Tax features of a joint venture agreement
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In recent years, the concept of “collaboration” has become very active in business.
Collaboration is the joint work (partnership) of several businesses in a certain project. “WIN-WIN” is the main goal of collaborations. Businesses seek to mutually benefit from joint projects, attract more customers, and increase their own brand awareness.
For example, business “A” is known for its brand, and business “B” has a great product, but no one knows about it. The result of the collaboration would be to increase the visibility of the business “B” product and generate additional revenue for Business “A”.
Or, business “C” has a great idea for development and knows how to create new products, but does not have the means to bring them to market, and business “E” has capital, but its skills with the promotion of the new product are not good enough.
When there is a need to legally formalize the relationship of the collaboration, the question arises, "How can I do it? Do I need to set up a separate legal entity for the project?” Indeed, no one needs unnecessary trouble connected with a legal entity setup, and to regulate such a relationship you can use the so-called joint venture agreement.
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How to organize work on a joint venture agreement from an accounting point of view?
According to the current Tax Code of Ukraine, if two or more legal entities perform activities under a joint venture agreement (without registration of a separate legal entity), such activities are accounted for as a separate entity within it.
What does it mean? You enter into an agreement with your partner, and all transactions relating to that agreement are accounted for as a separate entity / project. That is, you must make a separate balance sheet, statement of financial results and profit distribution (within the limits of this agreement).
Please note! Accounting of joint venture results is kept separately from other business operations of participants’ businesses.
Who is responsible for accounting under the joint venture agreement?
One of the participants or another person authorized:
- to keep records on the joint venture agreement;
- to monitor the results of a joint venture with other parties;
- to keep accounting and tax records;
- to prepare primary documents;
- to make financial and tax reports.
Usually, such a participant or responsible person is called the operator of a joint venture (hereinafter, the Operator).
When entering into an agreement, the following information must be specified:
- the purpose of the joint venture;
- the terms of your interaction;
- contributions to the joint venture and their percentage (money, property, equipment, raw materials, etc.)
- the principle of distribution of profits received;
- information about a participant or responsible party for accounting of a joint venture (operator of the joint venture).
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Peculiarities of accounting and tax accounting of joint ventures for a resident
Joint Venture Agreements are subject to registration with the fiscal authorities only in case of registration of a joint venture (as a separate entity) as a VAT or excise tax payer.
Check-list of tax peculiarities of the Joint Venture Agreement:
- the joint venture acts as a separate entity (hereinafter, the joint venture);
- the results of activities under the agreement are accounted for by the operator of the joint venture;
- the joint venture has its own income and expenses, financial statements and profits;
- contributions of participants to the activity may be expressed in monetary form as well as in tangible form;
- participants in the joint venture agreement may be single taxpayers, but the joint venture may not be a single taxpayer (only the general tax system);
- a participant operating under the unified tax system may not be appointed as the operator (exception, participant of the 4th group);
- transfer of property, goods / materials by the participant on the balance sheet of the joint venture is equated to the purchase and sale transactions (subject to VAT taxation);
- VAT return is filed on behalf of the joint venture and the taxpayer assigned to it (if the joint venture is a VAT payer);
- no separate income tax return for the declaration of the results of the activities under the agreement.
Below we will elaborate on the features of each tax in more detail.
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Profit tax for joint ventures in Ukraine
A joint venture is not a separate payer of profit tax. The financial results under a joint venture agreement are distributed among its participants. The income received by each participant is taxed according to the rules of each participant’s taxation scheme.
In practice, it looks as follows:
- The operator makes a separate Balance Sheet and Financial Statement of the joint venture (these forms are not submitted to the fiscal service and the statistics service).
- The Balance Sheet and Financial Statements are transferred to the parties of the agreement, which on the basis of the received reports determine the share of income and expenses as a percentage of the shares of their contributions.
- The income and expenses determined by the participants are consolidated with the financial results of the participants from their principal activities.
- Participants declare their profits on the basis of the consolidated statements.
For example, 2 participants (both participants operate under the general taxation system) have concluded a joint venture agreement. The shares of the contributions to the joint venture: the participant “A” - 40%, the participant “B” - 60%.
Financial result of the joint venture agreement:
- Income – UAH 2,500,000
- Expenses – UAH 1,300,000
- Profit – UAH 1,200,000
According to the rule of proportional distribution of profit:
1. The participant “A”:
Income = 2,500,000*40% = UAH 1,000,000
Expenses = 1,300,000*40% = UAH 520,000
Profit from joint activity = 1,000,000 - 520,000 = UAH 480,000
2. The participant “В”:
Income = 2,500,000*60% = UAH 1,500,000
Expenses = 1,300,000*60% = UAH 780,000
Profit from joint activity = 1,500,000 - 780,000 = UAH720,000
Profit before taxes for each of the participants (without taking into account joint venture):
The participant “A” – UAH 600,000
The participant “B” – UAH 1,400,00
Profit before tax of each of the participants, including the results of the joint venture
The participant “A” = 600,000 + 480,000 = UAH 1,080,000
The participant “B” = 1,400,000 + 720,000 = UAH 2,120,000
Profit tax for each participant:
The participant “A” = 1,080,000 *18% = UAH 194,400
The participant “B” = 2,120,000 * 18% = UAH 381,600
Based on the example, we see that there is no separate declaration of income tax under the joint venture agreement. Each of the participants accrues profit tax after consolidation of results of its main activity with results of activity under the agreement.
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The Joint Venture Agreement and VAT
A joint venture as well as its participants may not be VAT payers. A joint venture must be registered as VAT payer only if the amount of accrued and paid sales for the previous 12 months exceeds UAH 1 million.
During the joint venture agreement registration, the fiscal service shall assign a 9-digit tax number (TIN) to the joint venture.
In case of registration of a joint venture as VAT payer the operator is obliged to:
- keep records of VAT, according to the requirements of the tax code;
- issue tax invoices within the terms established by law (in the tax invoice the supplier (seller) indicates the joint venture, and the sign of the tax number “3”);
- prepare and submit a VAT return to the fiscal authorities (under the joint venture agreement a separate VAT return is submitted, regardless of the main activity of the participants).
Please note! When accounting for contributions of participants, it should be taken into account that the transfer of property, goods, materials, works, services in joint ventures is equated with the purchase and sale transactions and is subject to VAT.
Labor relations in joint ventures
Since a joint venture is not a separate legal entity, it cannot enter into an employment relationship with employees. Therefore, the employment relationship is formalized with one of the participants, often the operator.
The participant, who concludes employment agreements with the employees in the part of the joint venture agreement, has the obligation to accrue wages, to withhold and accrue taxes on wages and pay them to the budget.
Please note! Salary payments are made from the participant’s current account. Expenses on salaries are compensated to the participant at the expense of profit received from the results of joint activity.
Income tax and non-resident income tax
Income received by a non-resident based on the results of joint activities is subject to taxation at the rate of 15% (tax on repatriation). The tax shall be paid by the tax agent (joint venture operator) at the moment of transfer of income to non-resident at the expense of this income.
Please note! Joint Venture Agreements with non-residents must be registered with the Ministry of Economic Development.
Proportional consolidation of financial statements of joint ventures
As we have previously noted, participants report the results of a joint venture through consolidation. It is customary for joint ventures to apply the proportionate consolidation method.
The essence of this method: only those assets and liabilities are consolidated (combined) that are owned (and not controlled) by the participant.
It is recommended to reflect the data on the results of joint venture agreements in separate lines of the financial statements.
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