Taxation of Joint Venture Agreements Explained

Entering into a joint venture (JV) can be a strategic move for businesses aiming to pool resources, share risks, and achieve mutual growth objectives. When multiple business entities make a decision to start a new business together as a cooperative arrangement, they are creating what is known as a joint venture. However, navigating the tax implications of joint venture agreements is crucial for optimizing financial outcomes and ensuring compliance. As with most corporate transactions, tax is a key component in determining the ultimate structure and operation of a joint venture. One of the primary goals in structuring a joint venture is to ensure that it is set up in a tax-efficient way so as to minimise tax leakage on any profits made.

Joint ventures are collaborative arrangements between two or more entities to undertake a specific business project or activity. Even though a joint venture represents a cooperative between two or more business entities, each of those original entities retains its original legal status, whether as companies or corporations or as an individual or group of individuals. They can take various forms, including contractual agreements, partnerships, or corporate entities. Not all joint ventures involve the actual formation of a new business entity, but if a new entity is created it will be required to pay its own taxes. A joint venture can exist solely as an agreement between the original cooperating entities.

There are numerous advantages to forming a joint venture, including combining distinct talent and background from two separate entities to create a novel product or service, or taking advantage of one entity’s strength in marketing with another’s innovation. A joint venture can take the shape of any type of business entity, including a partnership or corporation. Though similar, a consortium is not the same as a joint venture, as it is a more casual business arrangement that does not involve the creation of a new entity. Though it is conceivable that multiple entities would be willing to enter a joint venture on a casual basis or via an oral agreement (and there’s no legal requirement that a joint venture register with a state or federal government), it’s still better to involve an attorney who can craft a document requiring the signatures of all parties involved.

Once a joint venture is formed, there are additional tax considerations that may come into play.

Joint Venture Structures and Tax Implications

Joint ventures can be structured in different ways. We illustrate these principles by reference to a joint venture in the form of a corporate entity (rather than a partnership) with corporate shareholders, as opposed to individuals. Here's an overview of the tax implications for different structures:

1. Joint Venture Company

Some advantages of a joint venture company are that it is a separate legal entity so that it is liable in its own right for tax liabilities and other debts. If things go wrong it is more difficult for liabilities to attach to the shareholders in the joint venture.

The transfer of capital assets into a joint venture company will potentially give rise to a charge to capital gains tax or corporation tax on chargeable gains for the shareholder making the transfer. If the asset transferred into the joint venture company is UK land, a charge to stamp duty land tax could arise for the joint venture company. For more on this see Out-Law's guide to stamp duty land tax. If shares are transferred in stamp duty could become payable by the joint venture company. The transfer could also give rise to a VAT liability. If the asset transferred is a business or a let property it may be treated as a transfer of a going concern for VAT purposes which would mean that VAT would not be payable by the joint venture company.

If the joint venture company is to be funded by way of loans from the shareholders, various anti avoidance provisions could prevent the joint venture company obtaining a tax deduction for the interest paid. These include the transfer pricing provisions, which restrict tax reliefs for payments between connected parties to the amount that would have been payable on an arm's length basis. The transfer pricing provisions can apply in relation to loans even if the interest rate is what an independent third party lender would have charged.

Shareholders could extract profits from a joint venture company by the payment by the joint venture company of dividends, interest or royalties or licence fees. One of the key considerations for shareholders is how they are able to extract profits from the joint venture, and the tax treatment of any such receipts. The JV company will be subject to tax on its own profits and so there will be leakage at the level of the JV company. It will then need to distribute any such amounts to its shareholders (generally either through a repayment of any debt financing, or through the payment of dividends). Such distributions can also give rise to tax leakage in the form of withholding taxes or tax on receipt by the relevant shareholder. Interest, royalties and licence fees may be tax deductible for the joint venture company, subject to anti avoidance provisions such as the transfer pricing rules.

The withholding tax position will depend on where the JV company is tax resident. For example, if the JV company is tax resident in the UK, withholding tax may arise on the payment of any interest (subject to various exemptions and the potential availability of relief under the relevant double tax treaty) and any royalties. The tax treatment of the distributions in the hands of the shareholders will depend on where the shareholder is tax resident. For example, if the shareholder is also tax resident in the UK, it is unlikely to pay any tax on the receipt of dividends or the repayment of the principal element of any loan.

The transfer of assets by a shareholder into the JV company may be treated as a disposal of such assets and therefore may give rise to tax liabilities. There are a variety of potential tax charges that can arise on the transfer of assets into a JV company. There are a number of potentially relevant reliefs which could be used to mitigate the impact of any such tax liabilities. However, the availability of the relevant relief(s) will need to be considered in detail based on the specific facts and circumstances existing at the time of the proposed transfers.

If a corporate joint venture is terminated, similar issues to those on set up will arise if assets are transferred out of the joint venture.

2. Joint Venture Partnership

There are three different partnership structures. A traditional partnership could be chosen, a limited partnership or a limited liability partnership or LLP. LLPs are treated as a separate legal entity, whereas limited partnerships and traditional partnerships are not.

If a joint venture partner transfers a capital asset into the partnership, the transfer will be treated as the disposal by the joint venture partner of a share in the asset in exchange for a share in the assets contributed by the other joint venture partners. No stamp duty should arise if shares are transferred in exchange for a share in a partnership. However, if UK land is transferred there will be a charge to stamp duty land tax calculated by reference to the profit share or shares of the partnership that the transferring partner does not own. For instance if a partner has a 30% share in the profits for the partnership it will be subject to stamp duty land tax in respect of 70% of the value of the land it transfers into the partnership.

Partnerships are transparent for tax purposes. This means that the partnership itself does not pay tax on its profits. Instead each partner is liable for tax on its share of the profits. For capital gains purposes each partner is treated as owning the share of each of the capital assets of the partnership that corresponds to its interest in the partnership.

A change in profit sharing ratios can result in a tax liability for a partner whose share is reduced. When a joint venture partnership is ended, the distribution by the partnership of its assets to the partners involves each partner whose share in an asset is reduced disposing of that share for capital gains tax purposes, which may trigger a tax liability.

Where UK land is transferred out of the partnership to a partner SDLT will be charged on the person acquiring the land.

3. Contractual Joint Venture

In a contractual joint venture the parties do not establish any separate entity to carry on the venture. Instead the parties enter into contracts and make their own profits and losses. As no particular documentation or legal structure is required in order for a partnership to exist, it is important that the parties to a contractual joint venture structure their operations so that they cannot be regarded as acting in partnership. If they are treated as acting in partnership they could be subject to unexpected tax and other liabilities.

A contractual joint venture will not involve the transfer of assets to another entity and so no tax issues should arise on set up or on termination of the arrangements. Also the operation of the joint venture will not involve any sharing of profits so each party will be subject to tax on the profits it makes as a result of the venture.

Key Tax Considerations

It is important to note that, for tax purposes, joint venture agreements themselves are not subject to income tax or supplementary taxes.

• Profit Extraction: Shareholders will wish to ensure that the joint venture is not adversely impacted by tax issues relating to other shareholders. The extent of any pre-completion protections will largely depend on whether there is a transfer of a business into the JV company (such that a majority of the historical tax risk will usually remain with the transferring shareholder), or a transfer of operating entities (where a broader range of tax protections is more suitable due to the JV company inheriting the tax history of such entities), as well as the negotiating position of each relevant shareholder. The goal of any such protections is to ensure that the JV company remains untainted by any pre-completion tax matters so that the shareholders only share in the post-completion profits or losses of the JV company. Some of the key post-completion matters are summarised below.
• Loss Extraction: It is likely that the shareholders will want to be able to have the power to extract any losses arising to the JV company in order to be able to use them to shelter other profits arising to such shareholders. It is therefore necessary to consider the protections to be included in the JV agreement to ensure that the extraction of such losses is not detrimental to the JV company. This is typically achieved by requiring the relevant shareholder to make a cash payment to the JV company in return for the use of some or all of the losses. In addition, if the shareholders have existing losses within their groups, it is often beneficial to include provisions in the JV agreement which allow the shareholders to surrender such losses into the JV company in order to offset any profits arising to the JV company. As with the extraction of losses, any such surrender will typically be in return for a cash payment by the JV company and there will also be various mechanical provisions incorporated to achieve this.
• Transfer Pricing: Joint venture arrangements may involve the ongoing supply of goods and/or services by one or more of the shareholders to the JV company. There are often specific provisions included in the JV agreement which deal with a situation where subsequent transfer pricing adjustments are made by a tax authority to transactions between the JV company and its shareholders. Broadly, these provisions seek to ensure that the economic impact of any transfer pricing adjustment is equalised between the JV company and the relevant shareholder(s).
• Secondary Tax Liabilities: As the shareholders will typically have material equity interests in the JV company, the potential for secondary tax liabilities for the JV company exists (i.e. where one person is made responsible for tax liabilities which are primarily attributable to another person). It may also be necessary to consider whether the JV company could fall within a shareholder’s tax consolidation either as a matter of law (such as the corporate interest restriction group) or by election (such as in the UK, a VAT group). If so, protections will need to be included to ensure that the JV company is not prejudiced.
• Information Access: As a minimum, each shareholder will wish to ensure that it has access to such underlying information concerning the JV company as it needs in order to comply with its own tax compliance obligations. Certain shareholders may also have specific requirements as to how the JV company operates from a tax perspective.

International Joint Ventures

This Practice Note considers the key tax issues arising when structuring, operating and terminating an international Joint venture, over and above those raised by a domestic UK joint venture. For information on the UK tax aspects of domestic joint ventures see Practice Notes:

• Tax implications of contractual joint ventures
• Tax implications of establishing a joint venture partnership
• Tax implications of operating and terminating a joint venture partnership
• Tax implications of establishing a joint venture company
• Tax implications of operating and terminating a joint venture company

For the purposes of this Practice Note, an international joint venture is considered to be an arrangement where either the joint venture vehicle (if one exists) or at least one of the joint venture parties is non-UK tax resident. It is assumed for the purposes of this note that the joint venture parties are corporate entities.

Tax Information and Financial Responsibilities

The contract manager is responsible for certifying and providing the participants with financial and tax information related to the agreement. Consequently, this provision partially annulled DIAN Concept No. Accordingly, through Concept No. 010470 of December 12, 2024, the DIAN adopted the position of the Council of State and confirmed that withholding tax on joint income must be allocated among the participants based on their respective participation percentages.

This position was reiterated in subsequent interpretations, including Concept No. In the latter, the DIAN was asked whether the manager may retain the entire amount withheld when the silent partner is not required to file an income tax return-such as in cases where the participant is a trust or a taxpayer under the Simple Taxation Regime. The DIAN’s response was clear: no. The withholding must be proportionally allocated even when a participant is not subject to the tax. To do otherwise would run counter to the purpose of the Council of State’s decision, which aims to avoid inequitable or unfair distribution of the tax burden within a joint venture.

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