How to Avoid Double Taxation in Joint Venture Agreement?
A person counting money after avoiding Double taxation in Joint venture

Joint Venture Tax: How to Avoid Double Taxation in Joint Venture?

Introduction

As an exception to all the fascinating things that happen only once in life, double taxation in the joint ventures is something that can certainly happen twice. For any entrepreneur who owns a successful business, the last thing he may want is to get taxed on his income more than once.

Any organization collaborating with another company seeks to expand its reach and presence in fields where it cannot do it independently. As the companies collaborate to make profits, no company would like to pay joint venture tax twice, as it would discourage the companies from collaborating and hinder their growth and partnership.

The concept of double taxation in joint venture refers to when a company pays taxes on its gains, and its shareholders pay personal taxes on dividends or capital gains from the company. This article aims to explain the basics of double taxation in joint venture agreement and answer the key question: How to avoid double taxation in joint venture?

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What is a Joint Venture Tax?

First, let us begin by understanding what a joint venture is. A joint venture (JV) is a commercial arrangement between two or more independent parties (referred to as joint venture parties) to do something specific.

E.g., to develop and market a new product, where the two (or more) parties can achieve their aim better together than separately like one may have the assets to manufacturing capacity and the other may be competent in research to develop something useful. Their collaboration will lead to significant development. 

Now that we know how joint ventures works, let’s address the elephant in the room. Taxes. Any businessman in the right mind will raise this question first; How are joint ventures taxed? In initiating a joint venture, the most standard task the two players can undertake is to set up a new entity.

The business arrangement between the two players will help determine how taxes are handled. The joint venture will have to pay taxes as any other business or corporation if it is a separate entity. If it operates as an LLC, its profits and losses will pass to the owners’ individual tax returns like any other LLC.

How is Joint Venture Income Taxed?

Double taxation in joint venture agreement is one of the essential tax principles involved in joint venture that discusses income taxes disbursed double on the exact origin of income. It takes place when earnings are taxed at the corporate level as well as on the individual level. Double taxation in joint venture also emerges in international trade, where the exact income is subject to taxation in two countries. 

Any chargeable gain made by such shareholders may result in a tax liability on the disposal of an asset to the JV company and disposal of a shareholder of any trading stock, transfer tax, or VAT liability.

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Double taxation in joint venture

What are the Tax Considerations When Structuring a Joint Venture?

One of the most important ideas behind arranging a joint venture is to make sure that it is set up in such a tax-efficient way to reduce any form of double taxation in joint venture during filing on the gains made. Below are listed some of the fundamental principles that are necessary while structuring a qualified joint venture. 

Extraction of Profits: A critical consideration for shareholders is how they can extract profits from the joint venture and the tax treatment of such receipts. The JV company will be subject to tax on its profits, so there will be leakage at the level of the JV company. Any such amounts must then be distributed to shareholders.

Transfer of Assets into the JV Company: Parties to a joint venture agreement transfer their assets into the joint venture to achieve their end goal, such transfer of assets and resources may lead to tax liabilities. When the tax liabilities arise, these assets and resources should be identified earlier so that the tax liabilities can be calculated as part of the joint venture agreement and avoided later on.

Transfer Pricing: Some joint venture agreements deal with continuous providing goods or services by one or more of the shareholders to the JV company. In such a situation, transfer pricing rules can be evaluated and involved in the agreement. 

Secondary Tax Liabilities: If needed in a situation, the joint venture agreement can include detailed requirements and conditions that will make sure that the expense of resulting secondary tax liabilities will fall on the shoulders of the shareholder who was liable in the first place for such tax.

Tax Consolidation: As per the situation, before undertaking the joint venture agreement, a financial consultant can determine whether the joint venture company falls under a shareholder’s tax association by a matter of law or by-election (such as in the UK, a VAT group). 

If such a situation persists, necessary provisions will have to be put in place to ensure that the resulting organization is not subject to discrimination.

Management of Tax Affairs: There may also be necessary to define the terms and conditions as to the commercial tax-related working of the joint venture organization. Depending on the requirements, all these conditions will have to be assessed and outlined in the joint venture agreement. 

What are the Tax Implications for a Joint Venture?

One of the deciding factors behind forming a joint venture or partnership is how taxes are handled. If the parties decide to enter a partnership, profits or losses will be divided by the percentage as decided earlier. In such a situation, each party will be solely liable to file taxes on their gains or losses while filing the income tax. 

Are Joint Ventures Double Taxed? How can you Avoid it?

Joint ventures fall under taxation as an establishment or collaboration. Organizations taxable as corporations will be affected by the phenomenon of double taxation in joint venture, where both the corporate as well as the shareholder levels will be subject to the double tax. But not to worry, as a satisfactory solution is available right here!

Contractual Joint Venture: The ultimate solution would be to arrange a contractual joint venture where the parties involved do not set up any individual establishment to harbor the joint venture. Instead, the parties enter into contracts and make their profits and losses. They pay tax only on their profits. This joint venture can be valuable to parties who can bid for mega contracts by merging the resources. A critical benefit of dealing in contractual joint ventures is that there are no joint or separate penalties for the failures of the venture.

Conclusion

The question raised in the introduction was how to avoid double taxation in joint venture. The answer is plain and straightforward.

Move to a contractual joint venture. But why such a hue and cry about it? Why not move forward with just creating a joint venture agreement and get the wheels started on the collaboration? It is where many organizations make mistakes. It is, therefore, essential to consider the tax position of both the JV company and the shareholders early in the process of establishing the joint venture to ensure that the financial modeling accurately reflects the tax position of each shareholder. For more valuable updates on double taxation in joint ventures, make sure to bookmark this URL. Keep progressing and developing! 

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