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Question Is Using a Cyprus Trust to Avoid Taxes in Europe Too Good to Be True?

curiosologybusiness

Mentor Group Silver
May 28, 2024
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Good morning everyone,

I think many will find this question interesting.

I saw a viral TikTok video about a company offering Cyprus trusts as a solution for Europeans. Here’s the idea:

1. Open a trust in Cyprus with a Cypriot lawyer as the trustee.
2. Sell your intellectual property to the trust.
3. All money your company makes goes into the trust.

Results:
- Personal income = 0
- Company income = 0
- Money is protected and gets tax benefits in Cyprus.
- You can live anywhere in Europe.

This seems too easy and beneficial. What problems might come up? What are the things to take in consideration?
 
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Also, ownership is just one part of it.

Let's say the company was registered in the Seychelles and owned by some Saudi prince. So what?
Is it the Saudi prince that manages the company? No, you are. So the company is taxable where you are.

Oh, but it doesn't have any profit because it spends all its money on licensing fees for some IP?
The fees have to be at arm's length. Which they are by definition if the parties are unrelated. But they likely wouldn't be if you are in some way a beneficiary of the trust (if the trust was even recognized).
So then the tax authority will check if the price for the IP was artificially inflated.
What is your IP? Some logo anyone could have ordered off Fiverr for $5? And for this the company just happens to pay $1M in fees for, and the director decides this was a good financial decision for the company?
What's really going to happen is they will say the value of the logo is $5 and anything in excess of that was taxable profit shifting.

They may also pull out CFC rules etc. to make the trust itself taxable.

The general idea does work, but the running costs for a compliant setup are so high that it only makes sense once you have reached a certain level of profit.
And you would usually still have to pay personal income tax.
 
You could do something similar with a foundation instead. Foundations are usually recognized in Europe.
But all the other points still hold true. You cannot have control of the foundation, so you will have to pay someone to manage it for you, for a proper salary (=high costs), and then you also run the risk that they will just take your money and leave.
And if you manage the company from another country, then there will be tax in that country, on the profits.
If you don't have profits, of course there will be no tax, but you probably won't be able to reduce the profits to zero, because you are not Starbucks.

Starbucks can do that, they can put their IP (brand, logo, franchising concepts, ...) into a Cayman Islands company, hire 100 people to sit around in the Cayman Islands doing basically nothing, and then charge their global subsidiaries high fees for licensing the IP. That works because Starbucks is a valuable brand. But if it's your own company that nobody knows and you don't have 100 employees in the Cayman Islands, the tax man will just laugh in your face.