Setting up and operating a joint venture

Structure

Are there any particular drivers in your jurisdiction that will determine how a joint venture is structured?

The structure of the joint venture is mainly driven by the joint venture parties’ needs.

Tax considerations

When establishing a joint venture, what tax considerations arise for the joint venture parties and the joint venture entity? How can tax charges be lawfully mitigated?

Contractual joint ventures are not subject to taxation, offer full tax transparency, and profits and losses incur directly to the joint venture parties.

In the case of an equity joint venture, the incorporation of the company is subject to Swiss stamp duty of 1 per cent of its nominal share capital exceeding 1 million Swiss francs. This stamp tax duty may be mitigated, if the joint venture entity is established by contribution in kind of parts of the joint venture parties’ businesses.

Corporate profits are taxed on a federal, cantonal and communal level. The federal profit tax rate is 8.5 per cent (effective tax rate 7.83 per cent). Tax rates vary between the 26 cantons and between the communes within the cantons, which allows for tax planning. Overall effective profit tax rates (2017) are between 12.43 per cent (canton of Lucerne) and 24.16 per cent (canton of Geneva). Many cantons have announced that they will lower profit tax rates owing to Corporate Tax Reform III (eg, canton of Geneva to 13.49 per cent).

Capital tax is raised on the company’s equity at variable rates depending on the canton where the company is domiciled, but it usually below 5 per cent.

A company may apply for a tax holiday if certain conditions are met. Tax incentives are granted on a case-by-case basis and their extent and duration largely depends on the size of the investment and the importance attributed to the economic development of the canton or region concerned. Such incentive may be either relief or exemption from income and annual capital tax for up to 10 years.

Overall, the joint venture parties should carefully analyse the situation and obtain tax advice before they establish the joint venture entity. The Swiss tax regime is very competitive. Searching for a beneficial tax structure within Switzerland will most certainly lead to an attractive result.

Asset contribution restriction

Are there any restrictions on the contribution of assets to a joint venture entity?

There are no restrictions on the contributions of assets to a joint venture entity, provided that the relevant assets are tradable, available to the company immediately after the contribution, can be capitalised in the balance sheet and the company can liquidate them, if necessary. Contrary to foreign jurisdictions, obligations of third parties to provide services to the company are not considered contributable assets.

Interaction between constitution and agreement

What is the interaction between the constitution of the joint venture entity and the agreement between the joint venture parties?

The articles of association (constitution) of the joint venture entity and the agreement between the joint venture parties are in principle separate items and they do not directly interact with each other. It goes without saying that the joint venture parties will mirror their agreement in the articles of association in order to safeguard certain aspects of their agreement. This includes, in particular, the purpose of the joint venture entity, maintaining the balance of power (ie, the shares the parties hold) between the parties, transfer restrictions of shares, the number of board members and the overall composition of the board and termination of the company if a specific goal is reached. The extent to which this is possible is limited by applicable law. However, since the articles of association are publicly available in Switzerland, but the joint venture agreement is not (and there is also no requirement for registration), joint venture parties usually prefer not to include too many details in the articles of association. Additional organisational matters are usually included in the organisational by-laws, which is an internal document. Conflicts between the articles of association and the agreement between the joint venture parties often create a conflict of interest for the board (see question 12).

Party interaction

How may the joint venture parties interact with the joint venture entity? Are there any restrictions?

If the joint venture entity is an AG, the joint venture parties will typically be the shareholders and benefit from all of the shareholders’ rights, including the right to obtain the annual report and the audit report (article 696 of the CO) and the limited right to information (article 697 of the CO), which may only be refused where providing such information would jeopardise the company’s trade secrets or other interests warranting protection. Under certain circumstances, the board of directors will want to withhold some information if this is required in the interest of the joint venture entity. However, the board of directors may in principle share all information with the shareholders informally as long as all shareholders are treated equally, there are no conflicts with the interests of the joint venture entity and the information is not restricted for other reasons (eg, data protection in relation to customer information). In any event, each joint venture party should ensure that it may nominate a board member. By contrast, in contractual joint ventures the parties have a right to information on the status of the joint venture’s affairs, to inspect its books and documents and to obtain a summary statement of its financial position (article 541 of the CO).

Exercising control

How may the joint venture parties exercise control over the joint venture entity’s decision-making?

For the protection of the joint venture parties, the joint venture agreement may, for example, require that shareholders’ meetings are duly constituted only if all shareholders (ie, joint venture parties) are present in the meeting or that specific decisions require an elevated quorum (for example, changes to the joint venture vehicle, such as liquidation or a merger or changes to the capital structure). Further, casting votes in favour of a joint venture partner can be provided for in the agreement in case of a deadlock situation (see question 21).

Minority shareholders do not enjoy particularly strong protection under Swiss law; however, any shareholder - including minority shareholders - may challenge the validity of resolutions that violate statutory law or the articles of association. In addition, the joint venture agreement can provide for additional protection of minority investors by, for example, requiring consent of all joint venture parties for particularly important decisions, such as decisions relating to capital expenditure exceeding a specified amount or the sale of important assets.

Governance issues

What are the most common governance issues that arise in connection with joint ventures? How are these dealt with?

Joint venture corporations face different governance challenges than, for example, public companies. While public companies may be concerned with stopping self-dealing, the major goal of a joint venture will be to balance the goals of the joint venture undertaking with the individual goals of the partners. Balancing these interests may become a challenge where the founders of a joint venture have representatives on the board of directors and these representatives endorse the interests of the founders (see question 12). Independent committees and codes of conduct can be used to level out the interests. Further, specialised committees may be helpful, especially where the joint venture engages in the technology or manufacturing business. Focusing on technical issues and resolving disputes relating to technical matters can then be dealt with by such committees.

Nominee directors

With an incorporated joint venture, what controls exist in your jurisdiction in relation to nominee directors? How should a nominee director balance the potentially conflicting interests of the joint venture company and the appointing shareholder?

The members of the board of directors of a Swiss AG are elected by the meeting of shareholders. From that perspective, a board member nominated by a shareholder is no different than his or her fellow board members. In practice, such a ‘nominee director’ often has an agreement with the appointing shareholder, which may result in conflicting duties towards the appointing shareholder on the one hand and the joint venture entity on the other. When the nominee director decides within his or her margin of discretion, it is considered acceptable that he or she acts based on the instructions of the appointing shareholder. If, however, there is a conflict of interest, the interests of the joint venture entity must take precedence or the ‘nominee director’ may incur personal liability. This risk can be mitigated to expressly define the support of the joint venture business as a purpose of the joint venture entity in its articles of association.

Competition law

What competition law considerations are engaged by the formation and operation of the joint venture? Is approval needed?

Generally speaking, two types of joint ventures can be distinguished from a competition law perspective. They are subject to different competition rules.

Full-function joint ventures are joint ventures that perform on a lasting basis all the functions of an autonomous economic entity. If the joint venture is a new entity, business activities from at least one of the controlling undertakings must be transferred to the joint venture for it to be picked up by merger control. Such transactions must be notified to the Swiss competition authorities prior to their implementation if the following thresholds are both met:

  • worldwide turnover of the undertakings concerned is at least 2 billion Swiss francs or the turnover in Switzerland is at least 500 million Swiss francs; and
  • at least two of the undertakings concerned each reported a turnover in Switzerland of at least 100 million Swiss francs (article 9 of the Federal Act on Cartels).

If the joint venture has no sufficient connection to Switzerland (ie, the joint venture has no intention to operate and generate turnover in Switzerland), a notification may not be required. This should, however, be discussed with the competition authorities in each case.

Cooperative joint ventures are joint ventures that are not full-function joint ventures. These are assessed under the rules applying to horizontal agreements. Such transactions can be notified pursuant to article 49a of the Federal Act on Cartels prior to their implementation.

Provision of services

What are the key considerations in your jurisdiction in structuring the provision of services to the joint venture entity by joint venture parties?

Generally, the provision of services to the joint venture entity should not create particular issues, to the extent that the board of directors does not outsource its non-transferable and inalienable duties (eg, the overall management of the company, the organisation of the accounting, financial control and financial planning systems as required for the management).

Employment rights

What impact do statutory employment rights have in joint ventures?

In general, Swiss employment law is of a very liberal nature. This means that an employment contract can be terminated on whatever grounds there may be, which also applies in a joint venture situation. However, an abusive termination may lead to penalties and damages.

The Swiss jurisdiction provides for a dual system for the granting of residence and work permits to foreigners, which distinguishes between EU and EFTA nationals (based on the Agreement on Free Movement of Persons) and non-EU or non-EFTA nationals (ie, ‘third-country nationals’).

EU or EFTA nationals only require a work permit for gainful employment lasting for more than three months, irrespective of their qualifications.

By decree of the Federal Council, qualified employees from third countries are admitted to the Swiss labour market in limited numbers, only if they are well qualified and fulfil certain statutory requirements, such as being a qualified employee. Statutory requirements include, among other things, providing proof that a person cannot be recruited from the labour market in Switzerland or another EU or EFTA member state. Certain exceptions can be made to the admittance requirements, for example for the transfer of cadre or specialists within international businesses or joint ventures. However, quotas for work permits exist on both the cantonal and the federal level and also apply to such exceptional work permits for qualified workers.

Intellectual property rights

How are intellectual property rights generally dealt with on the creation, operation and termination of a joint venture in your jurisdiction?

As further described in question 17, all assets contributed to the contractual joint venture are then jointly owned by the joint venture parties. Therefore, intellectual property rights are often transferred to the joint venture by way of a licence agreement, whereby the ownership remains with the parties.

However, it is also possible to transfer an intellectual property right to the joint venture entity as a contribution in kind. The valuation of a contribution of an intellectual property right in kind may pose problems in the event of the bankruptcy of the joint venture corporation or in the event the contributing party leaves the joint venture corporation. In both events, an initial under- or overvaluation may lead to liability towards creditors, shareholders or the leaving party.

Regardless of whether the joint venture is organised contractually or by corporation, it is highly advisable to agree on the rights and obligations of the joint venture parties in relation to the ownership and use derived from the joint venture’s operations both during the operational life of the joint venture and in case of a termination of the joint venture. These should be clearly established in the partnership agreement or the licensing agreement.

Joint venture parties should keep in mind that Swiss law provides for the employer’s ownership of inventions and designs created by employees (article 332 of the CO).