How to manage competition and tax risk in infrastructure JVs

The combination of these factors are likely to attract many businesses to joint venture arrangements, where they can partner with other companies to deliver complex projects while spreading risk and achieving economies of scale.

With JVs, companies who would otherwise be competitors may pool their resources and expertise to achieve something they could not have achieved individually or that they would not have been able to take on due to the risk or scale of the project. In addition, project owners will sometimes request or encourage contractors to cooperate in this way, and collaboration is generally being seen as a way to create efficiencies and sustainability in the infrastructure sector.

However, this type of cooperation between competitors will often raise issues of compliance with competition law and/or merger control regimes during their creation and operation. It is critical to address these issues at the early stages of planning so as to properly assess the risks and determine the need to identify the required justifications and put in place the practical measures to ensure compliance.

The risks of breaching competition law can be serious. Businesses can be fined up to 10% of their annual global turnover, while there is potential criminal liability for individuals involved as well as, increasingly in the UK, the prospect of long periods of director disqualification.

The risk assessment

Businesses need to carry out their risk assessments on a case by case and project by project basis. An assessment of and justifications for collaborating on one project does not provide a green light for cooperation on other future projects.

Businesses should consider whether their JV partners are their actual or potential competitors. If they are not, the competition issues are very significantly reduced. If the parties are coming together to each offer complementary expertise or skills, and businesses can be sure that they do not compete with those companies in the same or related markets, there are generally no competition concerns.

However, if would-be JV partners are competitors, businesses need to be able to justify why it is necessary for them to bid jointly for the project or whether they could have done it alone. Justifications based on the need to share risk, capacity and resources may be entirely justified but businesses need to be able to substantiate those justifications, and always make sure that internal documents are consistent with that analysis.

JVs between competitors which are designed to operate on an ongoing basis as opposed to undertaking specific one-off projects are most likely to be scrutinised closely. It is often possible to demonstrate that JVs created for complex projects, such a major infrastructure projects, bring benefits to the wider public, and secure efficient allocation of public resources, which could only be delivered by collaboration between companies. For example, any assessment of a joint purchasing arrangement created to support a major project would assess the extent to which the cooperation between the parties on the purchasing market would have a restrictive impact on competition in the selling market, whilst also taking account of the likely efficiencies arising from economies of scale through the joint purchasing.

Whilst many JVs have no anti-competitive effects and are justified in principle, there is a risk that the parties may inadvertently step over the line between legitimate and pro-competitive cooperation into a breach of competition law during the operation of the JV. The JV should not be used as a cover for anti-competitive cooperation in the market such as price fixing, market sharing, bid rigging or the exchange of commercially sensitive information.

One of the most challenging compliance issues in JV arrangements between competitors is the prohibition on the exchange of commercially sensitive information. Guidance, protocols and information barriers may need to be put in place to make sure that the information shared is the minimum necessary to enable the JV to operate and does not cross the line into a wider sharing of commercially sensitive information beyond what is necessary for the particular project. This often arises where there is pressure from project owners be more 'open book', for example, in relation to joint purchasing.

As regards employees who are seconded by the parent companies to the JV or that sit as directors on the board of the JV, businesses may need protocols and confidentiality agreements in place to prevent certain commercially sensitive information being passed back within the parent companies.

Businesses need to make sure that there is a joined-up approach across all the JV parties to ensure that all risks are identified, managed and updated on a regular basis as the project develops and keep the risks under review and adapt them as necessary.

In considering the JV structuring, businesses should also consider whether any requirements to notify merger arrangements are triggered. Merger control rules will usually only apply to joint ventures where a stand-alone business with long term cooperation is envisaged and is not specific to one particular project. If this is the case, and certain financial thresholds are met, a filing may be required in one or more jurisdictions before the parties can complete and implement the JV agreement. Now the UK has left the EU, separate parallel merger filings may be required in both the UK and EU.

Tax considerations

The vehicle used to structure a JV will have different consequences from a tax perspective. This means it is important to consider tax at the outset, as the tax position from the various jurisdictions involved may influence the JV parties' choice of vehicle.

When considering the tax position of a JV vehicle, there are three main stages where tax will be relevant:

• at the outset, when the vehicle is established and assets may need to be transferred into the vehicle by the JV parties;
• whilst the JV is in operation and profits need to be distributed to the JV parties; and
• at the end of the project, when the JV is being terminated and assets need to be transferred out of the JV and residual cash/capital distributed amongst the JV parties.

If businesses are restructuring an existing JV and using a different vehicle there may be tax consequences where assets are transferred into the new JV.

When making structuring decisions that may affect the tax position of the JV and/or the JV parties, it is also important to consider whether there is sufficient cash available to pay any tax – particularly where a JV is being restructured. The restructuring may be taking place due to financial distress of one/more of the JV parties but the restructure may give rise to taxes that need to be paid despite the fact that profits may not be available for distribution to pay the tax.

The tax consequences of a corporate JV

A JV company will be a separate legal entity which will be liable for tax on profits in its own right.

The transfer of capital assets into a JV company may lead to capital taxes for the party making the transfer.

If land is being transferred there could be a land tax charge for the JV company too – in England and Northern Ireland this is called Stamp Duty Land Tax, while in Scotland a Land and Buildings Transaction Tax could apply. In Wales, if the sale was completed on or after 1 April 2018, the JV company could be liable to Land Transaction Tax.

There may also be VAT or other goods and services tax on the transfer.

When distributing profits, the payment from the JV company to shareholders can take different forms, such as dividends, interest, royalties or licence fees, which may have different tax consequences.

Depending on the relevant jurisdiction, and subject to any anti-avoidance provisions, the profit distribution may be tax deductible for the JV company, reducing the JV company’s taxable profits.

The JV parties – likely shareholders in the JV company – will also have to consider their own tax position when extracting profits from the JV and will want to choose the most tax efficient way of extracting profits.

Similar issues may arise on termination – tax may arise for the JV company when assets are transferred out of it, and taxes may need to be paid by shareholders/JV parties when capital assets or residual profits are paid or returned.

The tax consequences of a partnership JV

The key tax difference between a corporate JV and partnership JV is that partnerships are tax transparent. This means that the partnership itself does not pay tax on its profits. Instead each partner is liable for tax on its share of the profits. There is no joint liability for the tax liabilities of other partners.

On establishment of the partnership JV, capital taxes may be payable by a JV partner on a transfer of capital assets into the partnership.

Stamp taxes and/or land taxes may also be payable on the transfer of assets into the JV partnership.

Profits will be shared directly between JV partners according to the partnership agreement. Profits will only be taxed on receipt by the partners – the partnership JV itself will not be subject to tax.

It is commonly accepted that each JV partner is treated as owning a share of each of the capital assets of the partnership that corresponds to its interest in the partnership. Consequently, if the JV partnership disposes of a capital asset, each partner will make a disposal of its share in the asset and will be subject to tax depending upon their personal circumstances.

A change in profit sharing ratios can also result in a tax liability for a partner whose shares are reduced. This may be relevant on a restructuring if additional investment is being sought from new JV partners – the new investment may result in the existing JV partners' shares in the JV being diluted and them being treated as disposing of part of their share in the JV, which may give rise to a tax charge, despite no distribution of cash being received. Depending on the jurisdiction in which the JV is located, it may be possible to defer this liability until the partner leaves the JV partnership.

On termination, the distribution of the assets to the JV partners will result in tax charges – the nature of which will depend on the nature of the assets being transferred. For example, where land is transferred, the JV partner receiving the land may need to pay tax on acquisition. VAT may also be payable on the transfer of certain assets.

The tax consequences of a contractual JV

In this scenario there is no vehicle as such, rather the parties enter into a JV agreement, in which they will decide how they will work together. The parties will then pay tax on their own profits, depending on where they are located and the vehicle they use to enter the contract. The JV should have no tax consequences itself.

It is important that a contractual JV cannot be regarded as a partnership, so the JV parties are not subject to unexpected tax liabilities. A key indicator of a partnership is profit sharing; therefore, contractual JVs will need to ensure that arrangements are structured to avoid this.

Very limited tax issues should arise on formation or termination of the contractual JV arrangements.