Joint venture

What it means

A joint venture is cooperation between two or more independent companies on a shared project in which they share contributions, risks and returns. Typically one company’s know-how is combined with the other’s market, capital or technology.

It most often takes the form of a jointly owned company, for example an s. r. o., which the partners set up and own in agreed shares. A less formal version is a contractual arrangement without a new company, in which the partners simply divide tasks and returns by contract.

The legal framework consists of the articles of association of the joint company and a shareholders’ agreement governing management, funding, profit distribution, deadlock resolution and a partner’s exit.

How it works in practice

Partners contribute different things: money, a non-cash contribution such as machinery or property, a technology licence or access to customers. For non-cash contributions we deal with valuation and the tax consequences for the contributor, and for licences with royalties and their taxation.

The joint company and its owners are often related parties, so purchases, sales and services between them must be at market prices under the transfer pricing rules. With a foreign partner we also check whether its activity in Slovakia creates a permanent establishment.

In a partner’s books the stake in the joint company is shown as a financial investment and, where consolidation is required, it flows into the consolidated financial statements. Before entering a joint venture we recommend mutual due diligence.

What to watch out for

Most disputes arise over decisions and exits. If the partners each hold 50 percent and cannot agree, the joint company is paralysed. The agreement should therefore contain a deadlock mechanism and rules for selling a stake, such as a pre-emption right or a compulsory buy-out.

Partners share sensitive information in the course of cooperation. Without clear protection of trade secrets and a non-compete, a partner may use the know-how it gained in its own business once the cooperation ends.