What are the most common ways to structure an international joint venture involving your jurisdiction?
Lawyer’s from around the globe, including our very own Alex Canham, answer this question on international joint ventures, which is published in IR Global’s Collaborations Across Borders Virtual Series.
Spain – Bosco de Gispert Segura (BDG) There are three ways to structure a JV in Spain and choosing one of them will depend on the purpose of the JV. The first involves creating a new company. If two companies are willing to start a business together, they create a third company in Spain and this company is owned by the others in a 50/50 or any other agreed arrangement. This company is the one that performs the business and there are tax implications and contractual issues to be dealt with in Spain. It normally requires a shareholder’s agreement to regulate the rights and obligations of each party.
The second way is participation in business between two companies by means of a contract. Both companies put forward capital or knowledge towards the success of the business, but they do that without the need to set up a new structure in Spain. It is essential to set up the relationships between the parties and to try to foresee and prevent all possible situations to avoid future conflicts.
The third way is most common when it comes to public contracts. In Spain there is a special purpose vehicle called the Unión Temporal de Empresas (UTE), which is a temporary union of companies.
For some public contracts, you need to fulfil very specific of requirements, which can be difficult to accomplish. Governmental bodies want contractors for work such as building motorways, airports or train stations to meet certain criteria, such as previous experience, specific numbers of workers and revenue thresholds. Individual companies don’t always fulfil these requirements, but by uniting two companies this is often easier to achieve. Companies joined together under this UTE umbrella receive special treatment under Spanish law, so it is a common way to set up a JV when working with pubic authorities in Spain.
Another option would be the so called AIE (Agrupaciones de Interés Economico), a temporary union for the private sector.
England – Alex Canham (AC) In the UK, one of the main questions I ask when looking at international joint ventures (JVs) is what is the purpose? Is it a management JV designed to share information, or an output JV designed to deliver a product or service based on skill sets the parties want to bring together? That will dictate the type and structure of JV that the parties end up using.
There are a variety of different models available for use in the UK. There is a formal JV which uses a limited liability company (Ltd), or a traditional unincorporated partnership (LLP) as the vehicle. There are also collaboration JVs, which are more informal with no central entity, and are really about people coming together with a series of contracts to work together and provide an output through their existing business structure. This is more of a knowledge sharing arrangement, rather than a centralised business, and involves a collaboration agreement or a contract which agrees that particular information, skills or knowledge will be shared or used in a particular way. In some cases this forms the basis of an unincorporated partnership, depending on the terms.
At the other end of the scale you can create a new vehicle to house a JV, with equity stakes taken by each party. You have a separate body with rules and regulations and compliance. It allows parties to hold assets centrally in the form of stock, IP, equipment, or staff and they can run it as a separate business function that is perhaps not part of the day-to-day business of its owners.
The more common approach in international projects is more formal, because people like having a central vehicle in which they have an equity stake and a set of rules and regulations that govern the project.
With an informal arrangement, it might just be a revenue stream, but a centralised vehicle allows both parties to record the profits / revenues from the project, the funding received and the apportionment of liabilities and risk. It also ringfences it from the rest of the business, meaning a specific value can be more easily proscribed, helping any potential future sale.
What we tend to see on the international side of things, is a lot more projects designed to generate a capital value. Both parties come together with skills and experience and services to run as a standalone business, and doing this on an informal basis makes apportionment of value harder.
Germany – Markus Steinmetz (MS) I can underline a lot of what Alex already said. With regard to structures, it will depend on who the JV partners are. As an example, in the case of the pharmaceutical industry, when a new drug is established they need a partner to execute clinical studies in several countries.
The pharma company will often create a formal JV with a provider who executes the studies. This is because the pharma company needs a lot of confidence in the other party, since they are from a different industry with different standards around issues like confidentiality.
A lot of highly confidential information about subjects is provided to this firm, which engages university hospitals for trials, and leaks could be very damaging.
Another example of this is engineering companies, particularly suppliers to the automotive industry. Foreign companies from China, the US or Canada who are engaged in the same area, will form JVs with German firms. This happens a lot with electric cars and battery technology.
Formal JVs makes sense to share mutual knowledge to help each other. We often find that a foreign company will buy shares in a German entity and vice versa, to enhance the mutual participation.
England – AC The concept of holding shares is a significant one, particularly if the party investing is a junior partner. It allows them to feel they have a tangible direct interest in the project, rather than just handing over IP, funds or information. They have something in exchange for all that knowledge, effort or resource they are providing.
Also, in regulated sectors like pharma, having that centralised JV allows apportionment of risk and liability and clarifies which party is responsible for dealing with regulatory and compliance issues.
If you have a JV in those sectors, we find that, unless you are going to seek a direct authorisation for the JV, you are relying on one of the parties providing a regulatory umbrella.
Washington D.C. – William Shawn (WS) I think one of the real critical questions to ask, as we have heard, is what’s the purpose of the JV? Until we understand that, it’s really difficult to determine the choice of the proper entity and, for that matter, the terms and conditions of the JV. An IP JV, used for passive licensing, is different to a manufacturing JV, which is an operational entity.
There are also some circumstances under which a JV will not work. In an IP relationship, it may be that a cross-licensing arrangement would work better than a complicated or expensive entity created to house the IP in a joint venture.
Another question would be, what are the rights of the joint parties, and do they want a public or private vehicle? Special purpose vehicles (SPVs) are established to accomplish specific things.
The most common private entity is a C corporation, which is particularly attractive given new tax legislation. From there we can go to a partnership or a limited partnership depending on the number of parties involved in the JV.
The choice of entity is driven by what the clients are trying to achieve and what the best means are for achieving that. In China, for example, statutory structures mean there are a number of things mandated by law.
There is limited flexibility and often 51 per cent Chinese ownership. If a US firm wants to penetrate that market they need a JV partner, and that’s been a point of contention with the Trump Administration. It is not clear whether or not IP has to be handed over to the senior Chinese partner in the joint venture.
This is also the case in Iraq, where there are statutory requirements for a local partner. You better pick the right one though, since there are all kinds of money laundering and corruption issues there that need to be closely watched.
A JV is a lot like a marriage, there is excitement at first, but it has to make sense to last over the long-term.
Brazil – Adriano Chaves (ADC) Generally speaking, it is possible to establish a joint venture in Brazil through the opening of a new entity (NewCo) or through agreements, including by means of a ‘consortium agreement’, a specific type of contract which is appropriate for specific projects, with a definite term of duration.
To define the best structure, it is important to understand the purpose of the project and what is to be developed. We need to know what the parties want to achieve, their respective contributions and their rights.
However, it would be fair to say that, if the project is to be developed in Brazil, cross-border joint ventures commonly involve the creation of a NewCo. Among the reasons for favouring this choice of structure is the fact that Brazil has strict currency exchange and import controls, and a complex taxation system, and a NewCo makes it easier to address those challenges.
Among the disadvantages of a NewCo are the more complex shareholding and corporate governance structure, the need for more elaborate exit strategies, and a more complex approach to the intellectual property of each group involved.
NewCos are more commonly established as corporations or limited companies – sociedades limitadas. Corporations tend to be adequate vehicles to implement complex joint ventures, as they have features that can better accommodate the interests of joint venture partners or minority shareholders and allow more sophisticated funding strategies. Despite this, sociedades limitadas present the advantage of being simpler, less expensive to maintain and, to a certain extent, more confidential with regard to company information.
As regards contractual joint ventures, they tend to be easier to implement and terminate, but they may not be apt to address some of the challenges of the Brazilian legal environment. To illustrate, a “silent partnership” (sociedade em conta de participação) between a foreign entity and a Brazilian entity will not be able to register the foreign investment with the Brazilian Central Bank, thus making it impossible for the Brazilian entity to remit dividends or repatriate funds abroad. A solution to this would be to establish a local subsidiary of the foreign entity, which would then establish the silent partnership with the Brazilian entity.
A ‘consortium agreement’ is available for specific projects and can be very helpful, particularly if the customer accepts to pay each party to the consortium separately and directly (for their respective contribution). It is typically used for the supply of services and goods in case of large projects that have a definite period of duration, including infrastructure and other governmental projects.
It is also common to see a combination of the different structures, in which case a NewCo could have several intercompany arrangements with its shareholders and their affiliates.
Iceland – Sigurbjorn Thorbergsson (ST) Joint venture can be set up in Iceland in almost any form of corporate structure, but most commonly the parties involved prefer to use a limited company or private limited company to formalise their cooperation and risk control. Joint ventures are subject to merger control and need to be reported to the competition authority when of a larger scale. Iceland´s corporate income tax is one of the lowest in Europe.
Belgium – Stéphane Bertouille (SB) Joint Ventures in Belgium can take various forms, depending on the option of the parties and the purpose of the JV, which can be either purely contractual or in the form of a corporate entity.
The corporate entity is often a separate legal entity with limited liability for its partners. The most common forms are the public company (Société anonyme / Naamloze vennootschap) and the private company with limited liability (SPRL/ BVBA). It can also be a company with no limited liability for its members, which does not constitute a separate legal iden- tity with a legal personality.
Other forms of JV include the general partnership (société de droit commun/ maatschap), which is the most common form of unincorporated contractual JV, and applies if no specific choice has been made by the parties.
The temporary company (société momentanée/ tijdelijke vennootschap) is used for specific projects in the building industry or for research purposes in the context of bidding or tender processes for the time required to complete the project.
The corporate form with limited liability is often preferred over a purely contractual arrangement or the choice of a company in which one or more JV partners have unlimited liability. However, these limited companies are subject to publication requirements such as annual balance sheets, articles of association and notarial deeds, which add extra cost.
New Zealand – Mark Copeland (MC) Until quite recently international JVs in New Zealand were routinely structured as either incorporated or unincorporated ventures. However, in 2007, in response to calls from international investors for a more flexible and tax-efficient option, the New Zealand Government introduced limited partnerships as a further JV struc- turing option.
These three structures remain by far the most commonly used JV arrangements in New Zealand.
An incorporated JV involves registering a limited liability company (JVCo). The JV parties are the shareholders, appoint the JVCo directors, and will often enter into a shareholders’ or formal JV agreement. With a separate legal personality, the JVCo can own assets, enter into contracts, incur obligations and liabilities, make profits and suffer losses.
A clear advantage of an incorporated JV is that, generally, liability for the JVCo’s debts and obligations is limited to the JVCo. A JVCo also provides flexibility of ownership, as JVCo shareholders can generally easily transfer or acquire shares without disrupting the business.
With an unincorporated JV (UJV), the JV parties make different contributions through their existing structures to create a business venture or achieve a common objective, and typically have a formal agreement detailing their rights and obligations with respect to each other and third parties. Profits and losses flow through to the JV parties themselves, and are treated according to the relevant JV party’s tax status.
An unincorporated JV can be attractive to lenders, who can maximise their tax deductions and who may have concerns about a JVCo’s ability to pay dividends. Another key and beneficial difference is that UJV partnerships are not subject to the taxation loss limitation rules that apply to LPs, permitting the UJV parties to claim full deductions for all tax losses attributed from the UJV partnership in an income year.
A Limited Partnership (LP) is a separate legal entity which must have at least one general partner (GP) responsible for management, at least one limited partner, and a private partnership agreement. Commonly, each JV party will be a limited partner, contribute capital to the LP and hold shares in the limited liability company GP in proportion to their respective interests.
A Limited Partnership affords more privacy to the offshore investor parties than a JVCo. The Limited Partnership Agreement and details of the limited partners’ respective investments may be kept private (although the details of the GP will be public). Probably the key benefit of an LP is that, while governed like a company, it is taxed in a similar way to an ordinary partnership.
LPs are treated as transparent for New Zealand income tax purposes, generally allowing income, gains and losses of the LP to flow directly to the limited partners, whose personal tax status will govern how they are taxed. Limited partners that are not tax resident in New Zealand may be able to receive a credit in their home jurisdiction for any tax paid in New Zealand on income derived from the LP.
Texas – Don Looper (DL) Things have changed a lot for the US with the new tax code enacted in Dec 2017. What characterised the structuring of US companies doing business abroad before that date, was the extremely high corporate tax rate in the US – one of the highest in the world.
The business of structuring businesses abroad was focused on deferring the repatriation of income back into the US to avoid the high tax.
Companies would try to keep a lot of that income overseas, so if they did have to invest in new ventures abroad, that money would not come from the US. The change in tax law, especially with C corporations, has made it more attractive to do business from the US. If a US C corporation is engaged in activities such as selling services abroad, it can now be taxed as low as 13.25 per cent. This means we are looking to structure deals directly from the US, while before, we would look to set up a JV company with a branch or subsidiary of the US parent in the country where they were doing business and then have the income parked in an offshore company.
The new tax law has served its purpose, but some European countries have been up in arms that this tax code is an effective export subsidy for US c-corps. We’ll see how that works out.
Sharing in the structure of the ownership of a JV will often depend on the different classes of stock, and the skill is in the determination of the rights of preferred stock. When we do business with companies in the Middle East, there is a strict partnership with local entities, so the way we devise shareholder agreements is key. Even though you give the nominal amount of ownership required by statute, you ned to make sure the realities of that ownership reflect the actual investment and participation of the partner.
Germany – MS It is interesting working with German companies investing in China. Chinese regulations are tough and you need a JV for a Chinese investment. They are reforming this law from 2022, but for the time being you need a Chinese JV to start a project.
Slovakia – Andrea Vasilova – (AV) In Slovakia we also use either a contractual or corporate JV. Corporate JVs are most common, either in a form of a joint stock company or limited liability company. An LLP may be used too, but the most popular is the joint stock company. JVs are used mainly in start-ups, or when a partner is looking for an investor to fund a particular project.
My clients usually prefer a corporate JV rather than contractual because it is more formal, and if they hold the shares, they can make sure they participate. Contractual JVs are often used like a kind of a letter of intent, in that they start the process, but may end up as a corpo- rate JV eventually.
For example, we have a client developing a new technology. The client was looking for equity investment to set up a corporate JV with a foreign investor, but still wanted to keep more than 50 per cent of the shares. Because the client did not want to relinquish any more shares, he funded the project via grants, euro funds and other strategic partners. The client recently found four million euros of extra investment, but not via a JV because he didn’t want to lose control of the company.
Germany – MS Often, with start-up companies, it’s just business angels interested in the financing part of the company, but not in the knowledge or development of the ideas.
When the start-up becomes established, then the big strategic players in the market become interested, and a JV can make that work. It also allows the seed investors to exit.
England – AC are there minimal capital requiremenrs for a JV in other jurisdic- tions?
In the UK, public-limited companies have a £50,000 minimum requirement, but not a private limited company.
Germany – MS There is a minimum share capital requirement of EUR 25,000 euros in Germany.
Slovakia – AV In Slovakia we have a minimum registered capital require- ment of EUR 5,000 for a limited liability company and EUR 25,000 for a joint stock company. Since 2017, we have had a new type of joint stock company called the Simple Joint Stock Company, where just 1 euro of share capital is needed.
Germany – MS We do have that in Germany, but it is not allowed to pay out profits until the company has EUR 25,000 of capital.
Slovakia – AV The Simple Joint Stock Company was established mainly for start-ups, because EUR 25,000 can be difficult to raise at the beginning.
England – AC We often see parties loaning money into a JV. They put a pound in each of actual capital and loan the balance, taking security of the assets in the company. This reduces financial commitments, if a company doesn’t want to sign up to a high level of share capital.
Cyprus – Soteris Flourentzos (SF) No specific statute governing joint ventures exists in Cyprus, however, in practice, there are four ways to structure international joint ventures (JVs).
Corporate JVs usually use a private limited company, separate from the participants, set up under the provisions of the Cyprus Companies Law, Cap. 11. Its operations are specified by its Memorandum and Articles of Association, supplemented by a shareholders’ agreement, and any other necessary collateral agreements with regards to, inter alia, the use of intellectual property rights owned by the participants.
This structure is usually more appropriate where it is aimed to establish and conduct a new separate business involving contractual interaction with third parties for profit-making purposes, due to the limited liability benefits.
The partnership is an unincorporated form of cooperation subsisting between not more than 20 natural or legal persons, carrying on business in common according to the provisions of the partnership agreement drawn between them. It can either take the form of a limited or a general partnership, and its form determines the liability of each partner.
Any business assets and intellectual property contributed by any party, unless otherwise specified, becomes the property of the partnership.
Partnership JVs are usually best suited for cases where two or more parties wish to conduct a business on a lasting basis and in close cooperation; thus, they are usually set up amongst professionals rather than for large-scale commercial operations.
A contractual JV is an unincorporated form of cooperation with no separate legal personality, materialised through a contractual agreement amongst the participants. Such JVs do not involve the conduct of business in common and the participants remain autonomous, with distinct roles, as these are clearly set out in the agreement, which must be comprehensive and detailed.
The venture may acquire rights and liabilities as a single entity. However, unless otherwise agreed, any business assets and intellectual property remain the property of the participant who contributed or developed them.
Contractual JVs are usually used in the contexts of tenders, both public and private. Specifically, in Cyprus, such JVs have been widely used for large construction projects where apparent costs and risks are high.
European Economic Interest Groups (EEIG) are established by Council Regu- lation Number 2137/1985, this structure is defined through a contract made between the participants, who have unlimited joint liability for the debts and liabilities of the EEIG, unless expressly excluded, and appoint the managers of the EEIG.
A duly registered EEIG may acquire, in its own name, obligations and rights of all kinds. However, unless it has legal personality, it cannot have assets and liabilities separate from those of its partic- ipants. EEIGs are usually used by smaller-scale specialised sector companies and professionals wishing to generate a larger international market profile.
Belguim – SB The minimum share capital required to establish a JV by way of a company with a legal personality in Belgium, depends on the form.
A private limited liability company requires EUR18,550, of which EUR6,200 needs to be paid immediately at the constitution of the company. However, it is expected that a new Belgian Company Code will enter into force on the 1st of January 2019, designed to abolish this minimum share capital requirement.
The minimum share capital to establish a JV by way of a public company is set at EUR61,500.
Second, there is a withholding tax applied to foreign investors that is generally calculated on the gross sales proceeds if the foreign person sells the property. The withholding tax is also applied to rents received. Withholding tax is imposed at the federal level and sometimes at the state level.
Third, there is an inheritance tax if a foreign individual dies while holding US property. Real estate and interests in US entities holding real property are considered as part of the US tax estate of a foreign individual, which is taxed at a rate of 40 per cent of the value over USD60,000.
The fourth tax, is an annual property tax applied on the state and local level, not the federal level. In California, this is 1 per cent of the assessed value based on the value at date the property was acquired or improved. In other states, the assessed value is often adjusted annually. Typically, this tax is passed on to the tenants as a component of rent.