Understanding the tax liabilities of partners in an unincorporated joint venture
In doing business via a joint venture, knowing the tax implications could help you avoid potentially perilous situations. This includes understanding corporate laws that may affect the tax liabilities of the partners.
The law is quite clear on the scope of tax liabilities for an incorporated joint venture (IJV), established as a company limited, as well as its shareholders. But questions sometimes arise about the tax treatment of an unincorporated joint venture (UJV).
Under the Revenue Code, a UJV is treated as a kind of "company or juristic partnership", which is a taxable unit for corporate income tax purposes. Under the statutory definition, a UJV exists wherever activities are jointly conducted for business or profit-seeking purposes among its members, at least one of which is a company limited or incorporated partnership. It is also treated as a taxable unit for value-added and specific business tax.
When a UJV fails to comply with tax requirements, how is the scope of liabilities to be borne by each partner determined? Since its status is not that of a company limited as in the case of an IJV, partners' liabilities will not be limited to the paid-up amount of registered capital represented by the shares they hold -- unlike the more familiar situation under an IJV.
In a recent court case, a Thai company (TCo) and two foreign companies (ACo and BCo) were registered for VAT as a UJV bearing the partners' names -- we will call it TCo, ACo and BCo Joint Venture -- with TCo holding a 99% stake. The UJV entered into an agreement with the Bangkok Metropolitan Administration in 1996 for a wastewater treatment project valued at 4.7 billion baht and the UJV was subsequently dissolved in 2004. Later, the Revenue Department assessed the UJV for its failure to file corporate income tax returns for 2001 and 2002, and failure to file VAT returns between February 2001 and March 2004.
As the UJV did not have a separate legal status, the department held TCo liable for UJV's tax arrears. TCo argued that it had already sold an 89% stake in 1997 and the remaining 10% in 2000 -- before the period when the UJV failed to file the relevant tax returns.
The court held the view that a UJV was in fact a non-registered ordinary partnership under the Civil and Commercial Code (CCC). Thus, each partner had unlimited liability for debts that a non-registered ordinary partnership owed to third parties -- even where the partners had executed an agreement to limit each other's liability.
As well, any person presenting himself to third parties as a partner in an ordinary partnership -- for example, allowing the partnership to use its name or failing to object to such use -- would be legally liable to the third party as a partner. Based on these rules, the court said: "Even though TCo sold its stake in the UJV before [the period of the contested tax arrears], since TCo was the founder of the UJV, there was no way that it did not know that its name formed a part of the UJV's name in the VAT registration, in the agreement with the Bangkok Metropolitan Administration, and in the financial statement of the UJV for the accounting year 2000. Thus, as the tax issues took place between 2001 and 2004, during which TCo's name was included in the UJV's name, TCo must be liable to pay the tax of the UJV."
Therefore, while the Revenue Department treats a UJV as a taxable unit for corporate income tax purposes, the rules under the CCC regarding a "non-registered ordinary partnership" will apply in considering tax liabilities of the joint parties.
Furthermore, since the CCC provides that a liquidator has a duty to settle the debts of a company, another question arises. If the corporate partner, in this case TCo, is dissolved and its liquidator makes distributions to shareholders without paying off the joint venture's tax arrears, will the liquidator be held liable? If so, is there any limit to such liability? It seems that the court already had an answer.
In another Supreme Court case, a director dissolved a company, knowing that it was in VAT arrears. In the course of liquidation, for which he legally became a liquidator, he distributed the entire amount to the shareholders without paying VAT. The Revenue Department filed suit against the liquidator for the outstanding tax debts.
The court ruled that "since the liquidator caused damages to the Revenue Department by intentionally not fulfilling his legal duties so that the Revenue Department could not collect VAT, the liquidator was liable for such VAT amount, but not exceeding the distributed amount that the company had at the time of liquidation".
In addition, the Supreme Court ordered the liquidator to pay annual interest of 7.5% on the distributed amount that should have been used to pay VAT until the payment was completed.
This raises another issue, as the liquidator was held personally liable for interest even though it exceeded the distributed amount that the company had during the liquidation process. It seems to be so, since the Supreme Court overruled a Central Tax Court ruling that denied the Revenue Department's request for the interest.
Establishing a UJV may provide flexibility in dealing with a project owner that prefers not to split a turnkey contract for tax purposes, and tax exemptions on profits distributed from the UJV to partners, which are a Thai company or a foreign entity doing business in Thailand. But it cannot be denied that the tax consequences of such an arrangement can be far more complex than originally expected.
By Rachanee Prasongprasit and Professor Piphob Veraphong. They can be reached at firstname.lastname@example.org