Factors determining the choice of a Joint Venture

Several factors have a significant bearing on the choice of structure for a proposed joint venture.

2.1.3.1 Capital requirements and availability of capital markets

1. The capital requirement of a project is a key determinant of the joint venture structure.

2. In capital-intensive projects, an incorporated joint venture structure is generally preferred.

3. This preference arises because an incorporated joint venture can raise large amounts of capital through:

   • equity,

   • debt, or

   • other financing avenues.

4. Unincorporated joint venture structures are usually less suitable for sourcing substantial capital.

2.1.3.2 Start-up time requirements

1. Incorporated joint ventures require a longer start-up period.

2. This is due to the numerous formalities involved in the incorporation of a company.

3. In comparison, setting up:

   • a partnership firm, or

   • a purely contractual joint venture
     involves fewer formalities and less time.

2.1.3.3 Tax cost

1. Tax considerations play an important role in determining the structure of a joint venture.

2. At present, the income tax rate applicable to:

   • domestic Indian companies, and

   • partnership firms
     is the same, i.e., 33.66 percent (inclusive of surcharge and education cess).

3. In addition to income tax, incorporated companies are also liable to pay:

   • dividend distribution tax at the rate of 14.03 percent
     (inclusive of surcharge and education cess) on distributed profits.

An unincorporated joint venture is taxed as an Association of Persons (AOP).

1. The tax applicable to an AOP is ordinarily levied at the maximum marginal rate.

2. Where the income of any member of the AOP is taxable at a rate higher than the maximum marginal rate, the total income of the AOP is taxable at such higher rate.

3. In other words, the highest applicable tax rate among the members becomes the governing rate for the AOP.

4. For example, where an unincorporated joint venture consists of:

   • a foreign company (taxable at 40 percent plus surcharge and education cess), and

   • an Indian company (taxable at 30 percent plus applicable surcharge and education cess),

5. And where the shares of the members in the joint venture are indeterminate,

6. The total income of the joint venture will be taxed at the rate applicable to the foreign company.

7. Accordingly, tax on the total income of such joint venture would be levied at:

   • 40 percent,

   • plus applicable surcharge (2.5 percent), and

   • plus education cess.

Other Factors

Foreign investment regulations play an important role in determining the structure of a proposed joint venture.

1. Sectoral caps applicable to foreign investment in the proposed activity are a key contributing factor.

2. Investment-related incentives available for the proposed activity also influence the choice of joint venture structure.

3. Recognition and protection of Intellectual Property Rights (IPRs) proposed to be:

   • transferred,

   • assigned,

   • used, or

   • otherwise dealt with by the joint venture
     are critical factors, particularly in technology-intensive joint ventures.

4. The adequacy of IPR protection often determines whether parties prefer an incorporated or contractual joint venture structure.

5. Licensing conditions applicable to the proposed activity are also relevant in structuring the joint venture.

6. Mandatory or compulsory licensing requirements must be taken into account.

7. Indigenisation requirements prescribed under applicable laws or policies are further important considerations in finalising the joint venture structure.