A joint-venture is one of the options available to you if you decide to form an alliance with other commercial companies. Before entering into an agreement, you should answer some important questions regarding the nature, characteristics, and possible forms of this type of association.

This article will present the most important aspects, and if you need additional information or assistance, do not hesitate to contact us.

What is a Joint-Venture?

According to the Commercial Act, a joint-venture is an association of traders with the objective of participating in a joint economic activity and achieving a common goal. It can be formed as a commercial company (a legal entity separate from the partners in the joint-venture) or as a civil partnership.

Formally, this association of traders is carried out through the conclusion of a joint-venture agreement.

Entering into a joint venture is a strategic move for companies looking to achieve long-term growth and capitalize on economies of scale. By forming a joint venture, businesses can pool their resources and expertise to undertake a specific project or expand into new markets. This type of partnership allows companies to share risks and reduce costs, while benefiting from the combined strengths of each partner. Whether structured as a limited liability company or another form of commercial entity, joint ventures offer the flexibility to tailor the partnership to the unique needs of the project. A joint venture agreement outlines the terms and responsibilities of each party, ensuring clear communication and alignment of goals.

Advantages of a joint venture partnership are such as cost savings, access to new technologies, and enhanced business operations. Companies based in joint ventures can leverage their combined capabilities to achieve greater efficiency and innovation. Management styles in joint ventures can vary, allowing partners to adopt the best practices from each organization. This collaborative approach fosters a culture of shared success and mutual benefit. A temporary joint venture, designed for a specific duration, enables companies to focus on defined objectives, while the contractual agreement governs the partnership’s framework. Overall, joint ventures are a powerful strategy for businesses aiming to achieve significant growth and competitive advantage in the marketplace.

Regarding the governing legal framework, according to Article 276 of the Commercial Act, the rules for civil partnership or for the type of company in the form of which the association is organized, apply to the joint-venture.

An example of a joint-venture is the aircraft manufacturing company Airbus, owned by British Airways and EADS, a joint-venture of three companies from France, Germany, and Italy.

Characteristics of a Joint-Venture

A joint-venture is a horizontal association of traders aimed at facilitating coordination among partners who work together to achieve a common goal.

Only traders can participate in a joint-venture, which distinguishes it from other civil or commercial companies. Notably, all types of traders, including public enterprises, can join a joint-venture.

A joint-venture is often created with a temporary purpose, and the contract specifies the exact conditions for its termination upon achieving the goal.

If you need consultation and assistance with drafting a contract, contact us.

What is the Difference Between a Joint-Venture and a Holding Company?

Unlike a joint-venture, a holding company is a vertical form of consolidation of commercial companies.

Holdings are always capital companies, with the parent company created to control other companies. This can happen through participation in the capital of the so-called subsidiary companies or in their management. Partners are expected to transfer at least 25% of their shares or interests to the holding.

You can read more on this topic in our article dedicated to holding companies.

On the other hand, a joint-venture unites commercial companies horizontally without mandatory capital participation, with the aim of facilitating coordinated actions to achieve a common economic goal. The management of this horizontal structure is determined by the chosen form of association.

What Forms Can a Joint-Venture Take?

According to Article 276 of the Commercial Act, a joint-venture can exist in two forms:

• civil partnership

or

• commercial company.

The Joint-Venture as a Civil Partnership is governed by the Obligations and Contracts Act (Articles 358-364). Established through a legal agreement between multiple parties, the civil partnership itself does not constitute a legal entity.

This means that it:

• has no independent property rights and obligations;
• does not need a separate name or firm;
• does not need registration in the Commercial Register
• does not need a specific management address or headquarters.

However, civil partnership needs a registration after establishment.

Within 7 days after the agreement for establishment, the civil partnership should be registered in the BULSTAT Register at the Registry Agency, from where it receives a unique BULSTAT code.

If necessary, depending on the business activity carried out, the civil partnership should also be registered for VAT, even though it does not form an independent legal entity - again within 7 days after the agreement for establishment.

The partners in the joint-venture have shares, the size of which determines their participation in the profits and losses of the company's economic activity. Unless otherwise agreed, the partners' shares are considered equal. Each partner has the right to withdraw his share before the termination of the partnership with a special notice.

The “property” of the association is divided in shares between the partners. If these shares are in money or raw materials, they are considered common property of the partners. Notably, for tax purposes, their provision to the joint-venture is not considered a supply of goods or services within the meaning of Articles 6 or 9 of the Value Added Tax Act.

If the share of a participant includes machinery and equipment, however, that partner retains ownership rights over them and only contributes them for common use.

The property created during the joint activities of the companies is also common property.

Upon the dissolution of the civil partnership, the common property is divided among the participants according to the terms of the agreement or according to the rules for judicial partition under the Code of Civil Procedure.

The Joint-Venture as a Commercial Company is established in accordance with the Commercial Act. A legal entity with an economic purpose, it can be considered a joint venture of the companies that formed it. The commercial company enters into contracts, has rights and obligations, and management bodies.

Depending on the chosen type of commercial company, the corresponding legal norms and regulations apply. In other words, if the joint-venture is established as a limited liability company (LLC), the legal framework for LLCs will apply.

Further information on the topic can be found in our article on types of commercial companies.

Accounting for a Joint-Venture

The accounting for the activities of this type of commercial association depends on the chosen form.

Although the civil partnership is unincorporated (i.e., not considered a legal entity), for tax purposes, it is equated to a legal entity within the meaning of Article 1, paragraph 2 of the Accounting Act. Therefore, even though the civil partnership does not require registration for its formation, it must subsequently be registered with BULSTAT.

If the civil partnership charges VAT for services rendered, it can also use tax credit for supplies from its subcontractors.

The taxation of profits from the joint activities of the individual partners in the joint-venture is carried out through the distributed dividends, and their tax treatment is regulated in the Corporate Income Tax Act.

According to Art. 38, para. 9, item 2 of the Accounting Act, civil partnership is obliged to publish in an economic journal or in Internet their annual financial reports or a declaration for lack of activity.

Conclusion

This article presented the most important aspects related to the nature, formation, and forms of a joint-venture.

If you need a consultation with a good lawyer on these and other issues, contact us. We would be pleased to provide our assistance.

Law Firm "Danailova, Todorov & Partners" is a leader in the fields of commercial, contractual, labor, administrative, and tax law.