A Joint Venture is where two parties agree to pool their resources for the purpose of accomplishing a specific task. A joint venture can be created by:
- a contractual agreement between the parties
- setting up separate legal entity
- establishing a partnership
- establishing a European Economic Interest Grouping
1. Contractual joint ventures
The basis of the cooperation is based on a contractual agreement between the parties. Since no separate legal personality is created, unless the parties have agreed otherwise, assets and intellectual property of the business remain the property of the parties who contributed or developed them.
The agreement usually provides provisions for the:
- rights and liabilities
- contributions
- share of income generated
Advantages:
- No registration requirements.
- Minimal formalities compared to the other possible structures.
- No joint liability.
- Governed exclusively by contact law offering flexibility as to the operation and termination.
- Independent tax planning possibilities for each party with regards to losses incurred and profits earned.
Disadvantages:
- The absence of a legal framework regulating the relationship requires the drafting of detailed regulation relating to all aspects of the cooperation.
- The lack of separate legal personality may cause difficulties in establishing commercial or contractual relationships with third parties, necessitating guaranties being provided on a personal level by the parties.
2. Setting up a separate legal entity
This involves setting up a legal entity separate from that of its participants. This will involve establishing a new entity, typically incorporating a limited liability company.
The constitutional documents of the company govern the operation of the entity and the relations between the participants and the entity. A shareholders’ agreement is usually executed which operates in parallel. Depending on the circumstances, further agreements may also be required to be executed, for example to use intellectual property.
Advantages:
- Limited liability; liability of participants limited to capital.
- Participants control the company through the power of appointment of the board of directors.
- The company is governed by the Cyprus Companies Law, Cap. 113 which provides legal certainty and familiarity for participants as well as the counterparties. The relationship is not purely contractual.
- Tax optimisation possibilities given the low rate of corporate taxation applicable in Cyprus (at the rate of 12.5%). The numerous double tax treaties maintained by Cyprus may be exploited.
Disadvantages:
- Less flexibility compared to the other structures due to the applicable legal framework both in terms of operation and compliance.
- Governance and control questions might need to be addressed e.g. to deal with deadlocks.
- Restrictions and or conditions for the transfer of shares are typically adopted.
- Both the corporate profit and the dividends returned to participants might, under certain circumstances, be subject to taxation e.g. where participants are natural persons residing in Cyprus.
3. Partnership Joint Venture
A joint venture partnership can be a general or limited partnership. In the first case, each partner has unlimited liability whilst in the later only the general partner has unlimited liability and limited partners are only liable for the capital which they have agreed to invest.
Advantages:
- Relatively fewer formalities apply than in the case of corporate joint ventures.
- Registration requirements exist but no requirement for disclosure of the actual partnership agreement i.e. the constitutional document.
- Although the partnership has no legal personality, it may sue and be sued in its own name and may trade under its name.
- Apportionment of profits and losses on the basis of discretion.
- Attribution of profits to the partners; not to the partnership.
- Independent tax planning possibilities for each participant as regards losses incurred and profits earned. Wide options may be available due to the extensive network of double tax treaties maintained by Cyprus.
Disadvantages:
- Significant powers to unlimited partners. Given the powers of partners to bind the partnership, decision-making process needs to be addressed carefully.
- Liability comes with involvement in the management/control. Unlimited liability of general partners towards third parties. Solutions alleviating the effect of this may be possible.
- Tax transparency may not be beneficial where the partners are natural persons as they might be taxed at higher rates. Yet with appropriate structuring this may be avoided.
4. European Economic Interest Grouping (EEIG)
A European Economic Interest Grouping (EEIG) is a legal entity established and governed predominantly by European law (European Community (EC) Council Regulation 2137/85).
EEIG`s have capacity, in their own name, to contract or accomplish other legal acts as well as to sue or be sued. There is unlimited joint liability of the participants for the debts and liabilities of the EEIG but the exclusion or restriction of liability of one or more members for a particular debt or liability is possible if it is specifically agreed between the third party and the EEIG. EEIGs enjoy tax transparency. Profits or losses are taxable at the hands of the participants.
EEIG`s are designed to make it easier for companies in different countries to do business together, or to form consortia to take part in EU programmes. They must be related to the economic activities of the members but not replace them. The purpose is not to make profits for the EEIG itself.
Advantages:
- Ideal for alliances of firms in different member states of the European Union for joint promotion of activities.
- Comparatively less formalities than in the case of corporate joint ventures – there are however registration requirements.
- Tax transparency.
Disadvantages:
- Managers bind EEIG`s with third parties, even if their acts do not fall within the objects (unless the third party had knowledge).
- Unlimited liability of participants
How can we help?
We can provide advice on the most appropriate and efficient structure based on your individual circumstances.
Theodorou Law is a Cyprus law firm with Cyprus lawyers and other legal experts on legal matters involving Cyprus law, EU law and international law.
The above should be used as a source of general information only. It is not intended to give a definitive statement of the law.
If you have a query or wish to receive further information, please contact us using [email protected]
