Cyprus: Cyprus Chapter Of International Joint Ventures – Second Edition – Release 4

Introduction

In Cyprus, as in other economies, joint ventures have become an increasingly common form of business organization, where two or more natural persons or business entities combine and pool their financial resources, specialized knowledge, and practical experience to implement a specific project or undertaking. There is no definition of a joint venture in Cyprus law, but four forms of joint ventures can be identified in current practice: contractual joint ventures, partnership joint ventures (general or limited), corporate joint ventures, and European Economic Interest Groupings (EEIG).

Contractual Joint Venture

In General

A contractual joint venture is an unincorporated form of cooperation based on a contract between the interested parties. It does not involve the conduct of business in common, as in a partnership.¹ The parties to a contractual joint venture remain autonomous and retain distinct roles, rights, and obligations. Nevertheless, a contractual joint venture may acquire rights and liabilities as a single entity, and is capable of suing and being sued in its own name.²

Any permutation of individuals, partnerships, or companies may enter into a contractual joint venture. As contractual joint ventures normally involve a pooling of resources and knowledge without a separate legal personality, it is vital that comprehensive detailed contractual agreements are in place to regulate issues such as the respective contributions of the participants, their responsibilities, and their share in the income generated by the contractual joint venture.

In Cyprus, contractual joint ventures have proved popular for large construction projects, especially in the context of public tenders where both perceived costs and risks are high.

Advantages

The minimal formalities and costs involved in the formation, operation, and termination of a contractual joint venture make it more appealing. There is no special registration procedure for the establishment of a contractual joint venture, and no specific legislation other than contract law exists to govern its operations and termination.

Personal liability also is restricted in contractual joint ventures, and the concept of joint liability common to joint venture partnerships does not apply. A participant in a contractual joint venture is liable to third parties only for his own acts and omissions.

Furthermore, the absence of a separate legal entity ensures that each participant bears its own tax burden on its profits, pursuant to the tax legislation of the place where it is established. This allows independent tax planning and makes the best use of any losses incurred due to the operation of the joint venture.

Disadvantages

Potential disadvantages include the absence of a pre-existing specific legal framework to regulate the formation, operation, and termination of contractual joint ventures, which means that great care is necessary when drafting the relevant documentation to safeguard the smooth functioning of the resulting venture.

The lack of a separate legal identity for a contractual joint venture may prevent it from establishing a noticeable presence in the market, and prove cumbersome where contracts with third parties are concerned. The problem of joint liability may arise if a court rules that the contractual arrangements effectively constitute a partnership.

Business Assets and Intellectual Property Rights

The business assets and intellectual property rights vested in the contractual joint venture remain the property of the party that supplied them. Any intellectual property rights generated in the course of the joint venture's operations will be owned by the party whose employees or contractors created the rights.

The Copyright Law3 and the Patents Law⁴ govern intellectual property matters that may be relevant in a contractual joint venture. When ownership of intellectual property rights cannot be clearly established, the existence of the contractual joint venture will result in a deemed co-ownership.

Accounting Treatment and Taxation

Cyprus companies should account for their involvement with a contractual joint venture in accordance with International Financial Reporting Standards (IFRS).

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Footnotes

1 Otis Elevators vs. Republic of Cyprus, Supreme Court of Cyprus, Case 430/2000.

2 Electromatic Ltd vs. Republic of Cyprus, Supreme Court of Cyprus, Case 924/2003 and Case 1031/2003.

3 Law Number 59 of 1976, as amended.

4 Law Number 16(1) of 1998, as amended.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.