Establishing a joint venture has become increasingly common in Cyprus.
Like in other jurisdictions, in Cyprus the term ‘joint venture’ connotes business arrangements that involve the pooling of resources, knowledge and experiences of the participants for the purposes of accomplishing or implementing a specific task.
Under Cyprus Company law there is no actual statutory definition constituting a joint venture (JV) however in practice there are four forms of JV’s commonly used in Cyprus.
1) Contractual joint ventures:
This form of JV does not require a separate legal entity, it simply requires a contractual agreement between the parties. Contractual joint ventures are commonly used in the context of tenders for a project.
The Advantages of this form of JV is :
- Greater flexibility as to the operation and termination of the agreement.
- Contract law in Cyprus is based on common law principles.
- No company registration requirements.
- Time efficient solution.
- No joint liability; liability towards third parties limited to own acts or omissions of each participant.
- Independent tax planning possibilities for each party.
- Difficulties could arise in establishing commercial or contractual relationships with third parties due to the lack of a legal entity existing.
- Agreements need careful and skilful planning due to the lack of a legal framework to depend on.
- There is always a risk of classification of the relationship as a partnership by a court with the consequence of joint liability.
Partnership join ventures
This is an uncommon type of JV which constitutes a relationship is governed by the relevant statute which specifies the liability of each partner depending on whether the partnership would be a general or limited partnership. Within this type of JV business assets and intellectual property contributed by each party become the property of the partnership.Partnerships are tax transparent, accordingly, taxation occurs at the level of the participants and profits and losses accrue to them. A partnership is only recommended when two or more parties wish to conduct business on a lasting basis and in close cooperation.
- 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.
- 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.
- 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.
Corporate Joint ventures
This type of joint venture is created through the setting up of legal entity that is separate for its participants with documents governing its operation and relationship between the parties. A shareholders agreement is usually also established in parallel to this JV. a Corporate Jv is usually more appropriate where it is expected that the joint venture will need to enter into contractual arrangements with third parties due to the limited liability benefits.Taxation of income occurs at the level of the company. Participants are not taxed on dividends in Cyprus if they are not tax residents or if they are companies.Corporate joint ventures are commonly used by international clients aiming to benefit from the network of double tax treaties maintained by Cyprus.
- Limited liability; liability of participants limited to capital.
- Participants control the company through the appointment of the board of directors.
- The company is governed by the Cyprus Companies Law, Cap. 113 offering a greater degree of stability than other options since the relationship is not purely contractual.
- The low rate of corporate taxation is applicable in Cyprus at the rate of 12.5% and numerous double tax treaties maintained by Cyprus may be exploited.
- 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.
- More expensive than other options
European Economic Interest Groupings (EEIG)
This JV vehicle was established and governed predominantly by European law in 1989 and was intended to promote economic activities between member states. EEIGs are governed by a contract between their members and Council Regulation 2137/85. Under this type of JV 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 separately by each party.
- Established under European law; ideal for firms in different member states of the EU.
- Fewer formalities apply than other options therefore making this type of JV cost effective.
- Tax transparency.
- Managers can bind EEIGs as regards third parties, even if their acts do not fall within the objects of the Joint Venture.
- Unlimited liability of participants.
- More limited scope for use due to the statutory purposes dictated.