The matter in brief
How it went
Situation. A family with assets in several countries (real estate, shareholdings and accounts) needed an ownership structure that would simplify the management and inheritance of their wealth without loss of control.
What we did. We analysed the client’s assets and jurisdictions, designed a trust structure in Cyprus that took account of the currency control and tax requirements of every country involved, and supported its registration and the transfer of assets into it.
Result. The structure brought the management of assets in 4 jurisdictions under single control, with a transparent succession mechanism for the family’s next generation.
The legal basis for structuring through a Cyprus trust
Cyprus International Trusts Law. Cyprus trusts for non-residents are governed by the International Trusts Law of 1992, as amended in 2012 (Law 20(I)/2012). The amendment considerably simplified the regime: it removed the former limit on the duration of a trust and strengthened protection against claims by foreign creditors and against challenge under the forced heirship rules of other countries’ laws. To qualify as an International Trust, the settlor must not be a Cyprus tax resident in the year preceding its creation, and at least one of the trustees must be a Cyprus resident.
Russian CFC rules for unincorporated foreign structures. Chapter 3.4 of the Russian Tax Code (Articles 25.13-25.14) applies not only to foreign companies but also to foreign structures without legal entity status, which includes a trust. As a general rule, the settlor of a trust is treated as a controlling person and must file a notification of participation and a CFC notification, unless the conditions for loss of control over the transferred assets set out in Article 25.13 of the Tax Code are met.
The 1985 Hague Trusts Convention. Cyprus is a party to the Hague Convention on the Law Applicable to Trusts and on their Recognition, which makes it easier for other states party to the convention to recognise a Cyprus trust. Russia has not acceded to the convention, so a trust as a legal construct is not directly recognised in Russian civil law. This is taken into account when building the structure and deciding which assets to place within the trust and which to keep in direct ownership.
How capital structuring through a trust usually runs
The general sequence for a typical ownership structuring project. Actual timeframes depend on the number of jurisdictions, the types of assets and the depth of the due diligence carried out by the trustee.
Audit of assets and ownership goals
We build a full map of assets and jurisdictions and establish which goals matter most: protection against fragmented succession, consolidation of management or confidentiality. Timeframe: 2-4 weeks.
Choosing the type of trust and the trustee
A discretionary trust gives the trustee freedom in making distributions; a fixed-interest trust gives beneficiaries predictability. The choice of trustee determines who actually administers the assets. Timeframe: 2-3 weeks.
Drafting the trust deed
The deed of trust sets out the trustee’s powers, the beneficiaries, the rules for distributing income and capital and, as a rule, the role of a protector who oversees the trustee on the settlor’s behalf. Timeframe: 3-5 weeks.
Registering the trust and transferring assets
Entering the details in the Cyprus register of international trusts and legally transferring title to the assets to the trustee, taking into account currency control and corporate procedures in every jurisdiction concerned. Timeframe: 4-8 weeks.
Compliance and annual reporting
Filing CFC notifications and notifications of participation in foreign structures, the trustee’s banking compliance and, where necessary, information exchange under the CRS. Ongoing after the trust is created.
Common misconceptions about trusts in Cyprus
A trust as a way to hide assets completely. A Cyprus trust provides confidentiality in dealings with third parties, but it does not release a Russian settlor from the duty to notify the tax authority of participation in a foreign structure and of CFC status. Non-disclosure does not remove the obligation; it only creates a risk of penalties if the structure is discovered.
Equating a trust with an offshore company. A trust has no legal personality of its own: legal title to the assets passes to the trustee, not to “the trust” as a person. This changes how contracts, accounts and corporate rights within the structure are documented, and calls for different legal technique from that used with an ordinary legal entity.
The settlor retaining too much control. If the settlor in practice continues to dispose of the assets alone and gives the trustee binding instructions, the structure risks being recharacterised as a sham trust. That strips it of its protective function and may mean that, for tax purposes, the assets are still treated as belonging directly to the settlor.
Counting on automatic recognition of the trust in Russia. Because Russian civil law has no concept of a trust, the fate of assets held through a trust in a dispute before a Russian court is decided by analogy and needs separate analysis. This must be built into the structure in advance, not addressed after a dispute has arisen.
What to watch for when structuring through a trust
Liability for failure to file CFC reports. Article 129.6 of the Tax Code provides a fine for failing to file a notification of participation in a foreign structure, and a separate, larger fine under the same article for failing to file a CFC notification, for each undisclosed structure, whether or not it generated taxable profit.
Currency control over the structure’s accounts. Transactions on accounts connected with a trust in which a Russian person is treated as a controlling person fall under currency legislation. Breaching the procedure for notifying an account or the restrictions on transactions entails separate administrative liability.
Changes in the law of both jurisdictions. The CFC rules in Russia and the international trusts regime in Cyprus change from time to time. A structure that was effective when created needs periodic review so that it does not lose its status or preferential treatment because of later amendments.
Administration costs and the substance requirement. A professional trustee charges an annual administration fee, and the tax authorities of both countries increasingly check whether the structure has real economic substance. Formal registration without corresponding management raises the risk of challenge.
Ownership structuring in numbers
General benchmarks for this practice area, not figures for any specific case.
A similar situation? Let us discuss the details at a consultation.
Frequently asked questions
Does the import of equipment from abroad need to be declared to the tax authority?+
Yes, this is a separate procedure of customs declaration and currency control, and we support it in full as part of the transaction.
How do I choose between international arbitration and a state court for a dispute with a foreign partner?+
Arbitration is usually preferable for cross-border disputes: an award is easier to recognise and enforce abroad, unless the contract originally provided for a different jurisdiction clause.
Is this a real case or a generalised example?+
It is a real matter from the firm’s practice. We publish it without company names or the names of the participants, as every client agreement includes a non-disclosure clause.