The following is an extract from the ”Simple Guide to Cross-Border Business’ co-written by Morgan McManus Solicitors for InterTradeIreland. This Guide has become the first point of reference for any company seeking to enter the Cross-Border market, offering up-to-date and user friendly comprehensive information on questions connected with doing business in the other jurisdiction.
Copies of the July 2014 Edition are available to download here >>
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What Are The Options In Terms Of Co-Operation Structures?
The type of co-operation structure or Joint Venture vehicle that should be used in any set of circumstances will usually fall to be decided on the basis of how much risk each party is willing to assume for the Venture, the likely period of the joint venture and whether the proposed structure is tax efficient. The main types of joint venture vehicles are as follows:
The Joint Company
The jointly owned Company has often been the favourite vehicle for joint ventures, largely because it is simple to set up, easily understood, and provides limited liability and possible accounting benefits. However the decision as to where to incorporate/establish the Company i.e. in Northern Ireland or the Republic of Ireland will obviously be based on where the joint venture business will operate and if this is not conclusive then in the most tax advantageous jurisdiction.
Partnerships are becoming increasingly popular vehicles for their flexibility. From a taxation viewpoint, partnerships can often be more straightforward than companies but, on the other hand, the partners in a partnership have joint and several liability.
Contractual Joint Ventures
Another mechanism for effecting a joint venture is known as Contractual Joint Ventures. This is a contract that does not amount to a partnership and this is probably the simplest form of Joint Venture from a tax viewpoint. Very often the parties to a Joint Venture may wish to avoid the dangers of joint and several liability that exists in a partnership or sometimes they may wish to avoid certain tax implications that can arise in partnership arrangements. As such, they may wish to opt for a Contractual Joint Venture. This is best explained by an example.
A small chemical manufacturer on one side of the Border agrees to exclusively supply a “pharmaceutical company” on the other side of the Border with certain “know how” and chemicals to allow the pharmaceutical company to develop a new pharmaceutical product e.g. a cold remedy. If the chemical manufacturer were to be entitled to a future share in the profits of the cold remedy then the arrangement between them would fall to be treated as a Partnership.
The parties decide that they do not want to form a partnership e.g. the chemical manufacturer may not want to risk its money on a new pharmaceutical product that may not be a success. As such, the chemical manufacturer agrees to exclusively supply its “know how” and the chemical raw material to its joint venture partner in return for the pharmaceutical company agreeing (a) to spend x amount of money to develop and market the cold remedy, (b) to pay a set royalty for a pre-determined time period to use the “know how” and (c) to buy the necessary chemical raw material only from the Chemical manufacturer at a pre-set price for the pre-determined period.
In this way if the cold remedy were a success the Chemical manufacturer as supplier of the “know how” and raw material would be ensured of strong demand at pre-agreed prices under the contractual joint venture and the Pharmaceutical Company would not be entitled to threaten to source the raw material or “know how” from some other competitor for the period of the contractual joint venture. In the current example the chemical manufacturer was not prepared to risk its own money in establishing a joint venture but in return for offering to supply their “know how” and raw materials on an exclusive basis they will in turn benefit from increased turnover provided its joint venture partner successfully launches the cold remedy on the market.
What Contracts Or Documents Are Required?
It is of fundamental importance to have a legal agreement put in place when there is a joint venture. It is absolutely critical to define at the outset the nature of the joint venture i.e. is it a Company, a Partnership or merely some form of Contractual Joint Venture. Obviously, this is critical from a tax viewpoint because each arrangement will be taxed differently. Of fundamental importance from a legal viewpoint is to provide for scenarios where there is a breakdown in the relationship between the Joint Venture parties or there is a dispute between them or how the Joint Venture is to be wound up in the future.
What Law Governs Our Contract?
It would be normal for the Joint Venture Agreement to specify the law that will govern the agreement between the parties. It is a matter of negotiation between the parties to decide the law of which jurisdiction would be most appropriate to deal with matters of interpretation and/or dispute.
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