| ||Venturing Afar: Structural Tax Considerations in Cross-Border Joint Ventures |
Daniel M. Dunn, Esq .*
*Partner, O’Melveny & Myers LLP, New York, New York; College of the Holy Cross, B.A. 1985; George Washington University Law School, J.D. 1992.
This paper sets forth the principal U.S. federal income tax considerations for entering into a joint venture (JV) in a non-U.S. jurisdiction. Unless otherwise specified, this paper assumes that the JV’s operations will be subject to tax in the local jurisdiction in which it operates, regardless of whether the entity is foreign or local (and, in the event of a fiscally transparent entity, that the owners of the JV would be subject to tax on the JV’s operations). The paper provides a systematic approach to analyzing how best to structure a cross-border JV. To state the obvious, there is no clear answer as to the form of the entity to be used, the jurisdiction in which it should be formed, whether it should be a fiscally transparent or corporate entity in the local tax jurisdiction or in the investor’s jurisdiction, or to what extent holding companies should be used and what characteristics those holding companies should have. What follows, however, is an examination of the numerous complex considerations that affect the myriad decisions that have to be made for the tax structuring of a cross-border JV. At its simplest, JV planning can be broken down into two basic components: (1) reducing local taxes on the JV, and (2) reducing taxes in the investor’s jurisdiction on income from the JV and gain on disposition of the JV. Part II focuses on the general framework for analyzing a cross-border JV with the goal of minimizing local taxes. While this paper deals primarily with U.S. investor considerations in structuring a cross-border JV, Part II examines factors generally applicable to any cross-border JV, regardless of where the investors are located. The first section of Part II discusses the four basic tax forms of a crossborder JV, i.e., corporate, transparent, hybrid, or reverse hybrid. The next section sets forth the analytical framework for choosing the jurisdiction in which to form the JV, and the last section of Part II provides an analytical framework for determining whether to use a holding company. Part III of the paper then focuses on the tax planning and structuring issues peculiar to a U.S. investor in a cross-border JV, with an emphasis on reducing U.S. taxes on the investor’s share of the JV’s income and gain on disposition of the JV. Part III is principally dedicated to examining conceptual factors that must be considered in structuring a JV. Part IV then reviews specific rules applicable to corporate JVs, and Part V reviews rules particularly applicable to fiscally transparent JVs. There is a caveat to the discussions of non-U.S. jurisdictions. Throughout the paper, there are references to the consequences of tax laws in various jurisdictions, often without citation. This information is derived from experiences in transactions and reliance on (hopefully) competent local counsel. These references are included for illustrative purposes only. While the author has no reason to think such references are inaccurate, one should view them only with an understanding of their intended illustrative purpose.