Circular 2012/6 was issued on 22 February 2012 as part of the overall effort to provide tax incentives for business development. It states that the provisions of the Income Tax Law as well as those of the above mentioned Circular 2010/8 do not apply to interest payable by a Cyprus company related to an investment made by that company in shares of another Cyprus company, as long as the level of the shareholding is, directly or indirectly, 100%.

Furthermore, for the exemption to apply the participated Cyprus company must not have any assets not used in the business. In the case where the participated Cyprus company has assets not used in the business, the deductibility of related interest expense of the parent Cyprus company will be restricted to the part related to assets used in the business.

Circular 2012/6 came in effect on 1/1/2012.

The first and very important change is the re definition of the International Trust, whereby the Settlor and Beneficiary are defined as being non-residents of Cyprus in the year before the creation of the Trust. The wording in the old Law was not so specific and it was interpreted to mean that the Settlor and Beneficiaries were not ever residents of Cyprus.

The second most important change is that it is now possible to include immovable property in Cyprus in the fund of an International Trust, whereas it was not allowed before.

Moreover, another very important change is that there is no limit on the duration of the Trust now since the 100 years provision for the duration was deleted.  Therefore, perpetuity will prevail any legal doctrine or rule there is contrary to it.

With regards to taxation, provisions have been made for the taxation of the immovable property in Cyprus. Specifically, the income/profits of the International Trust deriving from sources within and outside the Republic are subject to any taxation which applies in the Republic, in the case where the beneficiary is a resident of the Republic. In the case where the beneficiary is not a resident of the Republic, the income/profit of the International Trust deriving from sources within the Republic only, are subject to any taxation that applies in the Republic.

Furthermore, the definition of Trustees is redefined to mean legal or physical entities who hold or it is implied that they hold a trust fund for the benefit of beneficiaries, regardless of whether the Trustee is a beneficiary of the Trust as well, and/ or for any purpose, not exclusively for the benefit of the Trustee. Also, the Trustees are now responsible to comply with and apply all provisions of the relevant Anti Money Laundering and related regulations.

Another interesting new provision is in Art. 11 relating to the confidentiality of the Trusts, whereby the Trustee has the power to deny revealing documents related to the accounts Trust fund to the Settlor, if he/she thinks it is not necessary and it is not to the best interest of the Trust. Also, the Trustee may now apply to the Court for discretion/advice with regards to how he/she should act upon any specific matter relevant to the International Trust, and the court may issue an order to this end.

A big part of the new legislation is dedicated to provisions establishing the Trust’s validity. All matters that arise related to the Trust or the settlement of any property to the Trust fund are determined by the Cyprus Law without any reference to the Law of any other jurisdiction. More specifically, any heir-ship rules that apply either in Cyprus or in any other country do not and cannot affect in any way a Trust or a settlement of any property. The notion is not different from before, however through the new provisions added in the new Law it is further enriched and strengthened.

Regarding the irrevocability of the Trust, the general principal remains the same. Even if it is not expressly provided for in the instrument of Trust, the Trust is presumed to be irrevocable by the settlor or his legal representatives, even though it was created voluntarily. Furthermore, irrespective of any provisions of any other Law or Regulation, the preservation or allotment to a settlor of a trust of any right or benefit to the Trust property whether they are preserved or allotted to the settlor in his capacity as a protector or supervisor of application of Trust or other, the validity of the Trust is not affected in any way nor is it possible to delay its execution.

The new Law introduces the Protector for the first time although it was extensively used even before the amendment. This is a person other than the Trustee to whom powers of any kind are assigned to by the document creating or proving the Trust, including the power to advise the Trustee with relevance to the exercise of his powers or with relevance to the right of the Trustee for approval or for veto and includes the power of appointment or cancellation of the appointment of the Trustee. It also introduces the Supervisor of application of Trusts, who is a person whose duty is to make sure of the execution of the International Trust with regards to non charitable Trusts according to article 7(3), whereby, the supervisor can execute a Trust which was created as a purpose Trust but without having perpetuity, even if the supervisor is not a beneficiary.

Another important provision is where it is stipulated that the powers and authorisations assigned by the provisions of the Law to the Trustee, the protector, the settlor and the supervisor of application of Trust respectively, are additional to the powers and authorisations that have been assigned by the International Trust and come in force only to the extent that there is no intention to the contrary expressed in the Terms of the Trust and are applied abide the Terms of the Trust and are subject to the terms of same.

There were some changes and/ or additions made with regards to the law that governs a Trust, which is not by default Cyprus Law. The Settlor of an International Trust may choose the law that will govern the Trust. The choice must be clearly stipulated or implied by the Terms of the Trust document, which is construed, in the case where necessary, in accordance with the facts of each case. The stipulated or implied choice is final, valid and effective, regardless of the circumstances. Furthermore, where there is no stipulated or implied choice, the Trust is governed by the law that has the closest relationship with the Trust. The factors taken into consideration are the country where the management of the Trust takes place, the country where the property resides, the country of residence of the Trustee and the purposes of the Trust and the countries where these need to be realised. Once the choice is designated, this choice is final, effective and valid regardless of the circumstances.

With regards to international jurisdiction, for the recognition and execution of civil/ commercial cases, the Cyprus Courts have jurisdiction, in addition to where the Governing Law is Cyprus or where the Trust clearly stipulates referral to Cyprus Courts, also when i) the Trustee is a resident of the Republic, ii) the Trustee is a company acting as a fiduciary company incorporated in the Republic, iii) any part of the property is in Cyprus, when the management of any Trust is in Cyprus and iv) when the parties accept the Law of Cyprus. Such jurisdiction is exclusive unless otherwise provided in the Trust document. Also, where the jurisdiction choice is stipulated to be of the Republic, the provisions of the Law apply regardless of any other provision related to conflict of laws that apply in the Republic and constitute a fundamental rule, the observance of which is a matter of public order. On the other hand, foreign Trusts are governed by the law of the country that governs it, and it is not enforceable in the Republic where the Court finds that this is contrary to public interest.

In addition to the above, the new Law also makes some changes to the provisions regarding Charitable Trusts, where these Trusts now have a much wider choice of purposes available, which widens the definition of such Trusts.

As a final point, the new Law is enforceable from the date it was passed onwards, however it is suggested that at some length the Law does have retrospective effects, even though the Laws that apply for the Trusts prior to the present law are still in effect, unless they contradict with the present Law or have been amended by it. The Laws and Regulations that have been applicable for investments within the Republic by non-residents of the Republic are applicable for any investments of an International Trust in the Republic. The present amendment Law is applicable for all International Trusts regardless of the time of creation, and its clauses do not affect the validity of any pre-existing valid distribution or transfer.

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The Law was initially purported to apply up to and including 30 March 2012, but the Parliament decided, during its session on 29/3/2012 to extend its application up to 31 October 2012. The extension was decided on the grounds of the effectiveness of the Law experienced so far in the collection of long outstanding taxes. Another reason stated for opting for the extension of the deadline was the need to give some more time to taxpayers to obtain the necessary funding in order to settle their tax liabilities, considering the great difficulties currently prevailing in securing finance.

A Protocol amending the Double Tax Treaty (‘DTT’) between the Republic of Cyprus and the Republic of Poland, dated 4 June 1992, was signed on 22 March 2012, between the Cypriot Finance Minister and the Polish Ambassador in Cyprus.

Main provisions of the Protocol

1. Withholding Tax (‘WHT’) on dividends, interest and royalties

WHT on dividends has been reduced from 10% to 0% for participation of at least 10% in the dividend-paying company for a period of 24 months, and to 5% in all other cases.

WHT on interest has been reduced from 10% to 5%.

WHT on royalties remains the same at 5%. The definition of the term royalties has been redefined in order to be in line with the relevant provisions of the OECD Model Treaty.

2. Maintenance of the existing regime for capital gains on sale of securities.

3. Maintenance of the existing regime for sea persons

It is estimated that there are around 9,000 Polish marine persons, the emoluments of whom are not taxed.

4. Exclusion of the limitation of benefits clause.

5. Exchange of information

Adoption of the relevant article as per the new OECD Model Treaty.

6. Taxation of directors’ fees earned by individuals only in the State in which they are residents

7. Abolition of the Tax Sparing Clause

The credit granted by one contracting State for tax that should have been paid in the other contracting State in the absence of specific tax incentives (tax sparing credit).

Conclusion

The amended treaty will come in to force on 1 January following the year in which ratification by both States takes place.

It is expected that the revised treaty will create increased investment interest between the two contracting States.