In nearly all areas of commerce, businesses are looking beyond their own borders to compete in the international marketplace. Often this involves seeking out foreign partners to combine their commercial strengths and resources through strategic alliances.

For those involved in the technical aspects of structuring a joint venture, the variety of form and objectives pose real difficulties in suggesting "off-the-shelf" solutions. Too often the choice of a corporate structure is made without a full analysis of other possibilities. When the joint venture proposed involves more than one jurisdiction, the options to be considered, and the costs involved in getting it wrong, increase significantly.

Where possible, technical support needs to be given at an earlier stage than in domestic joint ventures. A critical part in the process will be to translate each party's expectations as to form, documentation and fiscal structure into issues that the other parties can understand, so that time is not spent negotiating and winning or conceding points which are wholly technical in nature. Many complex issues can arise in a cross-border transaction. Therefore, an understanding of the cultural, legal and fiscal background of the other parties, and the locations in which business is to be done, can be a very significant aid in removing misunderstanding and allaying suspicions.

While the differences between one joint venture and another are more pronounced than the similarities, it is possible to set out broad principles and offer ideas and solutions which are of general application.

Over and above all the legal and tax considerations raised in the context of domestic joint ventures, cross-border joint ventures raise additional issues as they involve parties from different legal and tax jurisdictions, and conduct business across international borders.

These issues include:

An extended range of variables means a greater opportunity for planning (and for pitfalls) in structuring the joint venture.

Cross-border joint ventures involve different countries with different legal systems which operate differently from each other. This is particularly so when comparing civil law systems (the legal system prevalent in most of Europe, other than the UK and Ireland) and common law systems (for example, the US, UK and former dependent territories). Cultural differences in legal systems may cause problems or difficulties not always readily apparent.

The Anglo-American experience is based largely on the principles of contract law. If two parties agree to do something, it will be described and defined in detail with an attempt being made to document the rights and duties of the parties in most conceivable situations. The parties will expect their provisions to be fully enforceable and remedies clear. (For an overview of the tax issues that arise on the establishment, operation and termination of US based joint ventures, see PLC Corporate & Securities, Practice note, Joint Ventures: Tax Issues.) Under civil law, the approach and expectation is different (see box, ).

Parties entering into joint ventures under civil law systems should be aware that their rights and duties may be affected by the general legal background.

It is essential to address fully the key commercial elements of the proposed arrangement. Cross-border joint ventures are not fundamentally different creatures in this regard from their domestic cousins. In each case, it is necessary to identify the critical elements which will shape the deal. Each involve the same basic issues:

Put more simply, joint ventures are about money in, money out and control (see diagram, Money in/money out).

The key commercial elements must be considered in the context of the following practical issues:

When considering the viability and shape of the deal, certain legal, regulatory and tax issues may be of such a nature that they become deal breakers (see below for examples).

Having dealt with any potential deal breakers, the parties should concentrate on considering optimisation techniques. As already mentioned above, the choice of structure is often, though not always, tax driven.

Optimisation techniques include:

If the joint venture is to be set up to operate from, or trade in, a particular territory, the location may be a commercial given. However, the operations may still be structured in different ways. Operations may be in Country A but finance can be provided from Country B, technical know-how and intellectual property licensing from Country C, and parent companies located in Country D. An operation carried on by a branch of a foreign incorporated company may be located for tax or regulatory purposes in both countries, or only in the jurisdiction of the head office or principal place of management.

In other cases, several territories may be possible locations so that some positive planning is possible. This may be so if the business is to be conducted across several jurisdictions, or if the choice of location (for example, for a new factory) is dependent on the particular incentives offered by competing jurisdictions.

Some territories offer incentives for particular activities or for entities formed under the local law. However, over the last decade or so, the European Commission has investigated certain selective tax regimes (for example, in Ireland and Belgium), and has found that they constitute harmful tax competition between member states. In response, Belgium phased out the extremely attractive tax breaks which it had offered for the establishment of co-ordination centres and established a new regime under which Belgian companies are entitled to deduct a notional interest charge on equity capital. Ireland responded to the European Commission investigation by phasing out its special 10% tax rates (which applied to certain manufacturing activities and for foreigners investing in financial services located in the Dublin Docks) and replaced it with a general low rate of corporation tax (12.5%). For this reason, Ireland remains a fiscally attractive place to invest.

Even the UK, which is not renowned for offering tax breaks, participates in the intense competition in Europe to attract head offices of multinationals. The exemption for capital gains on the disposal of substantial shareholdings, and the absence of UK withholding tax on dividends, makes the UK an increasingly attractive location for international joint ventures (see ).

Form will be governed by a range of considerations:

As already mentioned above, the choice of vehicle should:

A corporate vehicle is generally a preferred choice since its legal status is clear, its ability to contract (for example, borrow money) certain, and the accounting position for the vehicle and parents relatively straightforward. Companies have the advantages of legal personality and limited liability (though so do a number of other legal forms).

From a tax perspective, a corporate vehicle may be more advantageous where:

However, in a cross-border context a corporate vehicle may be disadvantageous where:

In these circumstances there may be real economic advantages in not conducting the joint venture operations through a corporate entity. This may mean looking at a pure contractual arrangement or at a partnership. It may mean examining other local entities to determine whether or not they would be "transparent" from the standpoint of the tax authorities of the joint venture party while at the same time constituting a separate legal entity (see Hybrid vehicles).

Conflicting objectives may sometimes be reconciled by the use of hybrid vehicles. Entities of one jurisdiction can be classified differently when viewed by the authorities of another. A company can be treated as a partnership for US federal income tax purposes by simple election under the US "check the box" regulations (at least unless it is a per se corporation, as is the case for a UK public limited company, a French société anonyme, a Dutch naamloze vennootschapor and a German aktiengesellschaft). Various European partnership entities (for example, a Luxembourg SCA) may be treated as companies for UK tax purposes. A Delaware partnership can offer separate legal personality and limited liability yet be treated as transparent for tax purposes (see a70799).

However, the UK's rules preventing the exploitation of differences between the tax systems of different jurisdictions in Part 6 of the Taxation (International and Other Provisions) Act 2010 (anti-arbitrage rules) can stop UK tax advantages arising to UK joint venture parties from, for example, the use of hybrid entities. For more information on the anti-arbitrage rules see Practice note, Financing multinational groups: tax issues: UK inbound financing: Arbitrage rules and UK outbound financing: Arbitrage rules.

If there is a conflict between an operational desire for the venture to be conducted through a company and optimal tax planning, it may be possible to reconcile both aims by using an agency or nominee arrangement. This might be a solution where the transfer of assets to a newly formed joint venture company would carry a prohibitive tax cost, but where it is essential for the new venture to be seen to have a distinct personality. For example, the joint venture entity can take a corporate form, trade with the outside world in its own right and have a clear management structure but be structured so that its profits and losses are earned by it as nominee or agent for its parents. Such an arrangement will be effective where the need for a separate identity is organisational but not where the new entity must establish its own balance sheet and trading record.

If the conflict cannot be reconciled in this way, it is then necessary for a tax adviser to consider each constituent element of the joint venture to see whether efficiency can be achieved not through the legal form of the joint venture but through effective structuring of money in/money out (see Money in/money out).

Financing a cross-border joint venture is, in principle, the same as for a domestic joint venture. Choices include:

However, although the cross-border element can raise potential problems (for example, withholding taxes and non-deductibility of payments), it can also in certain jurisdictions create tax planning opportunities. Payments, deductible in a high tax country where operations or sales are located, may legitimately be made to a low taxed company in another jurisdiction. Even better, money may be borrowed in the parent company's high tax home (any interest paid is tax deductible) and used to subscribe for shares in an overseas company which in turn lends to the joint venture (interest again may, depending on the jurisdiction, be deductible). A financing instrument may be regarded as debt in the country where the borrower resides (allowing a deduction for interest), but equity in the country where the lender is located (giving the lender a credit for taxes paid by the borrower). Activities can be conducted through a branch or dual resident (that is, an entity treated as tax resident in more than one jurisdiction) and therefore expenses may fall to be deducted against income in two jurisdictions.

However, the anti-arbitrage rules can stop UK tax advantages arising to UK joint venture parties from, for example, hybrid financing instruments. For more information on the anti-arbitrage rules see Practice note, Financing multinational groups: tax issues: UK inbound financing: Arbitrage rules and UK outbound financing: Arbitrage rules.

Losses, in a tax sense, may arise because of start up operating deficits of the joint venture or in capital intensive joint ventures, particularly infrastructure projects, where tax depreciation and investment deductibility rules in the parent companies' home territories permit an accelerated deduction for tax purposes. It may also, for example, be possible to obtain a deduction for purchased goodwill (see, for example, Belgium, Germany, Italy, Netherlands, Norway and Sweden and more recently the UK) which could result in tax deductions becoming available. For a detailed explanation of the UK's tax regime affecting intangible assets such as goodwill, see Practice note, Intangible property: tax.

If this type of loss is anticipated, the parties should consider a number of options as follows:

Where losses are likely and where they would not otherwise be used directly by the joint venture parties, it is worth considering leasing or consortium type arrangements with outside investors. Though the details vary, these arrangements essentially permit tax-paying third parties in the jurisdiction where the joint venture is based to provide capital to the joint venture in such a way as to enable them to benefit from depreciation or other reliefs. This is a significant activity for many structured finance departments of international banks. It may even be possible for tax capacity in other jurisdictions to be accessed in this way, although tax authorities around the world have become more hostile to granting tax relief for expenditure incurred on assets outside the jurisdiction.

In wholly domestic joint ventures, use of losses is generally a timing game. In other words, efficient use is about getting tax relief sooner rather than later. This may also be true in cross-border situations but, more fundamentally, efficiency may be about absolute benefits: where relief is obtained for expenditure which is not allowable in one jurisdiction or where relief is obtained at higher marginal rates of tax.

People are likely to be a critical factor to any joint venture. One or more of the joint venture parties are likely to wish to second or assign personnel to the joint venture.

A basic choice to be made in cross-border joint ventures, as with domestic joint ventures, is between seconding employees to the joint venture or employing them directly from the joint venture.

It is frequently more advantageous for employees to be seconded. This is usually where secondment maintains the employee's continuity of employment for the purposes of social security, pension or other benefit schemes (for example, share option schemes) (see Practice note, Employee share schemes: joint ventures).

However, the secondment of staff to an EU company may attract a VAT charge. While this may, in any event, not be a significant issue for a fully taxable business, in other situations, particularly for groups engaged in financial services, VAT is a major cost item.

If VAT would be a problem there should be a solution. One is to group the employer and secondee entity into a single VAT group. Groups can sometimes be established across EU boundaries for VAT purposes with much greater ease than for other tax purposes. Another option is to consider the payment arrangements (that is, how salaries are paid by the joint venture). Direct payments by the joint venture to the employee can in practice be accepted by HMRC as not having any VAT effect.

A third option may be to formalise arrangements by dual contracts of employment so that the employees maintain their original employment contracts but are also employed by the joint venture. There may, in any event, be other commercial reasons (for example, enforceability of restrictive covenants) or tax reasons (for example, favourable benefits for income derived from offshore) for considering dual contracts. However, it should be noted here that HMRC will look closely at dual contracts and it has stated that:

(See further Tax Bulletin 76 (April 2005).)

This fundamental issue is sometimes determined almost casually. Clearly, where the joint venture is a creature of the domestic legislation of the territory in which it is based, there may be compelling reasons for the regulation of matters between the joint venture parties to be governed by the same law. However, very often this is inappropriate, for example, where the joint venture touches on a number of different jurisdictions, or where the parties positively wish to regulate their relations beyond the narrow constraints of a particular joint venture. In these cases there may be a tension between the dominant parties behind the joint venture, each of whom is likely to wish to have its home law as the governing law.

Factors that are relevant in making a choice for a neutral governing law include:

In any event, there will normally be good reasons for the parties to settle on a single choice of law and elect for this to be exclusive to any other.

Joint ventures are fraught with difficulties. Joint ventures which bring together parties from different backgrounds and which span the legal and fiscal regimes of more than one jurisdiction are even more difficult. However, many businesses are discovering that joint venture arrangements are essential to share costly development programmes, to gain access to larger markets or to expand into more rapidly developing economies.

The adviser's role is to create the right technical structure which meets commercial, operational, accounting, regulatory, legal and tax needs. Establishing an efficient and practicable operating and financial structure will not create success but it can get matters off to the best possible start.