Tax Benefits for Cyprus Trusts
The tax benefits of Cyprus trusts are a major reason why they are increasingly popular among high-net-worth individuals, including British non-doms. Cyprus is known for its favourable and flexible tax regime, which offers a range of advantages for individuals seeking to minimise their tax liabilities and maximise asset protection.
Below are the key tax benefits of Cyprus trusts:
1. No Cyprus Tax on Foreign Income and Capital Gains
One of the most compelling reasons to use a Cyprus trust is the favourable treatment of foreign income and capital gains. Cyprus does not impose income tax or capital gains tax on income or gains arising from sources outside Cyprus, provided that the income is not derived from Cypriot assets or activities. This is particularly advantageous for non-doms who have substantial wealth generated outside the UK, as they can accumulate wealth in the trust without triggering Cyprus tax liabilities.
Example: If a Cyprus trust holds foreign investments (e.g., shares or rental income from properties outside Cyprus), neither the income nor the capital gains will be taxed in Cyprus.
2. No Inheritance Tax in Cyprus
Cyprus is one of the few European jurisdictions that does not impose inheritance tax, making it an attractive jurisdiction for wealth transfer and estate planning. For British non-doms concerned about the UK’s inheritance tax (IHT), Cyprus provides a clear advantage. This allows wealth to be passed on to beneficiaries without the threat of significant inheritance tax (which can be as high as 40% in the UK on estates over £325,000).
Example: Assets held in a Cyprus trust, even if the settlor dies, are not subject to inheritance tax in Cyprus, helping to preserve wealth for future generations.
3. No Wealth Tax
Cyprus does not impose a wealth tax, meaning that the total value of assets held in a trust is not subject to taxation. This contrasts with certain European countries, such as France and Spain, which do impose wealth taxes. Non-doms looking to preserve and grow their wealth without additional tax burdens on the total value of their assets can benefit significantly from this tax-free environment.
4. No Capital Gains Tax on Certain Asset Types
Cyprus imposes capital gains tax (CGT) on the sale of immovable property located in Cyprus or on the sale of shares in companies that own Cypriot immovable property. However, the sale of other types of assets, including shares in foreign companies and other investments held by a Cyprus trust, is generally exempt from CGT.
Example: If the trust sells shares in a foreign company or foreign real estate, it will not be liable for CGT in Cyprus, which can be a significant saving compared to other jurisdictions that impose capital gains tax on global assets.
5. Income Tax on Trusts is Limited to Cyprus Source Income
While Cyprus imposes income tax on income derived from Cypriot sources, income earned by the Cyprus trust from foreign sources (such as dividends, interest, and rental income from foreign properties) is generally exempt from tax in Cyprus. The Cyprus trust is therefore able to accumulate wealth from international investments without incurring Cyprus tax liabilities.
Example: If a Cyprus trust receives dividend income from shares in a foreign company, this income is not subject to Cyprus income tax.
6. Dividend Income Exemption
Cyprus provides an exemption from income tax on most types of dividend income. As long as the dividends come from companies outside Cyprus, they are typically not taxed in Cyprus, which is particularly advantageous for trusts holding shares in international companies.
Example: If a Cyprus trust holds shares in a UK-based company and receives dividend payments, those dividends will not be subject to income tax in Cyprus.
7. Tax Treaty Benefits
Cyprus has an extensive network of double tax treaties with over 60 countries, including the UK, which allows trusts to avoid double taxation on income. These treaties ensure that income or gains that are subject to tax in one jurisdiction are not taxed again in Cyprus, and vice versa. This is particularly valuable for non-doms with international income and investments who want to avoid excessive tax liabilities on their global wealth.
Example: A Cyprus trust receiving income from the US or UK can benefit from the Cyprus-UK double tax treaty, potentially reducing or eliminating any tax on that income in Cyprus, depending on the treaty provisions.
8. No Taxes on Certain Types of Trust Distributions
Distributions made to beneficiaries from a Cyprus trust are generally not subject to Cyprus income tax, provided that the distribution is made from foreign-source income or capital. This can be highly beneficial for trust beneficiaries, especially if they are located outside Cyprus or are subject to high income tax rates in their home jurisdictions.
Example: If a Cyprus trust makes a distribution to a beneficiary based outside Cyprus, the distribution may not be subject to Cyprus income tax, enhancing the after-tax value received by the beneficiary.
9. Reduced Taxation on Investment Income
Cyprus offers preferential tax rates for income generated by certain investment vehicles. For example, income from the rental of immovable property located outside Cyprus is not subject to Cyprus tax. This can be particularly advantageous for trusts that hold investment properties in other jurisdictions, as it provides an opportunity to minimize tax exposure on rental income.
10. Flexibility in Trust Structures
Cyprus trusts offer flexibility in terms of how income is allocated and taxed. For example, the trust can be structured to ensure that income is either retained within the trust or distributed to beneficiaries, depending on the settlor’s tax planning goals. This flexibility allows for effective management of the trust’s tax position over time, ensuring that tax liabilities are minimised for both the trust and its beneficiaries.
11. Capitalisation of Cyprus International Trusts (CIT)
Cyprus International Trusts (CITs) are specifically designed for foreign settlors, making them ideal for British non-doms. These trusts benefit from preferential tax treatment, including an exemption from Cyprus income tax on most foreign-source income. Furthermore, CITs are subject to relatively low compliance requirements and are not subject to the same level of scrutiny as other types of trusts, making them a discreet and tax-efficient solution for wealth management.
Conclusion
Cyprus trusts offer significant tax benefits, particularly for British non-doms looking for an alternative to the UK's non-dom regime, especially with the forthcoming changes in 2025. With exemptions on foreign income and capital gains, no inheritance tax, and a wealth of double tax treaties, Cyprus presents a competitive, tax-efficient environment for wealth preservation and intergenerational planning. These benefits, combined with Cyprus' strong asset protection laws, make it an attractive jurisdiction for non-doms seeking to mitigate tax liabilities while ensuring the protection of their family wealth.