Tax Considerations In Foreign Joint Ventures

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When looking to expand business into foreign markets, U.S. based companies often times compare the benefits of partnering with a foreign partner that is already established in the jurisdiction versus starting a new entity and navigating the business, legal and tax uncertainties of the new jurisdiction on their own. For a variety of reasons, joint ventures have become increasingly popular as a means of penetrating foreign markets, because they offer many advantages over going at it alone in a foreign country, including easier access to foreign markets, sharing of financial risks with the foreign joint venture partner and reduction of the costs of doing business abroad, to name a few. However, there are important business and tax implications that U.S. based companies should be aware of before selecting this business model.

A typical structure for a foreign joint venture entails the transfer of intellectual property to the foreign joint venture in exchange for stock of the venture. Such an exchange between a U.S. individual and a U.S. corporation would generally receive tax-free treatment. In the international arena, however, the same transaction can have very different and adverse tax consequences to the U.S. venturer due to the application of an often overlooked section of the Internal Revenue Code (IRC), §367(d).

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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