Cyprus — Joint Ventures in practice

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, whether this is a particular project or business activity. There is no specific statute governing joint ventures yet in practice such arrangements take one of the following structures.

1. Corporate Joint Venture

The cooperation materialises through the setting up of a legal entity separate from its participants with constitutional documents governing its operation and the relations between the participants and the entity in addition to the statutory provisions of the Cyprus Company Law, Cap 113. A shareholders’ agreement is typically executed operating in parallel. It is possible that further agreements such as licences for use of intellectual property etc. will be signed. This vehicle might be 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. The termination is usually addressed in a shareholders’ agreement which specifies events of termination e.g. change of control, insolvency of a participant, attainment of objective etc. as well as the relevant processes e.g. sale of shares among participants, liquidation etc.

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. If the company is to be taxed in Cyprus, the management and control will need to be exercised in Cyprus. Any assets, including intellectual property created by the company, become property of the new entity. The setting up of the company might be subject to notification to the competent competition authority under merger control rules. Corporate joint ventures are commonly used by international clients aiming to benefit from the network of double tax treaties maintained by Cyprus. They are also a vehicle often employed to enter the Cyprus market with the assistance of a local participant.

Advantages:

• Limited liability; liability of participants limited to capital.
• Participants control the company through the power of appointment of the board of directors.
• The company is governed by the Cyprus Companies Law, Cap. 113, a statute based on English company law rules, which gives more legal certainty and familiarity for participants as well as the counterparties. The relationship is not purely contractual.
• Tax optimisation possibilities given the low rate of corporate taxation applicable in Cyprus (at the rate of 12.5%). The numerous double tax treaties maintained by Cyprus may be exploited.

Disadvantages:

• 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.

2. Partnership Joint Venture

The 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. In the first case, each partner has unlimited liability with the other partners for all debts and liabilities of the partnership. In the second case, only the general partner has unlimited liability; limited partners are only liable for the capital they agreed to invest but should not participate in the running of the business. The relevant statute imposes default and overriding rules governing the arrangement e.g. in relation to the termination or profit sharing. The termination of the partnership will typically be governed by the partnership agreement, but the statute also provides for specified circumstances which would apply unless the parties agree otherwise. Business assets and intellectual property contributed by each party become the property of the partnership (except if agreed otherwise) and should be exploited in accordance with the partnership agreement for the purposes of the partnership.

Partnerships are tax transparent, accordingly, taxation occurs at the level of the participants and profits and losses accrue to them. Partnerships might be subject to competition law rules prohibiting the restriction of competition. Further, the creation of a partnership might be subject to notification to the competent competition authority under merger control rules. Partnership joint ventures are regularly used for economic activities of professionals. They have also been used as a vehicle in the context of tenders (public or other).

Advantages:

• 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.
• Apportionment of profits and losses on the basis of discretion.
• 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.

Disadvantages:

• 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.

3. Contractual joint ventures

The basis of the cooperation of the participants is solely a contractual agreement between them. It is expected that such agreement will include detailed provisions regulating the rights and liabilities of the parties towards each other, the distinct role and input of each, their contributions, their share in the income generated etc. No separate legal personality is created. Business assets and intellectual property remain the property of the participant who contributed or developed them (unless of course the parties agree otherwise).

Profits and losses accrue to the participants and taxation is also incurred at the level of the participants. Such arrangements might be subject to competition law rules prohibiting the restriction of competition. Contractual joint ventures are commonly used in the context of tenders (public or other).

Advantages:

• Governed solely by contact law thus greater flexibility as to the operation and termination. Contract law in Cyprus is based on common law principles.
• No registration requirements.
• Minimal formalities compared to the other possible structures.
• No joint liability; liability towards third parties limited to own acts or omissions of each participant.
• Independent tax planning possibilities for each participant as regards losses incurred and profits earned.

Disadvantages:

• Lack of legal personality might cause difficulties in establishing commercial or contractual relationships with third parties.
• Need for detailed regulation of all aspects of the cooperation in the agreement due to the lack of legal framework for the relationship; careful and skilful planning is required.
• Depending on the facts and provisions adopted, risk of classification of the relationship as a partnership by a court with the consequence of joint liability.

4. European Economic Interest Grouping (EEIG)

A vehicle established and governed predominantly by European law (Council Regulation 2137/85) instead of national law. Specific purposes for EEIGs apply i.e. to facilitate or develop the economic activities of the members to enable them to improve their own results. In that context the activities of EEIGs must be related to the economic activities of the members but not replace them. The purpose is not to make profits for the EEIG itself. EEIGs are governed by a contract between their members and Council Regulation 2137/85. They have capacity, in their own name, to have rights and obligations of all kinds, to contract or accomplish other legal acts as well as to sue or be sued. 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 at the hands of the participants.

Advantages:

• Established under European law; EEGIs might be ideal for alliances of firms in different member states of the European Union for joint promotion of activities.
• Relatively fewer formalities apply than in the case of corporate joint ventures though there are registration requirements.
• Tax transparency.

Disadvantages:

• Managers bind EEIGs as regards third parties, even if their acts do not fall within the objects (unless the third party had knowledge).
• Unlimited liability of participants.
• More limited scope for use due to the statutory purposes dictated.

Which option is the most appropriate and or efficient in terms of structuring in a particular case depends on the facts at hand and the actual needs of the participants. The different factors need to be carefully examined with the help of experts so that the most suitable solution is adopted.