International Joint Ventures in Cyprus

A joint venture is not recognized under Cyprus law as a distinct legal concept. The term would usually refer to a commercial arrangement between two or more parties who pool their resources for the purposes of an intended project or business activity. They may take an incorporated or an unincorporated form.

The choice of structure of a joint venture depends on the circumstances of the parties wishing to enter into such a venture and their priorities. The most common structures used are:

• contractual or commercial joint venture: It has an unincorporated nature. It is based on a contractual agreement setting out all the details of the relationship. It has no separate legal personality and parties remain individually responsible.
• corporate joint venture: A limited company is established in which each party is a shareholder. It has a separate legal personality, and the liability of the shareholders is limited.
• joint venture partnership: A partnership is established and the parties participate as partners. It does not have a separate legal personality. General partners have unlimited liability and limited partners have  limited liability unless they take part in the management.

Cyprus law does not differentiate between foreign and domestic joint venture partners. In general, foreign investment is permitted without restriction. However, certain sectors are subject to limitations based on considerations of public interest, national security, or public safety etc.. In such cases, prior approval from the competent authority would be required.

While the overall investment climate is liberal in most sectors, specific legal and regulatory provisions may apply to foreign joint venture partners, particularly in strategically important or regulated sectors. These include, but are not limited to, banking and financial services, insurance, energy (oil, gas, and renewables), telecommunications, and real estate—especially in relation to the acquisition of immovable property. In these sectors, foreign investors may be required to obtain additional regulatory clearances, licenses, or governmental approvals or meet additional criteria.

In general the factors for consideration when the parties decide which structure to use for their joint venture would be:

• tax treatment: For example partnerships are transparent whereas companies are not, and if resident in Cyprus it will be subject to Cyprus taxation.
• accounting treatment: For example a joint venture through a company would be deemed a subsidiary but through a contractual arrangement it would not.
• choice of law and jurisdiction: For example the establishment of a joint venture company or a joint venture partnership under Cyprus law would be governed by Cyprus law whereas a contractual joint venture would be governed by the law chosen by the parties.
• obligations of the parties: In the case of a joint venture company or a joint venture partnership the parties would be bound by statutory rules (as well as an agreement if they choose to enter into one), whereas in the case of a contractual joint venture the parties would only be bound by the contractually agreed terms.  
• operational costs: A joint venture company or a joint venture partnership would have operational costs e.g. preparation of audited accounts, filings with competent authorities. A contractual joint venture may be structured by the parties involved in ways that keep operational costs much lower.

The formation of a joint venture may be subject to notification to the national competition authority, the Commission for the Protection of Competition, depending on whether it qualifies as a concentration and falls within the thresholds set by the law.

Prior notification would be mandatory in the case of the creation of a full-function joint venture i.e. one that performs on a lasting basis all the functions of an autonomous economic entity and is not limited to coordination between the parent companies (i.e. not purely cooperative or project-specific) which would meet the following thresholds set by law:

• at least two of the participating undertakings have a total turnover in Cyprus of at least €3.5 million each, and
• the combined aggregate turnover of all participating undertakings in Cyprus exceeds €10 million, and
• the transaction is not of a purely foreign nature (i.e., it has a local economic effect).

A notification must be filed and will be followed by an investigation and a decision of the Commission for the Protection of Competition declaring the concentration compatible or incompatible with competition. Only upon clearance the joint venture can be implemented.

There are legal and regulatory requirements on the contribution of assets to a joint venture entity, depending on the type of assets, the form of the joint venture and whether the contribution is in cash or in kind. Such requirements are not specific to joint ventures but apply to companies in general.

• Contributions in cash can be paid into the company’s share capital or as shareholder loans and must be recorded properly in the company’s financials and filings.
• Contributions in kind (non-cash assets e.g. real estate, equipment, IP rights, contracts, or shares in other entities). Such contributions must be valued and assigned at a fair market value. Independent valuation is recommended (though not strictly mandatory under the Companies Law, Cap. 113 except in the case of a public company). Depending on the nature of the asset being contributed, the formalities for completion of the transfer would need to be complied with. Board of directors approval and shareholder resolutions may be required. Contributions in kind must be recorded properly in the company’s accounting records and filings. Stamp duty may be payable depending on the nature of the asset e.g. contracts or real estate. Other taxes and fees may also be applicable e.g. in the case of real estate. In the case of IP rights (trademarks, patents), these would need to be assigned via written agreement which could be registrable with the relevant authority. Contribution of licences or contracts or even shares in other companies may require consent of third parties (e.g. in the event of change of control clauses or if regulatory approval is required in specific regulated sectors).

The legal and commercial issues to consider in order to ensure the venture is viable, compliant, and sustainable would be:

• Structure and legal form: An incorporated joint venture (usually via a Cyprus private limited company) would offer limited liability, separate legal personality holding assets and entering contracts and a more formal governance. An unincorporated joint venture (contractual arrangement or partnership) might have a simpler set up, no separate personality and the partners are typically jointly liable. This form is usually utilized for short-term projects.
• Governance and control: These would be mostly issues relating to decision making processes and disputes e.g. board structure, voting rights and reserved matters, deadlock resolution mechanisms, thresholds (e.g. simple majority vs. unanimity) etc..
• Contributions: Whether in cash, assets, IP, services or otherwise.
• Financial arrangements and profit sharing: Arrangements as to how profits/losses will be allocated, distribution policies (dividends, reinvestment), funding obligations (initial and future capital contributions), tax treatment of the joint venture (domestic and cross-border), transfer pricing compliance (for related parties) etc..
• Exit strategy and termination: The availability and ease of enforcement of mechanisms such as rights of first refusal, drag-along/tag-along rights, buy-out mechanisms and valuation formulas, termination clauses and post-exit obligations (e.g. non-compete).
• Dispute Resolution: The governing law and whether a dispute would be dealt with in courts or in arbitration.
• Liability: The risk allocation and limitation of liability (especially in contractual joint ventures), indemnities and warranties between parties, insurance requirements, regulatory risk (especially in highly regulated sectors).

Normally there are no governance restrictions in the case of a joint venture company in terms of number of directors or nationality. The presence of sufficient number of directors with residency in Cyprus might be required for purposes of tax residency. Corporate directors are generally  permitted.

It is mandatory that a secretary is appointed.

The appointment of a secretary is mandatory. Corporate secretaries are permitted. Although there is no residency requirement, typically such person is a local individual or company.

In the case of a contractual joint venture the choice of a foreign law is not prohibited and is permissible.

A joint venture company or a joint venture partnership established under Cyprus law would be governed by Cyprus law and be subject to the applicable statutory rules. The parties to the joint ventures may enter into shareholders’ agreements and partnerships agreement - depending on the form of the joint venture - under a foreign law. Note, however, that in the event of conflict with the statutory rules governing the company or the partnership, it should be expected that Cyprus courts will give effect to the statutory rules and override the contractual provisions under a foreign law.