Establish joint ventures

Jan, 10 2024


When opening a company together with one or more foreign partners, there are nuances related to management, participation, distribution of profits and risks. Establish joint venture is one of the most relevant ways of international business cooperation.

Joint venture is a form that allows person to conduct an international division of labor by opening a legal entity (company) within the framework of a common partnership. Investments are made by participants from different countries, thus providing an opportunity to jointly manage the enterprise, share risks and profits. From the actual point of view, this is one of the varieties of forms of joint business.

This term is not new, it appeared during the existence of the Soviet Union. And for now an alternative version of the concept is also used – an organization with foreign investment.

Goals of Establishing a joint ventures

There are several reasons for this. For example, the country where the joint venture operates fulfills the following goals:

  • saturates the market with new products and services;
  • attracts advanced technologies and innovative developments to the country;
  • shares management experience and receives it from participants from other countries;
  • attracts additional financial and material resources.

Companies are expanding their export base and reducing their product imports. Conditions are being created for expanding the sales market and optimizing the tax scheme.

Forms of joint ventures

The establishment of a company operating with the use of foreign investment is carried out in accordance with the current legislation. We are talking about legal provisions regulating the conduct of business activities and the work of enterprises, business companies and partnerships themselves.

The choice of the legal form of such an organization is carried out depending on the type of business, the tasks set, the amount of authorized capital, the number of founders and so on. The formation of a commercial organization that works with foreign investments is usually carried out as:

  • Business entity;
  • Business partnership;
  • Subsidiary company.

An enterprise that is established in another country will be considered completely foreign. The advantage is to use simpler schemes for monitoring the organization’s work. It is noteworthy that there is no need to share the profit with someone else.

Stages of a joint venture

Opening a new organization requires the initiator to understand the specifics of the local market. However, in the current reality the most popular is the acquisition of a ready-made local business. The investor immediately gets the opportunity to start servicing the customer base and consult with local partners on issues related to the local market. Practical activity begins right after re-registration. In some cases, if it is appropriate or necessary, part of the management functions can be assigned to an outsourcer located in the home country.

Cooperation is based on a formal agreement between the parties. The procedure for opening a joint venture is divided into several stages, in which person needs to do the following procedures:

  • to evaluate the objectives;
  • view the list of partners and select suitable ones;
  • send notifications about the creation of a joint venture and start negotiations, prepare a Protocol of intent;
  • to undertake a feasibility study;
  • prepare a package of constituent documents and engage in legal registration.

During goal setting, person needs to take into account the specifics of the case of opening a company.

Sequence of actions during joint venture opening

Having made sure that establish joint venture will allow you to solve your tasks as efficiently as possible, you can start the next stage – the search for partners. You can study the market yourself or use the support of intermediaries.

Having decided on the list of potential partners, they need to send a notification about the creation of a joint venture containing detailed information, including:

  • project title;
  • shared data;
  • baseline;
  • external and internal market characteristics;
  • potential product sales schemes;
  • the expected contribution amount from the partner.

Having made a final decision in favor of the chosen partner, you can start negotiations and preparation of the constituent documentation for registration events.

Documents for opening a joint venture

Practice shows that after signing an agreement of intent and determining the detailed parameters of a joint business, an agreement is concluded between the parties regulating joint activities. Within the framework of this document, each party undertakes to open a business company, or use alternative options for opening such structures. In some cases, the provisions of the Charter and registration of the company are immediately agreed upon.

To successfully complete the registration procedure, you need to create a set of documents for submission for verification, the structure of which consists of the following papers:

  • statements of the founders;
  • notarized copies of the constituent documentation (2 copies);
  • a notarized copy of the decision of the domestic property owner to open an organization or a notarized copy of the decisions made by the authorized bodies;
  • notarized copies of documentation from each legal entity from our country participating in the procedure;
  • documentation confirming the solvency of the foreign partner issued by its Bank or other financial institution. It is important that the document text is translated into Russian and notarized;
  • an extract obtained from the commercial register of the country of origin, or alternative evidence confirming the legal status of the foreign partner in accordance with the provisions of its local legislation.

Specifics of taxation of joint ventures

New joint legal entities become full-fledged separate taxpayers. Already initially formed legal entities are switching to the General system of taxation. The relevant taxes are paid in a General manner. In parallel, you can switch to “simplified”. Choosing this method of taxation allows the company to legally refuse to pay VAT, property tax and profit.

In situations where a company under the simplified system receives profit or dividends from transactions with certain categories of debt obligations, such income will still have to pay tax. By distributing the profit received as a result of doing business among the participants as dividends, they will be subject to income tax under the General scheme. This rule applies to both the General and simplified tax systems.

As a result, by distributing profits, participants will be able to receive dividends net of income tax, the amount of which is:

  • 13% for Russian organizations;
  • 15% for any foreign company.

It is noteworthy that the rate may be different, depending on the existence of an international agreement and its provisions.

Reduction of the tax rate

International agreements concluded with a number of countries provide for a reduction in income tax rates for dividends. It is important to clarify a few points:

  1. Often the amount of bids depends on how dense the share of a foreign company in the authorized capital is.
  2. The Scheme of taxation of dividends paid by a foreign organization is determined depending on the presence of a permanent representative office.

Therefore, when registering a new organization that involves foreign partners, it is recommended to pay attention to the provisions set out in the international agreement (if it exists).

Structure of joint ventures

As part of the opening of a joint venture, the current legal provisions make it possible to independently determine the choice of structure, for example:

  • general manager;
  • shareholders ‘ meeting as the highest management body;
  • board of Directors.

It is allowed to create an audit Commission to conduct periodic verification of reports received from the company.

Risks of opening and operating a joint venture

The effectiveness of a joint venture may decrease under the influence of certain factors, which are usually the result of differences in economic models and the principle of thinking of foreign partners. The risks may be as follows:

  • partners do not always correctly understand the tasks and goals, periodically conflict, and file complaints.
  • organization may face a lower degree of freedom in making important decisions;
  • it is possible to declassify the know-how of one of the partners;
  • it is possible that the organization will be absorbed by a stronger company in the future.

All this is due to different principles and styles of doing business, cultural differences. Know-how and developments that are the object of intellectual property of the joint company can be used by partners to develop their business. If the Manager made mistakes in managing the company, the risk of losing staff increases. At the same time, useful developments created and verified by the company may become available to third parties due to leaks of internal information.

Author of the article
Establish joint ventures
Valentina Khlavich
Managing Partner
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