Joint ventures in Luxembourg

What is a joint venture and which purposes does it have?

Joint ventures are generally used by companies with complementary knowledge, skills or abilities that wish to achieve a specific objective and where the union facilitates the achievement of it. In many cases, these are high-risk projects that require a significant financial investment, although this is not always the case and the objectives can be very varied. Some of the most common objectives are the following:

• Conquering a new market or entering a new country: it is usually common to access unknown or difficult geographical markets where one of the partners has an established presence or local knowledge.
• Development of new products or services: joint ventures allow companies to combine resources, skills, technology and specific knowledge to develop and market innovative products or services that they could not create separately.
• Reduce costs and share risks: a common objective is to share the costs associated with large-scale projects such as infrastructure construction, research or penetration into a highly competitive sector.
• Improve the supply chain: it can be used to optimize logistics or improve distribution by collaborating with partners who already have solid networks.
• Entering new sectors or industries: sometimes the aim is to diversify operations or enter economic sectors different from the usual ones with the support of a partner who has experience or backing in that market.truction of roads, railways, power plants or industrial facilities.
• Complying with legal or regulatory requirements: in some cases it is necessary to partner with a local partner in countries where laws require the participation of national investors or the creation of alliances in order to operate.
• Increasing competitiveness: a common objective is to form a strategic alliance to jointly face the competition or to gain a competitive advantage in a saturated and difficult industry.
• Developing large-scale infrastructure projects: joint ventures are often used to collaborate on large-scale projects that require significant investments such as the cons

Types of joint venture in Luxembourg

Joint ventures are not legally defined in Luxembourg legislation, however, there are options for collaboration between two companies. Such collaboration can be established in two main ways: on a purely contractual basis or by creating a new legal entity. The choice of one type or the other will depend on the objectives of the parties, the level of integration required and the scope of the collaboration. Below we will look at each type of structuring in more detail.

Contractual Joint Venture

In this type of joint venture, companies collaborate through a contract without creating a new independent legal entity. Each party maintains its own corporate structure and operates separately, but both companies agree to work together to achieve the common objective specified in the contract.

In this type of structure the parties agree on how to share revenues, costs, resources and risks and set out these agreements in a contract. It is a much more flexible and less costly option than structuring through the creation of a new legal structure so it is more suitable for short-term projects.

Corporate Joint Venture

Through this structuring, companies create a new independent legal entity in which both have shareholdings. This entity is responsible for managing the project or joint business.

The legal form is free, so a joint venture in Luxembourg can adopt one of the many legal forms available in the country such as a limited liability company (SARL), a public limited company (SA), a limited partnership (SCA) or a special limited partnership (SCS).

In this case the rights, responsibilities and contributions of each party are reflected in the company statutes. It is more suitable for long-term or large-scale projects as it tends to be more costly and complex to structure.

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The following table serves as a summary and provides a clearer view of the differences and implications of each form of structuring.

Advantages and disadvantages of a joint venture

Joint ventures are a powerful strategic tool for companies looking to collaborate on specific projects. But, like any business model, this type of collaboration has advantages as well as disadvantages and challenges that must be carefully considered before entering into such an alliance. Let's take a look:

✅ Advantages

• ➕ They allow for the sharing and reduction of risks and costs: joint ventures allow the parties to share the financial and operational risks associated with large projects or projects with high levels of uncertainty. But that's not all, the fact of combining capabilities can also imply a reduction of risks.
• ➕ Access to new markets: they are ideal for entering foreign or unknown markets since a local partner can offer their knowledge of the local culture and regulatory framework.
• ➕ Efficient use of shared resources: companies can combine their complementary strengths to achieve objectives that they could not achieve on their own.
• ➕ Taking advantage of economies of scale: by pooling resources and capabilities, joint ventures can reduce production costs to achieve economies of scale and thus become more competitive in difficult markets.
• ➕ Innovation and joint development: collaborating with another company can generate new ideas and accelerate research and development processes while fostering innovation.
• ➕ Greater credibility: as a general rule, it takes a long time for a young company to acquire credibility in the market and a solid customer base. Joining forces with a larger, better-known brand can help them achieve greater visibility and credibility in the market more quickly.
• ➕ Legal and tax benefits: forming a joint venture not only facilitates access to new markets and customers but also opens the door to operating under more favorable regulatory and tax frameworks. For example, creating a joint venture in Luxembourg is particularly advantageous thanks to its flexible regulatory framework and attractive tax environment that efficiently supports international collaboration.

❌ Disadvantages

• ➖ Conflicts between partners: differences in business culture, management styles, strategic priorities or performance expectations can generate friction. These differences can, for example, lead to disputes when making certain decisions.
• ➖ Operational and legal complexity: joint ventures can require complex legal agreements and high initial costs for their structuring.
• ➖ Risks of power imbalance: in some cases one of the parties may dominate the alliance, which can lead to unbalanced decisions or to benefits not being distributed equitably.
• ➖ Problems of confidentiality and intellectual property: sharing sensitive information or technology can expose companies to the risk of leaks, misuse of intellectual property or conflicts over the ownership of joint innovations.
• ➖ Lack of total control: as it is a collaboration, decisions must be made by consensus and this limits the autonomy of each company as well as slowing down the processes.
• ➖ Uncertain outcomes: not all joint ventures achieve their objectives, as there are many factors at play, such as market changes or integration problems, which can lead to the failure of the project.
• ➖ Difficulties in dissolving the alliance: if the joint venture ends in conflict, the separation of assets, employees and resources can be complicated, costly and even generate litigation between the parties.

Key legal aspects of joint ventures

As a final note, let's review some legal aspects that should not be overlooked when planning a joint venture in Luxembourg in order to guarantee its success and minimize risks:

• Choice of legal structure: the first key aspect is to decide whether the joint venture will be contractual or corporate, as the chosen structure affects aspects such as liability, decision-making, taxation and regulatory requirements.
• Contracts and legal agreements: regardless of the type of association chosen, the creation of a joint venture necessarily includes a collaboration contract that serves as a framework for the joint operation. This contract formalizes the essential terms of the joint operation between the different partners and must include aspects such as capital contributions, profit distribution, decision-making, voting rights and procedures for resolving conflicts. If the joint venture involves the creation of a corporate entity, this contract is complemented by the articles of association that formally define the rules of governance of the new company.
• Fiscal considerations: it is fundamental to take fiscal implications into account from the start as these vary according to the type of joint venture. In a contractual joint venture, profits are distributed among the partners as stipulated in the contract and taxed according to the fiscal legislation applicable to each participant. On the other hand, in a corporate joint venture, profits are also distributed according to the contract but the entity created is subject to the specific fiscal regulations of its legal structure.
• Protection of intellectual property and confidentiality: in many joint ventures the parties contribute technology, brands, patents or other intangible assets that must be adequately protected. It is therefore important to establish in advance how intellectual property will be managed and shared, clearly defining who will own the existing rights and any joint developments. In addition, it is indispensable to create confidentiality agreements to guarantee that neither of the parties uses sensitive information inappropriately or outside the framework of the alliance.
• Exit and dissolution strategy: every joint venture should include a clear plan for the dissolution or exit of the parties. Moreover, it is important to provide mechanisms for resolving conflicts and to consider clauses such as options for the repurchase of shares, pre-emptive rights or drag along and tag along clauses to protect the interests of the parties. Finally, in the event of dissolution, the agreement must detail how the assets will be distributed and what will happen to the outstanding obligations.