CYPRUS Law and Practice Contributed by: Alexis Erotocritou, Dafni Loizou and Georgia Demou, A.G. Erotocritou LLC
• Advantages: corporate governance, control reten - tion, succession planning without forced heirship. • Limitations: the corporate tax rate has increased to 15%, while exemptions for dividend income and gains from securities remain important for holding company planning. Such FICs may be either private companies limited by shares, or, in certain instances, private companies limited by guarantee are even more efficient and ben - eficial in such succession planning scenarios. 3.2 Recognition of Trusts Cyprus fully recognises and strongly protects trusts. Both local trusts and CITs operate under a clear com - mon law framework and are upheld by the courts, pro - vided that they are validly set up, there are no issues as to whether they are a sham, etc. While both types of trust are very beneficial and well used, CITs offer better asset protection, the ability to potentially avoid the forced heirship rules, strict con - fidentiality and wide flexibility, including long duration and reserved settlor powers. However, as mentioned in 3.1 Types of Trusts, Foundations or Similar Enti- ties , in order to be able to set up a CIT, the settlor and beneficiaries must not be Cyprus tax residents in the year before the CIT was established. Trusts are treated as transparent entities for tax pur - poses in Cyprus and, therefore, the method of taxa - tion of income received by the trusts depends on the tax residency of the beneficiaries. Cyprus-source income is taxed normally, but foreign- source income for non-resident beneficiaries is gener - ally exempt, and all trusts remain private while meet - ing AML and beneficial-ownership requirements (eg, exchange of information under FATCA/CRS). 3.3 Taxation of Trusts, Foundations and Similar Entities Located in Other Jurisdictions Cyprus taxes individuals involved with foreign trusts or foundations strictly based on their tax residency and domicile. A Cyprus–resident fiduciary is taxed only on fees or remuneration earned for acting as trustee or council member, and the trust’s foreign income is not attributed to them personally. For beneficiaries, non-
residents are taxed only on Cyprus-source income, while Cyprus tax residents are taxed on worldwide income but may use the non-dom regime to achieve exemptions, including a full exemption from the SDC on foreign-source dividend and interest income. Capi - tal distributions are generally not taxable. These rules create strong planning opportunities, allowing foreign trusts to accumulate income offshore and distribute it tax-free to Cyprus non-dom beneficiaries, thereby, enabling families to combine foreign structures with Cyprus residency for efficient long-term wealth and succession planning. 3.4 Tax Consequences of Fiduciary and Beneficiary Roles In Cyprus, the tax result does not depend simply on whether a person is called a fiduciary, donor/settlor or beneficiary; it depends mainly on tax residence, domicile, source of income, and the level of control retained or exercised. If a Cyprus tax resident beneficiary is also a trustee, protector or other fiduciary, Cyprus may tax that per - son on trust income or gains allocated or distributed to them, particularly where the income is Cyprus-source or where the beneficiary is a Cyprus tax resident. For CITs, the general rule is that Cyprus-resident benefi - ciaries are taxed on worldwide trust income and gains, while non-resident beneficiaries are generally taxed only on Cyprus-source income. A Cyprus resident fiduciary is taxed only on trustee frees, while distri - butions are taxed according to the beneficiary’s resi - dency and domicile, with non-dom receiving foreign source dividends and interest tax-free. In practice, these risks are managed by appointing independent professional trustees, using protectors or reserved powers instead of settlor as trustee arrangements, and maintaining clear documentation to preserve the trust’s validity and tax advantages. In Cyprus, a donor or beneficiary who also serves as a fiduciary is not subject to automatic adverse tax con - sequences, but excessive control can risk the struc - ture being treated as a sham or as a domestic trust, leading to taxation on worldwide income. A beneficiary or donor acting as the fiduciary of the trust is responsible for the tax administration (assess -
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