Saturday, 28 July 2012

Dubai Partnership Vs Corporation

Certain  jurisdictions,  such  as the  United  States,  it is essential  for one  or more  of the  joint  venture participants to ensure  the joint venture  vehicle  be deemed to be a partnership and not a corporation for purposes  of the  participant's home  jurisdiction  tax  rules.  For example,  under U.  S. tax  regulations  a corporation may be treated  as a 'partnership' for the U.S. co-venturer if 2 of the following 4 tests can be failed:

1. Does the joint venture entity have limited liability?

2. Is there centralized management and control in the joint venture entity?

3. Does the joint venture entity have continuity of life?

4. Are the shares of the joint venture entity freely transferable?

For obvious reasons, in a joint venture operation each of the participants will clearly want limited
liability and invariably  it is necessary  to have centralized management and control  for efficiency purposes. UAE companies law permits  the  ‘free transferability  of interest’  test  to  be  failed  in that  the  joint  venture agreement  (or shareholders  agreement)   can   mandate  the  unanimous consent   of  all  joint  venture participants  prior  to  any valid  share  transfer  (see  article  59). Such  a  provision   would   clearly   be inconsistent with  first refusal  rights, a shot-gun  provision and  other  similar methods  of resolving  share transfers but would certainly result in the failure of one of the 4 abovementioned tests. The second  failure in terms  of continuity  of life can  be arranged under  UAE companies law  by having  the  joint  venture agreement, the Incorporation Contract  and/or  the Articles of Association  (ie: similar to Bye-Laws) of the joint venture company provide  that the joint venture  entity will have a limited duration  and be dissolved on or before a specified  date or perhaps  a clause  that automatically triggers a dissolution  in the event of the  insolvency   or  bankruptcy  of  any  of  the  co-venturers.  The  UAE companies laws are  therefore sufficiently flexible to accomodate situations  such  as the partnership vs corporation issue faced by U.S. venturers   thereby   avoiding   double   taxation   in  many  instances   on  joint venture   income   and  other distributions  and for purposes  of depreciation write-offs.

Winston Wambua

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