introduction
The EU Tax Avoidance Directive (2016/1164 / EU) was implemented in Cypriot law and reads:
- with retroactive effect from January 1, 2020 in relation to hybrid mismatches, exit taxation and mismatches in tax residences; and
- Effective January 1, 2022 in relation to reverse hybrid mismatch arrangements that take advantage of the different tax treatment of a company or instrument under the laws of different jurisdictions.
With corporate tax avoidance regulations tightened, individuals need to consider better property protection strategies and do legitimate tax and tax avoidance planning. Cypriot fiduciary legislation enables trusts to be set up with advantageous tax systems and asset protection features. Family trust is deeply embedded in estate planning, but the Cypriot holding company can also be used as a family investment company (FIC) as an alternative to a family trust. So is the FIC an ideal alternative tax and inheritance planning structure?
Employment of a holding company as a family investment company
Properties of FICs
An FIC is a private company that invests rather than acts. In particular, an FIC holds the family’s long-term investments (such as stock portfolios or real estate), and the shareholders and directors are typically family members. For example, as the original owners of assets, parents often set up an FIC with at least two share classes. The parents typically hold one share class with voting rights but no dividend or capital return rights, while the children hold the other share class with no voting rights but full dividend entitlement and return on investment (for the required company admissions). The parents are usually the directors of an FIC, although a third party may also act as directors with the consent of the parents, especially if the parents do not reside in Cyprus. An FIC, like any other Cypriot holding company, is subject to its articles of association, which will be publicly available, as well as any agreements made by shareholders that have the advantage of being private.
The relevant documents of an FIC should be tailored to the individual circumstances and contain provisions that cover, among other things:
- the distribution of profits;
- the return of capital;
- the appointment of directors;
- Subscription rights; and
- Share transfers.
Establishment of a FIC
For example, Mr and Ms E are UK nationals who have decided to move or spend a lot of time in Cyprus after the Brexit transition period and set up an FIC as an asset protection tool or a family investment tool. The FIC can be fully incorporated with 100% foreign ownership as there is no restriction on the nationality or residence of the company’s shareholders.
When setting up an FIC in Cyprus, the following criteria should be met:
- The assets belonging to the FIC must be clearly identified and the directors must be clearly identified and reported to the relevant regulatory authorities. The directors or a majority of the directors of the FIC must be resident in Cyprus for proper administration and control in Cyprus.
- The FIC must be based in Cyprus. Depending on the FIC’s banking facilities, additional substance may be required in Cyprus or abroad.
- An accurate valuation of the FIC’s assets must be based on their fair value. In return, shareholders must receive shares (rather than assets) that are equal to their respective property value.
Benefits of FICs
The main advantages of setting up an FIC are as follows:
- FICs can employ non-EU foreign nationals who wish to work in Cyprus. These employees only have to apply to the civil register and the migration department for a temporary residence and work permit, which is usually valid for one to two years and is renewable. The immigration sector manages applications and issues residence permits to third country nationals (i.e. nationals of countries outside the European Union or the European Economic Area) who are either in Cyprus or abroad at the time of the application.
- Workers essentially have the rights of EU citizens. As such, her family will be allowed to live and reside freely in Cyprus.
- 67 countries, including Cyprus, have formally agreed and signed the multilateral BEPS instrument as part of their efforts to address tax treaty measures to eliminate soil erosion and profit shifting (BEPS). FICs can take advantage of the level playing field and stable economic environment that these measures bring with them.
- Corporate taxation exempts income from dividends.
- Withholding tax facilitates the exemption from dividend distribution to foreign shareholders.
- From 2015, the Cypriot tax law made it possible for new company capital to be reduced for tax purposes through the fictitious interest deduction regime. This tax reduction can be requested and used by the FIC.
- FICs enjoy Cyprus’ low corporate tax rate of 12.5% on net trading profit.
In addition, Cyprus-based companies can receive tax credits for withholding tax on income generated in Cyprus, which is a form of tax relief. These credits also apply to other taxable income.
A UK family looking to preserve and invest their children’s family wealth, provided they meet these requirements, can move to Cyprus and set up an FIC that offers the above benefits. In addition, due to language barriers and cultural differences, foreign entrepreneurs may feel more comfortable employing people from their own country.
Finally, starting a business in Cyprus is straightforward and quick, and opening a corporate bank account is generally easy.
Family trust
Family trust is controlled by the trustees, who may or may not be members of the family. The trustees hold the assets of the trust fund for the benefit of the beneficiaries at the request of the debtor. In accordance with the traditional trust structure, the trustees have a margin of discretion. This means that the trustees are free to decide whether payments are made and how much and how much these recipients are. However, such matters are governed by the trust deed itself and writing of wishes. The trust deed also governs the powers and responsibilities of the trustee. This document is private and only accessible to the data subjects. The trust is subject to the International Trusts Law (69/1992). The procedure for establishing an international trust in Cyprus is remarkably simple and can be arranged relatively quickly.
Building a family trust
At present, trusts established, interpreted and regulated under Cyprus law should be registered with the Cyprus Bar Association, the Cyprus Institute for Auditors or the Cyprus Securities and Exchange Commission in accordance with Section 25A (1) of the Trust Act as amended in 2013 .
According to Article 2 of the International Trusts Law, the following conditions must be met for a trust to be classified as an “International Trust”:
- The settler, either a natural or a legal person, cannot be a resident of Cyprus in the year prior to the establishment of the trust. The settler can be resident in Cyprus after the establishment of the trust.
- The above rule applies to beneficiaries unless they are a non-profit organization.
- At least one trustee must have been permanently resident in Cyprus since the establishment of the trust.
- The trust assets can include real estate in Cyprus or abroad.
- Beneficiaries of the trust who are resident in Cyprus are only required to pay taxes in Cyprus. Non-resident beneficiaries are not subject to tax on payments they receive from a Cypriot trust.
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Family trust has traditionally been viewed as the standard option for estate planning and wealth protection. An FIC is essentially a private limited company that can be used as an alternative to a family business. FICs are flexible and can be tailored to a family’s particular circumstances or needs. You can create different share classes that allow family members to have different rights to control, income and return on investment, and change structure over time. The question of which one to choose depends on individual family circumstances, goals and investment strategies. The good thing is that families have the option of creating a trust or FIC and can choose the best option based on their general way of life. If a family wants to combine property protection, low taxes and moving to Cyprus, one of these vehicles is suitable.