Table of Contents

• Introduction
• I.- Concept
• II.- Characteristics and Elements
• III.- Distribution of Profits and Losses
• IV.- Tax Treatment

Introduction

One of the most advertised contract agreements in Mexico is the joint venture. This is due to its flexibility to carry out deals without setting up another entity and wasting time and money on notary publics and bureaucracy. However, one person you should never avoid while entering into this contract is a capable attorney. Throughout this new entry, you will understand why.

First off, what is advertised worldwide as a joint venture in Mexico has two connotations: 1) a commercial contract regulated by Mexico’s General Law of Corporations and Partnerships in its Articles 252 to 259, known under the name of Asociación en participación; 2) an unnamed contract that generally is drafted by skillful attorneys under the commercial law’s boundaries and is known as contrato de empresa conjunta or contrato de colaboración empresarial. 

In this entry, I will address the first kind of joint venture since it’s the most used in Mexico. However, that asociación en participación is not really a joint venture according to international terminology, so don’t get discouraged. Still, it brings more legal certainty of what to expect while dealing with all parties related due to its express regulation. Hence, it is interesting to be treated first.

But why is the asociación en participación not really a joint venture? Well, because it doesn’t beget genuine cooperation between two parties, it only transfers one party’s assets to others (s) who will manage and use them for profit, and the one who transferred them only participates in the profits and losses, almost like a company but without all the formality necessary to set up one.  Whereas a joint venture implies that all the parties can manage the assets and use their expertise for profit without relinquishing the management of the business, and many times, their participation is restricted to stages of that business.

Nevertheless, in Mexico, we also use the real joint venture, but it’s more complicated to deal with it without knowing the scope of the asociación en participación. Therefore, as I said as a caveat, it’s essential to explain it first. Without further ado, let’s take a look at this legal institution.

I.- Concept

A joint venture is a commercial agreement by which a person (partner) grants to others (associates or co-ventures) who contribute goods or services, a share in the profits and losses of a commercial negotiation.

This contract does not have legal personality, corporate name, or denomination in general, but it is different in tax issues, as you will see. 

II.- Characteristics and Elements

Pursuant to Mexico’s General Law of Corporations and Partnerships, the following requirements must be made to be enforceable this contract:

1. The joint venture contract must be written and not registered in the Public Registry of Commerce. 
2.  The joint venture shall establish the terms, proportions of interest, and other conditions under which they will be performed. 
3. The partner acts in its own name, and there is no legal relationship between the associate or associates and third parties. 
4. In the absence of special provisions, this agreement is dissolved and wound up by the rules laid down for partnerships in collective name insofar as they do not conflict with the requirements related to this contract in the law.
5. The property contributed belongs in ownership to the party making the contribution unless the nature of the contribution requires some other formality or unless it is stipulated otherwise and the relative clause is registered in the Public Registry of Commerce of the place where the party making the contribution carries on business.
6. Parties cannot assign their rights to third parties, nor new co-ventures may be admitted without the consent of the majority.
7. The joint venture may not be amended except by the unanimous consent of the partner and associates unless it is agreed therein that the amendment may be agreed upon by the majority of them. In this case, the minority shall have the right to withdraw from the partnership.
8. The associates may neither engage in business of the same type as that which constitutes the object of the joint venture nor form part of companies that carry it out, neither on their own account nor on behalf of others, except with the consent of the other associates and partners.

III.- Distribution of Profits and Losses

The chapter related to the distribution of profits and losses is the most important one in the agreement, even though it is often omitted. If this happens, the law surrogates the will of the parties and states this distribution shall be performed according to Article 16 of the law, which textually states:

Article 16 .- In the distribution of profits or losses, the following rules shall be observed unless otherwise agreed:

I.- The distribution of profits or losses among the capital partners shall be made in proportion to their contributions;

II.- The industrial partner shall be entitled to one-half of the profits, and if there are several partners, such half shall be divided equally among them, and

III.- The industrial partner or partners shall not report losses.

However, suppose nothing is stipulated in the agreement regarding how those profits or losses are calculated. In that case, the interested party must first file a commercial lawsuit claiming the partner’s rendering of accounts. Then, when all parties acknowledge if there are profits or losses if they don’t comply with it, another lawsuit must be filed to enjoin paying losses or collect profits. A big waste of time. Lastly, consider that a commercial lawsuit could last, on average, one and a half years. 

Finally, there was a tendency for partners to mischievously decide not to pay profits to associates by using the lack of an express duty to render accounts until a precedent cleared up the issue and stated—as it’s clear indeed—the obligation to render accounts to associates emanates from the law. 

Also, if nothing is stipulated in the agreement, according to the law, the partner must render accounts semiannually so the associates are aware of profits or losses and can act according to their interests. 

JOINT VENTURE. THE OBLIGATION TO RENDER ACCOUNTS EMANATES FROM THE LAW, SO IT IS NOT SUBJECT TO THE COMPLIANCE OF THE RECIPROCAL OBLIGATIONS BETWEEN THE PARTIES IN THE AGREEMENT.

The nature of the joint venture has been discussed in doctrine, jurisprudencia, and in the General Law of Corporations and Partnerships itself, which does not expressly recognize it as a company of this type; It even denies the attributes of legal personality and corporate name. However, the fundamental thing is that Article 259 of the law on the matter establishes that in the absence of special stipulations for its operation, dissolution, and wind up, the rules relating to the company in collective name, to which it does the characteristic of being a commercial company is recognized, as long as it does not contradict the provisions of the chapter relating to the joint venture. Thus, in the absence of regulation for rendering of accounts in the joint venture, the general rules for the company in collective name concerning the administration of the company must be applied, which will be in charge of one or more administrators, who may be partners or strangers (article 36 of the General Law of Corporations and Partnerships); and the administration account, which will be submitted semi-annually, if there is no agreement on the matter, and at any time agreed upon by the partners (article 43 of the same law). As it can be seen, the obligation to render accounts for the administration of the joint venture arises from the law and leaves the parties free only to establish the frequency with which they must be carried out, with the provision that it may occur at any time, in which the partners agree. Consequently, failure to comply with reciprocal, simultaneous, or other obligations between the partner and associates cannot serve as a basis for failing to show the management account of the joint venture.

Whatever it is, if you want to enter a joint venture, you must weigh carefully the mechanism of profits and losses distribution, and a skillful attorney must be involved. This is essential because nothing is more harmful to a business than an unenforceable contract. 

IV.- Tax Treatment

A joint venture in Mexico has many surprises because although the law that creates it states this figure doesn’t beget a corporation nor creates a ‘legal personality’, for tax purposes, that’s what it really is, and it shall pay taxes as a corporation. The above, pursuant to Article 17 B of the Federal Tax Code, which textually states: 

“17 B.- For the purposes of the tax provisions, a joint venture will be understood as a group of people who carry out business activities on the occasion of the celebration of an agreement provided that they, by legal provision or the agreement itself, participate in the profits or the losses, derived from said activity. The joint venture will have a legal personality for the purposes of the tax law when in the country it carries out business activities, when the agreement is celebrated in accordance with Mexican laws, or when any of the legal hypotheses established in Article 9 of this Code. In the aforementioned cases, the joint venture resident in Mexico will be considered.

The joint venture will be obliged to comply with the same tax obligations under the same terms and under the same provisions established for legal entities in the tax laws. For such purposes, when said laws refer to a legal entity, it shall be understood to include the joint venture considered in the terms of this provision.

For tax purposes and in the means of defense that stand against the tax consequences derived from business activities carried out through the joint venture, the partner shall represent said association.

The joint venture will be identified with a denomination or company name, followed by the legend A. in P. or, in its absence, with the name of the partner, followed by the acronyms mentioned above. They will also have, in national territory, the address of the partner”.

In this way, although at first, you could avoid the bureaucracy related to setting up a company while entering a joint venture, for tax purposes, your accountant should consider it as one, not only in the federal jurisdiction but also in the local government of Chihuahua, since the Article 16 of the Tax Code of the Chihuahua State practically regulates the same legal hypothesis as the federal on. Therefore, the local taxes must be paid by the partner of the joint venture as if it were a company. A nonsense.

By Omar Gómez

Partner

beLegal abogados S.C

Abogados en Ciudad Juárez, Chihuahua, México

Visit my personal website at www.ogomezabogado.com

Contact the firm: [email protected] or call (656) 774-75-73 for English assistance or (656) 271-41-43 for Spanish assistance.