Texas – DL We have done a lot of work on tax recently. The stated intend of the new tax code was to pull money back into the US and stop US companies from going abroad. This is 100 per cent diametrically opposed to the new tariff proposals, which are driving companies out of the country.
The tax law created a one-time repatriation tax which is very complicated. We have just finished working through one with a Brazilian company. If you are Exxon, it’s very easy to understand, but if you a small company with JV partners, it’s a very weird and complex set of rules.
The GILTI tax is another new tax on all controlled foreign corporations (CFCs). If you have a foreign company in any country, operating solely in that other country, the US has changed its forever structure by imposing this new GILTI tax, which is a 10.5 per cent tax on current income, even if the operations are solely and exclusively in another country.
The C-corporation tax that Mark mentioned means that US companies doing business abroad do benefit from a reduction in tax which results in an ultimate tax of 13.125 per cent. The bizarre part of that is the incentive to move outside of the US. A company can provide a service in the US and pay 21 per cent tax, but can provide that service outside the US via JV and reduce that to 13.125 per cent. There is a lot of corpo- rate structuring going on right now, as a result of the new tax act.
Washington, D.C. – WS The tax issue doesn’t drive the decision making, if a party had a really good business rationale, but it is always an early item on the checklist. The reforms have made things more advantageous internationally for moving JV entities onshore into the US.
Spain – BDG In Spain there are no general rules, just a case-by-case basis to see which structure is better. The general rule is that corporate income tax is 25 per cent of the profit with some benefits for the early years of the company. There are some interesting tax benefits when the JV develops IP or IT, the so called “patent box”.
One thing to say is that, in this temporary union of companies (UTE), both the companies involved pay taxes, as if the JV didn’t exist. To decide the best approach on tax terms should imply to review the tax treatment of the foreign company in its home country and the double taxation treaties that may apply.
New Zealand – MC For Incorporated JVs, transferring shares in the JVCo can have adverse tax consequences impacting on the JVCo’s ability to carry forward tax losses and to retain valuable imputation credits for shareholders.
Another significant disadvantage of a JVCo is that any capital gains generally cannot be distributed tax free to New Zealand tax resident shareholders during the JVCo’s life, and cannot be distributed tax free to international (non-resident) shareholders at all.
Other tax consequences can arise from the transfer of assets by the JV parties into the JVCo – for example, an asset which has increased in value since it was acquired by the relevant share- holder, which is then transferred to the JVCo (perhaps in exchange for shares on incorporation), may bring about a tax liability for the JV party. Tax consequences may also arise if shareholders deal with the JVCo on non-arm’s length terms.
There are also a number of tax limitations on the use of Limited Partnerships. From a commercial perspective, income, gains and losses can be attributed to limited partners in agreed proportions, however, from a tax perspective, partners are instead treated as receiving a share of all amounts in proportion to their part- nership share.
Also, while LPs are relatively flexible in terms of further investment (as additional limited partners can easily be added to an LP), introducing new limited partners and selling existing partnership shares to new partners can give rise to unexpected tax consequences. Finally, there may also be limits imposed by the ‘loss limi- tation rules’ on the amount of deductions that a limited partner can claim.
For an unincorporated JV (UJV), deciding whether or not a legal partnership is created by a UJV requires a detailed assessment of all the facts and relevant law. Expert tax and legal advice, and a well-drafted UJV agreement are critical to ensure that the wrong UJV structure is not inadvertently adopted.
Brazil – ADC Brazil is known for having a large number of different taxes and a complex taxation system. Therefore, it is important to have a good understanding of the possible taxes that will impact the joint venture in different scenarios before structuring it.
First, it is important to stress that the importation of services by a Brazilian customer from a foreign entity may trigger taxes reaching almost 50 per cent of the price of the services, depending on the nature of the services, the existence, or not, of a double taxa- tion treaty and whether the payment is grossed-up for withholding taxes. This high tax burden is an incentive for one to avoid a contractual joint venture where one of the parties provides services from abroad to Brazilian customers. In other words, it is an incentive for the creation of a NewCo in Brazil with the resources and capability to provide services to Brazilian customers.
In the case of a NewCo, the foreign party should know the taxation on the funding of the NewCo and on the disposal of the investment. In a nutshell, funding through capital increases would ensure minimal taxation, where only a tax levied on the foreign exchange transaction would apply on the remittance of the capital at the rate of 0.38 per cent.
The payment of dividends abroad is exempt from taxes, at the moment. The repatriation of capital – by virtue of a capital reduction or dissolution – will be subject to capital gain tax at progressive rates ranging from 15 per cent to 22.5 per cent on the difference between the amount of the capital invested and the amount remitted. The sale of the shares by the foreign party will also be subject to capital gain tax. The definition of the location of NewCo in Brazil should consider the applicable State and Munic- ipal taxes. Prior studies are required.
If the joint venture is established within an existing Brazilian company, due dili- gence, particularly in connection with tax matters, is extremely relevant, in view of the complexity of the system and of the hefty penalties applicable in case on violation of tax laws.
The intercompany agreements between the NewCo and its shareholders will, in principle, be subject to the transfer pricing rules applicable in Brazil and in the jurisdiction(s) of the shareholders.
On the other hand, a consortium arrangement or a contractual joint venture allow each party to provide its goods and services separately, thus segregating its invoices and tax liabilities.
In any event, if there is one piece of advice that we deem relevant in connec- tion with taxes in Brazil, it is that the parties should analyse the scenarios and plan in advance, as it is not simple to undo or fix structures that create unde- sired tax liabilities.
Iceland – ST The corporate income tax is 20 per cent of commercial profit and the VAT on sale of goods and services is 24 per cent, with few lower exemptions. It is important to register the corporate structure as a VAT company right after its incorporation in order to get all accrued VAT back. VAT accrued prior to the VAT registration is not refunded, and VAT registration is a simple procedure. Iceland´s local currency is Krona (ISK) and corporate accounts are to be filed in the local currency.
It is possible to apply for exemption and be allowed to register the annual accounts of a company in foreign currency. It is usually allowed when the major income and costs are in a foreign currency. Withholding tax on dividends is subject to bilateral tax agreements for each country and the corporate form of the JV partner.
Belgium – SB A JV established by way of a corporation (separate legal entity) is subject to corporate tax in Belgium. For large companies, the corporate tax rate is reduced from 33.99 per cent to 29.58 per cent as from assessment year 2019, and will be 25 per cent (abolishment of crisis contribution) starting in assess- ment year 2021.
For SMEs, the rate goes down to 20.4 per cent (including crisis contribution of 2 per cent) on the first bracket of EUR100,000 of net taxable income as from assessment year 2019 and will be 20 per cent (abolishment of crisis contribution) starting in assessment year 2021. This small and medium enterprise (SME) rate will only apply if a minimum salary of at least EUR 45,000 is paid to a company director (individual).
A purely contractual JV is subject to tax transparency, but if the JV is deemed to have a permanent establishment (i.e. if the tax authorities identify the JV as a permanent establishment taxable as a separate entity), the JV will have to pay the corporate tax on its profits.
Transfer pricing between the JV and the partners should be scrutinised carefully, as it could lead to taxation if the transfer pricing is not at arm’s length.
Germany – MS Tax treatment depends on each project and influences the way it is structured. Taxes in Germany are quite high, so if you have a JV partner in a foreign company, it is best to use tax treaties between those countries.
England – AC In the UK, if you have a centralised JV vehicle, it is treated in the same way as many normal companies in the UK. From a tax perspective, the JV will be responsible for tax in the same way as a corporate registered in England and Wales. It will be responsible for tax on profits and VAT, it will also need to deal with employment tax, income tax and national insurance that may be due for members of staff working in the JV.
We would also highlight transfer pricing in the context of a JV. The key thing we find is that providing the JV with goods, services, resources or support and access to facilities can be subject to transfer pricing regulations and that must be considered carefully.
This is particularly true when there is an international dimension to the JV. Various regulations will apply in the home country of the JV partners, as well as in the UK, if the JV is incorporated here.
If you had a French company and a UK company in a JV, or two overseas companies entering a JV in the UK, there are potentially three or four sets of tax laws that could apply, depending on how they were being treated, so looking at transfer pricing and tax treaties is crucial for tax efficiency.
There is a common intention of everyone in a JV to make some profit and extract that through dividend or capital distribution. Careful thought needs to be given I order to avoid withholding tax or double taxation.
Slovakia – AV Yes, indeed, according to applicable Slovak legislation, the clients have to consider income tax regulations, impact of double taxation treaties and their transfer pricing strategies, which all depend on the business model and the structure of the JV in order to avoid any unexpected issues in their future.
Cyprus – SF The Cyprus tax regime is regarded as one of the most favourable and advantageous tax regimes for business in Europe. However, each structure, depending on its nature, has some specific attributes with regards to the taxation regime applicable.
The taxation of income in a Cypriot corporate vehicle occurs at the level of the company. The participants are not taxed on dividends in Cyprus unless they are tax residents here or are companies, for which the corporation tax is in the region of 12.5 per cent.
With such a low percentage, and taking into account that Cyprus has a wide network of double tax treaties, there is clearly the potential of tax optimisation for an international client choosing to use a corporate joint venture. It should further be noted that, for a company to be taxed in Cyprus, its management and control will need to be exercised in the Republic.
Interest received in the course of the main business activity of a corporate joint venture or closely connected with it, less the costs of earning the interest, is subject to income tax at 12.5 per cent.
Interest payable by a corporate joint venture to a non-resident shareholder is not subject to withholding tax. Generally, interest expenses payable by a Cyprus corporate joint venture are fully deductible, provided that it can be shown that the respective loans are at arm’s length.
Where an excessive interest rate exists, this will be disallowed for tax deduction purposes.
Profits realised from the disposal of securities are exempt from taxation, unless they are gains from the sale of shares of a corporate joint venture that owns immovable property in Cyprus. These are subject to capital gains tax to the extent that they relate to the property. The Income Tax Law, as amended, provides group relief by allowing resident compa- nies of a group to offset losses against taxable profits.
Taxation for partnership joint ventures occurs at the level of the participants and any profits or losses accrue to them. Each partner is responsible for filing its own tax return dealing with its share of the profit. Tax transparency can be unwelcome when profits increase, because the attribution to the partners is automatic, potentially hindering effective tax planning.
With contractual JVs, taxation occurs at the level of the participants and any profits and losses accrue to them. This may be considered as one of the most important downsides of a contractual joint venture, although there is a possibility of independent tax planning for each partner, with regard to the losses incurred and the profits earned, mitigating the negative effects of tax trans- parency.
EEIGs are also tax transparent, meaning profits and losses are taxable at the hands of the participants and not at the level of the European Economic Interest Grouping. National laws regulate substantive issues regarding, inter alia, the exact tax rate and generally the appli- cable tax procedures