided that: (i) (ii) in the case of a change from the law of Cyprus to the law of another jurisdiction, the new proper law recognises the validity of the trust and the respective interests of the beneficiaries. in the case of a change from the law of another jurisdiction to the law of Cyprus, this change is recognised by the proper law of the trust previously in effect. 56 TRUSTS & TRUSTEES World Trust Survey May 2003

4 Cyprus has signed, but is not a party to, the Hague Convention of 1st July 1985 on the Law Applicable to Trusts and on their Recognition. 13. Succession The terms of the trust must adequately divest the settlor of his property so that the trust may not be attacked. Moreover, the trust created should be valid and should not fail by virtue of general law eg, the three certainties test (intention, subject matter and beneficiaries). 14. Trustees powers of investment Local trusts: Under the Trustee Law, trustees may invest trust assets in investments authorised either by the trust deed or by the law. The latter are defined as investments in any securities in which trustees in England are for the time being authorised by the law of England to invest trust funds. Power to invest in specific investments may also be authorised by order of a competent court. International trusts: Under the International Trusts Law, there are no limitations on the kind of investments into which the assets of the trust may be put, so long as the investment powers are exercised with the prudence and diligence of the reasonable person and subject to any provisions contained in the trust instrument. 15. Trading trusts The personal liability of trustees on their trading contracts may be limited by provisions in those contracts, by an indemnity in the trust deed or by having as trustee a limited liability company with a normal share capital. Where the trade is carried on by a company, the majority of whose shares are owned by the trustees, they have certain duties to enquire into the management of the company which may be modified (to some extent at least) by the terms of the trust deed. 16. Taxation (i) (ii) (iii) (iv) There is a fixed stamp duty of CYP 250 payable on the creation of a trust under the International Trusts Law. (v) The overall effect of the new tax laws passed in 2002, which change the previous remittance-based system to a system of taxation of worldwide income for residents of Cyprus, and of Cypriot-source income for nonresidents, combined with the extensive network of double taxation treaties, is likely to make a Cypriot international trust an even more attractive and effective vehicle for channelling income to and from companies in different jurisdictions. Trusts as such are not taxable in Cyprus, but the beneficiaries are taxable through the trustees. Local trusts: The Cypriot tax authorities treat local trusts as transparent vehicles for income tax purposes. Trustees are required by law to make returns to the Inland Revenue, to pay any tax due on the trust income and to supply details of trust beneficiaries and accounts. The Cypriot authorities are now committed to the adoption of international standards of exchange of information (see 3 above). International trusts: The International Trusts Law provides that the income (including dividends, interest and royalties) and profits of an international trust derived or deemed to be derived from a source outside Cyprus are exempt from income tax or any other tax imposed in Cyprus such as capital gains or special contribution in the hands of the trustees. The beneficiaries of an international trust are also exempt from the payment of any tax in respect of any money received from the trustees. International trusts are exempt from the duty of registration, and the International Trusts Law prohibits the disclosure of information to third parties unless authorised by court order. 17. e-commerce Service providers in Cyprus continue to upgrade their infrastructure and communications capabilities as part of the effort to consolidate the island as a prime location for e- commerce and internet-based activities. Foreign owned e-businesses which establish a taxable presence in Cyprus can take advantage of an exemption from value added taxation for all transactions with non-residents. Cyprus transposed EC Directive 97/7/EC on the Protection of Consumers in respect of Distance Contracts by enacting the Completion of Distance Consumer Contracts Law (14(I) of 2000). This law provides consumers with certain legal and economic guarantees when using distance communication techniques, such as videotext or electronic mail, for their purchases of goods or services. These technological and legal developments are helping to position Cyprus as an attractive centre for low-cost online business. There is also a proposal for legislation on a broad range of e-commerce matters such as taxation, electronic signatures and data and domain name protection etc. which TRUSTS & TRUSTEES World Trust Survey May

5 will continue the alignment of Cypriot law with the acquis communautaire of the European Union. 18. OECD, FATF and FSF OECD: See 3 above. FATF: See 2 above. FSF: In its Report of the Working Group on Offshore Financial Centres for the IMF in April 2000 the FSF placed Cyprus in Group 3, the lowest group, on the basis of the apparent discrepancy between the small size and resources of its financial regulations and supervisory practices and the large size of its financial services industry. This seemingly arbitrary decision was challenged as unjust and wrong by the Cypriot Government and it invited the FSF to reassess the position of Cyprus, whose track record in combating money laundering has been praised by various national and international bodies. The FSF has suspended its activities in this field, pending a major assessment report from the IMF which is expected towards the end of Counter-terrorism In 2001 Cyprus passed the International Convention for the Suppression of the Financing of Terrorism (Ratification and Other Provisions) Law (29 of 2001). 20. Regulation and administration of trust companies Three types of trust company can be incorporated in Cyprus and act as trustees of Cypriot international trusts, as follows: Local trust company: Such a company is not required to hold a trust licence but must inform the Central Bank of Cyprus that it acts as a trustee and that the settlor and beneficiaries are non-residents of Cyprus. It will then be permitted to operate external bank accounts under the Exchange Control Law. Private trust company: Such a company usually acts as the trustee of a single trust or one of a restricted number of trusts. It is required to disclose to the Central Bank that it intends so to act, but it is not required to hold a trust licence. The Exchange Control Law permit will be issued on condition that the company s memorandum prevents it from acting as a professional trustee. Professional trust company: Such a company requires a trust licence from the Central Bank, for which the company must supply details of the nature and scale of the trust business, the arrangements for its operations and information about its professional expertise and current business. If it is a corporate entity, the principal beneficial shareholders must also supply a letter of authorisation to enable the Central Bank to exchange information with third parties and regulatory authorities about the application for a licence. The Central Bank will also wish to be satisfied that the persons involved in such an entity are fit and proper persons to be concerned in the provision of such services. Their fitness and properness is determined by means of detailed questionnaires and personal interviews. The Financial Services Enterprises Law requires trustees to maintain the highest professional standards of integrity and independence in the exercise of their duties and powers. 58 TRUSTS & TRUSTEES World Trust Survey May 2003