There are several reasons as to why a business may want to enter a joint venture overseas. Joint ventures allow for much faster and less costly access to foreign markets than can be achieved by purchasing an existing company in the jurisdiction or starting a new venture. They provide quick access to channels of distribution, and they provide access for the non-resident partner to knowledge and know-how of the local marketplace, which substantially enhances the probability of success for the venture. But partnering with, sharing the risks and taking advantage of another firm's local resources and expertise can be a treacherous undertaking without proper planning and understanding.
From a technical standpoint, a joint venture may be defined as a temporary strategic partnership of short, medium or long term, which creates an organization, group or alliance of persons or groups of companies that maintain their individuality and legal independence but act together under one same direction and standards. The aim of a joint venture is to carry out a specific commercial operation, with the parties agreeing on all factors of the agreement, including the constitution of investment, control, responsibilities, personnel, risks, expenses and benefits. It is also referred as a "business collaboration" which is the cooperation between different economic units with a common goal, usually to carry out business while sharing any possible risks.
The normal and recommendable way to begin is to first agree on a MOU (Memo of Understanding) so that the basic issues get resolved from the start. The MOU may cover confidentiality issues, intentions of the parties, basic obligations on how to carry on the business deal, the governing jurisdiction, etc. At this stage, the parties should be aware that an MOU carries little legal strength in the event that one party does not wish to proceed with the deal.
If the parties decide to move forward the next step is to give shape to the business project, properly giving the joint venture its form.
In Chile, this legal-commercial structure may be carried out in two ways:
- By means of a legal entity incorporating a company and agreeing on everything to set forth in the joint venture.
- By means of a contractual agreement, agreeing on every matter that should be taken care of. If a contract is used, it should be comprehensive so that no relevant matters are left out.
Incorporating a Legal Entity
Incorporation is usually the recommendable way for a joint venture. This solves many of the common arising issues as there it creates a legal structure and a set of background basic norms that protect investors and entrepreneurs. Matters such as administration, disputes, equity and capital contributions are already covered and may be changed to accommodate the parties' intention.
Additionally, the parties may also agree specifically on those issues they want to cover or solve before engaging into a business partnership (IP, labour contributions, taxes, etc).
The contractual agreement is the less common approach and it includes a few challenges. A key positive is the room for flexibility it provides as the parties are free to negotiate and agree on any and all issues as required.
The contract will most likely be required to be drafted very specifically for the agreement so costs is another issue to have in mind.
Taxation of a Joint Venture
The taxation will depend on whether the joint venture has been structured purely as a contractual agreement or through a legal entity. Again, it is simpler to structure it as a legal entity.
With this in mind, there are still a few key principles regarding taxation of a joint venture:
- A joint venture is taxed depending on the kind of income they produce and the legal structure employed.
- A joint venture that is not structured as a legal entity may very well be considered a Permanent Establishment (PE) with basically the same tax burdens as a formal company. It is important to note that PEs lack some of the benefits that legal entities possess and due to several tax reforms over the last few years, PEs are no longer a desirable business platform.
- The tax burden in a contractual agreement is much harder to define as partners must have a clear delimitation on the tax income of each party, making filing much more difficult.
- The tax structure must ensure the recovery of VAT (GST). Once again in a contractual agreement this is a matter that must be carefully considered.
- The tax structure must look out for any tax leakages. The more complex the contractual agreement may get the harder it may be to set tax efficiency.
- Any agreement should consider fair market value. Capital and work labour must be clearly assessed by the parties. These provisions may also be extended through a regular legal entity and are not limited to a contractual agreement.
Although legal agreements are required to create and sustain international joint ventures, in order to prosper, the joint ventures must be practical, living and evolving relationships. Continued positive interaction and dialogue between the business decision-makers after the formation of the joint venture is critical. Circumstances change and the management team and the joint venture itself must be capable of changing with them.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.