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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

Can Thematic Investing provide investors with growth opportunities in uncertain times?

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The impact of COVID-19 on the investment market

New whitepaper from CAMRADATA explores

CAMRADATA’s latest whitepaper on Thematic Investing, considers the role this type of investing can play in asset management and explores trends that can permeate society and traverse sectors. The whitepaper includes insights from guests who attended a virtual roundtable on Thematic Investing hosted by CAMRADATA in November, including representatives from CPR Asset Management, Sarasin & Partners, Impact Investing Institute, PwC, Quilter Cheviot, Scottish Widows and Stonehage Fleming.

Sean Thompson, Managing Director, CAMRADATA said, “In these seminal times, thematic investing has the potential to shape how the future unfolds. Yet running a successful thematic fund is no easy feat – it is a bit like navigating unchartered waters trying to identify the trends and the long-term opportunities.

“Trends such as AI and biotechnology are still in their relative early days, for example, and global economies are undergoing dramatic changes. But mapping out certain trends, identifying potential sustainable returns through a unifying thread that spans multiple sectors, could help future-proof investments. “Our roundtable guests considered current key themes, which themes worked well, and which have not and how thematic investors could identify trends with the potential to offer future growth.”

The guests named themes they currently like which included artificial intelligence, China, climate change, clean energy, automation, evolving consumption, ageing, digitalisation, water, waste management, biodiversity, and board diversity.

After discussing themes that have worked or not, the guests looked at total allocation to themed funds, and whether clients might be blinded by themes to the overall risk exposure in their portfolios.

Key takeaway points were:

  • Themes have a habit of coming and going. One guest recognised that automation and robotics, for example, were cyclical, which means that investors will have to think carefully about entry-points.
  • It was agreed that the commodities ‘super cycle’ of the 2000s came about with the economic development of China. Many commodities-based products found their way into mainstream investing, but this is unlikely to happen again.
  • One guest was surprised by some of the themes that interested their customers; with their research showing that Board Diversity was almost the lowest-ranking concern among the ESG choices they listed.
  • There was correlation between environmental impact and social benefits to investing. The theme that concerns the Impact Investing Institute, which is less than two years old, is improved measurement of such relationships.
  • In terms of successful themes, one clear winner due to COVID had been digitalisation.
  • One theme that has not done so well is the Ageing theme focused on older people travelling and enjoying experiences abroad later in life.
  • One guest said their firm used themes for ideas generation, not as a shortcut for portfolio construction. They said themes lead to good ideas, but they then spend at least three months researching a stock, so that the best themes are represented by the best investments.
  • The final point was that there are sensitivities for any global investor in allocating to themes, even the biggest one of all, Climate Change.
  • But on a positive note, one guest added if all stakeholders can resolve their differences on definitions such as impact and ethical investing, then more capital will be readily transferred into opportunities.

The whitepaper also features two articles from the sponsors offering valuable additional insight. These are:

  • CPR Asset Management: ‘Central Banks: leading the path towards Impact Investing’
  • Sarasin & Partners: ‘Theme or fad? How to invest for the long term’

To download the Thematic Investing whitepaper, click here

For more information on CAMRADATA visit www.camradata.com

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Promises, Promises: Navigating the Reputational Risks of ESG Investment Pledges

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Why are people investing in music?

By Nir Kossovsky and Denise Williamee, Steel City Re

As the trend towards ESG investment and a low-carbon economy continues, banks are being backed into a reputational corner. Law firms specializing in representing the expanding pool of litigious shareholders are salivating.

On one hand, banks understand the inherent financial risks and challenges involved with making a wholesale move towards a low-carbon economy. The transition to a greener corporate world can’t happen overnight; as long as “brown” assets continue to be profitable, those in bank leadership positions have to balance their green aspirations with their responsibility to shareholders.

On the other hand, while not renewing loans on existing coal mines or fracking sites may improve a bank’s carbon disclosures, it could have social and financial ramifications that disappoint other stakeholders—i.e., causing people to lose their jobs. Still, financial institutions are experiencing pressure from all sides—from ESG investors to social license holders – to divest the fossil fuel industry and adopt drastic “green financing” practices now.

To alleviate these pressures, banks are pledging greener financing initiatives. Almost every large global bank has made some sort of commitment. Goldman Sachs, for example, announced they would spend $750 billion on sustainable finance over the next decade. Bank of America pledged $300 billion.

Bank boards and executives likely don’t fully appreciate the reputational risks posed by the aspirational statements they’re making. They are making promises and raising expectations without the operational or governance systems in place to ensure those expectations will actually be met. Overpromising and increasing the risk of angering and disappointing stakeholders is the very definition of reputational risk.

Banks are in a unique position: integral to every aspect of our economy, well-known brands that work hard to build and retain the trust of their customers and the general public while operating in an environment of intense scrutiny by politicians and regulators at every level of government. Satisfying all the stakeholders calling for greener policies while fulfilling their responsibility to their shareholders is a demanding balancing act fraught with risk. The Business Roundtable pledge, led by JP Morgan Chase CEO Jamie Dimon, and elevating employees, communities, and the environment as stakeholders, was an attempt to strike that balance. Already, though, that pledge is being dismissed by politicians like Senator Elizabeth Warren, who characterized it as an “empty publicity stunt.”

The price of missing expectations is costly, and bank executives and board members could find themselves in a legal hot seat. Federal securities lawsuit filings alleging reputation harm from missed expectations are up 60% over last year, the third year of a rising trend.

This trend stems from SEC regulation S-K that calls for more human capital disclosures, and the Caremark decision that sets the bar for most securities litigation and makes board oversight of mission-critical corporate operations a test of the duty of loyalty. Other cases, like In Re Signet, have made ESG-like pronouncements—historically “immaterial corporate puffery”—now potentially material in the securities arena.

For example, directors’ duty of loyalty were successfully questioned in alleged failures of innovation (In Re Clovis Oncology, Inc., board failure to protect the firm’s reputation for pharmacologic innovation); safety (Marchand v. Blue Bell Creameries, board failure to protect the company’s reputation for food safety); and environmental sustainability (Inter-Marketing Group USA, Inc. v. Armstrong, board failure to protect the firm’s reputation for oil pipeline-related environmental protection).

In other words, aspirational pledges are now being considered by courts with the full weight of a material public disclosure. As wealth managers chase ESG-informed investing and capital markets chase ‘green underwriting’, the plaintiff’s bar chases boards and executives making pledges that appear to be no more than aspirational marketing.

The only way to strike a balance and mitigate these risks is through a robust Enterprise Risk Management (ERM) strategy that’s centered around understanding who your key stakeholders are, what their interests are, and ultimately, what their expectations are. Coincidentally, it is also one of the three key behaviors the world’s largest asset management firm, Blackrock, is demanding of all investee companies in 2021 thus communicating the type of authenticity to its slogan “beyond investing,” that BP failed to accomplish with similar sloganeering a decade ago.

Banks need to create a central intelligence unit with board level oversight to comb through every aspect of the organization to identify stakeholder interests, potential risks and/or exposures. Pledges and communications should be informed by a rigorous and honest self-assessment of the institution’s public filings and operational capacity. Overpromising is costly. ESG pledges must be rooted in achievable goals that a bank’s leadership are confident their institutions can reasonably execute on an operational level. Banks also need to consider transferring or financing risks using the broad range of conventional and parametric insurance products currently available.

Enterprise risk management, when executed properly, will fulfill ESG commitments, reassure stakeholder groups and give marketers, counsel, and investment as well as government relations professionals an authentic story to tell about strong corporate governance. ERM focused on reputational intelligence will provide confidence to ESG funds, institutional investors, bond raters, and government officials alike.

The popularity of ESG investment and chasing ESG ratings is not going to go away, and stakeholder pressures will continue to mount. Investors doubled the size of the ESG sector this year, putting $27.4 billion into ETFs traded in U.S. markets. According to a recent survey conducted by Bank of America relating to ‘Gen Z’—which is just entering the workforce—80% take ESG into account when making their investment decisions.

Bank leadership that is striving to attain the correct balance between stakeholders and shareholders need to lean more into the “governance” portion of the ESG equation; pledges backed by enterprise risk management are the strongest pledges you can make.

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ESG – Bubble or Bandwagon?

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Portfolios that a daring young investor may choose

By Josh Gregory, Founder of Sugi

Isaac Newton was a successful investor, but he lost a fortune (£15m in today’s money) in the South Sea Bubble of 1720. When asked about his misadventure, he supposedly replied that he ‘could calculate the motions of the heavenly stars, but not the madness of people’ (presumably, himself included). 

The rise and fall of South Sea stock was one of the earliest and largest instances of a market bubble and crash. Three hundred years later, we’re facing another massive investing trend: sustainable investing. In the last year or so, almost every investment institution has jumped on the sustainability bandwagon. 

It’s now arguably more notable to find an asset manager who hasn’t committed to sustainable, ethical, responsible, impact and/or ESG (environmental, social and governance) investing than one who has. The numbers are telling: in August 2020, assets in global ESG exchange traded funds and products topped $100 billion (£73 billion) globally. 

Demand for sustainable investments has been bolstered by two main factors. Firstly, with climate change firmly on the global agenda and all eyes watching the Biden administration’s transition to power (and the subsequent climate change policy that will follow), ‘greening up’ has never been more of a priority for businesses and individuals. This includes the investment industry, with both retail and institutional investors increasingly demanding that their money has a positive impact on our planet. 

Secondly, since the start of the COVID-19 pandemic reports have continually claimed that ESG funds are outperforming ‘traditional’ investments. No longer is going green cited as a ‘nice to have’; rather, these reports demonstrate the value and resilience of ESG funds to the investor community, increasing demand. Surely, this can only be a good thing? Yes, but only if investors know what they’re buying. 

It’s no secret that ESG investing suffers from complexity, lack of transparency and a lack of any universal standard. Fundamentally, this is why we created Sugi – a new platform enabling retail investors to track the environmental impact of their investment portfolios using clear and objective carbon impact data. 

Josh Gregory

Josh Gregory

Today, ESG terms can lawfully be used to label pretty much anything. Ultimately, this means that the ESG label is not a guarantee of good practice. In fact, an ESG rating is a financial risk metric – the scores calculate the extent to which ESG issues affect a company’s economic value. Many investors, even institutional investors, don’t know how to decipher this. The scores themselves are designed to be used in tandem with portfolio dashboards and other data to make financial decisions. This effectively means that the scores on their own without any context are not of much use to anyone.

This has led to a glut of greenwashing in the sector, where investment products are described as green, ethical or sustainable, but the description is unsubstantiated. And while the top financial performance of ESG funds seems uncontroversial, those digging a little deeper may be surprised at what they find. Many ESG funds are heavily weighted in favour of technology companies, which typically have low carbon emissions. These stocks skyrocketed in 2020 but it’s important to note the context. It was largely due to the COVID-19 lockdowns and had nothing to do with the stocks’ ESG credentials. 

The EU, the UK and the US are all working on their own strict definitions of ESG. This should, in theory, go some way to clarify what investors are getting when they choose an ESG or sustainable investment product. However, this will take a while to implement and there will still not be a globally recognised definition or standard. 

It would seem many people are pouring money into investments when they don’t know what they’re buying. That’s nothing new. But underneath the ESG label lies something meaningful, worthwhile and, above all, valuable for the world in which we live – environmental, social and governance best practice.

The question remains though, is it a bubble? A bubble exists if ESG investments are over-valued (i.e. over-bought). Right now, ESG funds may be in bubble territory because many of the underlying stocks that make up the funds are themselves in a bubble. But does that make ESG a bubble? If it is, when do we call it? 

Historically, all bubbles –whether they be tulips, canals, railways or the internet – no-one knows. And if I knew now, I’d be sunning in the South Seas rather than writing this blog!

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