JOINT VENTURE ACCOUNTS (JPAS)

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What is a joint venture contract?

Joint venture contracts involve the participation of one party (the venturer) in the outcome of a particular business or project that is carried out within the legal form of another party (the manager). The unitholder provides the manager with assets or investments and the manager is responsible for operating the business. The return obtained will be shared between the two parties on the basis of the agreements they have entered into. Not only profits, but also losses. It is therefore a partnership formula halfway between a contract of employment and a contract of loan and, to formalise a commercial company, which has several advantages for entrepreneurs

Participation account concept:

 The essence of this type of partnership, which is not subject to any solemnity requirement, consists of a financial collaboration by virtue of which one or more entrepreneurs (non-managing participant) take an interest in the operations of another (managing participant), contributing to them with such part of the capital as they may agree, and sharing in their success or failure in such proportion as they may determine.

• CONTRIBUTIONS:

Contributions, whether in cash or not, are not capital contributions, but merely represent the creation of a right in favour of the non-managing account-holder to participate in the results of the activity in question. Non-managing investors are therefore not shareholders of the management company.

• FORMAL REQUIREMENTS:

According to the provisions of the Commercial Code, this type of agreement does not require any solemnity (public deed or registration in the Commercial Register) although, in practice, both parties usually reflect this in a public deed for the purposes of proof before third parties. With this commercial form, no legal entity is created, nor are there any common assets between the parties. It is a type of contract with bilateral and reciprocal obligations, but it is not a commercial company. Nor is it a loan contract, a business lease, a business management contract or a shareholder's loan. 

The joint venture contract is much more flexible than a corporate form, it is an attractive type of contract for an investor to participate in a business activity in exchange for a return on the results of the activity. It can even be agreed that the joint venture account will relate to a particular business, rather than the entire business of the company. 

• REGULATION:

Articles 239 to 243 of the Commercial Code, falling under Title II "Joint Venture Accounts" (Book II of the Commercial Code). Before explaining the characteristics of this type of agreement, let us look at what the Commercial Code says. 

ARTICLE 239.

Merchants may take an interest in each other's operations, contributing to them with such part of the capital as they may agree, and sharing in their success or failure in such proportion as they may determine.

ARTICLE 240.

Joint ventures shall not be subject to any formality in their formation and may be entered into privately, either orally or in writing, and their existence may be proved by any means recognised by law, in accordance with Article 51.

ARTICLE 241.

In the negotiations referred to in the two preceding articles, no business name common to all the participants may be adopted, nor may any direct credit be used other than that of the trader who makes and conducts them in his own name and under his own individual responsibility.

ARTICLE 242.

Those who contract with the trader who bears the name of the negotiation shall have an action only against him, and not against the third party who contracted with the manager, unless the latter formally assigns his rights to them.

ARTICLE 243.

Settlement shall be effected by the manager, who, on completion of the operations, shall give a reasoned account of the results.

According to the Supreme Court: "joint ventures have been described in the doctrine as a partnership formula between individual or collective entrepreneurs. The social partnership that makes possible the participation of one, called a participant, in the business or enterprise of the other, called a manager, with both remaining dependent on the success or failure of the latter".

Characteristics of the joint venture contract

 THERE ARE TWO PARTIES TO THIS CONTRACT:

1. The manager: is the proprietary part of the company and the business activity.
2. The participant: is the investing party, which provides assets, rights or capital to participate in the profits of the business.

WE CAN HIGHLIGHT THE FOLLOWING CHARACTERISTICS:

• The parties can voluntarily establish whatever they deem convenient, as long as it does not contravene the law, this contract takes into account the autonomy of the will.
• The investor, the venturer, may contribute movable or immovable property, money, claims or intellectual property rights. Anything that is subject to valuation may be contributed.
• Agreements can be established in a private contract between the parties, it is not obligatory to make it public. Although the rule states that such a contract can be verbal, our professional advice is always to put such agreements in writing.
• The participant is not involved in the management of the business and has no legal liability.
• The participant shares with the manager the profits and losses of the business in which it has invested. It is important to establish the quantification mechanisms so that there is clarity between the parties.
• The manager has to allocate the contributions to the activity. In addition, the participant has the right to information on the development of the activity.
• When the contract ends, the participant must receive what he/she has invested and the benefits derived from it. In the event of losses, he will receive less than he invested, but he is never unlimitedly liable for poor economic results.

Taxation of joint ventures

For the participants or investors, if they are individuals, the result of the business is taxed for personal income tax purposes as income from movable capital. It is considered for tax purposes as a transfer of own capital to third parties. This income is included in the savings tax base, taxed at a rate of 19% to 26%, and not in the general tax base (where it could be taxed more, due to the effect of progressivity). For the manager, the result of the business will be taxed in accordance with the activity, i.e. in his personal income tax as income from economic activity, or if it is a commercial company, in corporate tax. The advantage is that the income paid to the participant is a deductible expense (in the year in which it accrues), which reduces the tax base and, consequently, taxation. These are financial expenses, so the legally established limits for deductibility must be observed.

This is different from a dividend, which is a remuneration paid to investors but can never be considered a deductible expense for the company. It should also be borne in mind that, for the purposes of the Tax on Transfer of Property and Documented Legal Acts (ITP and AJD), this transaction is subject to the type of corporate transactions that would be taxed at the rate corresponding to each Autonomous Community, for example, 1% in the case of Aragon. The contribution would be exempt, but once the contract has been terminated, the refund is treated as if it were a reduction in the share capital of a commercial company with a refund of contributions, and would therefore be taxed for this tax. The tax aspects of this form of business collaboration are dealt with in Binding Consultation V2234 of 2011.