Setting up and operating a joint ventureStructure
Are there any particular drivers in your jurisdiction that will determine how a joint venture is structured?
Typically, tax considerations are important drivers that will determine how a joint venture is structured. Other key factors that may drive the structure of a joint venture are:
- the accounting treatment of the joint venture (in particular, whether the joint venture partners wish to include the joint venture in their consolidated accounts);
- the respective ownership percentages of the partners;
- the duration of the joint venture;
- competition law aspects;
- corporate governance considerations;
- the jurisdictions where the joint venture partners are based; and
- the jurisdictions in which the joint venture will be investing.
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?
One of the most important aspects to consider from a tax perspective when establishing a joint venture is the legal form of the joint venture vehicle and its qualification under Dutch tax law. This qualification of the joint venture vehicle is decisive when determining whether the joint venture parties or the joint venture vehicle are subject to taxation in the Netherlands. The legal form of the joint venture vehicle can also be relevant for Dutch dividend withholding tax purposes. Generally, only entities with a capital divided into shares are subject to the Dutch dividend withholding tax act.
A transfer of shares or assets and liabilities from a joint venture party to the joint venture vehicle can trigger corporate income tax or real-estate tax, or both. However, Dutch tax law includes several provisions that could effectively allow for a tax-free contribution by the joint venture parties to the joint venture vehicle. Apart from several roll-over facilities, the participation exemption could provide relief for situations in which qualifying shareholdings are contributed by Dutch-resident joint venture parties.
If a joint venture party transfers a business to the joint venture, this will generally be considered a transfer of a business going concern for Dutch VAT purposes and deemed not to fall within the scope of Dutch VAT.
Under the foreign taxpayer rules, foreign joint venture parties can be subject to Dutch corporate income tax for holding an interest in the Dutch joint venture vehicle. In addition, any interest on a loan between the joint venture vehicle and the joint venture parties can also be captured by these rules. In most cases, it is relatively straightforward to structure around these rules, but it is important to consider the potential tax implications when setting up the joint venture structure.
Tax-planning strategies for setting up a joint venture structure that involves the use of hybrid mismatch arrangements should be revisited as the Netherlands will implement the amendment of the EU anti-tax avoidance directive (ATAD 2) with effect from 1 January 2020. Once implemented, it will be more difficult to set up a structure with double deductions or to claim a deduction without corresponding inclusion by using hybrid mismatches. Instead, tax-planning strategies should focus on the possibilities to claim roll-over facilities or exemptions where possible and needed, shifting profits from high-tax jurisdictions to low-tax jurisdictions using debt instruments, and on withholding taxes for which no credit is available.Asset contribution restriction
Are there any restrictions on the contribution of assets to a joint venture entity?
Under Dutch corporate law, there are no restrictions on the contribution of assets to a joint venture entity. However, if the joint venture vehicle is a BV or an NV, additional formalities apply if the contribution is made in exchange for one or more shares in the capital of the company.
If the joint venture entity is a BV, the management board of the BV must prepare a so-called management description that must state the value of the assets to be contributed and the valuation method applied. The valuation method applied must be in accordance with generally accepted accounting standards. The management description must refer to the condition of the relevant assets on a date that must be within five months before the date of the share issue.
If the joint venture entity is an NV, in addition to the preparation of a management description, an auditor must issue a certificate confirming that the value of the assets to be contributed is at least equal to the aggregate par value of the shares to be issued. In practice, this requirement proves to be quite burdensome, especially if the aggregate par value of the shares to be issued is substantial.
No similar requirements as to the value of the assets to be contributed exist if the contribution is made without the joint venture issuing any shares in exchange (ie, the contribution is made as a share premium contribution).
If the joint venture vehicle is a partnership, no requirements exist as to the valuation of the assets to be contributed.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?
If the joint venture vehicle is an entity with legal personality, the articles of association are its constitution. Since the articles are available for public inspection at the trade register of the Chamber of Commerce, all arrangements between the joint venture parties that are included in the articles are public information. For this reason, joint venture parties often decide to include all arrangements containing privileged information in the joint venture agreement only and not also in the articles. There is no requirement to register or file the joint venture agreement.
It is common practice to include a clause in the joint venture agreement stipulating that in case of a discrepancy between the joint venture agreement and the articles of association, the joint venture agreement prevails. The joint venture partners should be aware that, unlike the joint venture agreement, the articles of association have corporate effect, which means that the articles are binding not only on the joint venture partners but also on any third parties. It also means that any actions or resolutions taken in breach of the articles of association will be null and void, whereas actions or resolutions taken in breach of the joint venture agreement only constitute a breach of contract. Although the articles provide more protection and more certainty for the joint venture parties than the joint venture agreement, in practice it is not considered problematic to include specific arrangements between the parties in the joint venture agreement only.Party interaction
How may the joint venture parties interact with the joint venture entity? Are there any restrictions?
Information sharing and any other interactions between the joint venture entity and the joint venture parties are subject to the contractual arrangements included in the joint venture agreement and, in the case of an entity with legal personality, the provisions of the articles of association. In the case of a BV or NV, there is the statutory rule that the company’s management board and supervisory board or the one tier board, as the case may be, are required to provide all information requested by the general meeting, unless providing such information is contrary to an overriding interest of the company. It is unclear to what extent individual shareholders also have a right to information. Restrictions on information sharing may apply under rules of competition law or under the General Data Protection Act.Exercising control
How may the joint venture parties exercise control over the joint venture entity’s decision-making?
One of the most common and effective mechanisms allowing a joint venture partner to exercise control over the joint venture company is the right of a joint venture partner to nominate its own representatives in the company’s management board, supervisory board or one tier board. A shareholder’s right to nominate a member of a corporate body is usually structured as a binding nomination right and can be included in the joint venture agreement or the company’s articles. In the case of a BV, a shareholder can even be given the right to directly appoint its own representatives in the company’s corporate bodies. The right to nominate (or appoint) is often combined with specific quorum requirements and a provision in the articles stipulating that the company can only be represented vis-à-vis third parties and important decisions can only be taken with the minority investor’s involvement.
The other most common control mechanism in a joint venture company is to include in the joint venture agreement or the articles a list of reserved matters. Decisions on reserved matters can only be taken with the consent of the minority shareholders.Governance issues
What are the most common governance issues that arise in connection with joint ventures? How are these dealt with?
The most common governance issues arising in connection with joint ventures are related to the allocation of powers to the joint venture partners and how the joint venture partners can effectively exercise control over the joint venture and its business. If the joint venture entity is structured through a legal entity, typically the allocation of powers is partly laid down in the entity’s articles and partly in the joint venture agreement. Especially in the case of joint ventures where the ownership is not divided equally between the joint venture partners, both the articles and the joint venture agreement are often extensive and detailed. The reason for this is that the Dutch Civil Code provides little protection to minority shareholders, which means that minority shareholders will have to protect themselves through the joint venture agreement and the articles, if, for instance, they want to prevent being outvoted in respect of key decisions or being diluted in cases of capital increases.
Other important governance issues are concerned with how to balance the interests of the joint venture partners on the one hand and the interests of the joint venture on the other, and how to deal with deadlock situations.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?
Each director of a Dutch company has a fiduciary duty towards the company and should at all times perform his duties in good conscience. The Dutch Civil Code prescribes that in the performance of their duties, directors must be guided by the interests of the company. This implies that a nominee director is not allowed to act merely as a direct representative of the joint venture partner that nominated or appointed him or her and, in cases of potentially conflicting interests of the joint venture company and the appointing shareholder, the director cannot let the interests of the appointing shareholder prevail.Competition law
What competition law considerations are engaged by the formation and operation of the joint venture? Is approval needed?
If a joint venture qualifies as a concentration under the Dutch Competition Act and certain turnover thresholds are exceeded, the joint venture must be notified to the Netherlands Authority for Consumers & Markets (ACM). The ACM will investigate whether, as a consequence of the joint venture being established, a dominant position is created or strengthened that significantly restricts competition on the Dutch market. Such a joint venture may only be formed after consent from the ACM has been obtained. A joint venture is considered a concentration as meant in the Dutch Competition Act if:
- two or more joint venture partners can jointly exercise control over the joint venture; and
- the joint venture performs, on a continuing basis, all the functions of an autonomous economic entity.
If the joint venture does not qualify as a concentration, it may fall within the scope of the general cartel prohibition. In that case, the joint venture agreement will be null and void, unless one of several EU group exemptions applies, such as the group exemption for specialisation agreements or the group exemption for research and development agreements.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?
It is quite common that joint venture partners provide services to the joint venture. The terms under which the services are rendered can be included in the joint venture agreement or in separate agreements. The key consideration in structuring the provision of services to the joint venture entity by the joint venture parties is that these services must be provided on an arm’s-length basis. This is important both commercially and from a tax (transfer pricing) perspective.Employment rights
What impact do statutory employment rights have in joint ventures?
Various aspects of Dutch employment law have a significant impact in joint ventures. The impact of statutory employment rights in joint ventures is no different from other types of entities.
Worker mobility between the joint venture parties and the joint venture is subject to the general provisions of the Dutch Civil Code. Various rules apply, depending on the manner in which worker mobility is structured. In the event of a transfer of an employee from one of the joint venture parties to the joint venture, the latter is to be regarded as successive employer. The legal consequences are far-reaching with regard to, for example, the order of dismissal in the event of collective dismissal, the amount of the transition payment and the length of the notice period to be observed by the employer.
If cross-border employment is involved, it should be noted that all statutory employment provisions must be applied to employees who perform their work in the Netherlands. In addition to this, all employees seconded to the Netherlands to work for the joint venture are entitled to a limited number of basic employment conditions, such as the minimum wage, minimum paid annual leave and protection against discrimination, regardless of the law applicable to the employment contract.
In the event that a joint venture party contributes significant tangible assets to the joint venture (including employees), this may qualify as a transfer of an undertaking under EU and Dutch law. In that event, employees employed by the joint venture party and working for the business to be transferred will become employed by the joint venture by operation of law and under the same terms and conditions. In addition, dismissal following such a transfer of an undertaking is subject to more stringent rules. This also applies to a possible harmonisation of the terms and conditions of employment following a transfer.
Lastly, if the joint venture has a works council, its employees in the Netherlands must be involved in certain decisions of the management of the joint venture.Intellectual property rights
How are intellectual property rights generally dealt with on the creation, operation and termination of a joint venture in your jurisdiction?
When setting up the joint venture, intellectual property (IP) rights owned by the joint venture partners can be either transferred to the joint venture or the joint venture partners will retain ownership and grant a licence to the joint venture. The joint venture parties should also agree from the outset how to deal with newly created IP rights, not only for the duration of the joint venture but also upon termination of the joint venture.