Collaborations Across Borders Establishing International Joint Ventures

Collaborations Across Borders Establishing international joint ventures

Virtual Round Table Series Commercial Working Group 2018 Virtual Series | Collaborations Across Borders

IR Virtual Series, issue #33. First published August 2018.

irglobal.com | page 3 Collaborations Across Borders Establishing international joint ventures

Joint ventures can be an efficient and A JV can take many different forms, include a variety of clauses designed to effective way to access new markets, from an informal contractual arrange- limit liability, such as defence, indemnifi- develop new products or explore new ment between two parties to an entirely cation and hold harmless provisions. industries. They can be operational in new entity formed by multiple partners Each type has its advantages and disad- nature, or passive if they are used to hold complete with equity stakes or share- vantages, depending on the goal of the intellectual property or licences. holder agreements. In between there are joint venture and the structuring priorities hybrid forms, such as the temporary joint Their effectiveness has been confirmed for each partner. In the following discus- venture or UTE popular in Spain, which is by research from Bain & Company sion our experts describe some of these used to win large government contracts which conducted a global survey of 253 differences in more detail, touching on such as infrastructure build projects. companies that have used joint ventures the reasons why certain vehicles are (JVs) to generate growth or optimise Having a formalised structure with a new used in particular jurisdictions and the their product mix. More than 80 per cent company can be a useful way to record way in which their use can affect the of those firms reported that the deals had value, hold capital and apportion liability apportionment of liability in case of met or exceeded their expectations. more accurately. It also makes it easier dispute. to assign a set of rules and regulations The study also found that the value of We have a special focus on tax, high- that all partners have to abide by. It may, the joint ventures in question grew, on lighting how the Trump Administration’s however, also expose the JV partners average, by 20 per cent per annum new corporation tax code has affected to multiple tax legislation, which can be - that's twice the typical rate for M&A JV structuring in the US and focusing on costly and complex to resolve. deals. the importance of transfer pricing legisla- An informal, contract-based structure tion and double taxation treaties. Why then do more companies not use might be better suited to partners who JVs on a regular basis? The answer is The feature draws on the expertise of IR are less familiar with each other and the added complexity and potential risk Global members from ten jurisdictions - aren’t ready to commit capital, time and involved in bringing multiple parties including Spain, UK, US, Brazil, Germany, people to a formal arrangement. In some together in such a way, particularly Slovakia, New Zealand, Iceland, Belgium cases, it may be more difficult to appor- across borders when different cultures and Cyprus. tion liabilities under these arrangements, and legislation can add to the challenge. but the contract can be drawn up to

The View from IR

Thomas Wheeler Each discussion features just one represent- Founder ative per jurisdiction, with the subject matter Our Virtual Series publications bring together a chosen by the steering committee of the rele- number of the network’s members to discuss a vant working group. The goal is to provide different practice area-related topic. The partic- insight into challenges and opportunities iden- ipants share their expertise and offer a unique tified by specialist practitioners. perspective from the jurisdiction they operate in. We firmly believe the power of a global network This initiative highlights the emphasis we place comes from sharing ideas and expertise, on collaboration within the IR Global community enabling our members to better serve their and the need for effective knowledge sharing. clients’ international needs. irglobal.com | page 3 Virtual Series | Collaborations Across Borders

BRAZIL BELGIUM ICELAND Adriano Chaves Stéphane Sigurbjorn Partner, CGM Advogados Bertouille Thorbergsson  55 11 2394 8910  [email protected] Partner, Everest Law Honorary Director, TCM Group

Adriano Chaves specialises in M&A, corporate  32 2640 4400  354 5527500 law, finance, foreign investments, technology  [email protected]  [email protected] and contracts. He graduated from the University Stéphane Bertouille has a law degree from the Sigurbjorn Thorbergsson graduated from the Law of São Paulo in Brazil (1995) and concluded his University of Louvain, a licence in Economies School of the University of Iceland in 1991. He LL.M. at Columbia University School of Law in from the same institution, and a LLM in Corporate was admitted to the Icelandic Bar Association in New York (1999), where he was a Harlan Fiske law from New York University. 1994 and to the Supreme Court in 2009. Stone Scholar. Adriano is recommended by repu- table publications (Chambers Global, Chambers He started his own law firm, Bertouille & Partners, His main areas of practice are international trade, Latin America, Leaders League, LACCA, Análise in 1991. In 2005 the firm merged with Lawfort cross-border litigation, and creditor rights. From Advocacia). and joined Everest in 2007. He is now managing spring 2003 until spring 2015, Mr. Thorbergsson partner of Everest. was elected to various positions within TCM Adriano is co-rapporteur of the task force on B2C Group International Ltd. To the position of director Stéphane practises international tax law, tax liti- General Conditions of the Brazilian Chapter of from 2003 to 2007, of marketing team member gation, corporate due diligence and transactions the Commission on Commercial Law and Prac- from 2004 to 2006, and of managing director and corporate finance. He has published on tice (CLP) of ICC, and a member of the Commis- from 2009 to 2013. sion of Law Firms of the Brazilian Bar Associa- these topics. Stéphane is fluent in French, Dutch, tion, São Paulo (OAB/SP) English. As recognition for his outstanding contribution to the group and his steadfast promotion of inter- Everest is a law firm specialised in legal services national referrals and trade, Mr. Thorbergsson for businesses and corporations. Everest is was appointed Honorary Director of TCM Group comprised of a team of lawyers, each highly in 2015. specialised in those fields of law with which companies are faced on a daily basis.

irglobal.com | page 5 NEW ZEALAND U.S – WASHINGTON, D.C. GERMANY Mark Copeland William Shawn Dr Markus Managing Partner, Mark Co-Managing Partner, Copeland Lawyers ShawnCoulson Steinmetz

 64 7 345 9050  202 331 2300 Partner, Endemann.Schmidt  [email protected]  [email protected]  49 89 2000 568 50 Mark Copeland is a senior New Zealand commer- Bill Shawn is partner in ShawnCoulson, LLP, a  [email protected] cial lawyer. He is the founder and principal member of the ShawnCoulson international alli- Dr Markus Steinmetz has worked for Endemann director of New Zealand full-service commercial ance of law firms in Washington, Brussels, and Schmidt since 2014 and was a founding member and real estate law firm Mark Copeland Lawyers. London, where he is the co-managing partner, of the firm. and represents international and national corpo- Mark developed his career as a partner in rate, governmental, and trade association clients He studied law at the universities of Trier and top-level, award-winning corporate, commercial in litigation and commercial matters throughout Munich, achieving his MBA from the FernUniver- and specialist property law firms in Auckland and the U.S. sitat in Hagen. He was awarded a scholarship by Rotorua. He has acted for a wide range of clients, the German National Merit Foundation (Studien- from private individuals too government entities He is a past participant in the U.S. Federal stiftung des deutschen Volkes) and is an Assis- and major international corporations, advising on Government’s Attorney Honors Program, holds tant Professor at LMU Munich (Prof. Dr. Lorenz all aspects of commercial, agri-business and real the “AV Preeminent” peer rating by Martindale Fastrich) estate laws. Hubble, and was named a “Top Rated Lawyer in International Law & International Trade” by Amer- He began his legal career with Linklaters, working Mark is a Chartered Member of the NZ Institute ican Lawyer Media and Martindale Hubbell. as an attorney in Shanghai and Munich, before of Directors, a member of the Rural Panel of the moving to SEUFERT RECHTSANWÄLTE. He Arbitrators & Mediators Institute of New Zealand Bill has tried over 100 bench and jury trials and became a partner with Endemann Schmidt in (AMINZ), a director of several companies and a arbitrations in Federal and state courts and agen- 2017. past member of the Advisory Board of the Bank cies throughout the United States on privacy, of New Zealand for the Central Plateau Region. professional ethics, sanctions, and discovery He is a licensed specialist for corporate and issues, a number of which are reported in commercial law, focusing on M&A, Commer- Mark is the Vice Chair of the Legal and Ethics published opinions. He is the co-inventor of US cial and Corporate Law, Private Equity, Venture Committee of the International Paralympics Patent No. 9,621,539, Method and Apparatus for Capital, Bankruptcy and Liquidation and Labour Committee based in Bonn, Germany, immediate Securing the Privacy of a Computer Network, a Law, specifically Works Council Constitution Past-President and Chairman of Paralympics New secure, algorithmic means of complying with the Zealand and the Chair of the Sir Edmund Hillary EU Privacy Directive and its forthcoming Regula- Outdoor Education Centres of New Zealand tion counterpart. (Hillary Outdoors).

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CYPRUS SPAIN ENGLAND Soteris Flourentzos Bosco de Gispert Alex Canham Managing Director, Soteris Segura Partner, Herrington Carmichael Flourentzos & Associates LLC  44 1189 774 045 Partner, Grupo Gispert  [email protected]  357 25 107242  [email protected]  34 93 459 40 71 Alex specialises in co-ordinating, structuring and  [email protected] advising on corporate transactions and regularly Soteris Flourentzos is the founder and managing advises clients based in both the United Kingdom director of Soteris Flourentzos & Associates LLC. Bosco graduated in law from the University of and internationally on mergers and acquisitions, Soteris has 14+ years of broad corporate and Barcelona in 1998 after studying for a year at joint ventures, restructurings and corporate re-or- financial law experience, including nearly nine Universittà degli studi di Bologna. He joined the ganisations. years at two prominent Cyprus law firms, where bar of Barcelona in 2001, and, after working for he represented major multinational corporations, a few months in Scottish Legal Firms, he joined A solicitor qualified admitted to the Supreme financial institutions and private equity firms in Grupo Gispert in 2000, finally becoming a Court of England & Wales, Alex offers pragmatic contentious and non-contentious corporate and partner of the firm in 2014. and commercial solutions to clients both looking financial law cases of great magnitude and scale. He works mainly on Commercial and Litigation to invest in the United Kingdom or to export their services or expand into new territories around the Before executing his vision of building his own affairs and has played a determining part in globe. law firm with a new, innovative business model to major bankruptcy cases (Spanair, Clínica Sant accommodate the needs of international equity Jordi, Cromosoma, Joventut de Barcelona), Recent work includes, advising on an invest- firms, entrepreneurs and family offices, Soteris in addition to his interventions in various debt ment of in excess of GBP 5,000,000 in a private was a partner at Soteris Pittas & Co. restructuring cases. renewable energy initiative, negotiating favourable secured protections for a junior lender. Soteris holds an LL.B. (Hons) Law and an LL.M. In terms of corporate law, he has dealt with International Business Law from the University of cases involving M&A, due diligence, competition, Advising senior stakeholders on the issue of Exeter, UK. partner separations and conflicts in corporations, further loan note securities to raise finance for a both in court cases and settlements. major acquisition in the financial services sector.

He is a member of the Barcelona Court of Arbi- Advising banks and private lenders on struc- tration and the Madrid Chamber of Arbitration. tured and tiered debt solution, and drafting and negotiating inter-creditor arrangements and deed of priority/subordination.

irglobal.com | page 7 SLOVAKIA U.S – TEXAS Andrea Vasilova Donald R. Looper Partner, VASIL & Partners Partner, Looper Goodwine P.C.

 421 220 906 400  1 713 335 8602  [email protected]  [email protected]

Andrea Vasilova was admitted to the Slovak Bar Donald Looper is a tax lawyer whose practice Association in 2003, following graduation in focuses on project finance, project development, commercial law and traffic policing at the Police and structuring partnership, corporate, and inter- Academy of Bratislava. national transactions.

She began her legal career in 1999, working as His skills for structuring and managing interna- an in-house lawyer for IPEC Management Ltd, tional business transactions have resulted in his one of the biggest property developers in the being selected by clients to manage international Slovak Republic. projects negotiated in 36 foreign countries and across the United States. She was as associate lawyer with business consultancy ES Partners for two years, before U.S. clients utilise his tax and project manage- joining Vasil & Partners in 2004. VASIL & Part- ment skills to navigate treaty issues and manage ners is a unique Slovak law firm as, in addition to acquisitions in foreign countries, including super- Slovak and Czech law the firm deals with English vision of local lawyers and accountants, tax law. reporting, and contracting.

Andrea graduated from the Economic University Among his areas of experience are U.S. and in Bratislava in the faculty of General Economics, U.N. regulatory sanctions against foreign jurisdic- specialising in finance, banking and investments. tions and designated nationals. The 1994 case of Looper v. Morgan, upholding his measures to protect client privileged work product and communications, stemmed from Don’s legal role managing an international refinery and marketing acquisition while complying with international sanctions against Libya.

Don enjoys a close working relationship with executives and GCs, representing public and privately held companies and private equity funds in a variety of industries. In addition to his representation of upstream and midstream energy companies.

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QUESTION 1 – STRUCTURING JVS ACROSS BORDERS What are the most common ways to structure an international joint venture involving your jurisdiction? Any important challenges or opportunities that should be highlighted?

Spain – Bosco de Gispert Segura fulfil these requirements, but by uniting At the other end of the scale you can (BDG) There are three ways to struc- two companies this is often easier to create a new vehicle to house a JV, with ture a JV in Spain and choosing one achieve. Companies joined together equity stakes taken by each party. You of them will depend on the purpose of under this UTE umbrella receive special have a separate body with rules and the JV. The first involves creating a new treatment under Spanish law, so it is regulations and compliance. It allows company. If two companies are willing to a common way to set up a JV when parties to hold assets centrally in the start a business together, they create a working with pubic authorities in Spain. form of stock, IP, equipment, or staff and third company in Spain and this company they can run it as a separate business Another option would be the so called AIE is owned by the others in a 50/50 or function that is perhaps not part of the (Agrupaciones de Interés Economico), a any other agreed arrangement. This day-to-day business of its owners. temporary union for the private sector. company is the one that performs the The more common approach in interna- business and there are tax implications England – Alex Canham (AC) In the tional projects is more formal, because and contractual issues to be dealt with in UK, one of the main questions I ask people like having a central vehicle in Spain. It normally requires a sharehold- when looking at international joint which they have an equity stake and a er’s agreement to regulate the rights and ventures (JVs) is what is the purpose? Is set of rules and regulations that govern obligations of each party. it a management JV designed to share the project. information, or an output JV designed The second way is participation in busi- to deliver a product or service based With an informal arrangement, it might ness between two companies by means on skill sets the parties want to bring just be a revenue stream, but a central- of a contract. Both companies put together? That will dictate the type and ised vehicle allows both parties to record forward capital or knowledge towards structure of JV that the parties end up the profits / revenues from the project, the success of the business, but they using. the funding received and the apportion- do that without the need to set up a new ment of liabilities and risk. It also ring- structure in Spain. It is essential to set up There are a variety of different models fences it from the rest of the business, the relationships between the parties and available for use in the UK. There is a meaning a specific value can be more to try to foresee and prevent all possible formal JV which uses a limited liability easily proscribed, helping any potential situations to avoid future conflicts. company (Ltd), or a traditional unincor- future sale. porated partnership (LLP) as the vehicle. The third way is most common when it There are also collaboration JVs, which What we tend to see on the international comes to public contracts. In Spain there are more informal with no central entity, side of things, is a lot more projects is a special purpose vehicle called the and are really about people coming designed to generate a capital value. Unión Temporal de Empresas (UTE), together with a series of contracts to work Both parties come together with skills which is a temporary union of compa- together and provide an output through and experience and services to run as a nies. their existing business structure. This is standalone business, and doing this on For some public contracts, you need to more of a knowledge sharing arrange- an informal basis makes apportionment fulfil very specific of requirements, which ment, rather than a centralised business, of value harder. can be difficult to accomplish. Govern- and involves a collaboration agreement Germany – Markus Steinmetz (MS) I mental bodies want contractors for work or a contract which agrees that particular can underline a lot of what Alex already such as building motorways, airports information, skills or knowledge will be said. With regard to structures, it will or train stations to meet certain criteria, shared or used in a particular way. In depend on who the JV partners are. such as previous experience, specific some cases this forms the basis of an As an example, in the case of the phar- numbers of workers and revenue thresh- unincorporated partnership, depending maceutical industry, when a new drug olds. Individual companies don’t always on the terms.

irglobal.com | page 9 is established they need a partner to matter, the terms and conditions of the type of contract which is appropriate for execute clinical studies in several coun- JV. An IP JV, used for passive licensing, specific projects, with a definite term of tries. is different to a manufacturing JV, which duration. is an operational entity. The pharma company will often create a To define the best structure, it is impor- formal JV with a provider who executes There are also some circumstances tant to understand the purpose of the the studies. This is because the pharma under which a JV will not work. In an project and what is to be developed. We company needs a lot of confidence in IP relationship, it may be that a cross-li- need to know what the parties want to the other party, since they are from a censing arrangement would work better achieve, their respective contributions different industry with different standards than a complicated or expensive entity and their rights. around issues like confidentiality. created to house the IP in a joint venture. However, it would be fair to say that, if A lot of highly confidential information Another question would be, what are the the project is to be developed in Brazil, about subjects is provided to this firm, rights of the joint parties, and do they cross-border joint ventures commonly which engages university hospitals for want a public or private vehicle? Special involve the creation of a NewCo. Among trials, and leaks could be very damaging. purpose vehicles (SPVs) are established the reasons for favouring this choice of to accomplish specific things. structure is the fact that Brazil has strict Another example of this is engineering currency exchange and import controls, companies, particularly suppliers to the The most common private entity is a C and a complex taxation system, and a automotive industry. Foreign companies corporation, which is particularly attrac- NewCo makes it easier to address those from China, the US or Canada who are tive given new tax legislation. From there challenges. engaged in the same area, will form JVs we can go to a partnership or a limited with German firms. This happens a lot partnership depending on the number of Among the disadvantages of a NewCo with electric cars and battery technology. parties involved in the JV. are the more complex shareholding and corporate governance structure, the need Formal JVs makes sense to share mutual The choice of entity is driven by what the for more elaborate exit strategies, and a knowledge to help each other. We often clients are trying to achieve and what more complex approach to the intellec- find that a foreign company will buy the best means are for achieving that. tual property of each group involved. shares in a German entity and vice versa, In China, for example, statutory struc- to enhance the mutual participation. tures mean there are a number of things NewCos are more commonly established mandated by law. as corporations or limited companies – England – AC The concept of holding sociedades limitadas. Corporations tend shares is a significant one, particularly if There is limited flexibility and often 51 to be adequate vehicles to implement the party investing is a junior partner. It per cent Chinese ownership. If a US firm complex joint ventures, as they have allows them to feel they have a tangible wants to penetrate that market they need features that can better accommodate direct interest in the project, rather than a JV partner, and that’s been a point of the interests of joint venture partners or just handing over IP, funds or information. contention with the Trump Administration. minority shareholders and allow more They have something in exchange for all It is not clear whether or not IP has to sophisticated funding strategies. Despite that knowledge, effort or resource they be handed over to the senior Chinese this, sociedades limitadas present are providing. partner in the joint venture. the advantage of being simpler, less Also, in regulated sectors like pharma, This is also the case in Iraq, where expensive to maintain and, to a certain having that centralised JV allows appor- there are statutory requirements for a extent, more confidential with regard to tionment of risk and liability and clarifies local partner. You better pick the right company information. which party is responsible for dealing one though, since there are all kinds of As regards contractual joint ventures, with regulatory and compliance issues. money laundering and corruption issues they tend to be easier to implement and there that need to be closely watched. If you have a JV in those sectors, we terminate, but they may not be apt to find that, unless you are going to seek A JV is a lot like a marriage, there is address some of the challenges of the a direct authorisation for the JV, you are excitement at first, but it has to make Brazilian legal environment. To illustrate, relying on one of the parties providing a sense to last over the long-term. a “silent partnership” (sociedade em regulatory umbrella. conta de participação) between a foreign Brazil – Adriano Chaves (ADC) Gener- entity and a Brazilian entity will not be Washington D.C. – William Shawn (WS) ally speaking, it is possible to estab- able to register the foreign investment I think one of the real critical questions lish a joint venture in Brazil through the with the Brazilian Central Bank, thus to ask, as we have heard, is what’s the opening of a new entity (NewCo) or making it impossible for the Brazilian purpose of the JV? Until we understand through agreements, including by means entity to remit dividends or repatriate that, it’s really difficult to determine the of a ‘consortium agreement’, a specific funds abroad. A solution to this would choice of the proper entity and, for that

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be to establish a local subsidiary of the form of unincorporated contractual JV, a business venture or achieve a common foreign entity, which would then establish and applies if no specific choice has objective, and typically have a formal the silent partnership with the Brazilian been made by the parties. agreement detailing their rights and entity. obligations with respect to each other The temporary company (société and third parties. Profits and losses flow A ‘consortium agreement’ is available for momentanée/ tijdelijke vennootschap) is through to the JV parties themselves, specific projects and can be very helpful, used for specific projects in the building and are treated according to the relevant particularly if the customer accepts to industry or for research purposes in the JV party’s tax status. pay each party to the consortium sepa- context of bidding or tender processes rately and directly (for their respective for the time required to complete the An unincorporated JV can be attractive contribution). It is typically used for the project. to lenders, who can maximise their tax supply of services and goods in case of deductions and who may have concerns The corporate form with limited liability is large projects that have a definite period about a JVCo’s ability to pay dividends. often preferred over a purely contractual of duration, including infrastructure and Another key and beneficial difference is arrangement or the choice of a company other governmental projects. that UJV partnerships are not subject in which one or more JV partners have to the taxation loss limitation rules that It is also common to see a combination unlimited liability. However, these limited apply to LPs, permitting the UJV parties of the different structures, in which case companies are subject to publication to claim full deductions for all tax losses a NewCo could have several intercom- requirements such as annual balance attributed from the UJV partnership in an pany arrangements with its shareholders sheets, articles of association and income year. and their affiliates. notarial deeds, which add extra cost. A Limited Partnership (LP) is a separate Iceland – Sigurbjorn Thorbergsson New Zealand – Mark Copeland (MC) legal entity which must have at least (ST) Joint venture can be set up in Until quite recently international JVs in one general partner (GP) responsible Iceland in almost any form of corporate New Zealand were routinely structured for management, at least one limited structure, but most commonly the parties as either incorporated or unincorporated partner, and a private partnership agree- involved prefer to use a limited company ventures. However, in 2007, in response ment. Commonly, each JV party will be or private limited company to formalise to calls from international investors for a a limited partner, contribute capital to their cooperation and risk control. Joint more flexible and tax-efficient option, the the LP and hold shares in the limited ventures are subject to merger control New Zealand Government introduced liability company GP in proportion to and need to be reported to the compe- limited partnerships as a further JV struc- their respective interests. tition authority when of a larger scale. turing option. Iceland´s corporate income tax is one of A Limited Partnership affords more These three structures remain by far the the lowest in Europe. privacy to the offshore investor parties most commonly used JV arrangements than a JVCo. The Limited Partnership Belgium – Stéphane Bertouille (SB) in New Zealand. Agreement and details of the limited Joint Ventures in Belgium can take An incorporated JV involves registering partners’ respective investments may various forms, depending on the option a limited liability company (JVCo). The be kept private (although the details of of the parties and the purpose of the JV, JV parties are the shareholders, appoint the GP will be public). Probably the key which can be either purely contractual or the JVCo directors, and will often enter benefit of an LP is that, while governed in the form of a corporate entity. into a shareholders' or formal JV agree- like a company, it is taxed in a similar The corporate entity is often a separate ment. With a separate legal personality, way to an ordinary partnership. legal entity with limited liability for its the JVCo can own assets, enter into LPs are treated as transparent for New partners. The most common forms are contracts, incur obligations and liabilities, Zealand income tax purposes, generally the public company (Société anonyme / make profits and suffer losses. allowing income, gains and losses of the Naamloze vennootschap) and the private A clear advantage of an incorporated JV LP to flow directly to the limited partners, company with limited liability (SPRL/ is that, generally, liability for the JVCo’s whose personal tax status will govern BVBA). It can also be a company with debts and obligations is limited to the how they are taxed. Limited partners no limited liability for its members, which JVCo. A JVCo also provides flexibility that are not tax resident in New Zealand does not constitute a separate legal iden- of ownership, as JVCo shareholders may be able to receive a credit in their tity with a legal personality. can generally easily transfer or acquire home jurisdiction for any tax paid in New Other forms of JV include the general shares without disrupting the business. Zealand on income derived from the LP. partnership (société de droit commun/ With an unincorporated JV (UJV), the Texas – Don Looper (DL) Things have maatschap), which is the most common JV parties make different contributions changed a lot for the US with the new tax through their existing structures to create code enacted in Dec 2017. What char-

irglobal.com | page 11 acterised the structuring of US compa- Slovakia – Andrea Vasilova – (AV) In Slovakia – AV In Slovakia we have a nies doing business abroad before that Slovakia we also use either a contractual minimum registered capital require- date, was the extremely high corporate or corporate JV. Corporate JVs are most ment of EUR 5,000 for a limited liability tax rate in the US - one of the highest in common, either in a form of a joint stock company and EUR 25,000 for a joint the world. company or limited liability company. stock company. Since 2017, we have An LLP may be used too, but the most had a new type of joint stock company The business of structuring businesses popular is the joint stock company. JVs called the Simple Joint Stock Company, abroad was focused on deferring the are used mainly in start-ups, or when a where just 1 euro of share capital is repatriation of income back into the US partner is looking for an investor to fund needed. to avoid the high tax. a particular project. Germany – MS We do have that in Companies would try to keep a lot of My clients usually prefer a corporate Germany, but it is not allowed to pay that income overseas, so if they did JV rather than contractual because it is out profits until the company has EUR have to invest in new ventures abroad, more formal, and if they hold the shares, 25,000 of capital. that money would not come from the US. they can make sure they participate. The change in tax law, especially with C Slovakia – AV The Simple Joint Stock Contractual JVs are often used like a corporations, has made it more attractive Company was established mainly for kind of a letter of intent, in that they start to do business from the US. If a US C start-ups, because EUR 25,000 can be the process, but may end up as a corpo- corporation is engaged in activities such difficult to raise at the beginning. rate JV eventually. as selling services abroad, it can now England – AC We often see parties be taxed as low as 13.25 per cent. This For example, we have a client developing loaning money into a JV. They put a means we are looking to structure deals a new technology. The client was looking pound in each of actual capital and loan directly from the US, while before, we for equity investment to set up a corpo- the balance, taking security of the assets would look to set up a JV company with rate JV with a foreign investor, but still in the company. This reduces financial a branch or subsidiary of the US parent wanted to keep more than 50 per cent commitments, if a company doesn’t want in the country where they were doing of the shares. Because the client did not to sign up to a high level of share capital. business and then have the income want to relinquish any more shares, he parked in an offshore company. funded the project via grants, euro funds Cyprus – Soteris Flourentzos (SF) No and other strategic partners. The client specific statute governing joint ventures The new tax law has served its purpose, recently found four million euros of extra exists in Cyprus, however, in practice, but some European countries have been investment, but not via a JV because there are four ways to structure interna- up in arms that this tax code is an effec- he didn’t want to lose control of the tional joint ventures (JVs). tive export subsidy for US c-corps. We’ll company. see how that works out. Corporate JVs usually use a private Germany – MS Often, with start-up limited company, separate from the Sharing in the structure of the ownership companies, it’s just business angels participants, set up under the provisions of a JV will often depend on the different interested in the financing part of the of the Cyprus Companies Law, Cap. 11. classes of stock, and the skill is in the company, but not in the knowledge or Its operations are specified by its Memo- determination of the rights of preferred development of the ideas. randum and Articles of Association, stock. When we do business with compa- supplemented by a shareholders’ agree- nies in the Middle East, there is a strict When the start-up becomes established, ment, and any other necessary collateral partnership with local entities, so the way then the big strategic players in the agreements with regards to, inter alia, the we devise shareholder agreements is market become interested, and a JV can use of intellectual property rights owned key. Even though you give the nominal make that work. It also allows the seed by the participants. amount of ownership required by statute, investors to exit. you ned to make sure the realities of that This structure is usually more appro- England – AC are there minimal capital ownership reflect the actual investment priate where it is aimed to establish requiremenrs for a JV in other jurisdic- and participation of the partner. and conduct a new separate business tions? involving contractual interaction with third Germany – MS It is interesting working In the UK, public-limited companies have parties for profit-making purposes, due with German companies investing in a £50,000 minimum requirement, but not to the limited liability benefits. China. Chinese regulations are tough a private limited company. and you need a JV for a Chinese invest- The partnership is an unincorpo- ment. They are reforming this law from Germany – MS There is a minimum rated form of cooperation subsisting 2022, but for the time being you need a share capital requirement of EUR 25,000 between not more than 20 natural or Chinese JV to start a project. euros in Germany. legal persons, carrying on business in common according to the provisions

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Andrea Vasilova pictured at the 2018 IR ‘On the Road’ Conference in Toronto

of the partnership agreement drawn Contractual JVs are usually used in the is expected that a new Belgian Company between them. It can either take the form contexts of tenders, both public and Code will enter into force on the 1st of of a limited or a general partnership, and private. Specifically, in Cyprus, such January 2019, designed to abolish this its form determines the liability of each JVs have been widely used for large minimum share capital requirement. partner. construction projects where apparent The minimum share capital to establish costs and risks are high. Any business assets and intellectual a JV by way of a public company is set property contributed by any party, unless European Economic Interest Groups at EUR61,500. otherwise specified, becomes the prop- (EEIG) are established by Council Regu- Second, there is a withholding tax erty of the partnership. lation Number 2137/1985, this struc- applied to foreign investors that is ture is defined through a contract made Partnership JVs are usually best suited generally calculated on the gross sales between the participants, who have for cases where two or more parties wish proceeds if the foreign person sells the unlimited joint liability for the debts and to conduct a business on a lasting basis property. The withholding tax is also liabilities of the EEIG, unless expressly and in close cooperation; thus, they are applied to rents received. Withholding excluded, and appoint the managers of usually set up amongst professionals tax is imposed at the federal level and the EEIG. rather than for large-scale commercial sometimes at the state level. operations. A duly registered EEIG may acquire, in Third, there is an inheritance tax if a its own name, obligations and rights of A contractual JV is an unincorporated foreign individual dies while holding all kinds. However, unless it has legal form of cooperation with no separate US property. Real estate and interests personality, it cannot have assets and legal personality, materialised through in US entities holding real property are liabilities separate from those of its partic- a contractual agreement amongst the considered as part of the US tax estate ipants. EEIGs are usually used by small- participants. Such JVs do not involve of a foreign individual, which is taxed at er-scale specialised sector companies the conduct of business in common and a rate of 40 per cent of the value over and professionals wishing to generate a the participants remain autonomous, USD60,000. larger international market profile. with distinct roles, as these are clearly The fourth tax, is an annual property tax set out in the agreement, which must be Belguim – SB The minimum share applied on the state and local level, not comprehensive and detailed. capital required to establish a JV by the federal level. In California, this is 1 way of a company with a legal person- The venture may acquire rights and liabil- per cent of the assessed value based ality in Belgium, depends on the form. ities as a single entity. However, unless on the value at date the property was

otherwise agreed, any business assets acquired or improved. In other states, the A private limited liability company and intellectual property remain the prop- assessed value is often adjusted annu- requires EUR18,550, of which EUR6,200 erty of the participant who contributed or ally. Typically, this tax is passed on to the needs to be paid immediately at the developed them. tenants as a component of rent. constitution of the company. However, it irglobal.com | page 13 SESSION THREE - IDENTIFYING AND APPORTIONING LIABILITIES How are specific joint venture liabilities and disputes dealt with in your jurisdiction? Any examples?

England – AC On the liabilities front, Slovakia – AV If you have a corporate Slovakia – AV In a partnership agree- the central JV company is a great tool JV, you follow the law. If there is a liability ment you can agree a ratio of distribution for apportionment of risk and liability towards a third party, the shareholders/ for project liability. It doesn’t matter if the because all the risk of the JV is taken partners of the limited liability company other partner has less shares. through the vehicle. Each party provides are liable only within the unpaid contribu- England – AC That goes further than resources or staff to that company and it tions which are registered in a commer- we go in the UK, since the profits from is taking the risk. cial registry. The shareholders of joint a limited company would typically flow stock company do not bear any liability If the JV fails or incurs a liability, in the by reference to shares unless you have for the obligations of the company. The absence of parent or cross-guaran- a different class of shares. limited liability company and the joint tees, the liability is with the JV vehicle. stock company are both liable with their Germany – MS It’s always difficult for Everyone likes it, because they are not entire property for any breach of their JV partners, if one is interested in the directly liable for something they are not obligations. On the other hand, there is knowledge of the other, then it’s clear fully in control of. If the JV has a direct liability among the parties, which is why that the partner providing knowledge will liability to a third party, then it is appor- we have contractual freedom in joint not have to provide such a significant tioned between the various JV partners, stock contracts or corporate documents. financial investment. In Germany there according to clauses within the articles are often provisions in the JV agreement of association. England – AC Does a particular party allocating profits and finance, based on take a lead on the liability? If you have three partners with a share different commitments. in the JV, you can contractually say that Slovakia – AV The laws of Slovak Spain – BDG Liabilities will depend on each will be responsible for a certain republic provide contractual freedom on the activities of the joint venture or the amount of risk. On the informal side of this. There is a liability regulated by the new company. In Spain, we have a strong things, in a contractual relationship, there commercial code, but among the part- and restrictive legislation around labour is a direct liability to the main trading ners there is a lot of contractual freedom accidents with regard to the liability of business. applicable, since, there is no specific members of the board. legislation regulating joint ventures in JVs are about exploitation of a piece of Slovakia. The legal terminology from If the company is involved in a risky knowledge or equipment, or something corporate law does not define such activity where a labour accident might novel and untested. There is risk asso- terms explicitly. happen (e.g. construction), they need ciated with that, so having a central to be aware that the liability may skip company is really useful. England – AC That’s helpful from a JV from the company to the members of the perspective, because no two are the Germany – MS Regarding liability, it’s board. same. International or domestic JVs a bit simpler if you have a JV company are all designed on different terms. It One of the things I recommend in a JV is established for the JV project. It is impor- depends on what exactly the project an insurance policy to cover the liability tant to clarify which liabilities this vehicle is, the attitude to risk, who’s providing of members of the boards, since, in some will take on, so it’s then only a question the funding, and who’s providing the cases, the liability could be criminal. of financing for the shareholders or part- services or the balance of that between ners. If you don’t have your own entity As far as other liabilities are concerned, the two, three, four, five or six parties that to execute the JV project, then it can the JV has a limited liability, except when are involved. be very complicated to define the exact it is a temporary union (UTE) or an AIE. liabilities assigned to the project and We have got a very flexible legal frame- In that instance, all the partners are those assigned to the JV partners. work that is recognised in the same way liable for all the debts of the company. as the Companies Act in the UK. A JV is The general rule is limited liability for a England – AC That follows for estab- a limited company that happens to have company with the partners and board lishing profit and loss, rather than money multiple shareholders doing a project members only liable when they neglect flowing directly into the existing company together, so there are no restrictions labour accidents or some other specific and causing problems around extrapola- around obligations or liabilities. cases. tion of that data.

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Arbitration is the most common form of Brazil – ADC If a NewCo is created, New Zealand – MC Under an incorpo- dispute resolution between members of in principle the liabilities relating to the rated JV arrangement, shareholders in the JV, particularly when some of the implementation of the project would be the JVCo do not owe fiduciary obligations members are foreign. The arbitration will first attributed to the NewCo. Corpora- to one another, although a shareholders' normally take place in a neutral country, tions and sociedades limitadas afford the agreement can impose fiduciary-like being Paris or London the most common limited liability protection to shareholders, contractual obligations. Again, liability arbitration courts. but there are several exceptions provided for the JVCo’s debts and obligations is by law, particularly environmental, anti- generally limited to the JVCo, protecting Washington, D.C. – WS From the US trust, anti-bribery and consumer laws offshore shareholders and directors (and perspective, I think we first have to and labour case law, in which share- their assets). consider what the purpose of the entity holders may be personally liable. This is. If we are dealing in a high liability Although shareholders may be asked should be analysed on a case-by-case area, such as offshore oil drilling that’s to guarantee the JVCo (for example to basis, in light of several factors, such as one issue that may have a lot of labour secure funding) which can reduce the the field of activity. To address such risks liability or exposure. Once we know that, limited liability protection provided by at the NewCo level, the parties usually the first order of business is in struc- the JVCo, in our experience this rarely resort to insurance, corporate govern- turing the allocation of responsibilities outweighs the benefits of using a JVCo. ance measures and compliance policies. and liability, to include defence, indem- In a Limited Partnership the GP’s nification and hold harmless provisions A contractual joint venture allows the liability is unlimited and joint and several between the parties. If one makes a segregation of liabilities in a more with the limited partners - but usually mistake, the other is defended from the straightforward manner, but this does not residual after the LP's assets have been consequences of that mistake. Once we necessarily prevent the involvement of exhausted. Given this exposure, a GP is structure something well from a legal one party in liabilities or litigation origi- usually a limited liability company with standpoint to insulate the liability, then nated by the other party. nominal share capital. Limited partners insurance comes in as an important Therefore, in both cases, it is crucial to enjoy limited liability provided that they ingredient. have clear indemnification provisions do not take part in the management of We also look to see if the JV should and a good dispute resolution system. the LP (subject to certain exceptions be onshore or offshore. As Mark indi- There is a tendency for parties to choose allowing strategic control), which can be cated, the new tax legislation has made arbitration over judicial courts, as the particularly attractive to offshore and/or it attractive to bring the JV onshore, but court system in Brazil is subject to a lot passive investors. if we have concerns around issues like of red tape, the conclusion of lawsuits In an unincorporated JV that is not a part- anti-trust or consumer liability, we may may take years, and many judges may nership (see above), the JV parties keep want to keep the JV offshore to insu- not have the specific expertise required their respective businesses separate - late it through distributorship and other for the technical resolution of certain although they may, for example, jointly means, to avoid liability. We can then disputes. However, the fact that arbitra- use assets and facilities - and share keep lawsuits out of the US and force tion tends to be much more expensive costs up to the stage of production or claimants to go abroad. and does not allow the parties to appeal output. For tax purposes, a UJV which leads some companies to opt for the Insurance depends on the client’s budget is a partnership is broadly similar to that court system. This analysis should be and the risk factors, but it is one of the of LPs as discussed above, with UJV made on a case-by-case basis, in light of first things we look at, to see if there is partnerships treated as transparent for the complexity of the joint venture and of coverage and what the price might be. liability and tax purposes. Unless agreed the amounts involved. We don’t have quite the same type of otherwise, each JV party collects profits exposure for officers and director and More recently, mediation is becoming a for its own separate account and retains individual liability as in Europe, but, as a new trend, to be exploited prior to the ownership of its property. public company, we have a duty to share- beginning of an arbitration or judicial No matter which kind of JV structure holders and the best insurance coverage lawsuit. is used, where a JV is formed in New is a first step to establishing a good JV. In any event, if the JV project is to be Zealand its actions will typically be Spain – BDG I have to say that these developed in Brazil, we usually recom- subject to the laws of New Zealand contractual clauses between JV part- mend the parties to elect Brazilian law where a dispute between the JV parties ners are now more common in Spain, as the governing law and a city in Brazil arises. However, JV parties are also because of the influence of US and UK to be the venue for arbitration or court generally free to agree a different dispute lawyers. It only covers liability internally resolution, as this is more efficient from resolution place and process (e.g. arbi- though, not with a third party. an enforcement perspective. tration in Singapore) if this is considered

irglobal.com | page 15 more appropriate, and this is becoming national contracts do typically go with arbitration and mediation service that much more common in JV agreements arbitration rather than select a jurisdiction gives the benefit of arbitration without with international reach. and judicial process outside the US. the costs.

Texas – DL A lot of the issues identified This is always a major issue in a JV. Texas – DL The courts will often mandate are issues we face in the US as well. arbitration and mediation, but operated Belgium – SB If the JV is structured by Going back to the new regime of interna- through the court system it is far less way of a corporate separate legal entity tional structuring of businesses through expensive. with limited liability, the liability of the the US, the ability to do business directly JV towards third parties is limited to the I would add that the really large law firms from the US, means that a lot of the work assets of the JV. Creditors of the JV are have created somewhat of a monopoly done abroad in JVs are via contracts. not creditors of the shareholders. There- on the international arbitration process Before the changes, it was done through fore, they cannot reach the personal by being the participants in the organisa- ownership and partnership abroad, in a assets of the shareholders. tions that select the panel of arbitrators. foreign jurisdiction that was tax favour- They are picked on a system of points, able. A JV agreement may not provide that so if the country of Spain is selecting a shareholder can participate without When you have common ownership, counsel or arbitrators, they go through incurring any risk or loss. Such a clause there is certain unavoidable exposure to this points process, which always goes in a contract is deemed null and void. liability from the activities of the JV, that back to people from very large law firms The basic feature of companies is that will extend up the chain to the ultimate being picked. They have a business the members participate in the profits parent in the US. The owners can allo- model for this, with prices designed to and the losses. cate risk and liability between each other, gather USD2 million in legal fees by the but that doesn’t change the exposure of If the JV is structured by way of contract, time it is over. the entity itself. the partners have direct liability, but it Iceland – ST There is no special way can be limited vis-à-vis third parties by By using contracts, you can insulate of handling disputes and ascertaining specific agreement with them. yourself a lot better, having forum selec- liability for JV in the Icelandic legislation, tion clauses in the contract obligating the Subscribing an insurance policy could and disputes not resolved by contract parties to litigate in certain courts and partly resolve the liability issue, but there usually end up in the court system. Arbi- jurisdictions, indemnification clauses and is a cost, and often a portion of the risk tration is, in general, not frequently used representations and warranties. The fact is not covered. Liability implying criminal in Iceland as a means for dispute resolu- it is at arm’s length, means you can regu- offences are not covered. tion, but when a JV partner with a major late that risk much better. stake comes from a jurisdiction where Washington, D.C. – WS I agree with it´s a common practice, it´s likely there Marcia mentioned arbitration and it Don, the real problem we see with arbi- would be an arbitration clause in the part- would be interesting to get William’s take tration is the expense. We had an arbitra- ners’ memorandum of understanding. on this, because 15 years ago almost tion in London for a JV, and within one One risk factor previously mentioned is everybody began to use arbitration to month, the legal fees were USD250,000 the aspect of competition law, merger resolve disputes. for just getting the case underway. Many control and obligation to report a major American companies are worried about Most firms that I know, other than the JV to the competition authority. the expense of arbitration. really large ones, have reverted to relying Cyprus – SF For any dispute that may on jurisdictions in the US to go to court, We often provide for arbitration under the arise involving any structure established rather than arbitration clauses, because rules of an entity like the American Arbi- in Cyprus, the District Courts of Cyprus it’s cheaper. Three panel arbitrations tration Association (AAA), but not under are the competent authority to act, have become a business and are now its auspices. The parties follow the rules unless another jurisdiction is explicitly a USD2 million expense, rather that and select an arbitration, but don’t pay stated in the agreement made between USD200,000. We advise clients to go the substantial administration costs. For the participants or the venture and any with jurisdictions in the US, because the those entities that do want to select a US third party for a specific transaction. courts are reliable and much less expen- jurisdiction, we favour Delaware because However, the parties involved are free to sive. It may take time to get there, but it it has Chancery Courts devoted to busi- choose the use of arbitration as an alter- is a known process with rights to appeal. ness disputes and usually you have native dispute resolution path, avoiding pretty knowledgeable judges who under- In arbitrations you can end up with a split the long, time consuming and expensive stand business and focus on business. result, while the legal and arbitration fees judicial proceedings. can end up being three or four times as The trend is to go to litigation and, as a much as they would be in court. On the matter of fact, many of the courts in the other hand, most clients dealing in inter- US have very substantial court-annexed

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Alex Canham pictured at the 2015 IR Annual Conference in London

It should though be noted that for the The liability in partnerships depends such risks might be mitigated if specific case of the Corporation Joint Ventures, upon whether this is a general partner- agreements excluding particular liability where constitutional documents must ship or a limited partnership. In both are reached. be submitted, if the parties desire to cases though there must be a general Belgium – SB Dispute resolution by follow the path of arbitral proceedings partner who bears unlimited liability with arbitration is of course possible under for any potential dispute resolution, then the other partners for all the debts and Belgian Law but we tend to recommend this must be specifically stated in such liabilities of the venture. jurisdictional recourse, as use of the constitutional documents. The liabilities of contractual ventures judicial system is much cheaper than Generally, liability for each of the four depend on the wording of the contract arbitration. Furthermore, in contrast to different structures that may be estab- forming the basis of the venture. As no arbitration, appeal of judicial decisions lished in Cyprus may arise in different legal personality is created, the partici- is possible without delaying the matter, circumstances. pants will bear any liability may arise as decisions in first instance are imme- according to what is specified in the diately enforceable notwithstanding The participants of a corporate joint contract. Therefore, it is vital to have appeal. venture only bear limited liability and explicit and clearly written contracts the corporate joint venture will be held However, for international disputes, arbi- setting out in detail the duties, obliga- liable separately from its participants for tration offers the added advantage that tions and liabilities of the participants. any breach. The corporate joint venture the parties can choose the language of will be responsible for any taxes due or Under an EEIG structure, the participants the proceedings, as opposed to judicial any creditors of the venture or for the will bear unlimited joint liability for any procedures in which the language of the obligations and duties arising under any debt or liability. This is the biggest disad- proceedings is determined by the loca- potential contract in which the venture vantage of these types of ventures as the tion of the court. has entered. The venture can sue and be participants are at greater risk. However, sued in its own name.

irglobal.com | page 17 SESSION THREE - TAX TREATMENT AND BENEFITS What are some of the major tax implications that international JVs need to be aware of in your jurisdiction?

Texas – DL We have done a lot of work things more advantageous internationally quences may also arise if shareholders on tax recently. The stated intend of the for moving JV entities onshore into the deal with the JVCo on non-arm's length new tax code was to pull money back US. terms. into the US and stop US companies Spain – BDG In Spain there are no There are also a number of tax limita- from going abroad. This is 100 per cent general rules, just a case-by-case basis tions on the use of Limited Partnerships. diametrically opposed to the new tariff to see which structure is better. The From a commercial perspective, income, proposals, which are driving companies general rule is that corporate income gains and losses can be attributed to out of the country. tax is 25 per cent of the profit with limited partners in agreed proportions, The tax law created a one-time repatri- some benefits for the early years of the however, from a tax perspective, partners ation tax which is very complicated. We company. There are some interesting tax are instead treated as receiving a share have just finished working through one benefits when the JV develops IP or IT, of all amounts in proportion to their part- with a Brazilian company. If you are the so called “patent box”. nership share. Exxon, it’s very easy to understand, but One thing to say is that, in this tempo- Also, while LPs are relatively flexible in if you a small company with JV partners, rary union of companies (UTE), both terms of further investment (as additional it’s a very weird and complex set of rules. the companies involved pay taxes, as limited partners can easily be added to The GILTI tax is another new tax on all if the JV didn’t exist. To decide the best an LP), introducing new limited partners controlled foreign corporations (CFCs). approach on tax terms should imply to and selling existing partnership shares to If you have a foreign company in any review the tax treatment of the foreign new partners can give rise to unexpected country, operating solely in that other company in its home country and the tax consequences. Finally, there may country, the US has changed its forever double taxation treaties that may apply. also be limits imposed by the ‘loss limi- structure by imposing this new GILTI tax, tation rules’ on the amount of deductions New Zealand – MC For Incorporated which is a 10.5 per cent tax on current that a limited partner can claim. JVs, transferring shares in the JVCo income, even if the operations are solely can have adverse tax consequences For an unincorporated JV (UJV), deciding and exclusively in another country. impacting on the JVCo’s ability to carry whether or not a legal partnership is The C-corporation tax that Mark forward tax losses and to retain valuable created by a UJV requires a detailed mentioned means that US companies imputation credits for shareholders. assessment of all the facts and relevant doing business abroad do benefit from law. Expert tax and legal advice, and a Another significant disadvantage of a a reduction in tax which results in an well-drafted UJV agreement are critical to JVCo is that any capital gains generally ultimate tax of 13.125 per cent. The ensure that the wrong UJV structure is cannot be distributed tax free to New bizarre part of that is the incentive to not inadvertently adopted. Zealand tax resident shareholders during move outside of the US. A company can the JVCo’s life, and cannot be distributed Brazil – ADC Brazil is known for having provide a service in the US and pay 21 tax free to international (non-resident) a large number of different taxes and a per cent tax, but can provide that service shareholders at all. complex taxation system. Therefore, it is outside the US via JV and reduce that to important to have a good understanding 13.125 per cent. There is a lot of corpo- Other tax consequences can arise from of the possible taxes that will impact the rate structuring going on right now, as a the transfer of assets by the JV parties joint venture in different scenarios before result of the new tax act. into the JVCo – for example, an asset structuring it. which has increased in value since it Washington, D.C. – WS The tax issue was acquired by the relevant share- First, it is important to stress that the doesn’t drive the decision making, if holder, which is then transferred to the importation of services by a Brazilian a party had a really good business JVCo (perhaps in exchange for shares customer from a foreign entity may rationale, but it is always an early item on incorporation), may bring about a trigger taxes reaching almost 50 on the checklist. The reforms have made tax liability for the JV party. Tax conse- per cent of the price of the services,

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William Shawn pictured at the 2017 IR Dealmakers Conference in Barcelona

depending on the nature of the services, the location of NewCo in Brazil should is 24 per cent, with few lower exemp- the existence, or not, of a double taxa- consider the applicable State and Munic- tions. It is important to register the corpo- tion treaty and whether the payment is ipal taxes. Prior studies are required. rate structure as a VAT company right grossed-up for withholding taxes. This after its incorporation in order to get all If the joint venture is established within high tax burden is an incentive for one accrued VAT back. VAT accrued prior to an existing Brazilian company, due dili- to avoid a contractual joint venture where the VAT registration is not refunded, and gence, particularly in connection with one of the parties provides services from VAT registration is a simple procedure. tax matters, is extremely relevant, in view abroad to Brazilian customers. In other Iceland´s local currency is Krona (ISK) of the complexity of the system and of words, it is an incentive for the creation of and corporate accounts are to be filed in the hefty penalties applicable in case on a NewCo in Brazil with the resources and the local currency. violation of tax laws. capability to provide services to Brazilian It is possible to apply for exemption customers. The intercompany agreements between and be allowed to register the annual the NewCo and its shareholders will, In the case of a NewCo, the foreign party accounts of a company in foreign in principle, be subject to the transfer should know the taxation on the funding currency. It is usually allowed when the pricing rules applicable in Brazil and in of the NewCo and on the disposal of the major income and costs are in a foreign the jurisdiction(s) of the shareholders. investment. In a nutshell, funding through currency. Withholding tax on dividends capital increases would ensure minimal On the other hand, a consortium arrange- is subject to bilateral tax agreements for taxation, where only a tax levied on the ment or a contractual joint venture allow each country and the corporate form of foreign exchange transaction would each party to provide its goods and the JV partner. apply on the remittance of the capital at services separately, thus segregating its Belgium – SB A JV established by way the rate of 0.38 per cent. invoices and tax liabilities. of a corporation (separate legal entity) is The payment of dividends abroad is In any event, if there is one piece of subject to corporate tax in Belgium. For exempt from taxes, at the moment. The advice that we deem relevant in connec- large companies, the corporate tax rate repatriation of capital – by virtue of a tion with taxes in Brazil, it is that the is reduced from 33.99 per cent to 29.58 capital reduction or dissolution – will be parties should analyse the scenarios and per cent as from assessment year 2019, subject to capital gain tax at progressive plan in advance, as it is not simple to and will be 25 per cent (abolishment of rates ranging from 15 per cent to 22.5 undo or fix structures that create unde- crisis contribution) starting in assess- per cent on the difference between the sired tax liabilities. ment year 2021. amount of the capital invested and the Iceland – ST The corporate income tax For SMEs, the rate goes down to 20.4 amount remitted. The sale of the shares is 20 per cent of commercial profit and per cent (including crisis contribution by the foreign party will also be subject the VAT on sale of goods and services of 2 per cent) on the first bracket of to capital gain tax. The definition of

irglobal.com | page 19 EUR100,000 of net taxable income as they were being treated, so looking at Where an excessive interest rate exists, from assessment year 2019 and will transfer pricing and tax treaties is crucial this will be disallowed for tax deduction be 20 per cent (abolishment of crisis for tax efficiency. purposes. contribution) starting in assessment year There is a common intention of everyone Profits realised from the disposal of secu- 2021. This small and medium enterprise in a JV to make some profit and extract rities are exempt from taxation, unless (SME) rate will only apply if a minimum that through dividend or capital distribu- they are gains from the sale of shares salary of at least EUR 45,000 is paid to a tion. Careful thought needs to be given I of a corporate joint venture that owns company director (individual). order to avoid withholding tax or double immovable property in Cyprus. These A purely contractual JV is subject to tax taxation. are subject to capital gains tax to the transparency, but if the JV is deemed to extent that they relate to the property. The Slovakia – AV Yes, indeed, according to have a permanent establishment (i.e. if Income Tax Law, as amended, provides applicable Slovak legislation, the clients the tax authorities identify the JV as a group relief by allowing resident compa- have to consider income tax regulations, permanent establishment taxable as a nies of a group to offset losses against impact of double taxation treaties and separate entity), the JV will have to pay taxable profits. their transfer pricing strategies, which all the corporate tax on its profits. depend on the business model and the Taxation for partnership joint ventures Transfer pricing between the JV and the structure of the JV in order to avoid any occurs at the level of the participants partners should be scrutinised carefully, unexpected issues in their future. and any profits or losses accrue to as it could lead to taxation if the transfer them. Each partner is responsible for Cyprus – SF The Cyprus tax regime is pricing is not at arm’s length. filing its own tax return dealing with its regarded as one of the most favourable share of the profit. Tax transparency can Germany – MS Tax treatment depends and advantageous tax regimes for busi- be unwelcome when profits increase, on each project and influences the way ness in Europe. However, each struc- because the attribution to the partners is it is structured. Taxes in Germany are ture, depending on its nature, has some automatic, potentially hindering effective quite high, so if you have a JV partner in specific attributes with regards to the tax planning. a foreign company, it is best to use tax taxation regime applicable. treaties between those countries. With contractual JVs, taxation occurs The taxation of income in a Cypriot at the level of the participants and any England – AC In the UK, if you have a corporate vehicle occurs at the level of profits and losses accrue to them. This centralised JV vehicle, it is treated in the the company. The participants are not may be considered as one of the most same way as many normal companies in taxed on dividends in Cyprus unless they important downsides of a contractual the UK. From a tax perspective, the JV are tax residents here or are companies, joint venture, although there is a possi- will be responsible for tax in the same for which the corporation tax is in the bility of independent tax planning for way as a corporate registered in England region of 12.5 per cent. each partner, with regard to the losses and Wales. It will be responsible for tax With such a low percentage, and taking incurred and the profits earned, miti- on profits and VAT, it will also need to into account that Cyprus has a wide gating the negative effects of tax trans- deal with employment tax, income tax network of double tax treaties, there is parency. and national insurance that may be due clearly the potential of tax optimisation for members of staff working in the JV. EEIGs are also tax transparent, meaning for an international client choosing to use profits and losses are taxable at the We would also highlight transfer pricing a corporate joint venture. It should further hands of the participants and not at in the context of a JV. The key thing we be noted that, for a company to be taxed the level of the European Economic find is that providing the JV with goods, in Cyprus, its management and control Interest Grouping. National laws regulate services, resources or support and will need to be exercised in the Republic. substantive issues regarding, inter alia, access to facilities can be subject to Interest received in the course of the the exact tax rate and generally the appli- transfer pricing regulations and that must main business activity of a corporate cable tax procedures. be considered carefully. joint venture or closely connected with it, This is particularly true when there is an less the costs of earning the interest, is international dimension to the JV. Various subject to income tax at 12.5 per cent. regulations will apply in the home country Interest payable by a corporate joint of the JV partners, as well as in the UK, if venture to a non-resident shareholder is the JV is incorporated here. not subject to withholding tax. Generally, If you had a French company and a interest expenses payable by a Cyprus UK company in a JV, or two overseas corporate joint venture are fully deduct- companies entering a JV in the UK, there ible, provided that it can be shown that are potentially three or four sets of tax the respective loans are at arm’s length. laws that could apply, depending on how

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Contacts

UK HEAD OFFICE KEY CONTACTS CONTRIBUTORS

IR Global Thomas Wheeler Bosco de Gispert Segura (BDG) The Piggery Founder Grupo Gispert – Spain Woodhouse Farm [email protected] irglobal.com/advisor/bosco-de-gispert-segura Catherine de Barnes Lane Rachel Finch Adriano Chaves (ADC) Catherine de Barnes B92 0DJ Channel Sales Manager CGM Advogados – Brazil Telephone: +44 (0)1675 443396 [email protected] www.irglobal.com/advisor/adriano-chaves www.irglobal.com Nick Yates William Shawn (WS) [email protected] Editor ShawnCoulson – U.S – Washington, D.C. [email protected] www.irglobal.com/advisor/william-h-shawn

Donald R. Looper (DL) Looper Goodwine P.C. – U.S – Texas www.irglobal.com/advisor/donald-r-looper

Mark Copeland (MC) Mark Copeland Lawyers – New Zealand www.irglobal.com/advisor/mark-copeland

Sigurbjorn Thorbergsson (ST) TCM Group – Iceland irglobal.com/advisor/sigurbjorn-thorbergsson

Soteris Flourentzos (SF) Soteris Flourentzos & Associates LLC – Cyprus www.irglobal.com/advisor/soteris-flourentzos

Andrea Vasilova (AV) VASIL & Partners – Slovakia www.irglobal.com/advisor/andrea-vasilova

Dr. Markus Steinmetz (MS) Endemann Schmidt – Germany www.es-law.de/en/attorneys/dr-markus-steinmetz

Stéphane Bertouille (SB) Everest Law – Belgium www.irglobal.com/advisor/stephane-bertouille

Alex Canham (AC) Herrington Carmichael – England www.irglobal.com/advisor/alex-canham

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