With the dramatic increase in the globalization of the economy in all market sectors, the ‘joint venture’ has become the vehicle of choice to expand into new areas of business and new markets for a variety of reasons. First and foremost, a company can minimize or soften its financial risk by expanding into a new geographical or product market and seeking a partner with similar expertise in the target market to share it. Even if capital risk is not a concern, many large enterprises worldwide choose a joint venture and assume a passive role in it for the purpose of spinning off, instead of selling, a business not part of its ‘core’ base. Whatever the reason for establishing a joint venture, the venture partners must carefully plan all aspects.
International Joint Ventures
Although joint ventures can be local or international in scope, the focus of this brief synopsis will be limited to ‘international joint ventures,’ which simply means a business combination of two or more partners from different jurisdictions with an enterprise that will cross one or more borders, and the governing law of the joint venture entity will be ‘foreign’ to one of more of the joint venture participants.
In the context of an international joint venture, the parties would elect to carry on the venture through a Bermuda ‘exempted company,’ which is exempted from the requirements of the Bermuda Companies Act which are applicable to ‘local companies.’
Regulation of exempted companies is not onerous and the primary regulatory steps are conducted prior to incorporation and include filing an application with the Bermuda Monetary Authority (‘BMA’) to obtain permission to incorporate the exempted company. The application discloses who the proposed beneficial shareholders will be and each beneficial shareholder is be required to file a Personal Declaration Form with the BMA when submitting the application to incorporate.
Under current Bermuda law, there is no income tax, withholding tax, capital gains tax or capital transfer tax payable by exempted companies with respect to its income. It is possible to obtain an undertaking from the Minister of Finance in Bermuda under the Exempted Undertakings Tax Protection Act 1966 of Bermuda (as amended) that, in the event of there being enacted in Bermuda any legislation imposing tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, such tax shall not, until the year 2035, be applicable to the exempted company. This applies unless such Bermuda tax may apply to persons ordinarily resident in Bermuda for foreign exchange control purposes who hold shares, debentures or other obligations of the exempted company or such tax as may be applicable to any property within Bermuda leased or let to the exempted company.
Similarly, under current Bermuda law, there are no exchange control restrictions of any kind relating to the joint venture vehicle or any of its undertakings. Unlike many other jurisdictions, Bermuda will permit the joint venture exempted company to deal in any foreign currency free of exchange controls.
Similarly, there are no restrictions on the foreign ownership of a Bermuda exempted company other than BMA approval of any new shareholder that intends to hold 5% or more of the joint venture company. For further information, review our Memorandum on Joint Ventures. For legal assistance with joint ventures, contact us to speak with a professional.