Transfer of Assets on Formation; Taxes for Transferor
Taxation considerations are important and often critical in the choice of joint venture structure. They are particularly important and complex in the case of international joint ventures where more than two legal and tax systems may apply.
There may be tax issues upon the establishment of the joint venture. The contribution of assets to a joint venture company will normally trigger tax liability for the participants. This liability will depend on whether assets are transferred to it. The transfer of assets by one party is a disposal for corporation tax on chargeable gains purposes [CGT]. There may be CGT tax on the uplift in value between the date of acquisition and disposal.
Formerly, generous “rollover” relief was allowed. However, the rules were considerably narrowed and restricted in 2002. The reorganisation reliefs available on internal group reorganisations are not generally available in a joint venture, as the transfer is not usually made to an entity under common control.
The transfer of trading stock to the joint venture entity may give rise to a taxable profit. The transferor may be deemed to recognise a taxable receipt for corporation (on income) tax purposes. It may be possible to elect to transfer the stock at its acquisition cost to the transferor, subject to conditions being satisfied. The position is affected by whether or not the transferee vehicle is connected with the transferor. This will depend on the extent of its shareholding and control in the circumstances.
Transfer of Assets on Formation; Other Tax Issues
Assets which are transferred may carry capital allowances. Where the amount reclaimed by way of allowance exceeds the cost less the value at the time of transfer, there may be a balancing charge. Equally, there may be a balancing allowance where less has been afforded by way of capital allowances than the actual depreciation that has occurred.
There are provisions for the transfer of losses between connected entities such that the accumulated loses may continue to be available to the transferee. This generally requires a high level of percentage ownership by the transferor in the transferee than is usually the case with a joint venture.
The transfer of business assets will usually qualify for relief from value-added tax as a transfer of a business as a growing concern if they together comprise a distinct business.
The transfer of assets may be subject to stamp duty on the consideration or the value of the consideration. There are reliefs, subject to conditions available for transfers within groups and the connected parties. They may not be satisfied in the case of many joint ventures.
Reliefs Mergers, Reconstruction and Amalgamation
There are reliefs, subject to conditions available for transfers within groups and connected parties. They may not be satisfied in the case of many joint ventures as they usually meet the requirements of a group company with the joint venture, which usually requires at least a 75 percent shareholding.
The joint venture may be established by the merger of two existing subsidiaries held by the joint venture holding company parties. They may qualify for share for share merger relief. Under the relief, each participator may exchange shares in its subsidiary for shares in the joint venture company, which then holds the subsidiary companies’ assets. The shares in the subsidiary are swapped for shares in the joint venture company.
There may be relief from capital gains tax and stamp duty in the context of a reconstruction or amalgamation. This generally requires that the undertakings which are reconstructed, amalgamated or merged remain under common ownership without any change in the persons ultimately entitled to the shares. This may not be available in the establishment of many joint ventures.
Previous reliefs from stamp duty and capital gains tax may be subject to clawback when an entity leaves a group. The deferred charges may be triggered as the assets are no longer within the venturers group.
Ongoing Tax Issues; Consortium Relief
The joint venture will raise important ongoing taxation issues. The design of the joint venture arrangement may be heavily determined by the taxation possibilities and implications in respect of monies invested and on the financial return on the venture if any.
Group relief which allows the surrender of trading losses between groups is generally available only in respect of 75 percent group. Most joint ventures will have no 75 percent participant.
Consortium relief is designed to be available in joint venture type cases. Consortium relief allows a proportionate amount of trading losses and equivalents such as excess charges and capital allowances, to be surrendered to members proportionately. Consortium relief is not available where one entity has a 75 percent or greater interest. Accordingly, in this case, the minority is entitled to neither group relief nor consortium relief.
There are various residence conditions applicable to consortium relief. Formerly these required residences in Ireland. Residence within the EU under revised rules now suffices by reason of requirement or equal treatment udert EU Treaty
Dividends and Distributions
Dividend withholding tax applies to dividends paid out to Irish resident natural person. Similarly, payments to non-residents are intrinsically outside the charge to tax on investment income, and no dividend withholding tax applies, provided they reside in the EU or a tax treaty country.
The payment of dividends and distributions (quasi-dividends deemed to have the same tax status) between resident corporate entities is generally exempt from corporation tax for the recipient and from the dividend withholding tax obligation for the paying company.
In a contractual joint venture much as a partnership, the participants will be taxed on their proportionate part of the taxable profit. Receipts and deductions will be apportioned. The partners are deemed to have a proportion of the partnership trade.
Termination of JVs
Tax issues will arise on the termination of the joint venture. In principle, there may be a double layer of taxation by reason of the joint venture company’s capital gains tax liability on disposals of its assets and the disposal or deemed disposal by the joint venturer of its shares.
In effect, disposals by resident companies of shares in companies in which they have at least a five percent shareholding are now exempt from corporation tax on capital gains for the recipient. Where not available, pre-termination dividends may be available as a means of reducing this tax liability.
Partnerships and contractual joint ventures have no separate identity for tax purposes. The breakup of a partnership constitutes a capital gains tax disposal / realisation and a potential charge to tax.
More complex issues arise with cross-border joint ventures. There may be options in terms of the residence and place of establishment of the holding entity. It may be possible to establish it in a jurisdiction with negligible to low corporation tax rates.
The place of management of a corporate and/ or the place of incorporation generally determine the tax residence of the joint venture company. Ireland has a mixed place of incorporation and management rule. Many states deem corporates incorporated in the jurisdiction to be resident there irrespective of the place of management.
There exist provisions which may attribute a gain/profit to another jurisdiction. Some jurisdictions have controlled foreign company legislation which attributes part of the profits of non-resident entities in a low tax jurisdiction to the resident entity.
Local jurisdictions may give tax incentives and tax holidays to incentivise investment. There may be generous tax allowances for capital invested.
International Dividends and Distributions
An important consideration is the incidence of tax on profits and withholding tax on distributions. Dividends received by a resident company from a resident subsidiary are not subject to Irish tax.
The principal issues on the repatriation of profits, are issues of double taxation and withholding tax on both dividends and interest. The state of residence may tax the income as investment income.
The payment of dividends by the joint venture company to parents may be subject to withholding tax. Dividends received from non-resident subsidiaries are potentially subject to corporation tax.
The existence of domestic double taxation treaties is an important consideration. The tax on dividends, royalties or interest may be reduced by the availability of tax credits for tax paid elsewhere. Ireland offers generous unilateral relief, where there is no double taxation treaty.
Where there is a double tax treaty between the home state and the state in which the venture is undertaken, dividends are usually paid from subsidiaries at a reduced rate of withholding tax or with no withholding tax at all. Interest paid may be subject to tax but enjoy the benefit of a credit or exemption under the tax treaty.
The EU parent-subsidiary directive eliminates taxes on dividends where there is a 25 percent shareholding or more, and the parties are all EU resident. Within the European Union, dividends paid by subsidiaries within the EU are paid without withholding tax.
Some countries impose thin capitalisation rules which can deem interest payments by under capitalised companies to be distributions and accordingly subject to withholding tax and subject to equivalent obligations to that for the payment of dividends.
Many states have a controlled foreign companies regime. This is designed to prevent the accumulation of profits in another jurisdiction subject to a lower level of tax. The rules seek to apportion a part of the profits of the foreign resident entity, where it is controlled by residents, to the resident corporate shareholders.
Many jurisdictions have transfer pricing rules. They apply to transactions between a company, a non-resident company. Their purpose is to substitute market values on transactions with a view to preventing the accumulation and maximisation of profit in low / zero tax jurisdiction.
Many of capital gains tax reliefs on reconstruction, transfers of a trade are available as between EU group companies. This followed from legislation implementing equality of treatment for EU and domestic corporations.
Irish resident shareholders in a REIT are liable to income tax on income distributions from the REIT plus PRSI and USC. Irish resident corporate investors will be liable to 25% corporate tax on such distributions.
Irish resident investors are liable to capital gains tax at a rate of 33% on a disposal of shares in the REIT. Non-resident investors are not liable to Irish capital gains tax because the REIT is a publicly listed company.
However, the investors may be liable to such taxes in their home jurisdictions. In relation to dividends, it is intended that the REIT will apply dividend withholding tax (DWT) at the rate of 20% from income distributions to non-residents.
Certain non-residents may be entitled, under their tax treaties, to recover some of this DWT from Ireland or otherwise should be able to claim a credit for DWT against taxes in their home jurisdictions.
Certain Irish resident pension funds, insurance companies and other exempt persons will be exempt from DWT.
The transfer of shares in the REIT is subject to 1% stamp duty
- Transfer of Assets on Formation; Taxes for Transferor
- Transfer of Assets on Formation; Other Tax Issues
- Reliefs Mergers, Reconstruction and Amalgamation
- Ongoing Tax Issues; Consortium Relief
- Dividends and Distributions
- Termination of JVs
- International Element
- International Dividends and Distributions
- Common Anti-Avoidance
- Taxation of REIT’s shareholders