A joint venture involves two or more parties joining forces, so that they can share risks, losses, and profits. However, under the Thai law, joint ventures are not allowed, not even large joint ventures with foreign markets. There is no room for binding legislation, only an understanding between the parties, which can occur in the form of a contract that binds them. It is essential for this contract not to be tied to or registered with a Thailand government body.
Therefore, in Thailand, there are only two kinds of possible joint ventures:
An incorporated joint venture requires the parties to file an application for a tax ID number, so that they can make joint tax submissions.
Unincorporated joint ventures require parties to keep their tax filings separate.
In Thailand, a joint venture is most often made between foreigners and Thai nationals. If foreign shareholders hold the majority in a joint venture, the status of it must be changed and it shall be registered under the Foreign Business Act of Thailand. The Foreign Business Act governs foreign-owned entities, and there may be Board of Investment benefits applied, too. This means a different legal definition, even for a small business.
Generally speaking, a joint venture can theoretically be formed in one of the following four ways:
- A foreign investor purchases shares in a company
- A local company purchases shares in a foreign company
- Local and foreign investors form a joint venture from scratch
- Public capital or bank debt is shared
Not all of these options are possible in Thailand, though. Joint venture partnerships are only permitted on a contract basis, regardless of the fact whether they are incorporated or unincorporated joint ventures.
Joint ventures are rarely permanent and are often dissolved when:
- One partner buys out the other.
- Market conditions evolve in such a manner that the joint venture is not appropriate anymore.
- There are financial or legal issues.
- The initial agreed-upon time for the venture has passed.
- Any or both joint venture partners do not agree with the original plan anymore.
- New goals are developed by either or both parties.
- The original aims of the joint venture agreement have been met.
- The original aims of the joint venture agreement have not been met.
Sometimes, a joint venture only involves a particular project or venture into new markets for a limited time. In rare cases, a business arrangement for joint venture work can be made long-term, usually when a new entity is formed from new partners. It is unlikely to come from a separate entity merging with another.
There is an option for participant companies to remain separate, but sometimes the parties involved can decide to merge two companies into a single new business. This is important to understand for tax purposes, because the way in which these companies pay taxes will depend on what kind of joint venture they are in.
A joint venture will always involve a limited partnership and never unlimited liability. This constitutes some risk to the company involved in a joint venture, whether in an existing or new market.
Attempting to establish a joint venture of any nature is a major decision. You are placing trust in some other party from some other business and with its own rights to share in your gains and risks. The other business will gain access to some of your capital, some of your records, etc. In places like Thailand, a such legal entity is only attainable through contracting. One company cannot entirely merge with another to form a new organization; therefore, there will always be two parties that are intrinsically separate and must cooperate in a limited liability capacity.
A joint venture can be an extremely risky kind of business or general partnership. The nature thereof tends to be volatile, ownerships can change unexpectedly, and the parent company structure of most joint ventures can cause serious issues even in a country like Thailand, where a joint venture depends only on a contract and is not a recognized legal entity on its own. A successful joint venture is rare if not managed by a legal team. A joint venture relationship can be difficult.
However, that being said, a joint venture has several benefits that must also be acknowledged. It grants business entities access to established distribution channels under an existing distribution agreement and established markets. There is increased access to technical expertise and greater overall capacity than a single business entity might have. There are more resources available in a joint venture.
There are two joint venture cases: that stand out as a famous example of this type of business practice and the success that can come from it: partnership between Microsoft and General Electric and partnership between Boeing and Lockheed Martin. There are many other joint venture cases that you might want to explore to learn more about the practice.
Despite these successes, it is essential for joint venturers to have an exit strategy, even if they are only working together on a specific project. It is risky to combine resources, not least of all because of intellectual property laws. A written agreement and integrated management team with shared invested capital and risk can be beneficial, but they are not a fail-safe. Any JV company must have an exit strategy.
Business activity should be closely monitored and accurately reported. A JV agreement should also be in place. There are several questions related to matters like how a single-owner limited liability company is run or divided, and where intellectual property claims fall, how business income is divided, etc.
Limited partners in public companies can buy market share in foreign companies, but a true joint venture business cannot exist within Thailand.
At Juslaws & Consult, we offer support throughout any business venture, but support for a joint venture is especially important. Make sure to have legal representation at board meetings related to complicated matters as well, so that decisions can be made within the bounds of legality.
Joint ventures can quickly escalate into critical situations, so please contact us for more information before you engage in one. And remember, Juslaws & Consults offers a FREE first consultation for any legal need.
