In this newsfeed we will focus on two popular Cyprus entities, which can be used for arranging and administering the wealth of a family in order to ensure its smooth and careful transmission from one generation to the other, the Family Investment Company and the Family Trust.
Family Investment Company
The term “Family Investment Company” or FIC has become very trendy lately and the reason is that more and more families and wealthy individuals are enquiring on its use and benefits as a means of managing their estate and passing it over to younger generations. In fact, the FIC is nothing more than a normal Cyprus private limited liability company with different classes of shares.
In the most common scenario the FIC has two classes of shares (although it can have more based on the needs and circumstances), with the parents holding shares with voting rights but with no access to dividends or distribution of capital. On the other hand, children hold shares with no voting rights but with access to dividends and distribution of capital, subject to approval through the decision-making process applying to the company.
Such decision-making relates mainly to the Board of Directors on which the parents can be appointed as members (directors). It should be kept in mind that for the company to be considered as a tax resident of Cyprus its management and control must be exercised in Cyprus. One of the main factors in determining whether the management and control of a company is exercised in Cyprus is the country of residence of the majority of its directors. Therefore, the parents can be appointed as directors but if they are not resident of Cyprus then local directors will need to be appointed as well in order to secure that majority.
As for all private limited liability companies in Cyprus, the operations of a FIC will be mainly governed by its Memorandum and Articles of Association, in which issues such as the powers and duties of the directors, voting and share class rights are set out. Considering that the Memorandum and Articles of Association is a public document, any sensitive provisions can be set out in a private agreement between the shareholders.
The role of the Trusts has evolved over the years and they are now considered as very effective vehicles for a range of purposes including inheritance planning, protection of assets, wealth management and other.
A Trust is a private arrangement between the Settlor, who is the person or entity creating the Trust by transferring assets to the Trustees, who will be holding and managing these assets for the benefit of the Beneficiaries, separately from their own property.
Effectively, the Trustee is the legal owner whilst the Beneficiaries are the beneficial owners. The Settlor may also appoint a Protector to act as a guardian so as to ensure that the Trustees are acting in accordance with his/her wishes and for the benefit of the Beneficiaries.
Usually the Trustees will have discretionary power in managing a Trust. Therefore, how Trust assets will be managed and invested, whether there will be any distributions and to which beneficiaries, etc. are issues at the absolute discretion of the Trustee. However, such matters can also be provided in the Trust Deed, which is the governing document of a Trust and through one or more Letter of Wishes to be provided by the Settlor for consideration by the Trustee. The Trust Deed is a private document, accessible only by those concerned.
Families not residing in Cyprus can qualify for the set-up of a Cyprus International Trust, which presents significant tax advantages. A Cyprus International Trust has the following characteristics:
• The Settlor is not a permanent resident of Cyprus in the year before the creation of the Trust.
• The Beneficiary is not a permanent resident of Cyprus (unless a charity) in the year before the creation of the Trust.
• The Trust property can be anything, including immovable property situated in Cyprus.
• At all times, there is at least one Trustee resident in Cyprus.
• The Trust has no limitation as to its duration.
• Income can be accumulated for the whole duration.
You can find more about Cyprus International Trusts in our related Practical Note, by clicking on the relevant link below.
There are plenty of benefits for transferring family assets and wealth to an entity such as a FIC or a Trust. A selection of them are summarized below:
- Inheritance/Estate Planning: Avoidance of forced heirship rules, which exist in many countries around the world or other Inheritance Law provisions in the country/ies where the family members are residing.
- Tax Optimisation: Efficiently managing taxes, duties and other charges, which frequently apply to transfers related to inheritance, as well as taxes related to the ongoing management and investment of wealth. Indeed, a Cyprus International Trust is exempted from all taxes in Cyprus assuming the Beneficiary is not a resident of Cyprus and none of the income/profit of the Trust derives from sources within the country.
- Protection of Wealth: Ensuring that the assets are managed by people who have the skills and knowledge of doing so and that the transfer of responsibility as well as any distributions to heirs are made based on a plan, in order to limit irresponsible spending, especially by younger members of the family.
- Flexibility: Both entities can be migrated to another jurisdiction in case there is a need to do so, keeping their history.
The two types of entities also have their own advantages, such as access to Double Tax Treaties, subject to conditions, for companies and privacy as well as easy of set up and administration for Trusts. The question of which one to opt for depends on the circumstances, objectives and investment strategies of each family.
As always, we are at your disposal for any further information or clarification and for considering any specific enquiries, concerns and thoughts you may have.