The fast rise of cryptocurrencies has led us to a new era of wealth creation and investment opportunities.

Yet, with this innovation comes an array of challenges: regulatory uncertainties, market volatility, and risks related to estate planning, asset protection, and tax efficiency. For high-net-worth individuals and serious investors in the crypto space, structuring their digital assets in a secure, compliant, and efficient way is more critical than ever. One of the most effective solutions involves the use of a Cyprus International Trust (CIT).

By creating a Cyprus International Trust to hold shares in a company that manages crypto investments, investors gain the dual benefits of asset protection and operational control. This article explores the unique benefits of structuring your crypto assets through a Cyprus trust, explores the mechanics of this structure, and highlights why Cyprus, with its progressive legal framework, is the ideal jurisdiction for this innovative approach. Supported by the expertise of AGPLAW and AGP Trustees, this arrangement provides a strong solution for modern crypto investors.

Why Use a Cyprus International Trust for Crypto Assets?

A trust is a legal arrangement in which assets are transferred by a settlor to a trustee, who holds and manages them for the benefit of designated beneficiaries. Trusts are widely used for asset protection, estate planning, and tax optimization. In the case of a Cyprus International Trust (CIT), the settlor can set up the trust under the Cyprus International Trusts Law, which has long been regarded as one of the most sophisticated and flexible trust frameworks in the world.

What makes this approach particularly compelling for cryptocurrency investors is the unique structure it allows. Instead of holding crypto assets directly within the trust, the trust holds shares in a company, which becomes the operational entity for managing and investing in crypto. Importantly, the settlor of the trust can serve as the director of the company, retaining control over crypto trading and investment activities. This creates an effective and efficient balance between security and flexibility, while the trust serves as the ultimate layer of protection.

The Risk of Unexpected Death and the Role of a Trust

One of the most overlooked yet critical risks associated with cryptocurrencies is what happens when the owner dies unexpectedly. Unlike traditional financial assets, which can be accessed by heirs with proper documentation, crypto assets require specialized knowledge and secure access credentials, such as private keys, wallet passwords, and exchange login details. Without a clear succession plan, these assets can be lost forever, causing immense financial and emotional distress to the heirs, not to mention that in most occasions heirs may have not even been aware of such assets.

This risk arises because cryptocurrencies are decentralized, and ownership depends entirely on the control of private keys or login credentials. If these are lost or inaccessible, there is no central authority to recover them.

Consider the following real-world challenges faced by crypto investors who pass away unexpectedly:

1. No Access to Wallets: If the deceased has not documented or securely passed on their private keys, the assets become irretrievable.
2. Lack of Technical Knowledge by Heirs: Many heirs may not have the technical expertise to understand complex crypto wallets or exchanges.
3. Unclear Legal Ownership: Without proper estate planning, disputes can arise among heirs over the rightful ownership of the crypto assets.

How a Cyprus International Trust Solves This Problem

By placing cryptocurrencies under the ownership of a Cyprus International Trust, these risks can be effectively mitigated.

Here is how the trust structure provides a solution:

Centralized Oversight Through Trustees:

• The trustee manages the overall administration of the trust, ensuring that all crypto-related documentation (private keys, passwords, wallet recovery phrases, etc) is stored securely and is accessible when needed.
• In the event of the settlor’s death, the trustee ensures that the crypto assets are transferred to the designated beneficiaries in accordance with the terms of the trust deed.

Clear Succession Planning:

• The trust deed explicitly outlines who the beneficiaries are and how the assets should be distributed upon the settlor’s death.
• This eliminates the need for lengthy probate processes and reduces the risk of disputes among heirs.

Professional Management of Technical Assets:

• Trustees, especially those with expertise in cryptocurrency management, can ensure that wallets, exchanges, and keys are properly handled and that beneficiaries receive guidance on how to access and manage their inheritance.

Avoiding Loss of Digital Assets:

• By storing crypto-related credentials securely under the trust, the risk of losing assets due to misplaced keys or forgotten passwords is minimized. Institutional-grade security solutions, such as hardware wallets or custodial services, can be integrated into the trust’s operations.

This approach ensures that the crypto wealth one has worked hard to build is preserved and passed on to the legitimate heirs seamlessly, without the risk of technical or administrative complications.

Structuring Crypto Investments: How It Works

The structure involves three interconnected components:

1. The Cyprus International Trust: This is the foundational entity. The settlor creates the trust under Cyprus law, transferring assets into it, either directly or indirectly (such as, through the transfer of company shares). The trust is administered by a trustee, who may be a professional trustee or corporate service provider based in Cyprus.
2. The Company Owned by the Trust: The trust acts as the shareholder of a company that is incorporated in a jurisdiction favorable to cryptocurrency management. The company serves as the operational arm, managing investments, storing crypto, and conducting trading activities.
3. Settlor as Director: The settlor is appointed as the director of the company, ensuring that they retain full decision-making authority over how crypto assets are managed and invested.
4. Ongoing Accounting and Annual Audit: The company, as the operational arm, will maintain accurate and up-to-date accounting records and conduct annual audits of its financial activities. This practice ensures that the investor has full visibility and control over the company’s performance and crypto-related activities. Through proper record-keeping and auditing, the investor gains a clear and ongoing understanding of the value and performance of their crypto investments, while ensuring compliance with applicable regulations.

This arrangement allows for seamless control over day-to-day operations while benefiting from the legal and financial safeguards provided by the trust.

The Benefits of This Structure

The combination of a trust and a company creates a powerful solution for cryptocurrency investors, addressing key concerns such as asset security, regulatory compliance, and long-term financial planning. Below is a deeper analysis of the key advantages of this structure.

Asset Protection

One of the most compelling reasons for using a Cyprus International Trust is its ability to shield assets from potential risks. Once crypto assets or company shares are transferred into the trust, they are no longer considered part of the settlor’s personal estate. This means that the assets are protected from claims by creditors, lawsuits, or disputes, including those arising from divorce proceedings or bankruptcy.

For cryptocurrency investors, who often face risks related to the volatility of the market and legal uncertainties, this level of protection is invaluable. Furthermore, Cyprus trust law provides that assets transferred to a trust cannot be contested unless it is proven that the transfer was made with the intent to defraud creditors. Even in such cases, any claims must be made within two years of the transfer.

In the context of crypto, this means that your holdings are safeguarded from external risks, whether they stem from personal financial difficulties or legal challenges.

Tax Efficiency

Tax planning is another critical factor for crypto investors, given the significant gains that cryptocurrencies can generate and the evolving tax treatment of digital assets in different jurisdictions. Cyprus offers one of the most attractive tax environments for individuals and businesses operating in the crypto space.

Under the Cyprus International Trusts Law, income and profits earned outside Cyprus are exempt from taxation in Cyprus, provided the beneficiaries are not Cyprus residents. Additionally, Cyprus does not impose inheritance tax or estate tax, making the trust an ideal vehicle for passing on wealth to future generations without incurring unnecessary tax liabilities.

The trust-owned company further enhances tax efficiency. Companies incorporated in Cyprus benefit from a low corporate tax rate of 12.5%, one of the most competitive rates in the European Union. Profits earned through the company, whether from crypto trading or other investment activities, can be structured in a way that minimizes tax exposure. Moreover, Cyprus’s extensive network of double taxation treaties ensures that income is not taxed twice in different jurisdictions.

It is important to note that global regulatory reforms are rapidly evolving, with governments increasingly focusing on cryptocurrency investments to ensure proper taxation. For instance, in the United Kingdom, HM Revenue & Customs (HMRC) has been actively sending ‘nudge’ letters to crypto investors, reminding them of their tax obligations and the importance of accurate reporting.¹

Despite these efforts, a significant number of crypto investors fail to declare their profits, leading to substantial amounts of untaxed gains. A study focusing on Norwegian crypto holders revealed that 88% of investors did not report their holdings, highlighting the pervasive nature of tax evasion in the crypto space.²

Given this global trend towards stricter enforcement and the likelihood of increased scrutiny, establishing your crypto investments under a secure, EU-compliant, low-tax jurisdiction like Cyprus is not just advantageous but essential. This proactive approach ensures compliance with current and forthcoming regulations, safeguarding your assets from potential legal and financial repercussions.

Retention of Control

A major concern for many settlors when creating a trust is the potential loss of control over their assets. This is where the proposed structure excels. By appointing the settlor as the director of the trust-owned company, the arrangement ensures that the settlor retains full control over the management and investment of their crypto assets. This is especially beneficial for experienced crypto investors who prefer to oversee their portfolios and make direct decisions about trading strategies.

The Cyprus trust structure strikes a unique balance between providing the legal protection of a trust and maintaining the operational flexibility of direct control. This makes it particularly appealing to investors who wish to protect their assets without relinquishing their ability to manage them.

Confidentiality and Privacy

Privacy is a significant concern for cryptocurrency investors, given the public nature of blockchain transactions and the scrutiny that often accompanies large-scale crypto holdings. Cyprus International Trusts provide a high degree of confidentiality. Details of the trust, including the identities of the settlor, beneficiaries, and trust assets, are not publicly disclosed. This ensures that your crypto wealth remains private and secure from unwanted attention.

Additionally, while the company is subject to regulatory compliance and reporting, its structure allows for anonymity concerning ultimate beneficial ownership, as the trust itself acts as the shareholder.

Estate and Succession Planning

Passing on digital assets to future generations can be complicated, particularly in the case of cryptocurrencies, which require specialized knowledge and secure storage methods. A Cyprus International Trust simplifies this process. By designating beneficiaries in the trust deed, the settlor ensures that their crypto assets will be transferred seamlessly and efficiently upon their death, without the need for probate or other lengthy legal procedures.

This structure also eliminates the risk of crypto wallets or private keys being lost or mismanaged by heirs who may not have the technical expertise to handle digital assets.

Elaboration on Cyprus Trust Law

Cyprus International Trusts are governed by one of the most robust and investor-friendly legal frameworks in Europe. The Cyprus International Trusts Law (Law 69/92), amended in 2012, has enhanced the jurisdiction’s reputation as a global hub for trust services.

Key features include:

• Asset Protection: Trust assets are protected from creditors, even in cases of bankruptcy or divorce, unless fraud is proven within a two-year period.
• Flexibility: The trust can hold a wide range of assets, including cryptocurrencies, real estate, and shares in companies.
• Tax Advantages: Income and gains earned outside Cyprus are tax-exempt if beneficiaries are non-residents.
• No Limit on Duration: Trusts can exist indefinitely, making them ideal for long-term planning.

Practical Implementation Roadmap

Setting up this structure requires careful planning and expertise.

Here is how AGPLAW and AGP TRUSTEES can help:

1. Draft and execute the trust deed, identifying the settlor, beneficiaries, and trustee.
2. Incorporate the trust-owned company in a favorable jurisdiction.
3. Appoint the settlor as the director of the company for operational control.
4. Set up secure wallets and bank accounts (if necessary) for crypto holdings.
5. Ensure compliance with AML/KYC regulations: Ensuring compliance is a crucial step. Since cryptocurrencies are categorized as high-risk assets under anti-money laundering (AML) and counter-terrorism financing (CTF) regulations, enhanced due diligence (EDD) is typically required for any structure involving crypto investments. However, contrary to outdated perceptions, this is no longer an overly complex or prohibitive process. Today, service providers and trustees are well-versed in handling crypto-related transactions, and advanced tools are readily available to simplify due diligence. Enhanced due diligence typically involves verifying the source of funds, identifying the ownership of wallets, and ensuring that all transactions comply with international AML standards. While these processes are thorough, they are now a standard practice in the financial industry and have become increasingly streamlined thanks to evolving regulatory frameworks and innovative compliance technologies. By working with experienced professionals such as AGP TRUSTEES, crypto investors can understand these requirements smoothly and confidently. These measures not only ensure compliance with legal obligations but also enhance the credibility of the structure, making it easier to integrate with banking and e-banking institutions and other financial partners. What once might have seemed challenging has now become a routine aspect of responsible crypto asset management.

Tax Scenarios for the Structure

Income from Crypto Trading: Profits earned by the trust-owned company are taxed at Cyprus’s corporate tax rate (12.5%) but are exempt from further taxation if reinvested or distributed to non-resident beneficiaries.

Inheritance Planning: No inheritance or estate tax applies.

Capital Gains: Gains earned outside Cyprus are exempt from taxation for non-residents.

Conclusion

By combining the forceful asset protection of a Cyprus International Trust with the operational flexibility of a company, this structure offers unparalleled benefits to crypto investors. Whether your goal is to secure your digital assets, optimize your tax strategy, or pass on your wealth to future generations, this innovative approach ensures a legally compliant and efficient solution. With 19 years of experience in trust law, corporate structuring, and international tax planning, AGPLAW and AGP Trustees provide the expertise and guidance necessary to implement this structure seamlessly.

Furthermore, as members of the Society of Trust and Estate Practitioners (STEP, UK and Cyprus) since 2005, a globally recognized professional body for trust and estate practitioners, our team adheres to the highest standards of ethical and technical expertise in trust management.

The information provided in this article is for general informational purposes only and does not constitute legal, financial, or tax advice. While every effort has been made to ensure the accuracy of the content, AGPLAW and AGP Trustees accept no responsibility or liability for any errors, omissions, or inaccuracies. Readers are advised to seek professional legal, tax, or financial advice tailored to their specific circumstances before making any decisions or implementing any structures described herein. AGPLAW and AGP Trustees shall not be held liable for any direct, indirect, or consequential losses arising from the use of, reliance on, or inability to use the information provided in this article.

For all enquiries please contact our team of experts at agp@agplaw.com

References:

^{1 – 22/8/2024 – Crypto investors urged to review tax obligations as HMRC sends ‘nudge letters’, from the Chartered Institute of Taxation (CIOT).}

^{2 – 26/8/2024 – Financial Times “Crypto tax evasion is ‘pervasive’”}

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