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TAXATION OF CYPRUS INTERNATIONAL TRUSTS

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Charles Savva

Cyprus International Trusts (“CIT’s”) have evolved considerably since 1992 when they were formally introduced in Cyprus legislation. Cyprus acquired a “state of the art” international trusts regime allowing non-residents to establish trusts with excellent confidentiality, tax mitigation and asset protection features. The 1992 Law was not a self-contained law but it built on the 1955 Trustees Law, Cap.193 which is almost identical to the English Trustees Act of 1925. In the past years, Cyprus international trusts proved to be popular among foreign investors, allowing them to hold their accumulated wealth through a trust jurisdiction offering stability and flexibility in terms of financial management as well as freedom from forced heirship rules applicable at their resident countries. While the 1992 Law was a good start to the Cyprus International Trusts regime in Cyprus, it gradually became dated, lacking in features that were available in other jurisdictions.

Charles Savva

Charles Savva

In March 2012, the Ministry of Councils passed a long-overdue amendment to the 1992 CIT Law, which made CIT’s more flexible and attractive to foreign investors. The salient advantages of CIT’s such as confidentiality, asset protection and avoidance of forced heirships were significantly enhanced causing a surge of interest by foreign investors for the establishment of CIT’s. In September 2013, the CIT Law was further amended to provide for the creation of a trust register to be maintained by the authorities supervising the providers of trustee services. This latest development has been welcomed by the trustee services community as it solidifies Cyprus’ position as a leading trusts jurisdiction attracting high net worth individuals from around the world.

The 2012 amendments to the CITs addressed and clarified issues related to taxation, given the flexibility to allow a beneficiary to become a Cyprus tax resident following the formation of the Trust. While trusts have originally been utilised to plan and preserve family wealth, in recent years and in Cyprus particularly, the tax regime applicable to trusts has transformed them into tax planning vehicles. Generally, Cyprus trusts are transparent in tax terms. The trustee is responsible for discharging the beneficiaries’ tax liabilities on their behalf, but the income of the trust is not assessed on the trustee. Since neither settlers nor beneficiaries of international trusts could be Cyprus residents, the 1992 law had no requirement for detailed tax provisions.

The amending law of 2012 introduces a uniform tax regime applicable to all persons on the basis of the tax residency test. Income and profits of an international trust which are earned from sources within and outside Cyprus are subject to every form of taxation imposed in Cyprus in the case of a beneficiary who is resident. In the case of a non-resident beneficiary only Cyprus-sourced income and profits are subject to Cyprus tax.

These provisions ensure that there will be no discriminatory taxation available to anyone. Beneficiaries who are Cyprus tax residents will be subject to Cyprus tax on their worldwide income in the same way as any other Cyprus tax residents and non-resident beneficiaries will be subject to Cyprus tax only on Cyprus-sourced income.

The application of these provisions is clear and straightforward when all the beneficiaries of the trust concerned are non-resident or resident in Cyprus. Where there is a mixture of resident and non-resident beneficiaries it will be necessary to apportion the various sources of income between them.

In the meantime, preliminary discussions have taken place between the Inland Revenue Department, the Institute of Certified Public Accountants of Cyprus and other interested parties, and the following principles have been agreed:

  • The trustee will be responsible for the payment of any taxes due, for providing all relevant information concerning the trust and its beneficiaries as well as for compliance with anti-money laundering legislation. If any beneficiary is a Cyprus tax resident the trustee will be the person responsible for registering the beneficiary for Cyprus tax purposes if they are not already registered.
  • Insofar as taxation of the trust and its beneficiaries is concerned, the tax residency status of the beneficiaries will be the determining factor. The following taxation of trusts is applicable by the Inland Revenue Department under section 12(1):
  • If all beneficiaries are Cyprus tax residents the trust will be treated as a domestic trust and will be subject to Cyprus taxation on all income;
  • If all the beneficiaries are non-residents the trust will be considered as an international trust and will be subject to taxation only on Cyprus-sourced income;
  • If the beneficiaries are both resident and non-resident, taxation will be determined by reference to the scope of rights that the respective beneficiaries have in the trust. The tax treatment of the trust will be determined according to a simple majority test. If more than 50% of the rights adhere to beneficiaries who are Cyprus residents the trust will be treated as a domestic trust and will be liable to Cyprus tax on worldwide income. If more than 50% of the rights link to non-resident beneficiaries the trust will be treated as an international trust liable to Cyprus tax only on Cyprus-sourced income.

The main taxes on income in Cyprus are income tax and Special Contribution for Defence (SDC tax). Dividends and passive interest are exempt from income tax, but subject to SDC tax at 20% and 30% respectively. Rent received is subject to income tax and also to SDC tax at 2.25%. If a dividend is received from a Cyprus company the trustee should pay SDC tax on the one-fifth of the dividend attributable to the Cyprus-resident individual. Dividends received from overseas are not subject to taxation where the majority of beneficiaries are non-resident. When the trustee distributes the income, SDC tax will have to be deducted and paid over to the tax authorities on the amount attributable to the Cyprus resident beneficiaries. Similarly, in the case of interest and rents received the trustee will be responsible for paying SDC tax on Cyprus-sourced interest, and income tax and SDC tax on Cyprus-sourced rents received. Foreign-sourced interest is not subject to taxation, but if it is distributed to the Cyprus-resident beneficiaries the trustee will need to deduct SDC tax and pay it over to the tax authorities. For foreign-sourced rents, income tax and SDC tax will be payable only when and to the extent that the income is distributed to the tax resident beneficiaries.

International trusts will be liable to taxes such as VAT and stamp duty on their activities in Cyprus. Section 12(2) of the International Trusts Law states a fixed stamp duty on the establishment of an international trust. International trusts are subject to immovable property tax on property held in Cyprus irrespective of the residence of the beneficiaries.

The only gains subject to capital gains tax are gains on disposals of real estate situated in Cyprus and, to the extent that the gain is derived from the real estate holding, on disposals of shares in companies holding real estate in Cyprus.

The simplicity of establishing a CIT combined with the certainty of its operation by Cyprus law renders the CIT one of the most sought-out wealth management tools worldwide. Through the latest amendments to the CIT Law, Cyprus has achieved transparency and alignment with all EU and local anti-money laundering laws and regulations, while maintaining a legal system that offers asset protection to the highest degree. The new tax provisions provide a tax neutral environment allowing investors to take advantage of Cyprus’s tax regime.

Our team of highly experienced professionals can advise you on establishing and maintaining a Cyprus International Trust, tailored to your specific business and personal circumstances. Please contact Mrs. Stella C. Koukounis at [email protected] or Mr. Charles Savva on [email protected] to discuss how we can be of assistance to you.

Investing

Northern Trust: Outsourcing Accelerates Through Pandemic as Investment Managers Seek to Improve Margins, Enhance Business Resilience, and Future-Proof Operations

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Northern Trust: Outsourcing Accelerates Through Pandemic as Investment Managers Seek to Improve Margins, Enhance Business Resilience, and Future-Proof Operations 1

White Paper Sees Increase in Managers Outsourcing Middle and Front Office Functions to Achieve Optimal Business Structures

According to a white paper published today by Northern Trust (Nasdaq: NTRS), investment managers of all sizes and strategies have been prompted to undertake a comprehensive review of their operating models as a result of the Covid-19 pandemic which has accelerated existing trends that are compounding cost pressures. This has led increasing numbers of managers to outsource in-house dealing and other functions, such as foreign exchange and transition management, hitherto seen as core.

While cost savings remain a core driver, and indeed are one outcome of outsourcing, costs are no longer the only focus. Far from being solely a defensive reaction to increased pressure on margins, the white paper (‘From Niche to Norm’) describes outsourcing as part of the target operating model, or moving toward the ‘Optimal State’ for many investment managers, and  explains how the focus “has expanded to the variety of other potential benefits offered – enhanced capabilities, improved governance and operational resilience.”

Gary Paulin, global head of Integrated Trading Solutions at Northern Trust Capital Markets said: “The pandemic has challenged a range of operational assumptions. Working from home has, for example, questioned the need for a portfolio manager to be in close proximity with the dealing desk. Previously considered essential, the pandemic has effectively forced firms to ‘outsource‘ their trading desks to remote working setups and the effectiveness of this process has disproved the requirement for proximity, in turn, easing the path to third-party outsourcing. Many investment managers are actively considering outsourcing to a hyper-scale, expert provider as a potential, cost efficient solution – one that maintains service quality and, hopefully, improves it whilst adding resiliency.”

Northern Trust’s white paper compares outsourced trading to software-as-a-service stating: “instead of carrying the cost and complexity of running an in-house solution, firms move to an outsourced one, free up capital to invest in strategic growth and move costs from a fixed to a variable basis in line with the direction of travel for revenues.” 

Guy Gibson, global head of Institutional Brokerage at Northern Trust Capital Markets said: “The opportunity to deploy capital to build new fund structures, develop new offerings, focus on distribution and enhance in-house research has been taken up by several of our clients to the benefit of their investment approach, and to the benefit of their investors.  Additionally, in the last two months alone, many firms have recognized that outsourcing to a well-capitalized, global platform has enabled them to take advantage of cost-contained growth opportunities in new markets.”

A further development, which has echoes of the journey the technology industry has already undertaken, is the move towards ‘whole office’ solutions, which represent the next potential wave in outsourcing.

According to Paulin; “recently we have observed a growing number of managers wanting to outsource to a single, hyper-scale professional service provider who can do everything, everywhere. This aligns with Northern Trust’s strategy to deliver platform solutions for the whole office, serving our clients’ needs across the entire investment lifecycle.”

The white paper can be downloaded here.

Integrated Trading Solutions is Northern Trust’s outsourced trading capability that combines worldwide locations and trading expertise in equities and fixed income and derivatives with access to global markets, high-quality liquidity and an integrated middle and back office service as well as other services, such as FX. It helps asset owners and asset managers to meaningfully lower costs, reduce risk, manage regulatory compliance and enhance transparency and operational efficiency.

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How are investors traversing the UK’s transition out of lockdown?

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How are investors traversing the UK’s transition out of lockdown? 2

By Giles Coghlan, Chief Currency Analyst, HYCM

Just when we thought we had overcome the initial health challenges posed by COVID-19, the UK Government has once again introduced lockdown measures in certain regions to curb a rise in new cases. This is happening at a time when the government is trying to bring about the country’s post-pandemic recovery and prevent a prolonged economic downturn.

This is the reality of the “new normal” – a constant battle to both contain the spread of the virus but also avoid extended economic stagnation.

Of course, no matter how many policies are introduced to spur on investment, traders and investors are likely to act with caution for the foreseeable future. There are simply too many unknowns to content with at the moment.

To try and measure investor sentiment towards different asset classes at present, HYCM recently commissioned research to uncover which assets investors are planning to invest in over the coming 12 months. After surveying over 900 UK-based investors, our figures show just how COVID-19 has affected different investor portfolios. I have analysed the key findings below.

Cash retreat

At present, it seems that by far the most common asset class for investors is cash savings, with 78% of investors identifying as having some form of savings in a bank account. Other popular assets were stocks and shares (48%) and property (38%). While not surprising, when viewed in the context of investor’s future plans for investment, it becomes evident that security, above all else, is what investors are currently seeking.

A third of those surveyed (32%) said that they intended to put more of their wealth into their savings account, the most common strategy by far among those surveyed. This was followed by stocks and shares (21%), property (17%), and fixed interest securities (17%).

When asked about what impact COVID-19 has had on their portfolios throughout 2020, 43% stated that their portfolio had decreased in value as a consequence of the pandemic. This has evidently had an effect on investors’ mindsets, with 73% stating that they were not planning on making any major investment decisions for the rest of the year.

Looking at the road ahead

So, it seems that many investors are adopting a wait-and-see approach; hoping that the promise of a V-shaped recovery comes to fruition. The issue, however, is that this exact type of hesitancy when it comes to investing may well slow the pace of economic recovery. Financial markets need stimulus in order to help facilitate a post-pandemic economic resurgence, but if said financial stimulation only arrives once the recovery has already begun, the economy risks extended stagnation.

It seems, then, that there are two possible set outcomes on the path ahead. The first is a steady decline in COVID-19 cases, then an economic downturn as the markets correct themselves, followed by a return to relative economic stability. The second potential outcome is a second spike of COVID-19 cases which incurs a second nationwide lockdown – delaying an economic revival for the foreseeable future. At present, the former of these two scenarios is seemingly playing out with economic growth and GDP steadily increasing; but recent COVID-19 case upticks show that it’s still too soon to be certain of either scenario.

A cautious approach, therefore, will evidently remain the most common investment strategy looking ahead. But investors must remember that, even in the most uncertain times, there are always opportunities for returns on investment. Merely transforming a varied portfolio into cash savings risks a long-term decline in value.

High Risk Investment Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. For more information please refer to HYCM’s Risk Disclosure.

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Hatton Gardens 5 top tips for investing in Diamonds

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Hatton Gardens 5 top tips for investing in Diamonds 3

By Ben Stinson, Head of eCommerce at Diamonds Factory

Investing in diamonds can be extremely rewarding, but only if you know what to look for. For investors who lack experience, finding your diamond in the rough can be quite daunting.

For even the most beginner of diamond investors, the essentials are fairly obvious. For instance, you need to ask yourself will the diamond hold its value over time? What’s the overall condition of the stone and the jewellery? Is there history behind the item in question?

Although common sense plays a big part in investing, people often need insider tips and tricks to go from beginner to expert. Tony French, the in-house Diamond Consultant, at Diamonds Factory shares his professional knowledge on the 5 most important things to look for when investing in diamonds.

1: Using cut, weight and colour to determine value

Firstly, consider the shape, colour, and weight of your diamond, as this can play a pivotal role in guaranteeing growth in the value of your item. Granted, investing trends change with time, but a round cut of your diamond will almost always be the most sought after. The cut of your diamond is incredibly important, as it can influence the sparkle and therefore, the overall value. It’s a similar story for the intensity of some colours, such as Pink, Red, Blue, Green etc. Concerning weight, the heavier (bigger) stones will generally increase in value by a bigger percentage. Collectively these factors also contribute to the supply and demand aspect, which will determine their high price, and will ensure your item is re-sellable.

2: Provenance

Looking for significant value? Well, aim to own jewellery or diamonds that come from an important public figure. If you’re lucky enough to own a piece that has significant history, or was owned by a celebrity or person of interest, it’s an absolute must to have concrete evidence of this. Immediately, this proof will increase an item’s overall value, and there’s a good chance the stardom of your item might drum up interest amongst diehard fans, increasing the value even further…

Equally, it’s possible to proactively bring provenance to unique diamonds of yours. For instance, you can offer to loan bespoke, or unusual pieces for film, theatre, or TV performances – then it can be advertised as worn by xyz.

3: Find the source

Ben Stinson

Ben Stinson

Establishing your diamond’s source is one of the most important things you can do when investing in diamonds. If you’re starting out, try to purchase diamonds that have NOT been owned by too many people, as the overall value of the diamond will reflect multiple ownership. Alternatively, I’d always recommend buying from suppliers like ourselves or other suppliers and retailers, who buy directly from the people who have had them certified.

Primarily, this will allow you to have a greater degree of transparency, which is crucial when buying such a valuable item. Next, you should immediately see an increase in value of your diamonds, as identifying a source will allow traceability and therefore, market context.

4: Certification

Linked closely with my previous point, is the requirement to ensure that your diamonds are certified by a credible lab, and you have the evidence to prove so (a written document with specific grading details about your diamonds) – this will remove any doubts of impropriety.

It’s essential to remember that not all labs are the same, and many labs are better than others. Both the AGS (American Gem Society) and GIA (Gemological Institute of America) have great reputations and are world renowned. I’d recommend doing your own research into the labs, and when you’ve found the pieces that you’d like to invest in, then make an informed decision based upon your findings. Ultimately, proving certification will make your stones easier to insure, and deep down, you can have peace of mind knowing you have got what you have paid for.

Don’t forget to keep this paperwork in a safe location as well – you’d be surprised how many people we’ve met who have lost, or forget where they’ve placed it.

5:  Patience is a virtue…

If the market is strong, it might be tempting to look for an immediate sale once you’ve purchased a high value item. However, I suggest holding onto your diamonds for some time before even thinking about selling. More often than not, an item is more likely to increase in value over a few years than a few days – try and wait a little longer!

Equally, I would encourage having your diamonds, or jewellery professionally valued regularly. If you don’t have the knowledge to make a rough judgement on how much your pieces are worth, a consultant or expert can provide both a valuation, and contextualise that amount in the wider market. From there, you should be empowered with the knowledge to decide whether to keep or sell.

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