Issues Relating To Organizational Forms And Taxation

Transcription

1 Global Practice Guide Issues Relating To Organizational Forms And Taxation A Global Practice Guide prepared by the Lex Mundi Corporate Organizations and Securities Practice Group This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series at: Lex Mundi is the world s leading network of independent law firms with in-depth experience in countries. Through close collaboration, our member firms are able to offer their clients preferred access to more than 21,000 lawyers worldwide a global resource of unmatched breadth and depth. Lex Mundi the law firms that know your markets.

2 About this Guide This Guide of Issues Relating to Organizational Forms and Taxation provides guidance on the principal forms of business organization used in various jurisdictions and a description of the structural, securities and tax characteristics of the each of the structures. Table of Contents About this Guide... 1 Australia... 3 Austria Brazil Bulgaria Canada, Alberta, Ontario, Quebec Canada, Nova Scotia, New Brunswick, Prince Edward Island, Newfoundland & Labrador Cayman Islands Chile Cyprus Denmark Egypt Guatemala Hungary Indonesia Ireland Lebanon Lithuania Malaysia Malta Mexico Nicaragua Pakistan Peru Page 1

3 Poland Portugal Romania Slovak Republic South Africa Spain Switzerland Taiwan Thailand Turkey United Kingdom USA, Alabama USA, Arkansas USA, Connecticut USA, Georgia USA, Idaho USA, Indiana USA, Michigan USA, New Jersey USA, New York USA, Ohio USA, Oklahoma USA, South Carolina USA, South Dakota USA, Utah Uruguay Venezuela Page 2

4 Issues Relating to Organizational Forms and Taxation Australia Prepared by Lex Mundi member firm Clayton Utz 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. Corporation: Registered under federal law (Corporations Act). Advantages - perpetual succession; liability of shareholder or members of the corporation is limited to the unpaid amount on the shares held or to a specified guarantee amount. Disadvantages - subject to various levels of regulation, depending on whether the corporation is a securities exchange listed public, public or private (proprietary) corporation. Discretionary Trust: Established under contract but subject to separate state trust laws. Advantages - ability to distribute income or capital based on class participation or trustee's discretion; limited liability can be achieved by use of a corporate trustee with limited rights of indemnity. Disadvantages - typically a beneficiary of a discretionary trust will not have any ownership in the trust property; a trust may only exist for a finite period. Unit Trust: Established under contract but subject to separate state trust laws (and in some cases, federal law). Advantages - ability to distribute income or capital based on level of ownership, limited liability can be achieved by use of a corporate trustee with limited rights of indemnity. Disadvantages - a trust may only exist for a finite period; in some cases the trust is required to be registered under federal law (Corporations Act) and if so, required to have certain ownership structures (e.g. responsible entity, compliance committee) and statutory responsibilities and liabilities are imposed. Partnership: Established under separate state partnership laws. Advantages - ability to split income based on level of ownership. Disadvantages - liability is not limited and each partner may be sued for partnership debts. Limited Partnership: Established under separate state partnership laws. Advantages - a limited partner of a limited partnership can limit its liability to a specified amount; ability to split income based on level of ownership; and in the case of incorporated limited partnerships, perpetual succession. Disadvantages - liability of general partners is not limited and each general partner may be sued for partnership debts; a limited partner must not take part in the management of the business of the limited partnership and does not have power to bind the limited partnership. Under federal law, there are four forms of limited partnerships used as a structure for venture capital investment: Venture Capital Limited Partnerships, Early Stage Venture Capital Limited Partnerships, Australian Venture Capital Fund of Funds, and Venture Capital Management Partnerships. Of these 5 business organisation structures, the corporation is by far the most common. In addition to the above 5 structures, other structures which are less common for commercial activities are incorporated associations and co-operatives. 2. Are there attributes of the form that you consider unique to your jurisdiction? Nil Page 3

5 3. Describe the management and governance structure for each organizational form. Corporation: Typically the business of a corporation is managed by or under the direction of a board of directors of the corporation. Shareholders or members of the corporation will typically have a more limited role to make or approve certain decisions under stock exchange listing rules, federal law (Corporations Act), the constitution of the corporation or under contract (e.g. shareholders agreement). Discretionary Trust: The trustee will usually have broad powers to deal with trust property and to engage in the business of the trust. Certain decisions may require the notification and/or approval of a specified person (e.g. a person with the power to advise the trustee or with the power to appoint and remove the trustee). Unit Trust: The trustee will usually have broad powers to deal with trust property and to engage in the business of the trust. Unitholders or members of the trust will typically have a more limited role to make or approve certain decisions under stock exchange listing rules, federal law (Corporations Act) for certain trusts, the contract establishing the trust or under a separate contract (e.g. unitholders agreement). Partnership: The management and governance of a partnership will depend on the contract establishing the partnership. Decisions regarding the management of the partnership business may be determined by the partners, a specified committee or appointed board or representative (e.g. managing partner) as specified in the contract establishing the partnership. Limited Partnership: A general partner will manage the business of the limited partnership. A limited partner must not take part in the management of the business of the limited partnership and does not have power to bind the limited partnership. 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? Corporation: The board of directors of a public corporation must include at least 2 directors ordinarily resident in Australia. The board of directors of a private (proprietary) corporation must include at least one director ordinarily resident in Australia. There are no residency requirements for shareholders or members of a corporation (e.g. a corporation maybe a wholly owned subsidiary of a foreign investor). There are foreign investment laws and industry specific laws which may restrict the level of investment or control by foreigner investors. Discretionary Trust: There are no residency requirements for the trustee or beneficiary of a discretionary trust. There are foreign investment laws which may restrict the level of participation or control by foreigner investors. Unit Trust: For unit trusts which are required to be registered under federal law (registered schemes), the trustee (ie. responsible entity) must be an Australian public corporation which holds a relevant Australian financial services licence. Otherwise, there are no residency requirements for the trustee or beneficiary of a unit trust. There are foreign investment laws and industry specific laws which may restrict the level of investment or control by foreigner investors. Partnership: There are no residency requirements for the partners of a general partnership. There are foreign investment laws which may restrict the level of ownership of Australian assets of the Australian business of a general partnership. Limited Partnership: There are no residency requirements for the partners of a limited partnership. There are foreign investment laws which may restrict the level of ownership of Australian assets of the Australian business of a limited partnership. Page 4

6 5. Describe the extent to which management and owners are exposed to liability. Corporation: The board of directors can have personal liability under federal law (Corporations Act) or common law (judge made law) for a breach of fiduciary duties which are owed to the corporation. These fiduciary duties include obligations to act in good faith for a proper purpose, to act with care and diligence, and not improperly use their position or information obtained due to their position. Directors can also have personal liability where the corporation was trading whilst being insolvent. Liability of members of the corporation is limited to the unpaid part of the issue price of shares of the member or to a specified guarantee amount (in the case of corporations limited by guarantee). Under the constitution of the corporation, shareholders or members of the corporation can be liable to the corporation for duties or taxes imposed on the corporation in respect of the shareholder / member, their death, their shares or distributions made to them. A sole shareholder can be liable where their wholly owned subsidiary corporation was trading whilst insolvent. Discretionary Trust: Typically, the contract establishing the discretionary trust will expressly provide that an eligible beneficiary of the discretionary trust or the settlor of the discretionary trust is not personally liable to indemnify the trustee of the trust, or any creditor of the trustee, in connection with any trustee liability. Unit Trust: Typically, the contract establishing the unit trust will provide that the liability of unitholders is limited to the unpaid part of the issue price of units of the unitholder and no unitholder is personally liable to indemnify the trustee of the trust, or any creditor of the trustee, in connection with any trustee liability. Under the contract establishing the trust, the unitholder can be liable for duties or taxes imposed on the trustee in respect of the unitholder, their units or distributions made to them. Partnership: Every partner in a general partnership is liable jointly with the other partners for all debts and obligations of the partnership incurred while the partner is a partner. Limited Partnership: Every general partner in a limited partnership is liable jointly with the other general partners for all debts and obligations of the limited partnership incurred while the general partner is a general partner. The liability of a limited partner of a limited partnership to contribute to the liabilities of the limited partnership is limited to a specified amount. If a partnership (the investing partnership) is a limited partner in a limited partnership (the principal partnership), a partner in the investing partnership has no separate liability to contribute to the liabilities of the principal partnership. A limited partner has no liability for the liabilities of an incorporated limited partnership other than agreed obligations to contribute capital or property to the incorporated limited partnership. 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? Corporation: (i) Ownership interest is represented by a shareholding (in the case of corporations limited by shares) or membership (in the case of corporations limited by guarantee). (ii) Whether the ownership interest is transferable will depend upon the constitution of the corporation. (iii) There is a minimum requirement of one shareholder or member. Discretionary Trust: (i) A beneficiary of a discretionary trust will not typically have any ownership in the trust property. The contract establishing the trust may have default beneficiaries in respect of the income or capital of the trust (ii) Not applicable. (iii) There is a minimum requirement for one beneficiary (or class of beneficiary). Unit Trust: (i) Ownership interest is represented by a unitholding. (ii) Whether the ownership interest is transferable will depend upon the contract establishing the trust. (iii) There is a minimum requirement of one unitholder. Partnership: (i) Typically, the ownership interest is represented by a specified right to participate in part of the profits or losses of the partnership, and on the dissolution of the partnership, to a specified Page 5

7 right to participate in part of the surplus assets of the partnership. (ii) Whether the ownership interest is transferable will depend upon the contract establishing the general partnership. (iii) There is a minimum requirement of two partners. Limited Partnership: (i) Ownership interest is represented by a specified right to participate in part of the profits or losses of the partnership, and on the dissolution of the partnership, to a specified right to participate in part of the surplus assets of the partnership. (ii) Whether the ownership interest is transferable will depend upon the contract establishing the limited partnership. Subject to the terms of that contract, a limited partner in a limited partnership may (with the consent of the general partners) assign the limited partner s interest in the limited partnership, and a limited partner in an incorporated limited partnership may (with the consent of the general partners and the agreement of the transferee) transfer the whole or a proportion of the limited partner s interest in the incorporated limited partnership. (iii) There is a minimum requirement of one general partner and one limited partner. 7. Is there a minimum capitalization? Corporation: There is no minimum capitalization requirement for a corporation (e.g. a corporation can be incorporated with one share with a nominal issue price). Discretionary Trust: There is no minimum value of trust property requirement for establishment of a trust (e.g. a discretionary trust can be established with trust property of cash or other property with a nominal value). Unit Trust: Generally speaking, there is no minimum trust property requirement for establishment of a trust (e.g. a unit trust can be established with trust property of cash or other property with a nominal value). To carry out certain activities and obtain the necessary licence to undertake those activities (certain public trusts), there are federal law requirements for those trusts to have available specified adequate financial resources to provide the financial services covered by the licence. Partnership: There is no minimum partnership property requirement for establishment of a general partnership (e.g. a general partnership can be established without any partnership property). Limited Partnership: There is no minimum partnership property requirement for establishment of a limited partnership (e.g. a limited partnership can be established without any partnership property). 8. Is there a security that can be issued to the public? Corporation: Yes, subject to Australian securities laws (which can require that disclosure documents must be prepared with specified content and specified procedures to be followed), public corporations limited by shares can issue securities (shares, options to be issued shares or notes convertible into shares) to the public. Private (proprietary) corporations must not offer securities to the public where that would require the preparation of the specified disclosure documents, except for an offer of its shares to existing shareholders of the corporation, employees of the corporation or employees of a subsidiary of the corporation. Public corporations limited by guarantee cannot issue shares. Discretionary Trust: No. Unit Trust: Yes, subject to Australian securities laws (which can require that disclosure documents must be prepared with specified content and specified procedures to be followed), unit trusts can issue trust interests (units, options to be issued units or notes convertible into units) to the public. Partnership: A partnership interest in a general partnership can be offered to a person or legal entity. Under federal law, there are limits on the number of partners of a general partnership (which varies from 20 to 1,000 depending on the activities of the partnership) before the partnership must be incorporated. Page 6

8 Limited Partnership: A partnership interest in a limited partnership can be offered to a person or legal entity. Under state law, there are limits on the number of general partners of a limited partnership (which varies from 20 to 1,000 depending on the activities of the partnership). An incorporated limited partnership must not have more than 20 general partners. A limited partnership or incorporated limited partnership may have any number of limited partners. 9. Can the form incur debt, or grant security for debt? Corporation: Yes, subject to any restrictions in the corporation's constitution or any contracts to which it is a party. Discretionary Trust: Yes, subject to any restrictions in the contract establishing the discretionary trust or any contracts to which it is a party. Unit Trust: Yes, subject to any restrictions in the contract establishing the unit trust or any contracts to which it is a party. Partnership: Yes, subject to any restrictions in the contract establishing the general partnership or any contracts to which it is a party. Limited Partnership: Yes, subject to any restrictions in the contract establishing the limited partnership or any contracts to which it is a party. 10. What is the duration of the form? Can it be renewed? Corporation: A corporation exists until it is wound up or deregistered at the instigation of its shareholders or members, the Australian corporate re.g.ulator (the Australian Securities and Investments Commission), Australian courts or creditors of the corporation. Discretionary Trust: 80 years. No renewal. Unit Trust: 80 years. No renewal. Partnership: Subject to the contract establishing the general partnership, a general partnership exist until (i) if entered into for a fixed term, the expiration of that term; (ii) if entered into for a single adventure or undertaking, the termination of that adventure or undertaking; (iii) if entered into for an undefined time, the date mentioned in a notice of partner's intention to dissolve the partnership as the date of dissolution, or, if no date is mentioned, as from the date of the communication of the notice; (iv) the death or bankruptcy of any partner; (v) the happening of any event which makes it unlawful for the business of the partnership to be carried on, or for the partners to carry it on in partnership; or (v) a court order dissolving the partnership. Limited Partnership: For limited partnerships (other than incorporated limited partnership), refer to the "Partnership" heading above subject to the following. Subject to the contract establishing the limited partnership: (i) a limited partner is not entitled to dissolve the limited partnership by notice; and (ii) the death, bankruptcy or retirement or, in the case of a corporation, the dissolution of a limited partner does not dissolve the limited partnership. Subject to the contract establishing the incorporated limited partnership, an incorporated limited partnership exists until it is wound up by the partners or by the registrar under the applicable partnership laws for specified grounds (e.g. the partnership has ceased to carry on business or none of the partners is a limited partner). Page 7

9 11. Describe the process, customary time period and approximate cost of establishing the form. Corporation: The registration process involves lodging a registration application, paying a filing fee to the Australian corporate re.g.ulator (Australian Securities and Investments Commission), obtaining consents of officers and shareholders / members, and may involve the preparation of the constitution of the corporation (which is not mandatory). Once all the documents have been prepared, registration can occur within one day. The approximate cost of registration is A$700 - A$850 (as at June 2010) (excluding lawyers fees) depending on the company type (private or public). Discretionary Trust: The establishment involves preparing the necessary trust deed, and potentially incorporating any corporate trustee which does not already exist. The cost and time of preparing the trust deed will depend upon the complexity of the trust. Unit Trust: The establishment involves preparing the necessary trust deed, and potentially incorporating any corporate trustee which does not already exist. The cost and time of preparing the trust deed will depend upon the complexity of the trust. Partnership: The establishment involves preparing the necessary partnership agreement. The cost and time of preparing the partnership agreement deed will depend upon the complexity of the general partnership. Limited Partnership: The establishment involves preparing the necessary partnership agreement. The cost and time of preparing the partnership agreement deed will depend upon the complexity of the limited partnership. 12. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? Corporation: No. Discretionary Trust: No. Unit Trust: No. Partnership: No. Limited Partnership: No. 13. For what taxes is the form liable? Corporation: Companies resident in Australia are liable for income tax on their Australian sourced and foreign sourced income at 30% (the Government has announced that the 30% rate will be reduced to 29% from the income year). Gains/losses on capital gains tax (CGT) assets (this includes property and interests in property) are incorporated into, and taxed as part of, a taxpayer's taxable income under the CGT regime. Other significant taxes include (exemptions may be available with respect to these taxes): Tax: Goods and services tax (GST) Levied on: Commonwealth tax generally levied on the supply of goods and services Rate: 10% Tax: Fringe benefits tax (FBT) Levied on: Commonwealth tax levied on the provision of non-cash benefits to employees and associates of employees Page 8

10 Rate: 46.5% Tax: Payroll taxes Levied on: State based tax levied on salaries, wages, commission and allowances paid by employers Rate: 4.75% % Tax: Stamp duty Levied on: State based tax levied on dealings in certain assets (such as agreements to transfer, transfers, options and declarations of trust) in certain assets such as land, goodwill, IP, statutory licences, shares and units in private companies or private unit trusts etc. Stamp duty is also levied on mortgages, insurance contracts and dealings in shares and units in landholding companies and trusts Rate: Ad valorem (varies by type of asset, value/consideration and State/Territory) Tax: Land tax Levied on: State based tax levied on the unimproved value of land owned / used / leased (depending on the State/Territory) Rate: up to 3.7% (varies by value and State/Territory) Trust: Trusts are generally treated as flow-through vehicles for tax purposes, i.e. beneficiaries of a trust are liable for income tax on the income of the trust that they are "presently entitled" to (provided they are not under a legal disability). All other income is assessable to the trustee (with penalty rates applying in certain circumstances). A beneficiary is "presently entitled" to trust income where: a) he/she has an absolutely vested, indefeasible and beneficial interest in the income of the trust; and b) the income is available to be distributed for trust law purposes. Where a trust is a corporate unit trust or a public trading trust, it will be treated as a company for Australian tax purposes and not as a flow-through entity. Broadly, a corporate unit trust is a public unit trust that has acquired a business or other property from a company as part of a corporate restructure and a public trading trust is broadly a public unit trust that carries on or controls a "trading business". Partnership: Partnerships are generally treated as flow-through vehicles for tax purposes. That is, the partners of the partnership are liable to Australian tax on their share of the partnership income. A partnership is defined in the Tax Acts as an association of persons in receipt 14. What is the tax treatment of payments to foreign owners? Corporation: Non-residents are liable for Australian tax only on income sourced in Australia, subject to the protection of a double tax treaty (DTA) with Australia. Generally, a company will be resident in Australia if it carries on business, and have central management and control, in Australia. Nonresidents are generally liable for the following withholding taxes (WHT) on income from Australia (subject to certain exemptions). Type of income & Rate: Dividend (to the extent unfranked) 30% Interest 10% Royalty 30% Other income may be subject to withholding tax under the Tax Administration Regulations. These rates may be reduced under an applicable DTA. Under the conduit foreign income rules, non-portfolio dividends received by an Australian resident company from a foreign subsidiary may be exempt from WHT when distributed to a foreign owner Page 9

11 that beneficially holds all the shares in the Australian resident company (subject to certain requirements). Payments for goods/services provided by a foreign resident owner are subject to Australian transfer pricing provisions if the entities are "related parties". Such provisions are aimed at ensuring amounts paid between related parties are at arm's length. The foreign resident owners will be assessable on all Australian sourced income. Trust: Foreign resident recipients of a trust distribution from Australia are prima facie liable for Australian tax on the Australian sourced component of a trust distribution. While the trustee is initially assessed and pays tax on the income, foreign residents may claim a credit for the tax paid by the trustee. Non-residents will be exempt from CGT if the asset disposed of is not taxable Australian property (and has no permanent establishment in Australia). Taxable Australian property generally includes real property interests whether held directly or indirectly through subsidiaries. Where a trust is a Managed Investment Trust, non-resident beneficiaries are generally subject to WHT on the Australian-sourced component of distributions (excluding dividends, interest, royalties and capital gains on assets that are not taxable Australian property). Where the payment is made to jurisdictions that have an effective exchange of information policy with Australia on tax matters, the rate is 7.5% (from the 2010/2011 income year). Otherwise, the rate is 30%. Partnership: Foreign resident partners of a partnership are liable to tax on the Australian-sourced component of their share of the income of the partnership. Gains/losses on CGT assets are ignored when calculating the net income of a partnership and the partners are treated as having made the gain/loss individually. Foreign partners will be assessable on such amounts where the gain/loss is Australian-sourced. Limited Partnership: Where a limited partnership is treated as a company, refer to "corporation" section above. Otherwise refer to the "partnership" section above. 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? The main differences in tax treatment between Australian tax residents and persons not resident in Australia have been broadly discussed above. Contact Information David Landy dlandy@claytonutz.com Allan Blaikie ablaikie@claytonutz.com Clayton Utz Level 15 1 Bligh Street Sydney, New South Wales 2000, Australia Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 10

12 Issues Relating to Organizational Forms and Taxation Austria Prepared by Lex Mundi member firm CHSH Cerha Hempel Spiegelfeld Hlawati 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. Austrian law makes a distinction between legal entities which involve the personal liability of the entrepreneur and those which shield the shareholders from personal liability for the debts incurred by the company: Examples of non-corporate legal forms: Civil law partnership (Gesellschaft nach bürgerlichem Recht); General partnership (Offene Gesellschaft, "OG"); Limited partnership (Kommanditgesellschaft, "KG"); and Silent partnership (Stille Gesellschaft). Examples of corporate legal forms: Limited Liability Company (Gesellschaft mit beschränkter Haftung, "GmbH"); Stock corporation (Aktiengesellschaft, "AG"); and Societas Europaea (European Company Europäische Gesellschaft, "SE"). In addition to these three major forms of corporations, various legal associations exist, the most important of which are cooperative societies (Erwerbs- und Wirtschafts-genossenschaften), associations (Vereine), and mutual insurance associations (Versicherungsvereine auf Ge.g.enseitigkeit). The bulk of business, however, is conducted in the form of either a stock corporation or a limited liability company, the latter being by far the most frequently used corporate form in Austria. Most foreign-owned businesses in Austria are operated as limited liability companies since they provide for limited liability while at the same time allowing the company to remain essentially in private hands. They are also easy to form and operate. In the following we will limit our answers to the most relevant forms, namely OG, KG, GmbH, AG, and SE. OG Advantages: Although the OG is a non-corporate legal form, it may have rights, incur liabilities, acquire title to real estate and sue or be sued in its own name. No restrictions apply with regard to the maximum number of partners, their nationality, or residence. There are no formal requirements for its establishment, except for its registration with the commercial register. Disadvantages: All partners have unlimited liability for the obligations of the partnership. Because the statutory regulations regarding the distribution of profits and losses are generally insufficient, the relevant provisions should be included in a partnership agreement. Page 11

13 KG Advantages: The limited partner (Kommanditist) is only liable up to the amount of his/her capital contribution. Disadvantages: Limited partners do not have signing powers. They may, however, be appointed special agents (Prokurist) of the partnership or act under a commercial power of attorney (Handlungsvollmacht). GmbH Advantages: Shareholders have a strong role in the GmbH. The limited liability company is a corporate legal entity. Generally speaking, shareholders cannot personally be held liable for any debts and obligations. Disadvantages: Shares may only be transferred by notarial deed. The costs incurred in establishing a GmbH are relatively high and it is subject to the provisions of the Austrian Limited Liability Company Act ("GmbHG"). AG Advantages: The ease with which shares can be transferred. The possibility to take part in the capital market. Disadvantages: High establishment costs. Subject to the Austrian Stock Corporation Act ("AktG"). SE Advantages: Possibility to establish a one-tier system. Disadvantages: Long establishment process; high establishment costs. 2. Are there attributes of the form that you consider unique to your jurisdiction? No. 3. Describe the management and governance structure for each organizational form. OG The main feature of a general partnership is the unlimited personal liability of all partners for the obligations of the partnership. In the absence of any written regulations in a partnership agreement, all partners are entitled and obliged to manage the partnership. The same applies to the representation of the partnership. Each individual partner is entitled to represent the partnership externally unless otherwise provided for in the partnership agreement. The power to represent the OG cannot be limited with effect to third parties except in the case of collusion. As the Austrian Commercial Code ("UGB") does not contain detailed provisions on various aspects of partnership law, it is highly advisable and common practice to draft a partnership agreement when setting up a partnership in order to re.g.ulate the rights and obligations of the partners. KG KG is an association of two or more individuals/corporations where at least one general partner (Komplementär) is fully liable for the obligations of the partnership. The limited partner (Kommanditist), however, only has limited liability up to the amount of his/her capital contribution. Due to his/her limited liability, the limited partner may not take part in the management of the business and has no signing power. GmbH The company is represented by the management board, which consists of one or more managing directors appointed by the shareholders by means of separate shareholders' resolutions. The managing directors may be appointed for an indefinite period of time and are directly bound by shareholders' resolutions. The law on limited liability companies requires the appointment of a supervisory board for certain types of limited liability companies. Those companies which are not Page 12

14 required by law to appoint a supervisory board may voluntarily do so. The supervisory board is elected by the shareholders and must consist of at least three members. AG Unlike a GmbH, the AG has, without exception, a two-tier management system composed of the management board and the supervisory board. The law provides for two further obligatory bodies: the shareholders meeting, and the auditors. The management board of an AG consists of one or more individuals, called the members of the management board (Vorstandsmitglieder). The AG is represented by and acts through the members of the management board. The supervisory board of a stock corporation consists of at least three members, although the articles of association may provide for a larger number of supervisory board members. The managing directors of a stock corporation are not bound by instructions issued by the supervisory board or the shareholders meeting. The shareholders meeting elects and removes the members of the supervisory board as well as the auditors, decides on changes to the articles of association and specific items which are reserved for the shareholders meeting (e.g. the distribution of profits). SE The SE may be established in the form of a two-tier or a single-tier system. The statutes of the SE must provide for governing bodies such as the shareholders' meeting/general meeting of shareholders and either a management board and a supervisory board (two-tier system) or an administrative board (single-tier system). Under the two-tier system, the SE is managed by a management board. The member or members of the management board represent the company vis-à-vis third parties and in legal proceedings. The number of members of the supervisory board is determined by the Stock Corporation Act (Aktiengesetz). Under the single-tier system, the management board consists of three natural persons unless the articles of association provide for a higher number. The members of the management board are appointed by the shareholders meeting. 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? Persons resident outside of Austria may act as managing directors or shareholders. If the Austrian company carries out business activities in Austria, it may be necessary under applicable Austrian trade law to obtain a trade license (Gewerbeschein) and to employ a managing director (Geschäftsführer) who meets the proficiency requirements for the business to be carried out. This person must either be a person authorized to represent the corporation or an employee working at least half of his/her time for the corporation and paying social security contributions. The managing director is responsible for the correct conduct of the business in compliance with applicable trade law. The managing director needs to be resident in Austria or in the European Economic Area. According to the land transfer acts of the Austrian federal states, the transfer of real estate property to foreigners (legal entities and individuals) and in some cases also the transfer of tenancy rights is subject to the prior consent of the respective land transfer authority. This restriction also applies to indirect acquisitions (e.g. share deals) since the respective state legislation and administrative practice refers to the ultimate owner of legal entities for the purpose of assessing the necessity of prior consent. Page 13

15 5. Describe the extent to which management and owners are exposed to liability. OG Both partners of an OG are fully liable and may not limit their liability regarding the partnership s debts. KG The general partner (Komplementär) is fully liable for the obligations of the partnership, whereas the limited partner (Kommanditist) only has limited liability up to the amount of his/her capital contribution. GmbH The liability of shareholders in a limited liability company is generally limited to their respective capital contributions; liability exceeding this limit occurs only if shareholders are in breach of legislation which aims to protect creditors. AG/GmbH/SE Managing directors may be held personally liable for damage caused due to negligent breach of their legal obligations. It is often the case that only the company itself, represented by the remaining managing directors, the shareholders or the bankruptcy trustee, are entitled to claim damages. Direct claims may only be brought by third parties in specific cases if the managing director has violated a law protecting the interests of the creditors, intentionally infringed public policy, or committed a criminal offense. 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? OG (i) (ii) (iii) If one partner objects to a measure proposed by the management, the measure in question may not be implemented. Only measures which are performed in the usual course of business may be carried out by the partners individually. Extraordinary agreements (e.g. taking out loans for a considerable sum of money, selling land, opening new branches, etc.) require a decision to be taken by all partners jointly. It is only possible to transfer the partnership if all partners agree to this. Termination by a decision issued by a partner leads to the dissolution of the OG. However, the partnership agreement may provide other regulations governing termination. Minimum number of owners: two. KG: (i) Limited partners are entitled to receive a share of the profits, request a written copy of the financial statements, and check their correctness. This also includes the right to inspect the books and accounts of the KG. (ii) + (iii) Please see the information provided in (ii) and (iii) above for the OG. GmbH (i) Apart from the basic rights of shareholders to receive dividends and sell, pledge, divide, and bequeath share quotas in accordance with the law and the articles of association, shareholders also have the right to take part in all shareholders' meetings, participate in discussions, and vote. Shareholders' resolutions are passed in the shareholders' meeting except where, in a specific case, shareholders agree on a certain subject in writing or Page 14

16 agree in writing to pass a resolution. Certain shareholders' resolutions have to be passed at a formal shareholders' meeting. The shareholders' meeting (Generalversammlung) must be held at the corporate seat of the company unless otherwise provided for in the articles of association. The approval of all shareholders is required in order for a shareholders meeting to be held outside of Austria. Shareholders are entitled to a share of the profits in accordance with the annual financial statements of the company unless they excluded the distribution of such profits in the articles of association or by means of a shareholders' resolution. The profit distribution is based on the paid-in capital contributions of the shareholders unless otherwise provided for in the articles of association. Shareholders may not request repayment of their capital contributions. (ii) The shares are not incorporated as negotiable instruments and may only be transferred by means of a notarial deed. (iii) There is no minimum number of owners. AG (i) The shareholders of an AG have in particular the following basic individual rights: to receive dividends in accordance with the articles of association or shareholders' resolutions; to receive a proportionate share of liquidation proceeds (Liquidationserlös) in the case of the liquidation of the company; to inspect the annual financial statements; to sell, pledge, and bequeath their shares in accordance with the law and the articles of association; to take part in shareholders' meetings, to request information, and to vote; to file actions directed at declaring the corporation itself null and void. In the interests of creditors and other shareholders, a stock corporation may only be declared null and void if certain essential provisions of the articles of association are absent or null and void. The management board must answer inquiries raised in the shareholders' meeting and may only refuse to answer on the grounds that an answer would be detrimental to the interests of the company, the interests of related enterprises, or the public interest. (ii) (iii) A stock corporation may issue either registered shares, in which case the shareholders are to be recorded in the non-public shareholders' register kept by the corporation, or bearer shares. The shares of an AG are negotiable instruments and hence can be transferred with relative ease. For bearer shares, the handing over of the share certificate is all that is required. Registered shares have to be endorsed to the new owner who will then be recorded in the non-public shareholders' register. There is no minimum number of owners. SE The rules as outlined above in respect of the AG apply. Page 15

17 7. Is there a minimum capitalization? OG There is no minimum capitalization. KG There is no minimum capitalization. GmbH The minimum share capital of a limited liability company is EUR 35,000 and is to be paid up at least by half. AG The initial capital of a stock corporation must amount to at least EUR 70,000. Special minimum capital requirements apply to Austrian stock corporations performing certain kinds of business. For example, special minimum capital requirements apply to banks under Austrian law (EUR 5 million), investment service enterprises (EUR 125,000), or investment funds (EUR 10 million). SE: The SE Regulation requires subscribed capital of at least EUR 120,000. The special minimum capital requirements for AGs also apply to SEs. 8. Is there a security that can be issued to the public? Only AGs may issue securities to the public. 9. Can the form incur debt, or grant security for debt? All of these forms may incur debt and grant security for debt. 10. What is the duration of the form? Can it be renewed? Unless otherwise provided for in the articles of association, a corporate form is formed for an indefinite period of time. If the articles of association contain provisions concerning the duration of the company, such provisions must be registered with the commercial register. 11. Describe the process, customary time period and approximate cost of establishing the form. OG/KG The establishment of an OG and KG does not require the execution of articles of association, although it is advisable to draft such a partnership agreement. Furthermore, these forms must be registered with the Austrian commercial register. Total expenditure of approximately EUR 3,000 to EUR 5,000 should be assumed for the purposes of establishing an OG or a KG. GmbH The whole process of establishing a GmbH is likely to take approximately two to three weeks, from the respective decision to establish a GmbH until its actual registration with the commercial register. The amount of time it takes will largely be at the discretion of the judicial officer in charge at the commercial register. Page 16

18 The incorporation of a GmbH requires the execution of the articles of association in the form of a notarial deed in the presence of an Austrian notary public. Such a notarial deed has to be drawn up by a representative of the founding shareholder. The entire registration process will trigger costs of between approximately EUR 3,500 and EUR 5,000. AG It takes several weeks to set up a stock corporation. There are two ways of establishing an AG: the one stage formation and the successive formation. One step formations require the founders to subscribe to all shares. Successive formations require subscription to a part of the shares by the general public. However, successive formations are rarely used. One stage formation is the usual form, for which the following steps are required: Articles of association and their notarisation Subscription of all shares by the founders Appointment by the founders of the supervisory board and notarization of this act Appointment by the founders of the auditor for the first financial year Appointment of the management board by the supervisory board Preparation of a written report on the formation Examination of formation by the management and the supervisory board In the case of a formation with contributions in kind, a certified public accountant has to be appointed if the founders are members of the management or supervisory board Payment of at least 25% of the capital stock in the form of shares in the case of par value share, plus a premium in the case of non-par value shares; contributions in kind have to be made immediately. The costs of establishing an AG should be assumed to be between EUR 8,000 and EUR 10,000. SE The establishment process will take several months, depending on the formation procedure, the types of companies involved, ne.g.otiations with employees' representatives, and also depending on whether or not some of the companies involved are listed on the stock exchange. An SE must be registered with the commercial register in accordance with the provisions of the Stock Corporation Act (Aktiengesetz). In addition to the registration application which must be submitted to the court, one of the following documents has to be filed: the agreement on the involvement of employees according to Article 4 of Council Directive 2001/86/EC; or the resolution according to Article 3 para. 6 of Council Directive 2001/86/EC; or a declaration from all members of the management board that the time period pursuant to Article 5 of Council Directive 2001/86/EC has expired. After the particulars of the SE have been entered into the commercial register and have been publicized in the edict database and in the Official Gazette of the "Wiener Zeitung", the court must notify the Publications Office of the EU for the purposes of being published in the Official Journal of the EU. The establishment process will trigger costs in the amount of EUR 50,000 to EUR 80, Page 17

19 12. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? When the state acts in the private sector, it is obliged to act in accordance with all civil rights and obligations. Apart from all of the matters of private economic administration and budget management (as specified under Article 116 Sec. 2 of the Austrian Federal Constitutional Act, "B-VG"), the area of competence of local or central governments includes all matters which "exclusively or overwhelmingly deal with interests of the local community and are suited for management by the community within its local borders". Acquisitions involving state-owned companies may be subject to certain conditions of approval by central or local governments. 13. For what taxes is the form liable? Taxation of founding of companies Taxation of the capital committed: The founding of a company (AG, GmbH) or a partnership having a company as a personally limited partner gives rise to company tax amounting to one percent of the value of the amounts of capital agreed upon or supplied by all of the (non-personally liable) partners. Companies which are increasing their share capital or that provided by the shareholders, and the equipping of branch offices in Austria with capital stemming from its non-austrian parent, are also subject to taxation of one percent. Property acquisition taxes: The transferring of properties on a payment basis between living persons and the transferring of all shares of companies holding property or the procurement of all shares by a single party give rise to property acquisition taxes amounting to 3.5% of the quid pro quo. Property acquisition taxes amounting only to 3.5% of two times of the assessed value are levied for certain kinds of changes of legal form. An official court fee of one percent of the basis of calculation for the property acquisition taxes is levied for the purposes of entering the new owner in the official land register. Taxes levied on operating companies: Corporate income tax: The profits realized by corporations (primarily AGs and GmbHs) are subject to a non-progressive corporate income tax of 25%. Fully tax-liable GmbHs have to pay regardless of whether a profit was earned or not an annual minimum tax of EUR 1,750 (AGs: EUR 3,500). A lower rate of taxation is applied to a corporation during its first four quarters of operation. The dividends paid out by a company to its shareholders are subject to a withholding tax of 25% (capital gains tax). For natural persons who are tax liable in Austria, this satisfies the need to pay taxes on this income. There are no further encumbrances (final taxation). Local tax: Local tax is paid by every company with employees in Austria. It amounts to 3% of the total remuneration. This tax can be reported as a corporate expenditure and is thus a deduction. The contribution to the Family Burden Equalisation Fund (Familienlastenausgleichsfonds "FLAF") is similar to the local tax. The latter amounts to 4.5% of the total remuneration. Turnover taxes: The turnover tax is levied on taxable proceeds from business transactions in Austria. The rates of taxation amount to 10% or 20%, the latter being the normal rate. Deduction of earnings taxes: In Austria, the taxes to be paid by employees on their remuneration (taxes on their income) are retained by the employer, who then transfers it to the tax authorities. Taxation of corporations: Income earned by natural persons is subject to a progressive income tax not exceeding 50%. Depending upon whether the partner is a natural or legal person, the stakes in the profits held by partners in partnerships are subject to either person-based or corporate income taxes. Page 18

20 Income arising from interest paid on funds invested or on other receivables held vis-à-vis banks, earnings on capital invested in certain kinds of Austrian receivables-based securities, and dividends distributed by domestic corporations (GmbHs and AGs) are subject to a final tax of 25%. Income earned by partners in partnerships (OG, KG) is not taxed at the corporate level (no corporate income tax). Rather, it is taxed at the personnel level of the partners. 14. What is the tax treatment of payments to foreign owners? Dividends and other kinds of shares in profit accruing to a domestic corporation from its holding of stakes in a domestic AG or GmbH are exempt from corporate income taxes. The same applies to dividends, shares in profit and proceeds from disposals and the liquidation of assets received by a domestic corporation from a non-austrian corporation which is comparable to a domestic AG or GmbH, in those cases in which the domestic corporation has directly held for at least one year a 10% stake in the non-austrian company ("international inter-corporate stockholding"). A corporation which neither has its seat nor its management located in Austria is only subject to corporate income tax for domestic capital gains. Foreign corporations are taxable for earnings from investments and participations (i.e. distributions and shares in profits from dormant equity holdings): for a withdrawal of corporate income tax in the amount of 25%. Income from debt securities and bank deposits or loans are not taxable for foreign corporations. In most cases, double taxation agreements (Doppelbesteuerungsabkommen "DBA") provide lower tax rates. Austria has concluded DBAs with a considerable number of countries. Most of these contracts are adaptations of the models issued by the OECD. These contracts foresee a reduction of Austria s withholding tax. The relationships with corporations based elsewhere in the EU are governed by the Parent Subsidiary Directive. The application of most of the DBAs results in the reduction of capital gains taxes of between 5% and 15%. 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? Regulations stipulate that official approval is required for the purchase by natural or legal persons who are not Austrian nationals, or by Austrian companies with non-austrian owners, of property in Austria or rights deriving from property. Austria s states have their own regulations, but these have been adapted for citizens of EEC countries to allow the exercising of the four freedoms in the Community. This implies that legal transactions with them are to be treated as if they were between citizens of Austria. Contact Information Dr. Albert Birkner, LL.M. albert.birkner@chsh.com CHSH Cerha Hempel Spiegelfeld Hlawati Parkring 2 A-1010 Vienna, Austria Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 19

21 Issues Relating to Organizational Forms and Taxation Brazil Prepared by Lex Mundi member firm Demarest e Almeida 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. In Brazil, there are two main corporate structures commonly used for most business operations: limited liability companies and corporations. There are other legal entities set forth in Brazilian laws, such as simple partnership (sociedade simples), secret partnership (sociedade em conta de participação), general partnership (sociedade em nome coletivo), limited partnership (sociedade em comandita simples) and associations. However, those types of legal entities are not commonly adopted unless there is a specific business decision or operational reason that justifies adopting these types of organization. Limited Liability Companies: representing an estimated 90% to 95% of all companies organized in Brazil, these companies are recommended if the partners desire simplicity and flexibility in the corporate structure, lower maintenance costs, and the inapplicability of several legal formalities that are mandatory in the case of a corporation. It is usually appropriate in the case of wholly owned subsidiaries or restricted joint ventures. The articles of association may establish different levels of control for the company and determine which matters depend on the partners' prior authorization, in addition to the matters already provided by the law. In the event, however, that the new company has plans to issue debentures or other securities in the future, become a publicly held company, or admit other groups of investors, then the adoption of a corporation structure is preferable. A corporation is also preferable for ventures having a larger number or different groups of shareholders. Corporations: registered under the Brazilian Corporations Law (Law No. 6384/76), corporations are classified either in closely or publicly held. The latter are registered with and subject to the supervision of the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários CVM), and may have securities publicly offered or traded on organized securities markets. Advantages of corporations include liability limited to their interest in the corporate capital, transferability of shareholding and improved ability to raise capital. Corporations, on the other hand, are deeper regulated and supervised than limited liability companies, especially publicly held corporations. 2. Are there attributes of the form that you consider unique to your jurisdiction? No. 3. Describe the management and governance structure for each organizational form. Limited Liability Companies: Decisions regarding the company are made during partners meetings and are binding upon all partners, even if they were absent from the meeting or dissented. The Page 20

22 company may be managed by one or more persons, partners or not, Brazilian citizens or foreigners, provided that they are residents in Brazil. The manager will be in charge of the company's management and representation. Corporation: Unless otherwise provided for by law, shareholder decisions require a simple majority of votes, without abstentions being taken into account. The corporation may be managed by a board of officers and a board of directors (only required in certain cases of publicly held corporations and authorized-capital corporations), or just a board of officers. Corporations also have an oversight council, which must be an independent corporate body and may be permanent or ad-hoc, installed at the request of relevant shareholders, as prescribed by applicable regulation. The board of directors is a collective decision-making body that consists of at least three members, appointed at the shareholders' general meeting. The board of officers represents the corporation and performs all acts necessary for its normal operation. Finally, the basic function of an oversight council, when installed, is to oversee the acts of management. 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? Limited Liability Company: Managers must reside in Brazil. Corporation: Members of the board of officers must reside in Brazil. Members of the board of directors need not reside in Brazil, but they must appoint a representative who is a Brazilian resident to receive services of process in legal proceedings, according to Brazilian Corporations Law, should they reside abroad. Both: Any remittance of funds to Brazil by foreign partners, either as investment or a loan, must be registered with the Central Bank of Brazil s Electronic System. This registration is essential for future payment of profits to foreign partners, repatriation of capital (for capital investments), and/or payment of interest and principal (for loans). All foreigners that hold equity in Brazilian companies must be registered with the National Registerof Legal Entities to obtain a corporate taxpayer identification number (CNPJ) if they are a legal entity, or an individual taxpayer identification number (CPF) if they are an individual. 5. Describe the extent to which management and owners are exposed to liability. According to Brazilian laws, the company's assets are not linked to the partners' net worth. The owners will only be held liable if they abuse their powers or violate the law or the articles of association. In the event that the company's assets are not sufficient to bear the company's obligations, and the capital stock has not been fully paid-in, the partners of a limited liability company shall be jointly liable up to the amount of capital stock. As a general rule, members of management are not liable for acts performed within the regular course of business. Personal liability arises for acts involving abuse of power, excess of mandate, or violation of the law or corporate documents. Page 21

23 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? Limited Liability Company: The capital stock of a limited liability company is divided into quotas, which may be assigned and transferred. The number and ownership of quotas must be identified in the articles of association. Transfers of quotas to third parties are allowed, unless partners representing more than one-fourth of capital stock do not agree with the transfer. The other partners will have the right of first refusal with the transfer of company quotas whenever provided for in the articles of association or in the partner agreement. A limited liability company requires at least two partners. The partners may be legal entities or individuals, Brazilians or foreigners. If the partners are not Brazilian residents, they must have an attorney-in-fact in Brazil with powers to represent them in corporate matters in general and to receive services of process on their behalf. Corporation: A corporation's equity interest is represented by shares, which may be of different types, according to the advantages, rights and restrictions attributable to the shareholders. The two major types of shares are common and preferred. A corporation generally requires at least two shareholders, which may be legal entities or individuals, Brazilians or foreigners. Wholly-owned subsidiaries may be incorporate by means of a public deed or a result of a mandatory swap of shares. If the shareholders are not Brazilian residents, they must have an attorney-in-fact in Brazil with powers to represent them in corporate matters in general and to receive services of process on their behalf. 7. Is there a minimum capitalization? Limited Liability Company: As a general rule, no minimum capital stock is legally required. Capital stock should be consistent with the company s initial operational needs. In the event that more is needed, the partners may increase their capital at any time by amending the articles of association. The partners may pay in capital stock in cash, credits, or assets, and there is no legal time frame set forth by law for payment thereof. Services may not be rendered in lieu of paying in capital stock. Capital increases will only be allowed after full payment of the previously subscribed amount. Corporation: No minimum capital stock is generally required, however at least ten percent (10%) of the capital stock must be paid in for the establishment of the corporation. Capital increases may be performed at any time, as approved in a shareholders meeting, pursuant to applicable regulation and provisions of the bylaws. The corporation may also have an authorized capital in its bylaws, thus the capital may be increased by deliberation of the board of directors. The shareholders may pay in capital stock in cash, credits, or assets, and there is no legal time frame set forth by law for payment thereof. Capital increase by subscription and payment of new shares may be performed only after at least seventy-five percent (75%) of the total capital stock is paid in. For specific industries, irrespectively of the form, a minimum capitalization is additionally required (e.g. financial institutions, certain utility companies etc.). 8. Is there a security that can be issued to the public? Limited Liability Company: As a general rule, limited liability companies are not authorized to publicly issue and place securities in Brazil, except for certain commercial promissory notes. Page 22

24 Corporation: Publicly-held corporations are those registered with the Brazilian Securities and Exchange Commission ("Comissão de Valores Mobiliários" - "CVM"). Such corporations are authorized to issue and place to the public any securities in Brazil: while type A publicly-held corporations may publicly issue any security, offerings of type B corporations are restricted to nonequity securities. Ability by closely-held corporations to issue and place securities to the public is limited, mainly encompassing certain non-equity-related securities. 9. Can the form incur debt, or grant security for debt? Corporation and Limited Liability Company: Both forms can incur debt, or grant security for debt, subject to restrictions provided for in: (i) applicable regulation; (ii) the corporation's bylaws or the limited liability company's articles of association; (iii) partners or shareholders resolutions; and (iv) contracts or transactions to which the corporation or the limited liability company is a party or is bound to. Certain industries require prior approval by the regulatory agency for a debt or security to be entered into, or impose limits for that to occur. 10. What is the duration of the form? Can it be renewed? Corporation and Limited Liability Company: The duration of the form may be for an indeterminate term. There is no minimum or maximum term established by law. In cases in which the bylaws or articles of incorporation establish a certain duration term, it may be extended or renewed upon partners or shareholders resolution. Both a corporation and a limited liability company may be extinguished upon: (i) resolution of the partners or shareholders (dissolution); and (ii) conclusion of bankruptcy proceedings (liquidation). 11. Describe the process, customary time period and approximate cost of establishing the form. Limited Liability Company: In order to validly exist, the articles of association of a Brazilian limited liability company must be filed at the board of trade of the state where the company s head office is located, usually occurring during three (3) to five (5) working days. After registration at the board of trade, the company needs to obtain certain standard records, and depending on the type of business, it may be required to have other specific licenses and registrations for the company to operate (for instance, a license to be issued by the Sanitation Authority- ANVISA, or a license issued by the Foreign Trade Department, if the company imports/exports). Only after the company is duly enrolled with the National Registerof Legal Entities and receives a corporate taxpayer identification number (CNPJ) will be allowed to open bank accounts in Brazil and execute contracts. The approximate cost of registration of a non-operational varies from five to ten thousand Reais. Corporation: To validly exist, a corporation must file certified copies at the board of trade of the minutes of this inaugural shareholders' meeting and the approved bylaws, a complete list of all the subscribers of the capital stock, and if the capital is paid in cash, the bank receipt for the initial ten percent (10%) payment. As a general rule, after submitting the relevant documents to the board of trade, filing occurs within five (5) working days, unless the board of trade orders a change to the documents or requests additional information. Page 23

25 Like limited liability companies, corporations need to obtain standard registrations and others that might be necessary, depending on the type of business to be done. In the same way, a corporation s partners, whether legal entities or individuals, must be enrolled with the CNPJ or the CPF, as the case may be. The approximate cost of registration of a non-operational varies from five to ten thousand Reais. 12. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? Corporation and Limited Liability Company: No, except in cases in which the project or investment vehicle is executed by means of public biddings, such as administrative contracts or public tenders. 13. For what taxes is the form liable? Corporation and Limited Liability Company: Both corporations and limited liability companies are subject to the same taxes, some of which are applicable considering the respective activities performed by each corporation or limited liability company. It is important to mention that there is a tax reform underway that may change several aspects of tax law in Brazil. Below are listed the main federal, state and municipal taxes applicable: Federal Taxes I. Corporate Income Tax Levied on: Taxable profits. Calculation Methods: (i) real-profit basis; (ii) presumed-profit basis; and (iii) arbitrated-profit basis. Corporate Income Tax is levied at a 15% rate, plus an additional 10% on profits that exceed R$ 20,000 (twenty thousand reais) per month. Applicability: (i) Companies with total gross revenue in excess of R$ 48 million a year, and others required by law, must calculate real profits based on quarterly or annual balance sheets. They are not allowed to calculate this tax based on presumed profits (a method for calculating profits based on a percentage of gross revenue); (ii) If taxation is based on a quarterly balance sheet, payment of taxes will be definitive, and all rules for calculating annual profits will apply to such quarterly profit (rates, additions, provisions, offsetting losses, etc.). Income tax, in this case, may be paid in three equal, successive, monthly installments or in a single installment in the month subsequent to the quarter; (iii) If the company opts for payment based on yearly profits (the most common and generally adopted system), these profits will be calculated from the profit-and-loss statement prepared in December, covering earnings for the entire calendar year, but the tax must be pre-paid monthly. Monthly prepayment may be lowered or suspended if the taxpayer has accounting evidence that the pre-paid value until that month exceeds the tax value calculated based on real profits. II. Contribution to Finance Social Security ("Contribuição para Financiamento da Se.g.uridade Social" - "COFINS") Levied on: All revenues (including financial income, income from varying exchange rates, etc). However, to determine COFINS, gross revenue does not include canceled sales or services and unconditional discounts, among other amounts stipulated by law. The legislation currently establishes some exemptions (for instance, for export revenues and capital gains). Applicability: The COFINS rate applicable to most companies that calculate Corporate Income Tax on real-profit basis was raised from 3% to 7.6%. Moreover, for such companies this contribution became a non-cumulative tax, allowing taxpayers to deduct 7.6% of specific costs and expenses determined by law (inputs used to make goods, electricity used on the legal entity s premises, and Page 24

26 others). Companies subject to the presumed-profit system (and other companies) are still under the COFINS cumulative system and taxed at a 3% rate in general. III. Social Contribution on Profits ("Contribuição Social sobre o Lucro") Levied on: Taxable profits. Calculation Method: calculated quarterly or annually with pre-payments (depending on the taxpayer s income-tax option) and is not deductible from income tax, at a rate of 9%. While the basis of this tax is similar to that of corporate income tax, adjustments to calculate the taxable basis of the CSLL are sometimes different. IV. Tax on Financial Transactions ("Imposto sobre Operações Financeiras" - "IOF") Levied on: General financial transactions (i.e. those involving currency, bonds and securities, credit, gold and/or insurance). IOF tax rates vary according to the nature of the taxable transaction. V. Contribution to Social Inte.g.ration Plan ("Contribuição para o Programa de Inte.g.ração Social" - "PIS") Levied on: All revenues (including financial income, varying exchange-rate income, etc). However, to determine the tax, gross revenue does not include canceled sales or services and unconditional discounts, among other amounts stipulated by law. The legislation currently establishes some exemptions (for instance, for export revenues and capital gains). Applicability: The PIS tax rate applicable to most companies that calculate Corporate Income Tax based on real profits rose from 0.65% to 1.65%. Moreover, for such companies this contribution became a non-cumulative tax, allowing taxpayers to deduct 1.65% of specific costs and expenses determined by law (inputs used to make goods, electricity used on the legal entity s premises, and others). VI. Import Duty ("Imposto de Importação" - "II") Levied on: The customs value of imported goods at different rates according to the goods tariff code in the Mercosul Tariff Schedule (TEC), which is based on the Harmonized System of the World Customs Organization (WCO). The customs value of imported goods is determined in accordance with the Customs Valuation Agreement of the World Trade Organization (WTO). VII. PIS-Import and COFINS-Import Levied on: The importation of goods and services, generally at a rate of 1.6%% (PIS-Import) and 7.6% (COFINS-Import). Depending on the case, the taxpayer is allowed to take credits on the payment made. VIII. Export Tax ("Imposto de Exportação" - "IE") Levied on: Only a few products are subject to the export tax, such as (i) raw hides and the skins of bovine (including buffalos), equine, sheep, or lamb; (ii) cigarettes containing tobacco (when exported to the Caribbean, Central and South America); (iii) weapons and ammunition (when exported to South America, except Argentina, Chile, Ecuador and Central America, including the Caribbean Islands). The tax is calculated on the export price of the goods. IX. Tax on Manufactured Products ("Imposto sobre Produtos Industrializados" - "IPI") Page 25

27 This tax is similar to an excise tax. It is levied on most manufactured products, whether made in Brazil or imported. Although the IPI is ultimately passed on to the final consumer, it is charged on each production step or phase of independent manufacturers. The tax rate is variable according to the tax classification of the product (Mercosur Common Nomenclature NCM/ Harmonized System) shown in the IPI Levy Table [Tabela de Incidência do IPI TIPI/2.011], approved by Decree no. 7660/2011 Levied on: Manufactured products. The IPI is usually levied ad valorem. The rates are based on the type of product. The IPI is a value-added tax. A tax credit is allowed for the tax that has been paid in the purchase or importation of the raw material and components that are used in the manufacturing process of the product to be taxed or on the resale of the imported product. In the case of imported products, the IPI is calculated on the customs value, plus the import duty. Reimbursement: Taxpayers with an IPI credit balance accumulated for three months may ask the Brazil Federal Revenue Department for reimbursement in cash of the accumulated amount, or its use to offset other federal taxes. State Taxes I. Sales Tax on the Circulation of Goods and Services ("Imposto sobre a Circulação de Mercadorias e Serviços" - "ICMS") Levied on: Imported and domestic products at the time the goods leave the business premises. The ICMS due on each transaction is based on the price of products sold, and a tax credit is granted for ICMS paid on the purchase or importation of the products, as it is for the IPI. The ICMS is also imposed on interstate and inter-municipal transportation services and communications services. The tax rate is variable according to the tax classification of the product (Mercosur Common Nomenclature NCM/ Harmonized System) and to the State with jurisdiction to charge. Basically, States fixe a standard tax rate (normally, 17% or 18%), but for interstate operation the tax rate varies according to the characteristics of the seller and the purchaser: If the Seller is located in the Southern and Southeastern Regions, except the State of Espírito Santo and the Purchaser (a ICMS payer) is located in the States in the Northern, Northeast Mid-Western Regions and the State of Espírito Santo, the tax rate will be 7%; For other situations, since the Purchaser be a ICMS payer, the tax rate will be 12%; If the purchaser is not a ICMS payer, the rate will be the same applicable by the State where the seller is located; For certain products, the ICMS is due according to the tax substitution regime ("Substituição Tributária do ICMS - ICMS/ST"), in which case the tax due on the entire commercial chain of the product shall be collected at once at the beginning (as a rule, by the manufacturer or the importer) based on estimated values determined by the government to be applicable to future taxable events. As a rule, this system is implemented through a state agreement ("Convênio ICMS") or throughout specific protocols ("Protocolo ICMS"). II. Tax on Donation and Inheritances ( Imposto sobre Heranças e Doações - "ITCMD") Levied on: The transfer of personal assets or rights resulting from legal or testamentary inheritance and donations. Rates vary from 1% to 8% of the fair market value of the transferred asset or right. Page 26

28 Municipal Taxes I. Service Tax ("Imposto sobre Serviços" - "ISS") The ISS is a municipal tax levied on all services listed in Supplementary Law 116/2003 ("Lei Complementar - LC 116/2003"), except those subject to state taxation through the ICMS. Rates vary from 2% to 5%, depending on the municipality. II. Real Estate Transfer Tax ("Imposto sobre Transmissão Inter Vivos") Levied on: Property transfers at a progressive rate that varies depending on the property value on all transfers for value of any nature, except, as a general rule, in cases of contribution to capital stock. III. Property Tax ( Imposto sobre a Propriedade Territorial Urbana IPTU ) Levied on: property of real estate, charged annually at a 1% rate on the appraised value of the real estate; rates vary by municipality. 14. What is the tax treatment of payments to foreign owners? Remittance of Profits: Profits generated as of January 1996, paid by a Brazilian company to a foreign investor, are not subject to withholding taxes. The foreign currency to be remitted has to be purchased on the exchange market directly from any commercial bank, upon presentation of a corporate act declaring dividends, relevant financial statements, proof of the tax payment, and registration in the Electronic System of Registration of the BACEN, in the Foreign Direct Investment (Investimento Externo Direto - IED) mode. No further approval or consent of the BACEN is necessary, and there is no limitation on the amounts to be remitted if the original investment has been registered with the BACEN as described above. Currently, the rate of the IOF levied on the foreign exchange transaction related to the remittance is reduced to zero. Repatriation of Capital: Foreign capital invested in Brazil may be repatriated at any time, and there is no minimum period of investment. Repatriation of the investment up to the amount stated in the Foreign Direct Investment mode of the Electronic System of Registration of the BACEN may be made free of any tax or authorization (for this purpose, it is necessary to consider the proportional amount in comparison to the percentage of the capital reductoin). As a general rule, any surplus over the registered amount will be treated as a capital gain, subject to a 15% withholding tax (this rate goes up to 25% for investors domiciled in tax havens) Payment of interest related to loans: Interest are generally subject to withholding income tax at a 15% rate (or 25% rate if the beneficiary is domiciled in a low tax jurisdiction). Payment of services: services fees due to a foreign beneficiary may be subject to: withholding income tax (15% or 25%), CIDE (10%), PIS-Import (1.65%), COFINS-import (7.6%), ISS (2 to 5%) and IOF (0.38%). Page 27

29 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? For purposes of dividend distribution, the tax treatment is the same (regarding profits generated as of 1996). For purposes of capital gains, the rules for calculation of the tax basis are different in case of foreign owners in comparison to residents, and income tax rates applicable are also different (in general terms, 15% or 25% in case of foreign owners, 15% in case of individuals resident in the jurisdiction, and 34% in case of companies resident in the jurisdiction). As to investment in the Brazilian financial and capital markets, there are tax exemptions and reductions applicable to foreign investors. Contact Information Thiago Giantomassi tgiantomassi@demarest.com.br Demarest e Almeida Av. Pedroso de Moraes, 1201 Centro Cultural Ohtake Sao Paulo , Brazil Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 28

30 Issues Relating to Organizational Forms and Taxation Bulgaria Prepared by Lex Mundi member firm Penkov, Markov & Partners 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. The forms of organization recognized by Bulgarian law are different type of commercial companies (general partnership [sabiratelno drujestvo], limited partnership [komanditno drujestvo], limited liability company, joint stock company and partnership limited by shares [komanditno drujestvo s akcii]), cooperatives and non-profit legal persons being associations and foundations out of which only first two are used for conduct of economic activity. However, considering that the cooperative is a voluntary association of natural persons with variable equity and a variable number of members who through mutual assistance and cooperation carry out commercial activity in order to fulfill their economic, social and cultural interests appears not to be of interest for the foreign investors. Bulgarian legislation allows the presence of foreign commercial companies in Bulgaria to be realised under different formation, such as branch, representative office and commercial company. According to the Bulgarian legislation a branch does not have the capacity of an individual legal entity but may carry out commercial activity. The Bulgarian Commercial Act provides for that a foreign legal entity could register a branch in Bulgaria where the latter is fulfilling its commercial activities as a part of the organising structure of the company. The management of the branch could be performed either by the managing body of the company or by a local trade representative (such as commercial manager procurator and commercial agent). Practice shows that representative offices are usually established when the foreign entity does not intend to carry out any business in Bulgaria, but only wishes to demonstrate market presence, perform market researches, etc. Pursuant to the Investments Encouragement Act a representative office is not a legal entity and may not carry out commercial activity but there is no legal prohibition to maintain a stock of merchandise, to deliver merchandise, etc. Commercial companies are usually established where there is an intention for carrying out business activity in the country whereby it appears that the limited liability company and the joint stock company are the most adequate solution for the foreign investors. A cooperative is a voluntary association of individuals with variable equity and a variable number of members who through mutual assistance and cooperation carry out commercial activity in order to fulfil their economic, social and cultural interests, whereby the cooperatives is legal entity. 2. Are there attributes of the form that you consider unique to your jurisdiction? No 3. Describe the management and governance structure for each organizational form. The management of the branch could be performed either by the managing body of the company or by a local trade representative (such as commercial manager procurator and commercial agent). Page 29

31 The management of the representative office is performed by a commercial agent explicitly authorized by the principal for this end. The limited liability company s activities are managed by one or several managing directors who are all executives and may represent the company either independently or jointly with one or more of the other managing directors. Depending on the type of the governing system the joint-stock company is run by a Board of Directors or by Managing Board and Supervisory Board. The general shareholders meeting is a supreme governing body both in the limited liability company and joint stock company that resolves on all matters of fundamental importance for the existence and development of the respective company. Each partner is entitled to take part in the management of the general partnership's business, except when management has been assigned with the Articles to one or several of the partners or to a third party. A limited partnership is managed and represented by the general partners. A limited partner has no right to manage the partnership and block resolutions of the general partners. A partnership limited by shares is managed by a general meeting consisting of the limited partners and a Board of Directors consisting of the general partners. The bodies of the cooperative are the general meeting, which consists of all members of the cooperative; Managing Board and President (who is a Chairman of the Managing Board) and Controlling Board. 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? No 5. Describe the extent to which management and owners are exposed to liability. The partners in the general partnership are liable jointly and severally and their liability is unlimited. For the limited partnership's obligations one or more of the partners is/are liable jointly and severally and their liability is unlimited, and the remaining partners' liability does not exceed the amount of the agreed upon contribution. The general partners in a partnership limited by shares are liable jointly and severally for the obligation of the company and their liability is unlimited; the remaining partners are liable towards the company to the amount of unpaid part of the shares, if this is the case. The commercial company in a form of a limited liability company and a joint stock company is an independent legal entity, separate from its sole owner or shareholders. The company is liable for its commitments up to the amount of its whole property. The sole owner or the shareholders of the company is/are liable for the commitments of the company up to the amount of his interest contribution to the authorized capital of the company. Under Bulgarian law the managing director/s of a limited liability company, respectively the members of the board/s of a joint stock company are jointly and severally liable before the company for any damages caused through a fault of theirs as a principal. However, any director may be held harmless if it is established that it has no fault for the damage suffered by the company. The issue related to directors liability towards the company falls within the General Shareholders Meeting exclusive competence. Therefore the managing director/s, respectively the members of the board/s could be released from responsibility for their activity in this capacity for a certain period of Page 30

32 time by respective resolution of the shareholders meeting. This resolution most commonly is a part of the agenda of the regular annual shareholder s meeting designed to resolve on the issues related to the closing of the respective financial year. A cooperative is liable for its obligations to the extent of its property. A member of a cooperative is liable for its obligations to the extent of his/her equity shares. The Statutes of the cooperative may provide for its members to be liable for its obligations up to a maximum amount over and above their equity share. The members of the Managing Board and the Controlling Board are liable jointly and severally for any damages caused culpably by them to the cooperative. 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? In a limited liability company each shareholder has a company interest (equity share) in the company's assets, the amount of which is determined in proportion to its interest in the registered capital, unless otherwise agreed. The equity share is not a security. Each shareholder has as many votes in the General Shareholders Meeting as its interest of the capital, unless the Articles provide otherwise. An interest in a limited liability company may be transferred and inherited. The transfer of an interest from one shareholder to another shall be unrestricted, and the transfer to third parties shall be subject to the resolution of the General Shareholder s Meeting. An interest in a limited liability company shall be transferred with notarized signatures and shall be registered in the commercial register. Under Bulgarian law there is no requirement for a minimum number of shareholders. Therefore, there is no legal obstacle the whole capital of a limited liability company to be held by one person, on the contrary, a sole owner limited liability company is very often used for conduct of economic activity both by resident persons and foreign investors. In a joint stock company against the property contributions made the shareholders obtain shares. The share is a security which shall attest to the fact that its owner participates in the capital stock with the nominal value indicated on it. Shares may be materialized or dematerialized, registered or bearer shares. Preferred shares may also be issued. A share entitles its owner to one vote in the general shareholders meeting. The shares in a joint stock company are freely transferable unless otherwise agreed in the Articles. Bearer shares shall be transferred by delivery. Registered shares shall be transferred by endorsement which, to be binding on the company, must be recorded in the registered shareholders register. The Articles of Association may provide for other conditions for the transfer of registered shares. Similarly, there are no obstacles all shares in a joint stock company to be held by one person, which however is not so frequently encountered case as the single owner limited liability company is. 7. Is there a minimum capitalization? The capital of a limited liability company may not be less than BGN 2 (app. EUR 1). The minimum value of the capital stock of a joint-stock company shall be BGN 50,000 (app. EUR 25,000). The minimum amount of the capital stock required for performing banking, insurance activities or voluntary health insurance activities and other specific activities is determined by a special law. With respect to the other organizational form there is no such a requirement. 8. Is there a security that can be issued to the public? Pursuant to Bulgarian law to be public, a joint-stock company having a registered office in the Republic of Bulgaria must: a) have issued shares under the terms of a primary public offering, or b) have a share issue recorded in the register of the Financial Supervision Commission Act for the purpose of trading on a regulated market, or c) have more than 10,000 shareholders on the last day of two consecutive calendar years. Page 31

33 Further, it should be noted that even a joint stock company which is not public one could issue corporate bonds to be traded on a regulated market. 9. Can the form incur debt, or grant security for debt? Each of the organizational forms could incur debt; however, one should note that the branch and the representative office are not separate legal entities. Bulgarian law provides for possibility the form to grant security for its own debt as well as for third party s debt. 10. What is the duration of the form? Can it be renewed? The duration of both a limited liability company and a joint stock company could be limited for definite period of time or to be established for an unlimited period of time. However, the general shareholders meeting could pass a resolution for prolongation of the duration of the company before the expiration of the initially agreed in the Articles time period. 11. Describe the process, customary time period and approximate cost of establishing the form. According to the local law a branch of a foreign commercial company shall be entered into the Commercial Registerwith the Recordation Agency. For the registration a number of documents have to be presented that are purposed to certify the legal capability of the foreign company to be dully registered under its national law as having the right to carry out commercial activity, i.e. to be a merchant, to outline the parameters of the legal status of the branch and to indicate the person/s appointed to manage and represent the branch. Usually the registration procedure takes about 3-5 business days. The state fee for entering of a branch of a foreign commercial company is BGN 430 (app. EUR 215). Unlike the branch and subsidiary company (as pointed bellow), the representative office is subject to registration within the Unified Commercial Registerat the Bulgarian Chamber of Commerce and Industry (BCCI) in Sofia, regardless of the office s seat and location. To register a representative office the foreign person should submit an application in the standard of the BCCI accompanied by documents very similarly to those required for the registration of the branch. The fee for entering of a representation office varies from BGN equivalent of EUR 120 to EUR 156 depending type of registration (regular or express one). According to the local law a new company shall be entered into the Commercial Registerwith the Recordation Agency. The documents that would be needed for registration of a new company depend on the type thereof. Generally, the documents purposed to certify that the establishment meeting of the founders has been hold or a resolution of the sole owner has been passed (if this is the case), the legal capability of the foreign company, to outline the parameters of the legal status of the new company (name, seat and address, subject of activity, capital and distribution thereof, management and representation, etc.), election of the managing director/s or the members of the board/s, adoption of the Articles, the payment of the initial capital, etc. Usually the registration procedure takes about 3-5 business days. The state fee for reservation of a name for the new company is BGN 50, the fee for registration of a limited liability company is BGN 160 (app. EUR 80) and for a joint stock company is BGN 460 (app. EUR 230). When discussing the amount of eventual costs and expenses with regard to the establishment of a branch, a representative office or a subsidiary in Bulgaria one should also consider the amounts for ensuring of certified translation and legalisation of the official and other documents originating from abroad, notary and legal fees. Page 32

34 12. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? No 13. For what taxes is the form liable? Re.g.ardless which particular form used, for its commercial activities the Bulgarian commercial companies are taxed on profits with corporate income tax amounting to 10%. As mentioned above under Bulgarian law the branch of a foreign legal entity is an independent trader, it is keeping its own trade books and accountingis obliged to prepare an annual balance sheet. Thus, in respect to the commercial activities of the branch, the same tax treatment as one applicable towards Bulgarian commercial company will be applied. As advantage in this case we may point that the expenses made by the branch during the financial year will be deductable by the tax authorities. As far as the representative office performs on behalf of the foreign company only activities that could be characterized as of preparatory or auxiliary nature (such as monitoring the market, contacts with potential clients, customs clearance, liaising with administrative authorities, preparation of draft documents, participation in ne.g.otiations, etc.) there would be no tax implications. In the event, however, that the representative office executes some other activities, which can be treated as commercial it would be considered as a permanent establishment. In this case, pursuant to the Corporate Income Tax Act, there would be no difference in taxation between a branch and a representative office. 14. What is the tax treatment of payments to foreign owners? The tax treatment of the payments to foreign owners depends on the circumstance whether the investor is a legal entity or an individual. A tax withheld at source shall be levied on any dividends and shares in a liquidation surplus, as distributed (apportioned) by any resident legal entity in favor of any non-resident legal entities, with the exception of the cases where the dividends accrue to a non-resident legal entity through a permanent establishment in the country. The tax shall be final and shall be withheld by the resident legal entity distributing dividends or shares in a liquidation surplus. This rule shall not apply where the dividends and shares in a liquidation surplus are distributed in favor of any non-resident legal entity which is resident for tax purposes in a Member State of the European Union or in another State which is a Contracting Party to the Agreement on the European Economic Area, with the exception of the cases of hidden profit distribution. The taxable amount for assessment of the tax withheld at source shall be the gross amount of the dividends distributed whereby the rate of tax shall be 5 per cent. In case the investor is an individual, a final tax shall be levied on the taxable income from dividends and from shares in any liquidation surplus in favor of any non-resident individual, where accruing thereto from a source inside Bulgaria (Any dividends and share in any liquidation surplus, arising from participating interests in resident legal entity and unincorporated associations, including agreements on joint activity, shall have their source inside the Republic of Bulgaria). The final tax on any income from dividends shall be assessed on the gross amount as determined by the decision on the distribution of dividend. The final tax on any income from dividends in the form of a hidden profit distribution shall be assessed on the gross amount of the expenses as charged. The final tax on share in any income from liquidation surplus shall be assessed on the positive difference between the value of the said share and the documented cost of acquisition of the participating interest in the company/cooperative. The tax rate of the final tax shall be 5 per cent for the respective income. The final tax shall be withheld and remitted by the enterprise which is a payer of the income. Page 33

35 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? Generally, the tax treatment of the payments of dividends and/or shares in a liquidation surplus made to foreign owners does not differ from the tax treatment applied in respect to the same payments made to owners resident in Bulgaria. However, some difference could appear in case the foreign owner is a resident to a country between which and the Republic of Bulgaria an international treaty has been concluded, ratified and promulgated and has entered into force. Thus, if the international treaty contains any provisions different from the provisions of the respective relevant Bulgarian law, the provisions of the relevant international act shall prevail. Contact Information Svetlin Adrianov, Partner svetlin.adrianov@penkov-markov.eu Smilena Stoilova, Senior Associate smilena.stoilova@penkov-markov.eu Penkov, Markov & Partners 13B Tintyava Str., Floor Sofia, Bulgaria Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 34

36 Issues Relating to Organizational Forms and Taxation Canada, Alberta, Ontario, Quebec Prepared by Lex Mundi member firm Blake, Cassels & Graydon LLP 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. Forms of organization in Canada include corporations, unlimited liability companies (in certain provinces), general, limited and limited liability partnerships, joint ventures, trusts and cooperatives. Corporations may be formed pursuant to either provincial or federal legislation. A corporation is considered a legal person separate and apart from its shareholders, both in respect of existence and taxation and has the capacity, rights, powers and privileges of a natural person being able to contract, sue and be sued in its own name. Except under special circumstances, shareholders of a corporation are not personally liable for the debts, obligations or acts of the corporation thus making it one of the most attractive forms of organization. Advantages of corporations include limited liability, separate legal entity, transferability of ownership, continuous existence, possible tax advantages and improved ability to raise capital. However, public corporations (i.e. with securities held by members of the public whether or not traded on a stock exchange) are closely regulated and necessitate more extensive recordkeeping. A partnership is formed by two or more individuals or corporations that carry on business for profit. In contrast to a corporation, a partnership is not a separate legal person. The relationship of the partners is established by contract and is also subject to applicable provincial laws. A partnership may take one of three forms, a general partnership, a limited partnership or a limited liability partnership, the latter being available only to certain professions. In Québec there is an additional form of partnership: the undeclared partnership. This type of partnership is not very common and typically refers to a de facto partnership or one where the parties have omitted to make declarations in the manner prescribed by the legislation concerning the legal publication of partnerships. Subject to the terms of their agreement, all partners in a general partnership are entitled to participate in ownership and management, and each assumes unlimited liability for the partnership s debts and liabilities. In a limited partnership, there is a separation between the partners who manage the business ( general partners ) and those who contribute only capital ( limited partners ). A limited partnership must have at least one general partner, who will be subject to unlimited liability for the debts of the partnership. Limited partners are liable only to the extent of their capital contribution provided they do not participate in the management of the business. Some of the advantages of a partnership are ease of formation, low start-up costs, possible tax advantages and limited regulation. Disadvantages include unlimited liability, except in the case of a limited partner in a limited partnership, lack of continuity and divided authority. Unlimited liability companies (ULC s) may be formed in the provinces of Alberta, British Columbia and Nova Scotia. They are a type of corporation that, as their name suggests, do not limit shareholder liability and are mainly used for U.S.-Canada cross-border tax structuring, as they are capable of being treated (by way of election) as disregarded for purposes of the U.S. Internal Revenue Code. Two or more parties may engage in a joint venture or syndicate where they collaborate in a business venture. There is no specific statutory definition or regulatory scheme for joint ventures, at either the provincial or federal level, although they are not uncommon in certain industries such as construction and natural resources. To help avoid the presumption that a partnership has been formed, the joint venture agreement should declare that a partnership is not intended, although substance prevails Page 35

37 over form. The agreement should also set out the scope of the venture and the method of control and decision-making. It should stipulate the rights and obligations of the participants and provide mechanisms for the settlement of disputes. Unlike a corporation, a joint venture is not a distinct legal entity. It cannot sue or be sued. Such rights and liabilities are attached to the entities involved in the joint venture. In a trust, legal title to property is held by one person (the trustee) for the benefit of another (the beneficiary). The trustee is legally obliged to manage the property for the benefit of the beneficiary. A trust can be created for any purpose as long as the purpose is not illegal or contrary to public policy. Unless they can prove bad faith or negligence by the trustee, beneficiaries have little right to interfere in the management of the trust. The primary uses of trusts are for estate planning, tax deference and holding of investments. Except for real estate investment trusts, they are no longer widely used for active business ventures in Canada and will not be discussed in detail in this survey. Similarly to corporations, a cooperative can be formed under provincial or federal legislation. Considering the complexity of the vehicle and the fact that it is a vehicle that is almost never used by foreign investors, we will not discuss this vehicle further in this survey. 2. Are there attributes of the form that you consider unique to your jurisdiction? Other than ULC s, generally speaking, forms of organization in Canada do not have attributes that could be considered unique when compared to other jurisdictions. Nevertheless, it can be said that corporations in Canada, and especially privately-held corporations, are subject to flexible rules governing their capital and generally substantially less formalism than in several other non-canadian jurisdictions. 3. Describe the management and governance structure for each organizational form. A Canadian corporation acts through its board of directors and officers. The directors are elected by the shareholders, generally for a term of one year and subject, in many provinces, to any unanimous shareholders agreement, manage the business and affairs of the corporation. A unanimous shareholders agreement involves the removal of all or part of the powers of the directors and the transfer of these powers (and corresponding liabilities) to the shareholders of the corporation. Directors appoint officers and can delegate many of their powers to the officers. There are a number of general rules governing the qualifications and number of directors, such as a requirement that each director be at least a specified age and not a bankrupt, but there is no requirement that the director hold any shares in the corporation unless the incorporating documents provide otherwise. These rules apply equally to non-resident and resident directors. There are also additional rules that relate only to directors of public corporations. Under the federal statute, a private corporation must have at least one director, and a public corporation at least three. There are similar provisions in the Alberta, Quebec and Ontario legislation. Subject to the terms of their agreement, all partners in a general partnership are entitled to participate in ownership and management. In a limited partnership, the general partner(s) manage the business, while the limited partners only contribute capital. In order to preserve their limited liability status, limited partners must refrain from getting involved in the management of the entity. 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform or have interests in specific activities? The federal and Ontario legislations require 25% of the directors of a corporation to be resident Canadians except where there are fewer than four directors, in which case at least one must be a resident Canadian. In Alberta, at least 25% of the directors must be Canadian residents. Permanent residents of Canada who are not Canadian citizens may qualify as resident Canadians, either absolutely or only for a specified period. There are no residency requirements for officers. Quebec does not impose residency requirements for directors or officers. Page 36

38 Under the Investment Canada Act of 1985, foreign capital has equal status with Canadian funds for most purposes. Except for acquisitions above specific thresholds, investors need only notify the investment-review division of Investment Canada of an acquisition or new venture within 30 days of the transaction. To limit the growth of foreign-controlled enterprises within certain industries, federal statutes re.g.ulate the amount of allowable foreign ownership. These restrictions apply in the telecommunications, banking, media, cultural industries, airline, insurance, trust and loan industries. The North American Free Trade Agreement (NAFTA) also commits Canada to maintaining and strengthening an open investment climate. Partnerships do not have residency requirements. The partners need not be resident Canadians to conduct business in Canada, although they are also subject to the same federal regulations that control and limit the amount of foreign ownership in the above mentioned sectors. 5. Describe the extent to which management and owners are exposed to liability. A corporation is considered a legal person separate and apart from its shareholders and its shareholders benefit from limited liability. Please see item 3 above as to unanimous shareholder agreements. In certain rare cases, involving situations such as fraud or unlawful conduct, courts have allowed lifting the corporate veil, thus holding shareholders personally responsible for the corporation s acts. Directors and officers of a corporation have a duty to act honestly and in good faith with a view to the best interests of the corporation. They must exercise their powers with due care, diligence and skill, and must comply with the corporation s governing statutes, regulations, constitutive documents, and any unanimous shareholder agreement. They are also subject to conflict of interest rules. Where directors and officers ne.g.lect their duties they may be subject to personal liability. They may also be subject to other liabilities, such as with respect to certain unpaid taxes, employee wages, payment of improper dividends, and environmental offences. In a general partnership, each partner has unlimited liability for the debts and obligations of the partnership. In a limited partnership, the general partner has unlimited liability for the debts and obligations of the partnership whereas the limited partner s liability is limited to its investment. 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? (i) Ownership of a corporation is represented by shares of the capital of the corporation (also called share capital). The charter documents of a corporation may provide for more than one class of shares including shares with limited or no voting rights and special entitlements to distributions and return of capital. At least one class of shares must be common shares namely shares entitling their holders to share in the remaining property of the corporation upon its dissolution. Partners in a general or limited liability partnership do not form a separate legal entity; they share ownership in the assets and business they are conducting through an agreement that sets out how decisions will be made, profits will be shared, disputes will be resolved, future partners will be admitted to the partnership, partners can be bought out, and what steps will be taken to dissolve the partnership when needed. (ii) Yes. Shares of a corporation, which are in registered form, may either be publicly exchanged on the stock market or privately transferred. Privately-held corporations are required to provide for share transfer restrictions in their articles of incorporation or other charter documents. A partnership ownership interest may be transferred unless specified otherwise in the partnership agreement. Page 37

39 (iii) Canadian corporate legislations does not require a minimum number of owners. Corporations may have only one shareholder. The Canada Business Corporations Act specifically states that one or more individuals or bodies corporate may incorporate a corporation. Similarly, under Quebec law, a corporation may be constituted by one or more founders, and the articles of incorporation set out the fixed number or the minimum and maximum number of directors. In Ontario and Alberta, one or more individuals or bodies corporate may incorporate a corporation by signing articles of incorporation and by having the governmental regulatory authority endorse the certificate of incorporation. Similarly, no restrictions exist as for any minimum number of owners in a general partnership, provided of course that there are at least two partners. A limited partnership must have at least one general partner. 7. Is there a minimum capitalization? Under corporate law, there are no minimum capitalization requirements in Canada for corporations. Upon incorporation, the corporation will set out in its articles of incorporation the classes and any maximum number of shares that it is authorized to issue, and, if there are two or more classes of shares, the rights, privileges, restrictions and conditions attaching to each class of shares. Similarly to corporations, there are no minimum capitalization requirements for partnerships. Capital contributions and partner s entitlement to capital are addressed in the partnership agreement. In the absence of a specific agreement as to what is each partner s share in capital, all partners share equally. 8. Is there a security that can be issued to the public? Yes. Canada has a federal system of government, with power divided between the federal government and the provinces. To date, securities legislation is governed at the provincial level and each of the provinces and territories has its own securities legislation, although the rules in many areas have been standardized and cooperative systems established between the re.g.ulators. The securities laws determine whether or not a prospectus is required for a particular offering of securities and set out the forms and procedures which apply to different forms of offerings. Provincial securities laws on securities define the different kinds of securities that can be issued to the public in Canada. The definition is very broad including: any document constituting evidence of title or interest in the capital, assets, property, profits, earnings or royalties of a person or organization; a debt obligation; a share, stock, unit, unit certificate, participation certificate, certificate of share or interest, pre-organization certificate or subscription right or warrant. Typically, in Alberta, Ontario and Quebec, every person intending to make a distribution of securities to the public must prepare a prospectus providing full, true and plain disclosure of all material facts relating to the securities issued or proposed to be distributed and complying with the requirements of the province s securities law. It must also contain a statement of the rights given to the purchaser. Nonetheless, many exemptions to the prospectus requirement exist, for example, for certain debt securities issued or guaranteed by a financial institution. 9. Can the form incur debt, or grant security for debt? Yes. Corporate capital may also be raised by borrowing. Directors may authorize borrowing unless the incorporating documents or a unanimous shareholders agreement restricts them. Restrictions upon directors, however, will usually not protect the corporation against third parties in the case of unauthorized borrowing by directors. Corporations also have the power to grant security interests over their property and to give guarantees. Page 38

40 Generally, partnerships may also incur debt and grant security for debt in the conduct of their business. 10. What is the duration of the form? Can it be renewed? Under Canadian corporate law, a corporation is a legal entity separate and apart from its shareholders and it has perpetual existence, unless and until it is dissolved. The dissolution process under most provincial and territorial statutes is similar to that of the Canada Business Corporations Act, and can be voluntary or involuntary. Canadian corporations (including Quebec corporations under the new Business Corporations Act that will come into force in early 2011), cannot per se be renewed, but they can be continued under the laws of any other Canadian jurisdiction, including the Canada Business Corporations Act. A continuance consists of two steps: the first being the continuance-export of a corporation from its home jurisdiction, and the second being the continuance-import of the corporation under the laws of the new jurisdiction. One of the principal reasons for continuing into another jurisdiction, as discussed below, is for the purpose of amalgamating with one or more other corporations, whether or not related. Another reason for continuing into another jurisdiction is to avoid having to meet the Canadian residency requirements for one or more of the directors by continuing in a jurisdiction with no or less stringent residency rules. Generally, general or limited partnerships can be dissolved in accordance with the causes of dissolution provided in the partnership agreement, by accomplishment or impossibility to accomplish their object, or by consent of all partners. They can also be dissolved by a court for a le.g.itimate cause. In Alberta and Ontario, subject to an agreement between the partners to the contrary, partnerships may also be dissolved by a partner giving notice of its intention to dissolve the partnership, death or bankruptcy of a partner. 11. Describe the process, customary time period and approximate cost of establishing the form. A corporation is formed in Canada by filing certain prescribed documents with the appropriate authorities under the Canada Business Corporations Act or the corporations statute of one of the provinces. A federal corporation is formed under the Canada Business Corporations Act, upon the filing of that corporation s articles of incorporation in prescribed form with Corporations Canada. The articles of incorporation of a Canada Business Corporations Act corporation are required to include: the name of the corporation, the place where the corporation s registered office is to be situated, the classes and maximum number of shares that the corporation is authorized to issue, and if there are two or more classes of shares, the rights and restrictions attaching to each class of shares, a statement describing any restriction on the transfer of the corporation s shares, the number of directors, or the minimum and maximum number of directors, and any restriction on the business the corporation may carry on. The provincial corporate statutes have similar requirements. The Canada Business Corporations Act specifically states that one or more individuals or bodies corporate may incorporate a corporation. An incorporating individual must also be eighteen years of age or older, of sound mind and must not have the status of a bankrupt. The name of a corporation is regulated in all jurisdictions to avoid names that are considered to be too general or misleading. Any proposed corporate name must first be searched and approved by the governing authority in the proposed jurisdiction of the corporation s incorporation. There is a screening process and it is possible to pre-clear a name prior to application for incorporation. In addition, the Quebec Charter of the French Language requires that a corporation carrying on business in Quebec use a French version of its name. Once the required documents are filed and fees paid, incorporation is automatic. The corporation comes into existence on the date of issue of a certificate of incorporation by the re.g.ulators. The cost of incorporating a Canadian corporation is relatively modest in most Canadian jurisdictions. The fee to incorporate a corporation federally pursuant to the Canada Business Corporations Act is Page 39

41 C$250 (or C$200 if filed online). For Ontario, the fee of incorporation pursuant to the Business Corporations Act is C$360 (or C$300 if incorporated electronically). For Quebec, the fee of incorporation pursuant to the Companies Act is C$300. For Alberta, the fee of incorporation pursuant to the Business Corporations Act is C$100. The incorporation of a Canadian corporation can generally be accomplished very quickly, and a routine incorporation can easily be completed within a week. Partnerships are formed by contract between the different partners and are subject to applicable provincial legislation. Limited partnerships must be constituted by a written agreement distinguishing the rights, powers and liabilities of the limited partners from those of the general partner(s). This information must also be published to inform third parties of the limitations on certain partners' liability. In Alberta, Québec and Ontario partnerships must register with provincial authorities. In Québec, registration takes place with the Quebec Enterprise Registrar and has to be completed within 60 days of the start of operations. In Ontario, businesses register with the Companies Branch of the Ministry of Government Services. In Alberta, ordinary partnerships for the purpose of trading, manufacturing, contracting or mining must register with the Registrar of Corporations and pay a registration fee of C$10, and limited partnerships must also register with the Registrar of Corporations and pay a registration fee of C$ Describe the process, customary time period and approximate cost of establishing the form. No. Generally, there are no requirements for the government to be part of a project or investment vehicle or receive part of the profits therefrom, apart from corporate income and other applicable taxes. 13. For what taxes is the form liable? It is most common for a substantial business undertaking to be organized using a Canadian corporation. The commentaries below are therefore limited to such form of organization. Although a Canadian corporation will normally offer limited liability to its shareholders, a British Columbia, Alberta or Nova Scotia unlimited liability company might be chosen by a foreign investor in order to achieve certain foreign tax objectives. However, all taxable Canadian corporations are subject to taxation in Canada. Corporate Income Taxes The Canadian federal Income Tax Act ( ITA ) levies income tax on the worldwide taxable income of a Canadian corporation, independently from its shareholders. Generally, the taxable income of a Canadian corporation with operations in more than one Canadian province is allocated for provincial income tax purposes among those provinces in which the corporation has an establishment. The Province of Québec levies its own income taxes under the Québec Taxation Act. The effective rate of Canadian federal tax on general active business income is currently 18%, after taking into account a reduction in rate that partially offsets the impact of provincial taxation. This rate is scheduled to decrease gradually to 15% in Provincial tax rates on general active business income will vary depending on the province: Province 2010 Provincial Tax Rate (%) Alberta Ontario Québec Combined 2010 Federal and Provincial Tax Rate (%) A Canadian corporation may be entitled to various federal and provincial income tax incentives, such as tax credits. The eligibility to such incentives will generally depend on the corporation s status and business activities. Page 40

42 Withholding Taxes The ITA levies a final tax on most types of payments received by a non-resident from a person resident in Canada. Therefore, a Canadian corporation must withhold tax on several types of payments made to a non-resident person (including non-resident corporations) at a rate of 25% (unless such rate is reduced or eliminated by an applicable tax treaty). Payments on which such withholding may apply include certain management or administration fees, rental payments, interest paid to persons not dealing at arm s length, dividends, royalties and similar payments. The withholding tax is imposed on the non-resident, however, the Canadian payor has withholding, remitting and reporting obligations. In addition, when a payment is made in respect of services rendered in Canada by a non-resident, the Canadian corporation is generally required to withhold and remit 15% of such payment to the tax authorities, except if an appropriate waiver is obtained. If the service is rendered in the Province of Québec, a further 9% must be withheld and remit to the tax authorities. Unlike the above withholding, the withholding for services rendered in Canada is a collection mechanism requiring withholding on account of any ultimate tax liability of the non-resident arising from its activities in Canada. Such withholding may therefore be refundable to the extent that no Canadian income tax is payable by the non-resident. Federal and Provincial Commodity Taxes Generally, a Canadian corporation must collect the Goods and Services Tax ( GST ) at the rate of 5% of the amount payable for taxable supplies made in Canada by the corporation and must pay GST on taxable supplies acquired in Canada. A corporation will usually be entitled to a full reimbursement of the GST paid on taxable supplies acquired in the course of its activities (such refund being described as input tax credit). The corporation must then remit the difference between the GST collected and its input tax credits for the relevant reporting period. If the input tax credits exceed the amount of GST collected, the Canadian corporation may claim a refund. The Province of Ontario and the Federal government have cooperated to combine GST and provincial sales tax in a 13% harmonized sales tax. There is no provincial sales tax in the Province of Alberta. In the Province of Québec, the provincial government administers both the GST and the Québec Sales Tax ( QST ). The QST regime is generally consistent with the GST regime. Currently, the QST rate is 7.5% and will increase to 8.5% and 9.5% in 2011 and 2012, respectively. Payroll Taxes As an employer, a Canadian corporation carrying on business in Canada has to withhold and remit Canadian federal and Québec provincial source deductions and to make employer payroll contributions on remuneration paid to employees working in Canada. Duties on transfers of immovables Generally, a municipality in the Province of Québec is required to collect duties on the transfer of any immovable when the property is situated within its territory. The transferee of the immovable transferred shall generally be liable for payment of the transfer duties to the municipality. RATES OF QUÉBEC LAND TRANSFER DUTIES Taxable basis of up to $CAN 50, % Part of taxable basis in excess of $CAN 50,000 but not exceeding $CAN 1% 250,000 Part of taxable basis which exceeds $CAN 250, %** ** Effective January 29, 2010, the City of Montreal has increased the marginal rate for the calculation of duties on transfers of immovables to 2% in respect of the part of the consideration for the transfer which exceeds $500, Page 41

43 In Ontario, land transfer tax is payable on a province-wide basis upon most transfers of ownership of real property interests. This land transfer tax is assessed on the value of the consideration for the transfer and is imposed at the following graduated rates for most commercial transactions: RATES OF ONTARIO LAND TRANSFER TAX Value of the consideration up to and including $CAN 55, % Value of the consideration exceeding $CAN 55,000 up to and including $CAN 1% 250,000 Value of the consideration exceeding $CAN 250, % For real property situate within the boundaries of the City of Toronto, in addition to the Ontario land transfer tax, a municipal land transfer tax is also payable in most cases upon the transfer of ownership of real property interests. The municipal land transfer tax is also imposed at graduated rates but for most commercial transactions is slightly less than 1.5% of the total consideration for the transfer. In Alberta, there is no land or property transfer tax or provincial tax payable pursuant to a real estate transaction. 14. What is the tax treatment of payments to foreign owners? Except for the withholding taxes described above and other more specific withholding taxes a foreign owner may be liable for, a foreign owner who receives payments from the Canadian corporation and who does not carry on business in Canada will not be liable for income tax in Canada on payments so received. In addition, subject to any applicable tax treaty, Canada and the Province of Québec tax foreign owners on their gain from the disposition of taxable Canadian/Québec property, which includes shares of certain Canadian corporations that, at any particular time during the 60 month period that ends at disposition, derive or derived their value principally from real or immovable property situated in Canada/Québec. The disposition of a taxable Canadian/Québec property by a foreign owner will result in reporting obligations in Canada. 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? As a Canadian corporation is generally used by foreign owners to carry on business in Canada, the following general comments apply regarding situations where a Canadian corporation is involved. Owners resident in Canada may benefit from Canada's progressive income tax rate structure whereas foreign owners are generally subject to a single Canadian tax rate under the withholding tax regime briefly discussed above. Although Canadian residents are generally taxed on capital gains, Canadian resident individuals may in certain cases not be taxed on capital gains realized upon the sale of shares of Canadian corporations. Foreign owners will generally be taxed on gains realized upon the disposition of shares of Canadian corporations which constitute taxable Canadian/Québec property, subject to any applicable tax treaty. Also, certain dividends paid by a Canadian corporation to Canadian resident individuals or taxable Canadian corporations may be received tax free. Subject to any applicable tax treaty, dividends paid to non-resident owners will normally be subject to the withholding taxes described above. Page 42

44 At the corporation level, when a private corporation is not controlled by one or more non-resident persons, such corporation may be entitled to a number of tax benefits under the Canadian income tax regime, including a reduced tax rate on certain income, that are not available to Canadian corporations controlled by non-residents. Contact Information Blake, Cassels & Graydon LLP 855-2nd Street S.W., Suite 3500 Calgary, Alberta T2P 4J8 Tel Fax: This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 43

45 Issues Relating to Organizational Forms and Taxation Canada, Nova Scotia, New Brunswick, Prince Edward Island, Newfoundland & Labrador Prepared by Lex Mundi member firm McInnes Cooper 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. The most commonly used forms of organization available in Canada are corporations (including unlimited liability companies popular with foreign investors for tax reasons), partnerships, limited partnerships, joint ventures, trusts, co-ownerships, or a combination of the above. The selection of the appropriate form of business organization structure will depend on the circumstances of the investor, the activity to be conducted, the method of financing, income tax ramifications and the potential liabilities related to the activity. The corporation is the entity most often used to carry on commercial activities in Canada. In Canada, the words corporation and company are largely synonymous. The corporation is a legal entity separate from its owners (unlike the limited partnership, partnership, trust, co-ownership or joint venture). The shareholders do not own the property of the corporation. The liability of the shareholders is generally limited to the value of the assets they have invested in the corporation to acquire their shareholdings (except in the case of unlimited liability companies discussed below). A corporation also has advantages due to the relative ease of raising capital by selling shares and transferability of ownership. On the other hand, corporations are closely regulated, potentially more expensive to organize, require extensive record keeping, and may be difficult to dissolve. A partnership is not a separate legal entity (unlike a corporation), but a relationship that exists between persons who carry on business in common with a view to profit. Partners share in the profits, losses and net proceeds on dissolution. The most significant advantage of a partnership is that it is permitted to flow through losses to its partners that may, subject to certain rules in the Income Tax Act (Canada), be used as deductions against the partners other income. Other advantages of forming a partnership are the relative ease of formation and dissolution, relatively low start up costs, possible tax advantages, limited regulation, broad management base and financial and moral support among the partners. Possible disadvantages of a partnership are: unlimited personal liability for debts of the partnership, divided authority, difficulty finding additional partners and possible development of conflict between partners. The most significant disadvantage of a general partnership is that each of the partners is personally liable for the liabilities of the partnership. This exposure can be minimized by using a limited partnership rather than a general partnership. In a limited partnership, the liability of a limited partner is limited to the extent of its investment in the partnership so long as it takes a passive role in the business and governance of the limited partnership. In a limited partnership, the one or more general partners will remain personally liable for all of the liabilities of the partnership. 2. Are there attributes of the form that you consider unique to your jurisdiction? The two (2) main sources of company law in Canada are provincial and federal legislation. Each Page 44

46 province has its own corporate legislation, including the the Companies Act ( NSCA ) in Nova Scotia, Business Corporations Act ( NBBCA ) in New Brunswick, Companies Act ( PEICA ) in Prince Edward Island and the Corporations Act ( NLCA ) in Newfoundland and Labrador. The federal corporate legislation is the Canada Business Corporations Act ( CBCA ). The Nova Scotia unlimited liability form of company (also known as an unlimited liability company, or NSULC) is a body corporate formed under the NSCA in approximately the same manner as a limited company. Unlike a limited company, the liability of the members of an NSULC is unlimited. If the NSULC is wound-up or goes bankrupt, a liquidator will require the members of the NSULC to contribute to the payment of the NSULC s debts and the costs of winding up. NSULCs have become very popular because of the ability to characterize an NSULC as a flowthrough entity for United States tax purposes, simplified through the adoption of "check-the-box" rules in An NSULC may be treated as a body corporate for Canadian tax purposes and as a partnership or disregarded entity for American tax purposes. This hybrid treatment has provided businesses with a variety of cross-border tax planning options. The Fifth Protocol to the Canada-US Income Tax Convention (the Treaty ) that came into effect on January 1, 2010 imposed a new broad "anti-hybrid" rule, which provides that certain payments by or through fiscally transparent entities that do not satisfy the "same treatment" test will be subject to the Canadian domestic rate of withholding tax of 25% rather than the reduced rate of withholding tax otherwise available under the Treaty (0% for interest, 5% for US bodies corporate holding 10% or more of the voting stock, 10% for royalties (0% for certain other types of royalty payments), and 0% for management fees). The anti-hybrid rule has a broader impact than intended by US Treasury and the Canadian Department of Finance. Practitioners have been concerned about the uncertainty associated with the application of the "same treatment" test. However, guidance issued by the Canada Revenue Agency clarified a number of points and blessed a two step process that effectively avoids the application of the anti-hybrid rule to the payment of dividend from a NSULC to a US entity. If fiscal transparency is important from the US tax perspective and a corporation from a Canadian tax perspective is important, the NSULC is still a useful vehicle for new investments into Canada. One important aspect of the Nova Scotia model of incorporation of a limited company or NSULC (unlike the business corporations act or "BCA" model in other jurisdictions), is that it is effectively contractual in nature. This offers flexibility that is often lacking in the BCA model. 3. Describe the management and governance structure for each organizational form. The directors of a corporation are generally required to supervise the management of the business and affairs of a corporation unless a unanimous shareholders' agreement is in place (discussed below). Each director must act honestly and in good faith with a view to the best interests of the corporation and must exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. The directors may delegate their powers to a managing director or committee, except for certain specified matters, such as fundamental changes affecting the corporation, the issue of securities, the payment of dividends and the approval of financial statements and other disclosure documents. Shareholders make a financial investment in the corporation which entitles those with voting shares to elect the directors. If shareholders are not satisfied with the performance of the directors, they may remove the directors or refuse to re-elect them. Except for certain fundamental transactions or changes or where a unanimous shareholders' agreement is in place, shareholders normally do not participate directly in corporate decision-making. The shareholders of a corporation may enter into a shareholders agreement which provides for the conduct of the business and affairs of the corporation, re.g.ulates the rights and obligations of the Page 45

47 shareholders to one another and which may provide for rights of first refusal or other provisions dealing with the transfer of shares. Under the CBCA, NBCA and the NLCA, all of the shareholders may agree, under a unanimous shareholders agreement, to restrict in whole or in part, the powers of the directors to manage the business and affairs of the corporation and to give to the shareholders the rights, powers and duties which they have removed from the directors. The directors are thereby relieved of such duties and liabilities. Such an agreement might be used in a subsidiary corporation so that it is managed directly by the parent company with an active board of directors. The memorandum of association ("Memorandum") is the fundamental document of a Nova Scotia company and is unalterable except as authorized by the NSCA. Conceptually it represents the contractual consensus of all of the shareholders and is binding upon them and future shareholders as well as upon the company and its directors. There is no express statutory recognition of unanimous shareholders' agreements in the NSCA. Therefore, any restrictions fettering the directors' discretion in a unanimous shareholders' agreement must also be reflected in the Memorandum or articles of association. It is recommended that partners of a general partnership or a limited partnership enter into a written partnership or limited partnership agreement, which governs the relationship between the parties and the management of the partnership itself. 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? At least 25% of the company s directors are required to be Canadian residents under the CBCA or the NLCA. To qualify as a resident, a person must be either a Canadian citizen or a permanent resident under the federal Immigration and Refugee Protection Act. It is possible to avoid these residency requirements by incorporating in New Brunswick, Prince Edward Island or Nova Scotia, which have no residency requirements. Incorporation in these provinces can then be followed by extra-provincial registration in other provinces in which the company intends to conduct business. 5. Describe the extent to which management and owners are exposed to liability. Directors of corporations may be subject to certain penalties and/or personal liability under several Canadian statutes and common law principles if they fail to meet an appropriate standard of conduct or, in certain cases, if the corporation commits prohibited acts or fails to fulfill certain obligations. Directors may be personally liable to the corporation and/or its shareholders if they fail to act in the best interests of the corporation or to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances, or if they have approved or consented to an improper dividend, share issuance or share redemption. They may also be liable for the failure of the corporation to collect, remit or pay certain taxes, properly manage pension assets, pay employee wages (up to six months worth) or vacation pay or make source deductions from employees remuneration. Directors may also be liable in certain cases if the corporation contaminates the environment. Shareholders are generally not exposed to liability in addition to their investment in shares, unless they participate in the management of the corporation, or in the case of an NSULC where the liability of the members is unlimited. If an NSULC is wound-up or goes bankrupt, a liquidator will require the members of the NSULC to contribute to the payment of the NSULC s debts and the costs of winding up. The liability of a past member of an NSULC is limited to a period of one year after the member ceases to be a member, and liability does not extend to any debts or liabilities contracted after the member ceases to be a member. Furthermore, before approaching a past member, a liquidator will first require the current members of an NSULC to contribute to the payment of the NSULC s debts and the costs of the winding up. Page 46

48 The members of an NSULC are not directly liable to the NSULC s creditors. The liability of a past or present member of an NSULC is crystallized only when the NSULC s creditors petition the court for a winding-up order (or when the NSULC becomes bankrupt) and the company s debts and liabilities have not been satisfied. In such a case, the past or present member (if liable) owes the amount to the NSULC, not to the creditor. The liquidator will collect those amounts from the past and present members, and those amounts will be available to satisfy the claims of the creditors against the NSULC. Care should be taken when incorporating an NSULC or converting an existing company into an NSULC to ensure that an appropriate intermediary is interposed between a shareholder with assets and the NSULC (this is usually accomplished by making the direct shareholder of the NSULC a trust, a shell company, or a limited partnership), so that in the event of the winding up of the NSULC the shareholder who is exposed to liability will not have material assets that can be called upon to satisfy the debts and liabilities of the NSULC. 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? (i) how is it represented? Share certificates, in the case of corporations. Partnerships and limited partnerships usually maintain capital accounts for each of the partners. Generally, certificates are not issued. (ii) is it transferable? Yes, in accordance with the constating documents. The constating documents often contain restrictions on transfer to comply with exemptions from the requirement to file a prospectus under applicable securities laws. Shareholders agreements in closely held companies also usually contain transfer restrictions. (iii) is there a minimum number of owners? No, except in the case of partnerships, which require at least two partners. 7. Is there a minimum capitalization? Nominal capitalization is generally sufficient for any of the forms discussed. However, the thin cap rules in Canada disallow the deduction of interest, otherwise deductible, that is paid by a corporation resident in Canada to a specified non-resident, to the extent that the ratio of "outstanding debts to specified non-residents" to equity exceeds 2:1 A specified non-resident is a non-resident "specified shareholder", which is defined to be a person who either alone or together with persons with whom that person is not dealing at arm's length, owns shares of the capital stock of the subject corporation that: (a) give the holders the right to cast 25% of the votes at an annual meeting of the shareholders or, (b) have a fair market value of 25% or more of the fair market value of all of the issued and outstanding shares of the subject corporation. 8. Is there a security that can be issued to the public? Corporate shares (and debt instruments) are generally more readily marketable than units in partnerships or limited partnerships. Units in trusts were once popular in Canada due to advantageous tax treatment; however changes in tax laws have made them less attractive. Page 47

49 The corporate form is a flexible structure for business organizations. It is possible to utilize various classes of shares and share conditions to provide different levels of participation, control and risktaking in the corporation. Once established, a corporation can obtain additional funds by the sale of unissued treasury shares or by the issuance of debt. There are two general ways to raise capital in Canada: by filing a prospectus under applicable securities laws; or by raising money without a prospectus, which is possible if an exemption is available. A very significant portion of the capital raised in Canada is raised in circumstances where exemptions under applicable securities laws are available. The securities regulatory authorities attempt to harmonize their rules nationally, through the Canadian Securities Administrators ("CSA"), an umbrella organization comprising representatives of each securities regulatory authority in Canada. In addition, the federal government has proposed a national system of securities regulation, which is currently (as of 2010) subject to continuing ne.g.otiation between the federal and provincial governments and pending review by the Supreme Court of Canada to clarify constitutional issues. The CSA have adopted National Instrument in an attempt to harmonize the prospectus exempt distribution regime in Canada and increase efficiency for issuers participating in the Canadian capital markets. NI exemptions fall into four categories: a) Capital raising exemption that focus on the sophistication or deemed sophistication of the purchaser or the nature of the issuer (e.g. private issuers) and the relationship of the purchaser to the issuer and/or its officers and directors; b) Transaction exemptions, that allow the issuance of securities in connection with certain transactions on an exempt basis; c) Employee, executive officer, director and consultant exemption, which are the set of exemptions allowing for the issuance of shares to such parties, again under express parameters; and d) Miscellaneous exemptions. Most corporations in Canada are private issuers, which have fewer than 50 shareholders, carry restrictions on the right to transfer the shares of the corporation (the requirement that the consent of a majority of the directors or the shareholders to any proposed sale or transfer of shares be obtained being the most common restriction) and expressly prohibit any invitation to the public to subscribe for securities of the corporation. 9. Can the form incur debt, or grant security for debt? Yes, in accordance with its constating documents. In Canada, provincial legislation generally governs the creation and enforcement of security, with the notable exception of security over inventory granted to banks under the federal Bank Act, Provincial registryand land titles systems govern security interest in real property. Most Canadian provinces have adopted a Personal Property Securities Act ("PPSA") providing comprehensive legislation governing "security interests" in "personal property". Under the PPSA, "security interest" is defined as an interest in personal property that secures payment or performance of an obligation. "Personal Property" includes virtually all types of personal property. The PPSA re.g.ulates the creation, perfection and enforcement of security interests in a debtor's personal property, and creates a system for determining the priority of competing interests. The Page 48

50 PPSA applies to any transaction that creates a security interest in personal property, regardless of the form of document used to grant the interest. In most cases, the creditor perfects the security interest by registering a financing statement. Perfection can also be achieved through possession or control of certain types of personal property. Most Canadian lenders in PPSA jurisdictions use a general security agreement covering all of the debtor's existing and after-acquired assets. A general security agreement typically does not extend to real property. Instead, a separate mortgage of lands commonly securities the real property. A borrower may also use a debenture, which creates a security interest and mortgage in both real and personal property in the same document, Other security agreements may be limited to specific types of personal property, such as inventory and receivables, equipment or a pledge of securities. Lenders and others who take a pledge of shares in the capital of an NSULC must ensure that they will not be considered shareholders of the NSULC in the event that it is wound up. In the context of a pledge of shares, the legal title in the shares should not be transferred to the pledgee to create a charge, and the pledgee (or an affiliate) should not consent to become a member of the NSULC without taking a deliberate action within its control. The pledgee should not be a member if it merely takes possession of the share certificate(s) of the NSULC endorsed for transfer in blank, and is not entered on the register of members. The pledge agreement should be carefully reviewed and should contain language sufficient to ensure that the pledgee does not, by entering into the agreement, have the immediate right to be entered on the register of members. 10. What is the duration of the form? Can it be renewed? Corporations have perpetual existence, unless dissolved in accordance with the relevant corporate statute. The dissolution process can be relatively cumbersome in the case of a corporation. By way of example, the NSCA requires filing of notices and advertisements for a period of time, payment or provision for the debts and liabilities of the corporation, distribution of the corporation's assets to shareholders, and an application to the Registrar for approval of the dissolution. Subject to any agreement between the partners, a partnership is dissolved: (a) if entered into for a fixed term, by the expiration of that term; (b) if entered into for a single adventure or undertaking, by the termination of that adventure or undertaking; or (c) if entered into for an undefined time, by any partner giving notice to the other or others of his intention to dissolve the partnership. In addition, a limited partnership may be dissolved upon the retirement, death or mental incompetence of a general partner or the dissolution of a general partner when the partner is a corporation, unless the business is continued by the remaining general partners. The dissolution process is usually relatively simple a certificate of dissolution is filed, and the net assets are distributed to the partners after payment of the debts and liabilities of the partnership. 11. Describe the process, customary time period and approximate cost of establishing the form. Incorporating a federal or provincial corporation is a simple process. Certain forms containing basic information about the proposed corporation and its incorporators must be filed with government officials. A nominal fee must be paid and an acceptable name selected. A corporation can usually be incorporated in one or two days. Once incorporated, the corporation is subject to annual filing requirements to update its place of business, directors and senior officers. The approximate cost of incorporating a corporation ranges from $1,500 to $3,000, depending on the form of entity and jurisdiction. Page 49

51 12. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? No. 13. For what taxes is the form liable? Income taxes are imposed at the federal level, as well as by the various provinces and territories. Federal income tax is levied on the worldwide income of every Canadian resident, and, subject to the provisions of any applicable income tax convention, levied on the Canadian source income of every non-resident who is employed in Canada, who carries on business in Canada or who realizes a gain on the disposition of certain types of Canadian property. Generally, a province or territory will also impose an income tax on persons resident, or carrying on business, in the provincial or territorial jurisdiction. Certain provinces also tax non-residents on gains realized on the disposition of certain types of Canadian property situated in the province. The combined federal and provincial rate of income tax imposed on corporations varies widely depending on the nature and size of the business activity carried on, the location of the activity and other factors. In 2010, the rate of income tax in the provinces of Nova Scotia, New Brunswick, Newfoundland and Prince Edward Island applicable to non-canadian-controlled private corporations with a permanent establishment in a province ranged from a combined Federal and Provincial corporate income tax rate of 30.0% to 34.0%. Tax credits and other incentives are also available in certain circumstances to reduce the effective tax rates. A corporation that is not resident in a province is subject to a Federal corporate income tax rate of 28.0%. The federal government and most of the provinces have sales tax regimes. The federal government imposes a 5% per cent multi-stage tax called the goods and services tax (GST) on the supply of most types of property and services made in Canada. Many of the provinces have harmonized their provincial retail sales taxes with the GST at combined rates between 12% and 15%, while a few provinces in Canada maintain a separate provincial retail sales tax which is calculated on top of the GST. The federal government imposes other taxes, including customs duties and excise duties. Various provinces also impose other taxes, including provincial capital taxes (often limited to financial institutions), real estate transfer taxes, and payroll taxes. Most municipalities also impose annual taxes on the ownership of real estate 14. What is the tax treatment of payments to foreign owners? Canada levies a 25 per cent withholding tax on the gross amount of certain types of Canadian source income of non-residents. Payments subject to withholding include dividends, certain types of interest, rents, royalties and certain management or administration fees. Withholding tax can also apply to payments made between non-residents if the payments relate to a Canadian business or to certain types of Canadian property. The statutory withholding rate is often reduced or eliminated under bilateral tax treaties. Recently enacted legislation generally eliminates Canadian withholding tax on interest (other than interest that is contingent on the use of or production from property in Canada, or interest that is computed by reference to revenue, profit or cash flow) paid by a Canadian resident to arm s-length non-residents of Canada. While withholding taxes are imposed on the non-resident recipient, the payer is responsible for withholding the tax from amounts paid to the non-resident and for remitting the withheld amount to the government. Page 50

52 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? Canada imposes what is commonly referred to as the branch tax, pursuant to which all non-resident corporations that have operations in Canada are required to pay a tax of 25% on their Canadian source taxable income less deductions for (i) federal and provincial taxes, net taxable capital gains realized on taxable Canadian property not held for Canadian business purposes; and (ii) investment in property in Canada. Contact Information John Roberts john.roberts@mcinnescooper.com McInnes Cooper Upper Water Street Purdy's Wharf Tower II Halifax, Nova Scotia B3J 2V1, Canada Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 51

53 Issues Relating to Organizational Forms and Taxation Cayman Islands Prepared by Lex Mundi member firm Walkers 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. The responses provided in this questionnaire are generic in nature and should only be used as an indicative guide to the Cayman Islands position. These responses should not and cannot, be used or relied upon as a replacement for specific legal advice on any particular transaction. Further tailored legal advice should be sought on specific transactions as other Cayman Islands legal considerations which have not been the subject of this questionnaire may be relevant and should be considered and advised upon. We are Cayman Islands' Attorneys at Law and express no view and provide no responses as to any laws other than the laws of the Cayman Islands in force and as interpreted at the date of this questionnaire, being 21 July There are numerous different types of entities in the Cayman Islands. It is, however, beyond the scope of this questionnaire to address all of the legal issues which may arise in the context of transactions effected with all types of entities. Due to word count limitation on certain sections of this questionnaire, it is impossible to provide a full summary of all types of entities and it would be misleading to answer only some of the sections where word count permits relating to, e.g., partnerships and trusts, therefore the responses focus only on Cayman Islands companies. Please contact a Walkers attorney for information and firm memorandum on partnerships, trusts and other forms of entities available. An exempted company (a "Company") is the most commonly used type of Cayman Islands company for international transactions. Any proposed Company applying for registration under the Companies Law (as amended) of the Cayman Islands (the "Law"), the objects of which are to be carried out mainly outside the Cayman Islands, may apply to be registered as a Company. A Company may not trade in the Cayman Islands with any person, firm or corporation except in furtherance of the business of the Company carried on outside the Cayman Islands. A Company that is not listed on the Cayman Islands Stock Exchange (CSX) is prohibited from making any invitation to the public in the Cayman Islands to subscribe for any of its securities. Certain activities are regulated in the Cayman Islands and a Company may be required to obtain a licence or to register with the Cayman Islands Monetary Authority (CIMA) if it wishes to carry on such activities. These include banking business, trust business, company management, insurance business, mutual fund administration, business of a mutual fund and securities investment business. Part XIV of the Law permits any Company to apply to the Registrar of Companies to be registered as a se.g.re.g.ated portfolio company (SPC). Companies regulated by CIMA and also require the permission of CIMA to register as a SPC. Once registered as a SPC, a Company can create and operate one or more se.g.re.g.ated portfolios with the benefit of statutory se.g.re.g.ation of assets and liabilities between portfolios. 2. Are there attributes of the form that you consider unique to your jurisdiction? The provisions of the Law permitting exempted companies to register as SPCs have created opportunities for the introduction of innovative legal structures across a wide range of business areas. Mutual funds in particular have benefited from the use of SPCs. Standard mutual fund structures such as multi-class hedge funds, umbrella funds and master-feeder structures benefit from the ability to set up a statutory "ring-fence" to protect against cross liability issues relating to the assets and liabilities of the various se.g.re.g.ated portfolios within a SPC. Furthermore, the use of a SPC facilitates a more Page 52

54 streamlined offering structure for certain mutual funds. This closely follows the use of SPCs by insurers where individual insurance or product lines are se.g.re.g.ated in different se.g.re.g.ated portfolios thus protecting each from losses arising from the other categories of business written by the insurer. Examples of other uses include multiple tranche debt issue vehicles, property development companies, ship or other fleet owning companies, securitisation and derivative transactions. The advantages over traditional methods of creating legal divisions between accounts (such as setting up underlying special purpose vehicles and negotiating limited recourse provisions with third parties) include reduced complexity and possible cost savings. 3. Describe the management and governance structure for each organizational form. The constitution of a Company consists of a memorandum of association (the "Memorandum") and articles of association (the "Articles"). The Articles will invariably provide that the business of the Company shall be managed by the directors. Shareholders do not generally participate in the management of the Company's business. 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? No-company 5. Describe the extent to which management and owners are exposed to liability. Directors owe fiduciary duties to the Company. These duties include: a) duty of loyalty/duty to act in best interests of the Company; b) duty to act for a proper purpose; c) duty not to fetter director's discretion; d) duty to avoid conflicts; e) duty not to make secret profits from the director's position as director; f) duty to act fairly as between different shareholders; and g) duty to act with skill and care. These duties are owed to the Company itself, and not generally to individual shareholders. In the event of a breach of duty, the directors may be personally liable to account to the Company. Liability of shareholders: For a typical Company with limited liability of the members, no contribution shall be required from any member exceeding the amount, if any, unpaid on the shares in respect of which he is liable. As most Companies issue shares that are fully paid upon issue, the effect of this provision is that no further sums are payable by the holders of such shares once they have paid for their shares in full. There are certain rare cases where a court will permit the limited liability status of a Company to be pierced, such as where no corporate governance formalities have been observed and a shareholder has treated the Company as its alter e.g.o for the purpose of evading a personal liability. 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? The transferability of shares will be set forth in the Articles. Commonly, shares may only be transferred with the prior consent of the directors of the Company. Bearer shares are permitted but there are strict limitations on dealings with bearer shares, which may only be issued to a recognised custodian and they are now extremely unusual. A Company must have a minimum of one shareholder at any time. Unless provided for in the Articles, there is no maximum number of shareholders. A Company must have at least one share in issue, but Page 53

55 there is no minimum paid-in capital requirement. Fractional shares may be issued if the Articles so permit. 7. Is there a minimum capitalization? A Company must have at least one share in issue, but there is no minimum paid-in capital requirement. 8. Is there a security that can be issued to the public? A Company can issue equity and/or debt securities to the public however, a Company that is not listed on the Cayman Islands Stock Exchange is prohibited from making any invitation to the public in the Cayman Islands to subscribe for any of its securities. Consideration may also need to be made, depending on the facts, as to whether any registrations or exemptions from registrations, are required to be made under, but not limited to, the Mutual Funds Law or the Securities Investment Business Law. Tailored legal advice should be sought on any specific issuance of securities. 9. Can the form incur debt, or grant security for debt? Subject to any restrictions in the Memorandum and Articles, a Company can incur debt and/or grant security for debt. The grant of security, the nature of the security, the nature of the assets secured and registration of such security is a complex area outside the scope of this questionnaire. Further details can be found under the Lex Mundi Bank Finance and Regulation/Security over Collateral Multi-Jurisdictional Survey on the Cayman Islands and you are recommended to seek advice from your regular Walkers Attorney. 10. What is the duration of the form? Can it be renewed? Typically the Company will continue to exist for an unlimited duration. The Memorandum and Articles of the Company may limit the duration or specify an event, which, whenever such event, occurs, such occurrence causes the Company is to be dissolved. Please note that this questionnaire does not discuss the rarely utilised Limited Duration Company or the specific features applicable to such. 11. Describe the process, customary time period and approximate cost of establishing the form. Upon the filing with the Registrar of Companies (the "Registrar") of: 1. the Memorandum and Articles (if any); 2. the appropriate filings fees; and 3. a declaration from the subscriber to the effect that the operation of the Company will be conducted mainly outside the Cayman Islands, a Company shall be deemed to be registered, and the Registrar shall issue a Certificate of Incorporation. The Certificate of Incorporation will generally be issued within five working days, or within two working days upon payment of an express government fee. Registrations costs vary depending upon the amount of the authorised share capital and under current fee schedules of the Registrar (not by express incorporation) the fee is between US$732 and US$3,010. This does not include the additional incorporation fees such as legal fees to effect the incorporation, registered office fees, stamps and other incorporation costs. Specific guidance should be sought from your Cayman Islands' attorney. 12. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? Not applicable. Page 54

56 13. For what taxes is the form liable? There is currently no Cayman Islands corporation, income, capital gains, profits, withholding or other taxes (other than import duties, tourism taxes and stamp duties). 14. What is the tax treatment of payments to foreign owners? There is no withholding tax, income tax or capital gains tax in the Cayman Islands. 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? Not applicable. Contact Information Walkers Walker House 87 Mary Street George Town KY Cayman Islands Tel Fax info@walkersglobal.com This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 55

57 Issues Relating to Organizational Forms and Taxation Chile Prepared by Lex Mundi member firm Claro & Cia., Abogados 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. Chilean law contemplates two main legal entities that may serve as investment vehicles: the corporation (sociedad anónima) and the limited liability company (sociedad de responsabilidad limitada). In addition, investors may also opt to create a stock company (sociedad por acciones), general partnership (sociedad colectiva), silent partnership (asociación o cuentas en participación), limited partnership (sociedad en comandita), or branch of a foreign company (agencia de sociedad extranjera). The most common legal structures are corporations. Another legal structure which some market players have started to use is the stock company. They share most of the features of corporations (e.g., their capital is divided into shares of stock and the rules governing close corporations are applicable as default rules absence of specific provisions) except that, unlike corporations, they may be formed by one or more persons and are not dissolved when one person holds all of the shares in the stock company. General partnerships can be civil or commercial depending on their purpose. Limited partnership is a company organized between one or more persons who undertake to make a specific contribution to the company (Limited Partners) and one or more persons who commit to manage the company, whether personally or through their appointees, and in their own name (General Partners). There are two types of limited partnerships: a) simple limited partnerships, and b) stock limited partnerships. Silent partnership is a contract pursuant to which two or more merchants take an interest in one or more commercial transactions that only one of them (the administrator) performs in his own name and under his own personal credit, subject to the obligation of accounting for his participation and dividing with the other participants the profits and losses as agreed or, otherwise, in proportion to their respective interest. This legal structure is private, does not create a new legal entity, or has a name, domicile, or capital separated from the administrator. Finally, a foreign company may organize a local branch which does not have a separate legal existence from that of the foreign company that established it. 2. Are there attributes of the form that you consider unique to your jurisdiction? Not really. Generally, characteristics of Chilean law available legal vehicles are standard. 3. Describe the management and governance structure for each organizational form. Corporations are managed by a board of directors which represents the corporation in general, except with respect to those matters which pursuant to the law or by-laws are to be resolved by a shareholders meeting, either ordinary or extraordinary. The board members are all elected at a shareholders meeting (staggered elections are not permitted). The board is composed of at least 3 members, in case of close corporations, and of at least 5 members, in case of public corporations, except for public corporations with a market capitalization of not less than UF1,500,000 and at least Page 56

58 12.5% of the corporation s shares with voting rights is owned by shareholders which individually control or have less than 10% of those shares, in which case the board shall be composed of at least 7 members and shall appoint an independent director and create a directors committee composed of 3 members, the majority of which shall be independent of the controlling shareholder. The board shall appoint a general manager and other officers as the board deems appropriate. Limited liability companies management may be freely allocated by their partners upon one or more partners, upon a board of directors. Stock companies management may be freely allocated into one or more administrators and/or a board of directors, and a general manager. Civil general partnerships may be managed by one or more of the partners. If the appointment is made in the organization deed, it is of the essence of the partnership, unless expressly stated otherwise, and the manager may not resign except in cases provided in the organization deed or accepted unanimously by the partners, and may not be removed except in cases provided in the organization deed or when found incapable or untrustworthy to manage the partnership. In all other cases, the resignation or removal results in the termination of the partnership. Commercial general partnerships are managed in accordance with the by-laws provisions. If nothing is provided, the management corresponds to each of the partners, individually considered. When the management corresponds to each of the partners, any partner may oppose to acts or contracts intended by any of the other partners. The management of a limited partnership is vested only upon the General Partner(s). Limited Partners are completely restricted from participating in such management. The law sanctions any Limited Partner who violates this prohibition by depriving it from the limited liability privile.g.e. Limited Partners may hold meetings to discuss and decide matters other than those related to the management. In stock limited partnerships, the Limited Partners meeting must elect a Surveillance Board composed by at least three Limited Partners, which is in charge, among others, of inspecting the limited partnership s books and records. Branches are managed by the local representative appointed by the foreign company that established them. 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? Generally, there are neither restrictions regarding the nationality of the company s owners nor residency requirements. Also, no nationality requirement exists in respect of the managers but the general manager must be a Chilean resident. It is a requirement for tax purposes which, in case the individual that will act as general manager is a foreign citizen, will be satisfied when it has a VISA, either a working or temporary VISA. As a general rule, there are no restrictions or prohibitions on foreign investors to perform or have interests in specific activities. An exception to this general rule is the case of concessions granted by the Under-Secretariat of Telecommunications (Subsecretaría de Telecomunicaciones) which may only be granted to legal entities organized and domiciled in Chile, regardless of their capital structure. Hence, foreign companies are eligible via their Chilean subsidiaries to provide telecommunications services through concessions. Another restriction for foreigners refers to lands belonging to the State located up to ten kilometers from the national border which may only be acquired, leased or received under any other title, by Chilean individuals or entities. Same rule shall apply with respect to those lands belonging to the State located up to five kilometers from the seacoast, measured from the line of the highest tides. Page 57

59 However, in the latter case, foreigners with domicile in Chile may acquire, receive in lease or obtain under any other title the aforementioned lands upon prior favorable report of the Navy Under- Secretariat of the National Defense Ministry (Subsecretaría de Marina del Ministerio de Defensa Nacional). 5. Describe the extent to which management and owners are exposed to liability. In corporations and stock companies, owners are not liable for the debts of the company and the risk of a court piercing of the corporate veil is low (there is no relevant caselaw in this regard). Limited liability companies main feature is to limit the liability of the partners in respect of the company s obligations to each such partner s paid contribution to the company s capital. The liability of the partners of general partnerships is unlimited. Partners of civil general partnerships are liable for the obligations of the partnership before third parties in proportion to their respective contributions, and the portion of the insolvent partner shall proportionally increase the liability of the remaining partners. Partners of commercial general partnerships are jointly and severally liable for the obligations of the partnership before third parties. General Partners of a limited partnership are jointly and severally liable pursuant to all commitments made and losses sustained by the partnership. Limited Partners are only liable up to the amount they committed to contribute to the Partnership; provided however that they can be deprived from this benefit as explained in our answer to question 3 above. 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? Except for stock companies and branches, all other types of companies shall be formed by two or more persons (individuals and/or legal entities), and they are dissolved if one person holds all of the ownership interests. Stock companies may be formed by one or more persons and are not dissolved when one person holds all of the shares. The equity capital of corporations and stock companies are represented and divided into shares of stock. Preferred shares are allowed and in such case, the by-laws shall indicate the relevant series and privileges. The transfer of a corporation s shares shall be evidenced by means of a private deed executed by assignor and assignee before two witnesses of lawful age, a stock broker or a notary public, or by mean of a public deed executed by assignor and assignee. The corporation may not reject or make comments on the transfers of shares submitted thereto for their recording in the Shareholders Registry, unless such transfers do not comply with the foregoing formalities. The transfer is enforceable against the corporation and third parties from the moment the former has been recorded in the Shareholders Registry. The by-laws of public corporations may not stipulate limitations to the free transferability of shares. Shareholders agreements that contain restrictions to the transfer of the shares owned by the shareholders, who are party thereto, shall be deposited with the corporation and a reference to their existence shall be annotated in the Shareholders Registry. If the latter formalities are not complied with, the shareholders agreement will not be enforceable against the corporation. In case of limited liability companies, general partnerships and simple limited partnerships, ownership interests are not represented by shares and, in case of limited liability companies and general partnerships the relevant equity rights may not be transferred without all the other partners unanimous consent. In simple limited partnerships, a Limited Partner may transfer its rights but not the authority to examine the limited partnership s books and records. In stock limited partnerships, a Limited Partner Page 58

60 may transfer its shares only after two-fifths of their value has been contributed to the limited partnership. 7. Is there a minimum capitalization? As a general rule, there are no minimum capital requirements, but it is advisable that the capital amount selected be in accordance with the company s purpose. It is worth commenting though, that certain financial activities are required to be developed by a certain specific type of legal entity and to maintain a minimum capital. This is the case of the banking business, insurance business, and of pension, mutual and investment funds managements. Indeed, under the Banking Act a bank must have a minimum paid-in capital and reserves of UF800,000 (U.S.$32,510,253) and to contribute at least 50 percent of such amount as of the date of its incorporation. There is no mandatory time period for contributing the remaining balance. Notwithstanding the foregoing, as long as a bank has not contributed the minimum capital, it shall have an effective equity not lower than 12 percent of the bank s risk weighted assets. When such bank s paid-in capital reaches UF600,000 (U.S.$24,382,690) the effective equity required is reduced to 10 percent of its risk weighted assets. Also, pursuant to the Banking Act, each bank should have an effective equity of at least 8 percent of its risk-weighted assets, net of required allowances. Banks should also have a capital básico or Net Capital Base, of at least 3 percent of its total assets, net of allowances. Net Capital Base is defined as a bank s paid-in capital and reserves and is similar to Tier 1 capital, except for the fact that it does not include net income for the period. Pension funds managements ( AFP ) are corporations which exclusive purpose is to manage pension funds and to grant and manage the services and benefits stipulated in the law. The minimum capital required for an AFP with 10,000 or more members is UF20,000 (U.S.$812,756) and if at any point in time the capital falls below such threshold, the AFP shall increase the capital within six months, or otherwise the Superintendency of Pension Funds shall revoke its license and the AFP shall be dissolved. Finally, investment and mutual funds managers must be organized as corporations with the exclusive purpose of administering investment or mutual funds and must have a paid-in capital of at least UF10,000 (U.S.$406,378). 8. Is there a security that can be issued to the public? The equity capital of corporations, stock companies and stock limited partnerships is divided into shares of stock represented in certificates; provided however that in case of stock companies Chilean law authorizes the shareholders to issue shares without printing any physical sheets of the relevant stock certificates. 9. Can the form incur debt, or grant security for debt? All of the forms can incur debt and grant security for debt. Security can consist either on a security interest over assets (e.g., a mortgage or a pledge) or on a personal guaranty granted by the entity itself securing either their own obligations or third parties obligations. If governed by Chilean law, joint (but not several) guarantees are usually evidenced by means of a fianza where the obligor has certain defences, such as the beneficio de excusión: the right to demand that the creditor first seeks to foreclose on the assets of the debtor; the beneficio de división: the right of a co-guarantor that is not jointly and severally liable to demand that the liability be divided among all the co-guarantors, if more than one; the excepción de subrogación: which limits liability if the creditor has done something that impairs the right of the guarantor to be subrogated in the credit against the debtor upon payment; the beneficio de retractación: the right of the guarantor to repudiate the guaranty in respect of future obligations; and the excepciones reales y personales: actions in rem (willful misconduct) and in personam (set-off) against the creditor. All of such defences, except those based in the willful Page 59

61 misconduct of the creditor (or gross negligence which is assimilated in this regard to willful misconduct), may be waived in advance, and such waiver is enforceable under Chilean law. In case of a security interest over assets, it can be granted with respect to all of a company s assets only to the extent that each asset over which the security interest is intended to be created is individually described in the agreement creating the security interest. Floating charges or security interests over after-acquired property are available with respect to inventory, raw materials, elaborated and semi-elaborated products and spare parts. It is worth noting that the granting or creation by corporations of guarantees or liens securing third parties obligations other than that of subsidiaries (in which case the decision by the board shall suffice), the Corporations Act requires the approval at a duly convened shareholders meeting, by the affirmative vote of two-thirds of the issued and outstanding shares with right to vote. 10. What is the duration of the form? Can it be renewed? As a general rule, the duration of the entity is determined by the parties in the by-laws and except in case of limited liability companies and general partnerships, it may be indefinite and shall be indefinite in the absence of any reference in the by-laws. It can also be subject to a term to the extent set forth in the by-laws. Renewal, whether automatic or by the parties prior agreement may also be agreed in the by-laws. 11. Describe the process, customary time period and approximate cost of establishing the form. Except in case of stock companies (where one person is enough), at least two persons are required to establish a company. Corporations, limited liability companies, commercial general partnerships and stock companies must be incorporated pursuant to a public deed (or, in case of a stock company also pursuant to a private deed duly notarized) containing their by-laws, which shall include the references provided in the law (e.g., owners identification; company s name, domicile, equity capital; etc.). An excerpt thereof must be recorded in the relevant Commerce registryand published in the Official Gazette within a certain time period. No further governmental authorization is required. The Chilean Civil Code provides no formalities for the organization of civil general partnerships. Nevertheless, for purposes of evidence of existence, they require to be in written form. A simple limited partnership is organized by means of a public deed with the same contents as required for general partnerships, an excerpt of which must be registered in the relevant Commerce Registry. Stock limited partnerships have a two-step organization process, which can be accomplished in one act or in two separate acts. First, it requires a public deed and registration in the same conditions as the simple limited partnership. But the partnership is not effectively organized until the entire capital is subscribed and each partner has contributed at least one fourth of its committed contribution. In limited partnerships, the names of the Limited Partners must not appear in the name of the partnership or in the excerpt of the organization deed. If a Limited Partner allows the appearance of his name in the partnership s name, he will be liable for the partnership s obligations in the same terms as a General Partner. In stock limited partnerships, additionally, the names of the Limited Partners must not appear in the organization deed. Silent partnerships are established by means of a private contract which is not subject to any formalities. Nevertheless, for purposes of evidence of existence, they require to be in written form. Branches of a foreign company are established by means of a filing with a local notary public of: a) the documentation evidencing the due organization, existence and good standing of the foreign company; and b) the appointment of a local representative. The representative shall execute in Chile Page 60

62 a public deed setting forth, among others, the name under which the foreign company shall operate in Chile; the branch s purpose; that the assets of the branch shall be subject to Chilean laws and shall respond for the obligations undertaken by the branch in Chile; etc. An excerpt shall be recorded with the Commerce registryand published in the Official Gazette within a time period provided in the law. Establishment of a legal entity takes one month. Costs are between US$300 and US$400, plus the Commerce registryand legal fees. 12. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? No general requirement for the government exists to be part of a project or investment vehicle. As to sharing with the Government of part of the profits arising from a project, there is no such a general requirement. In some projects the law contemplates mechanism of revenue sharing with the Government. That is the case of public works concessions which are awarded by the Chilean Ministry of Public Works (Ministerio de Obras Públicas, the MOP ) after a public bidding process. Once awarded, the successful bidder enters into the Concession Agreement with the State of Chile, represented by the MOP. The Concessions Act grants the concessionaire the option to agree with the MOP a mechanism of risk allocation with respect to the risks generated by the uncertainty of traffic flows. In the event that the concessionaire s revenues generated from the operation of the toll road is substantially above the levels set forth under a agreed formula, the concessionaire will be required to share 50% of such revenues with the MOP. 13. For what taxes is the form liable? Most companies are required to pay First Cate.g.ory Tax on their annual accrued income at a rate of 17 percent. Corporations, stock companies, limited liability companies and branches are subject to First Cate.g.ory Tax on a complete-accounting basis (calculated on the basis of the accrual method of accounting, as a general rule). In this respect, there are certain matters that may be highlighted: a) there are no restrictions on the carrying forward of any tax losses; b) assets and liabilities are adjusted to reflect changes in Chilean inflation; c) under certain conditions, imported or new tangible assets may be depreciated by one-third of their normal economic life; d) dividends or profits from other Chilean companies are not subject to First Cate.g.ory Tax; and e) a tax credit may be granted with respect to foreign taxes paid on certain types of foreign source income. Under certain circumstances, some activities (e.g., agricultural, mining and transportation) pay taxes on the basis of deemed income, unless a corporation carries them out. Local entities shall keep a taxable profit fund ledger (the Fondo de Utilidades Tributables, or the FUT ) that tracks the entity s income and its tax situation. The FUT is used to calculate income taxes and the tax credits that may be available at the time profits are distributed by such entity to its partners or shareholders, as the case may be. In case of an agency, branch or permanent establishment, if the books and accounting records do not allow the tax authorities to determine the actual Chilean income, the IRS may determine such income by (i) applying to the gross income of the Chilean operations, the ratio between net income and gross income of the entity s headquarters (determined pursuant to the Income Tax Act), or (ii) applying to the assets of the Chilean operations, the ratio between the net income and assets of the entity s headquarters. The foregoing is without prejudice to the ability of the IRS to apply any of the deemed income assumptions contained in the Income Tax Act. In addition, entities shall pay and declare the Value Added Tax. Page 61

63 14. What is the tax treatment of payments to foreign owners? Additional Withholding Taxes are levied upon distributions and withdrawals of profits made by entities domiciled or resident in Chile to individuals or entities not domiciled or resident in Chile. As a general rule, the rate of the Additional Withholding Tax for distributions of profits by, and withdrawals of profits from, an entity other than a corporation, such as limited liability companies, are subject to Additional Withholding Tax at a rate of 35 percent to the extent that the profits distributed or withdrawn correspond to taxable income as registered in the company s FUT (as of December 31 of the previous year). On the other hand, if the FUT of limited liability companies is negative, profits distributed abroad shall not be subject to Additional Withholding Tax, which shall be deferred until the fiscal year in which the FUT of such limited liability companies registers taxable profits, unless such distribution could be applied to the non-taxable profits ledger (the Fondo de Utilidades No Tributables, or the FUNT ) in which case the distribution will not be subject to withholding taxes. Please note that any amounts remitted abroad by a limited liability company in excess of its FUT (as of December 31 of the previous year) are subject to a provisional 20 percent withholding tax on the amounts remitted abroad. In this case, the amount so withheld shall be used as a tax credit against the Additional Withholding Tax that may be applicable if at the end of the fiscal year in which such remittance is made, the FUT of such limited liability company is positive. Conversely, if at the end of such fiscal year the limited liability company does not have taxable profits, the foreign partners shall be entitled to a refund of the provisional tax withheld. In turn, distributions of profits by a corporation are always subject to Additional Withholding Tax at a rate of 35 percent. Finally, a credit is given for the First Cate.g.ory Tax paid by the local entity, if any. This credit, however, does not reduce the Additional Withholding Tax on a one-for-one basis because it also increases the tax base on which the Additional Withholding Tax is calculated. Entities domiciled or resident in Chile making distributions and withdrawals of profits, to individuals not domiciled or resident in Chile are required to withhold the applicable Additional Withholding Tax and declare and pay such tax to the Chilean General Treasury within the first twelve days of the month following the withholding. In addition, a special ledger must be kept to record the Additional Withholding Taxes so withheld, including the name and address of the person for whose benefit the withholding was made, along with annual affidavit filings. 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? Yes. As a general rule, owners which are individuals domiciled or resident in Chile are required to pay an Overall Income Tax. The Overall Income Tax is a progressive tax with rates ranging from zero percent to 40%. In connection with the profits that individuals receive from entities domiciled in Chile, individuals are allowed to use as a tax credit the 17% First Cate.g.ory Tax paid by the corresponding entity, if any. Page 62

64 In turn, and as a general rule, distributions and withdrawals to foreign individuals or entities not domiciled or resident in Chile are subject to an Additional Withholding Tax as described in answer to question 14 above. Contact Information José María Eyzaguirre B. jmeyzaguirre@claro.cl Claro & Cia., Abogados Av. Apoquindo 3721, 14th Floor Las Condes Santiago , Chile Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 63

65 Issues Relating to Organizational Forms and Taxation Cyprus Prepared by Lex Mundi member firm Dr. K. Chrysostomides & Co LLC 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. There are various forms of organisation that can be formed under Cyprus legislation and these include the private limited company and the public limited company formed pursuant to the Cyprus Companies Law Cap. 113 (as amended); and the general and limited partnerships which can be formed pursuant to the Partnerships and Business Names Law Cap. 116 (as amended). Private Limited Company The two major advantages of private companies are their distinct legal personalities and the limitation of their members liability to the amount of their contribution to the share capital of the private company. The Cypriot legislation is less restrictive in relation to director dealings with a private company as opposed to a public company. A private company is prohibited from issuing any invitation to the public to subscribe for any shares or debentures of the company. There are two types of private companies: (i) private companies limited by shares subscribed by the members; and (ii) private companies limited by a guarantee to a specific amount by each member. The private companies limited by guarantee are most commonly used for non profit making or for charitable purposes rather than for commercial purposes and they are therefore rarely used. The private company limited by shares is the vehicle most preferred by foreign investors, especially where a group holding company or joint venture structure is required. Public Limited Company A public limited company may offer its shares and debentures to the public. The liability of the members is limited to the share capital subscribed. Compared to the private limited company, a public limited company has increased formality requirements. This type of company is not commonly used by foreign investors unless the intention is to list the securities of the company on a stock exchange or attract a large number of members (more than 50). Partnerships The main difference between partnerships and limited liability companies is that in the case of partnerships the liability of the partners is unlimited. In addition partnerships require less formalities (and therefore expenses) compared to limited liability companies. This form of organization is not preferred by foreign investors, because partners have unlimited liability and because it is considered by the Cypriot Inland Revenue as a transparent tax structure. Cypriot legislation recognizes the following two types of partnerships: Page 64

66 General Partnership Under general partnerships, every partner is liable severally and jointly with the other partners, without limit on its liability, for all debts and obligations of the partnership incurred while he is a partner. All the partners are entitled to participate in the management of the partnership equally and each partner is entitled to represent and bind the partnership. Limited Partnership A limited partnership consists of at least one general partner liable for all the debts and obligations of the partnership and one or more limited partners who contribute a fixed amount to the partnership s capital. The liability of the limited partners is limited to the fixed amount of their contribution. The limited partners are not entitled to participate in the management of the partnership and they are not allowed to represent and bind the partnership by their signature. 2. Are there attributes of the form that you consider unique to your jurisdiction? No. 3. Describe the management and governance structure for each organizational form. Private and Public Companies The business of a private or a public company is generally managed by its directors with the exception of certain matters, which the Cyprus Companies Law Cap.113 expressively reserves for the competence of the members of the company. For example, decisions relating to the day-to-day management of a company, such as approval of agreements, disposition of assets and recommendation of dividends are taken by the directors of the company. On the other hand, decisions relating to the amendment of the Memorandum and Articles of Association of the company, liquidating the company or reducing its share capital, are matters reserved for the general meeting of the members of the company. The Articles of Association may limit the powers of the directors of a company further. Private limited companies must have at least one director, whereas public limited companies must have at least two directors. The Board of directors of a company may pass resolutions during meetings or by way of a written resolution. Similarly the members of a company may pass resolutions at general meetings or by way of written resolutions passed in lieu of a general meeting. Partnerships Partnerships are managed by their partners as they do not have directors or members. The Partnerships and Business Names Law Cap. 116 does not impose any requirements as regards the form of management of a general partnership, therefore the partners are free to arrange the management structure of the partnership in their preferred manner. As regards limited partnerships, the general partner is empowered to manage and bind the limited partnership. 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? Subject to the issues discussed in the next paragraphs, there is no requirement for the directors or shareholders of a company (whether private or public) or the partners of a partnership to be Cypriot residents. Consequently, there are no restrictions on foreign investors managing or having interests in such Cypriot forms of organization. Page 65

67 A. Taxation Requirements for residency In order for a limited liability company to be considered a tax resident of Cyprus, and thus be in a position to benefit from the favorable Cyprus tax regime, its "management and control" must be exercised within Cyprus. There is no precise definition for the term management and control, and all relevant facts and circumstances will be considered. In practice, the OECD model convention definition of management and control is followed by the Cyprus tax authorities and the following are indicative situations when the management and control test would be satisfied: (i) the directors or their majority are Cypriot residents; and (ii) the Board Meetings should be held in Cyprus; and (iii) the key management and commercial decisions are made within the Republic of Cyprus. B. Limitations and requirements in relation to regulated activities There are a number of activities which are regulated and would require a specific administrative licence prior to commencing operations, such as banking, insurance, educational and financial services. For example, limited liability companies which propose to provide financial services regulated under the Investments Firms Law (N.144/2007) as amended, must first obtain a licence from the Cyprus Securities and Exchange Commission. One of the prerequisites for obtaining such a licence is the disclosure of the identity, professional qualifications and relevant experience of the directors and shareholders (including ultimate beneficial owners) of the company to the Cyprus Securities and Exchange Commission. The Cyprus Securities and Exchange Commission may refuse to grant the relevant licence if they are not satisfied as to the suitability and fitness of the shareholders and/or they deem the professional experience of the persons that will be appointed as directors inadequate or unsatisfactory or if they think there is any risk for the correct and prudent management of the company. Furthermore, at least one of the directors and specifically, the person who will be employed on a full time basis and be responsible for the day to day management of the company, must be a Cypriot resident. C. Requirements in relation to the ownership of real estate property situated in Cyprus. There are restrictions on the ownership of immovable property in Cyprus by third country nationals (i.e. non-eu citizens and corporate entities owned by third country nationals, including corporate entities registered in the Republic of Cyprus). According to the Acquisition of Immovable Property by Aliens Law, Cap. 109, as amended, the acquisition of a secondary residence (i.e. holiday home or office premises for foreign entities) in Cyprus by third country nationals, is subject to limitations as regards the maximum size of the land (approx. 4000m2) and the number of properties that can be purchased (only 1). Moreover, family members cannot own more than one property unless they are financially independent adults and/or comprise separate family units. In order to register such property in their name, third country nationals are required to apply for and obtain permission from the local District Administration Office where the property is situated. With the exception of the type and size of the land mentioned above, third country nationals are not entitled to own any other immovable property. The above restrictions apply equally to non-eu corporate entities and Cyprus companies owned or run by third country nationals. Foreign entities that have bearer shares cannot own immovable property. Page 66

68 A Cyprus company may invest in land (as opposed to a secondary residence or office premises), for as long as no third country national has a controlling majority on its board or has a shareholding or voting majority of more than 49%, in all cases. For immovable property acquisition other than for a secondary residence, investors from third countries must have a local or EU partner who will hold not less than 51% of the shares and/or the votes and/or the seats on the board of a corporate entity. 5. Describe the extent to which management and owners are exposed to liability. Public and Private Companies The liability of the members of a private and/or a public company is limited to their contribution to the share capital of the company. In general, the directors of a Cyprus company owe a duty to manage the company in accordance with the provisions of Cyprus Law and within the regulations of the Memorandum and Articles of Association of the company and failure to do so will lead to the directors being liable for breach of their fiduciary duty. The directors may face liability if their actions fail to meet the following standards: Directors must act in accordance with their duty of good faith and in the best interests of the company; Directors must exercise their powers for the particular purpose for which they were conferred and not for some extraneous purpose; Directors must not fetter their discretion to exercise their powers from time to time; Directors must not, without the consent of the company, place themselves in a position in which there is a conflict between their duties and their personal interests; Directors must display a reasonable de.g.ree of skill that may be expected from a person of his knowledge and experience. Partnerships Under general partnerships, every partner is liable severally and jointly with the other partners, without limit on its liability, for all debts and obligations of the partnership incurred while he is a partner. In limited partnerships the general partner(s) is liable for all the debts and obligations of the partnership and the limited partner(s) is liable only to the extent of their contribution of the fixed amount to the partnership s capital. 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? (i) Private and Public Companies The ownership interest in a company limited by shares (whether public or private) is reflected by the shares which the company allotted to its members. Members are usually given a share certificate stating the number of shares which they own. Shares of Cypriot public companies listed in the Cyprus Stock Exchange may be held in uncertificated form through the electronic settlement system of the Central Depository of the Cyprus Stock Exchange. Page 67

69 Companies limited by guarantee do not have a share capital and therefore do not issue any share certificates. Their members guarantee a sum of money which represents their interest in the company. Partnerships The partnership interest is usually stipulated in the partnership agreement as a percentage since partnerships do not have share capital. (ii) Private and Public Companies Subject to any restrictions contained in the Articles of Association of a company, the members may freely transfer their shares to another person. In order to transfer the shares, an instrument of transfer must be executed by the transferor and the transferee and be delivered to the company for registration. The company will need to record the transfer in its register of members or give notice to the transferee of its refusal to transfer the shares explaining why. Uncertificated shares can be transferred through the procedures of the Central Depository of the Cyprus Stock Exchange. The transfer of the membership in a company limited by guarantee is subject to the company s articles of association. Partnership The transfer of an interest in a partnership is subject to the provisions of the partnership agreement. A partnership will be dissolved if one of the partners gave notice of his intention to leave the partnership, unless the partnership agreement provides that this would not result in the dissolution of the partnership and specifies the procedure for transferring the interest of the departing partner. (iii) Private companies must have at least one member whereas public companies must have at least 7 members. A partnership must have at least two partners. 7. Is there a minimum capitalization? A public company must have a minimum share capital of approximately Euro 26,000 whereas there is no minimum amount of share capital requirement for private companies. Partnerships have no minimum capitalization requirements. 8. Is there a security that can be issued to the public? Public companies may offer their securities to the public. Private companies are not allowed to offer securities to the public. Partnerships do not issue securities to the public. 9. Can the form incur debt, or grant security for debt? Companies and partnerships may incur debts as well as grant security over their assets in order to secure the debt. The members of a company are not liable for the debts of the company, whereas the partners of a general partnership are liable for the debts of the partnership. Page 68

70 10. What is the duration of the form? Can it be renewed? Private and Public Companies Subject to any contrary provisions in the Articles of Association, a company does not have a fixed term. A company will continue its existence unless struck off the companies register or wound up. Once a company has been dissolved and/or struck off the register of companies, it may only be restored by order of the Court or in limited circumstances, on application by a former director or member. Partnership The duration of a partnership will depend on the terms of the partnership agreement. Partnerships are set up for a fixed term and will be dissolved once the term expires, or for an indefinite term and will dissolve by notice given by one of the partners (unless the partnership agreement specifies otherwise see question 6(ii) above). The term of the partnership may be fixed for a specific activity or business and will come to an end when that activity or business will cease or it may come to an end by the bankruptcy or death of one of the partners (again subject to the provisions of the partnership agreement). 11. Describe the process, customary time period and approximate cost of establishing the form. Private and Public companies The formation of a new company requires the filling with the Cyprus Registrar of Companies of forms HE1, HE2 and HE3 together with the Memorandum and Articles of Association of the company. If the company is a public company it will also need to file form HE5. The average time required for the incorporation is 8 to 10 business days although the Cyprus Registrar of Companies has in the past few years launched a service whereby the company may be incorporated within the same date. The cost will depend on the amount of the share capital of the company (as there is a capital duty of 0.6% payable on the amount of the authorized share capital of the company). For example, a company with a share capital of Euro 2,000 would incur approximately Euro 800 as incorporation expenses. This does not include fees of local professionals undertaking the service of incorporation. Such fees vary. Alternative to incorporating a new company, there are opportunities to acquire an existing dormant company (shelf company) with standard articles of association. In such a case, it will be necessary to complete the transfer of the shares from the nominee members/subscribers to the new members of the company and if required, to change the composition of the Board of Directors. The changes can be completed within a day or two and the cost will be similar to the one for the incorporation of a new company. Partnerships A partnership can be incorporated by filing with the Cyprus Registrar of Companies the relevant form O.E. 1 and paying the relevant fee. The time taken to incorporate a partnership is similar as that for a company. The incorporation expenses will be approximately Euro 160. This does not include fees of local professionals undertaking the service of incorporation and/or drafting a partnership agreement (if requested). Such fees vary. Page 69

71 12. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? There is no such requirement under Cypriot legislation. 13. For what taxes is the form liable? Private and Public companies Companies are subject to: (a) 10% corporate tax on their worldwide profits; (b) 15% special defense contribution on interest received from activities which are not from the ordinary business of the company; (c) 3% special defense contribution on rents received; (d) 20% special defense contribution on dividends received from subsidiaries which are incorporated outside Cyprus, provided that more than 50% of the activities of the subsidiary relate to investment activities and the tax rate of the country where the subsidiary if incorporated is less then 5%. If the company is not a Cyprus tax resident but operates in Cyprus through a permanent establishment, the company will have to pay Cyprus corporate tax only on the profits attributable to the Cyprus permanent establishment. Corporate tax is payable in three installments during the tax year (1st August, 30th September and 31st December) and a final balance payment is payable by 31 December of the year following the tax year. A company which makes chargeable supplies in excess of Euro per year in any 12 months period will be required to register with VAT and must charge VAT on provision of goods and services. Currently the standard VAT rate is 15%. If a company has employees, it will be obliged to deduct income tax and social security contributions from the employees gross salary under the Pay-As-You-Earn system. In addition, the company will have to pay social security contributions for the employee. Partnerships For tax purposes a partnership is treated as transparent so that any tax liability arising from the partnership s business is assessed not against the partnership as a body, but against each of the members of the partnership. VAT, PAYE and employer s social security contributions apply to the partnerships in the same way as they apply to companies. 14. What is the tax treatment of payments to foreign owners? Pursuant to Cyprus legislation, there is no withholding tax on payment of dividends, interest or royalties. This applies for payments from companies and partnerships to non-cyprus tax resident individuals and companies. Page 70

72 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? There is no special or adverse tax treatment for foreign owners which is different from that of Cyprus tax resident shareholders. Contact Information Stelios Hadjilambris s.hadjilambris@chrysostomides.com.cy George Ioannou g.ioannou@chrysostomides.com.cy Dr. K. Chrysostomides & Co LLC 1, Lampousas Street 1095 Nicosia, Cyprus Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 71

73 Issues Relating to Organizational Forms and Taxation Denmark Prepared by Lex Mundi member firm Kromann Reumert 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. Various forms of organization in which one may choose to operate a business are available in Denmark such as public and private limited company, general partnership, limited partnership, limited share partnership, shipping partnership, cooperative, limited cooperative and foundation. In addition, association, sole proprietorship, European company and branch of a foreign company are available options. Each form of organization may offer a number of advantages and disadvantages compared with other forms of organization. Given the breadth of the questions below, our response will be restricted to the most common and/or relevant forms. a. Limited companies Public limited companies (aktieselskab or A/S) and private limited companies (anpartselskab or ApS) are collectively referred to as limited liability companies. Public and private limited companies are governed by one single Act, the Danish Act on Public and Private Limited Companies ("the Companies Act"). In limited companies, the capital is divided into shares. Private limited companies are prohibited from offering to issue its shares to the public. The shareholders are only liable to the extent of their contribution to the company, which also applies to shareholders in a public limited company. The main advantage of a public limited company lies in the fact that the shares may be offered to the public. As a consequence, the requirements to public limited companies are on certain points more restrictive, inter alia, public limited companies have to deal with higher minimum capital requirements. b. Partnerships All partners forming a general partnership (interessentskab or I/S) will be personally, jointly and severally liable for the company s debts. No minimum capital is required. Limited partnerships (kommanditselskab or K/S) are a variation of the general partnership consisting of general partners and a special class/type of partners: the limited partner. Contrary to general partners, limited partners are not subject to personal liability - and therefore enjoy a very restricted influence on corporate matters. Apart from the rules in the Danish Act on Business Enterprises there is no regulation of general or limited partnerships. Therefore, it is important that the partners set down their inter-partes relationship in the partnership agreement. A limited share partnership (partnerselskab or P/S) combines a limited partnership and a public limited company. Its capital is divided into shares representing the contributions made by the general partners and the limited partners. The Companies Act applies to this form, but general partners are personally liable for corporate debts. Page 72

74 c. Cooperatives The rules of the cooperative plays an important role, since no comprehensive regulation of cooperatives exists under Danish law. The purpose of a cooperative (andelsselskab) is to promote the common interests of its members through their participation in the cooperative as customers, suppliers etc. There are about cooperatives in Denmark, and several large companies, mainly in the food sector, are incorporated as cooperatives. A cooperative is formed for the benefit of its members and legally all the rights in the cooperative are based on the membership. Typically, the rules of the cooperative stipulate that only the cooperative is liable for the debts of the cooperative. As a result, a limited liability cooperative (andelsselskab med be.g.rænset ansvar or A.M.B.A.) has been formed. Whether or not the members of the cooperative are personally liable, no minimum capital is required, which is remarkable. d. Branch A branch (Filial) is a part of a foreign company that carries on business or trade from a permanent place of business located in Denmark on behalf of the parent company. A branch is not considered an independent legal entity under Danish law. The parent company is liable for all obligations incurred through the branch. Foreign companies organized as limited companies and partnerships, domiciled in an EU- or EEAcountry are allowed open a branch in Denmark. Other limited companies and partnerships, domiciled in a country outside the EU/EEA, may open a branch, provided that (i) they possess this right under an international agreement (ii), the Danish Commerce and Companies Agency ("DCCA") estimates that Danish companies are given similar rights in the country in question, or (iii) the DCCA decides nonetheless to grant the permission. 2. Are there attributes of the form that you consider unique to your jurisdiction? A Limited company enjoys certain freedom of choice with respect to their management structure. A limited company may choose between three different management structures. Firstly, a classic Danish/Nordic model according to which the limited liability company is managed by a board of directors and an executive board responsible for the day-to-day management of the company. Secondly, a common law inspired model, where the company board of directors consists of executive and non-executive directors. Thirdly, a German inspired model where the limited company is managed by an executive board. The executive board is overseen by a supervisory board. As indicated, none of the management structures as such are unusual in a European context, but the freedom of choice is unique. The Companies Act permits several share classes that may carry different rights. The division into share classes must be specified in the articles of association and may relate to both voting rights and financial rights. For example, the articles of association may provide that certain shares carry no voting rights/decreased voting rights/increased voting rights or that certain shares has preference to dividend. 3. Describe the management and governance structure for each organizational form. a. Limited companies Shareholders of a limited company exercise their power of decision at the general meeting. The general meeting is the highest authority of the company and the board of directors and the management board are, with a very few exceptions, bound to implement the decisions made at general meetings. Unless so required in the company's article of association, there is no requirement for a minimum number of shareholders to take part in a general meeting; the only requirement is that Page 73

75 it should be lawfully convened. Normal resolutions presented at the general meeting can be passed by a simple majority of votes. In order to protect minority interests, a qualified majority of votes is required to pass resolutions of a more vital character, including amendments to the articles of association. Further, an important minority protection comes from the general provision on abuse of powers in the Companies Act. According to this provision, the general meeting may not pass a resolution, provided that it is obvious that the resolution is likely to give certain shareholders or others an undue advantage over other shareholders or the company. As mentioned in question 2, a limited company may choose between different management structures: A classic Danish/Nordic system where the limited liability company is managed by a board of directors responsible for the company s policies in relation to business strate.g.y, organization, accounting and finance. The board of directors must appoint an executive board to be responsible for the day-to-day management of the company. Day-to-day management does not include decisions of an unusual nature or of major important, having regard to the circumstances of the limited liability company. Private limited companies are allowed, under certain circumstances, to operate solely with a management board. A common law inspired one-tier system very similar to the Danish/Nordic system, but where the limited liability company is managed by a board of directors consisting of both executive and nonexecutive directors. In public limited companies, the board of directors must have at least three members, and the majority of its members must be non-executive directors. Additionally, no executive officer may be chairman or vice-chairman of the board of directors. A German inspired Two-Tier system where the limited liability company is managed by an executive board. In public limited companies, the executive board must be appointed by a supervisory board. No member of the executive board may be a member of the supervisory board. The supervisory board of a public limited company must comprise at least three members. The supervisory board has no authority to determine the company s policies in relation to business strate.g.y, organization, accounting and finance, as the main function of the supervisory board is to oversee the management board. b. Partnerships The participation in the management of a general partnership is not only a right for the partners, it is also an obligation. The partnership meeting is the supreme authority of the company. The nonmandatory rule is that the partners must concur in all decisions, except for trivial or absolutely necessary decisions, e.g. decisions ordered by the law. The partnership agreement may stipulate which decisions can be made by an individual partner (dele.g.ation). A general partnership is allowed to have a managing director, which may be a partner or another person. The general partners of a limited partnership are responsible for both the internal and external affairs of the company. The limited partners do not prima facie have any veto right over decisions made by the general partners. The general partners enjoy an influence comparable to a board of directors and an executive board in a limited company. Limited partnerships may establish a general meeting - minimum on a yearly basis - and if so, the limited partners are allowed to vote in accordance with their share of the capital. At the general meeting most matters are decided by a simple majority of votes, including amendments to the partnership agreement. However, some (vital) decisions require the concurrence of all general partners. Limited share partnerships are identical with limited companies with respect to management structure, apart from one exception; the articles of association must provide the general partners with a special influence, since only general partners are personally liable for the company s debt. This influence might be the right to appoint their own members of the board of directors or something else. Page 74

76 c. Cooperatives The management structure of cooperatives depends on the rules of the cooperative. Normally, the management structure is based on a general meeting, a board of directors (elected by the general meeting) and an executive board (appointed by the board of directors). The members of the cooperative exercise their power of decision at the general meeting. According to the non-mandatory rule, every member has one vote at the general meeting, regardless of capital contribution or trade with the company. At the general meeting most decisions are taken by a simple majority of votes, but the articles of association of the cooperative may stipulate otherwise. d. Branch A branch of a foreign company must be managed by one or more managers. 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? In general, no such requirements/restrictions exist. However, this may not reflect the situation within certain very specific areas, which shall not be mentioned here. 5. Describe the extent to which management and owners are exposed to liability. a. Limited companies The shareholders of public and private limited companies have no personal liability for the obligations of the company other than to the extent they have invested in the company. A shareholder may, however, be held liable for damages which he/she, in the position as a member of the general meeting, has caused to the company, other shareholders or a third party. It is recognized under Danish law that a shareholder is not necessarily a skilled businessman or an active participant in the affairs of the company, and the fact that a shareholder is only liable for gross negligence and intention reflects this. The management of a company has a duty to conduct the business of the company properly (the duty of care) and in accordance with the articles of association and with the law in general. Members of the management who have caused damage to the company, the shareholders or a third party can be liable to pay damages. The general liability of directors in private limited companies is based on the general rule of negligence as under- stood in Denmark. This implies that where a tortfeasor has acted objectively in an irresponsible manner, and if the irresponsible conduct may subjectively be ascribed to the person in question as deliberate or negligent conduct, the standard for liability has been met. Members of the management do not incur liability collectively but on an individual basis. Anyone, who has a claim for damages, is free to sue members of the management. The general meeting can decide, by a simple majority of votes, whether the company shall sue members of the management. In Denmark, it has become common for larger and professionally run companies to take out a liability insurance for the board of directors as well as for the management. b. Partnerships The partners of a general partnership and general partners of a limited partnership are personally, jointly and severally liable for the company's debt. Limited partners of a limited partnership are not subject to personal liability. The general partners of a limited share partnership are personally liable for corporate debts; the remaining (limited) partners are liable towards the company to the extent of their contribution. Page 75

77 A partner (or another person) of a general and limited partnership involved in the exercise of powers can be liable for damages, through simple negligence, to the company, another partner or a third party. If an individual partner has acted negligently, the partnership will collectively incur liability with regard to a third party, provided that the responsible partner has acted within his competence. The shareholders and/or the management of a limited share partnership are subject to the rules governing liability for the shareholders and/or the management of a limited company. c. Cooperatives Whether the members of a cooperative are liable for corporate debts depends on if a limited liability cooperative has been formed, which is typically the case. Provided that a limited liability cooperative has not been formed, the members of the cooperative are personally, jointly and severally liable for corporate debts. However, the liability of the members is also secondary, meaning that a creditor must sue the cooperative before suing the members. Only if it can be established that the cooperative is not able to fulfill its obligations, a claim can be made towards the members of the cooperative. The liability of the members and/or the management of a cooperative correspond to the liability imposed on the shareholders and/or the management of a limited company, respectively. d. Branch As described in question 1, litra d, a branch is not considered an independent legal entity under Danish law. Consequently, the parent company is liable for all obligations incurred through the branch. The management of a branch is liable for damages caused, by simple negligence, to the branch or a third party. 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? a. Limited companies i. The ownership interest in a limited company is represented by shares, and the company is required to set up a register of shareholders. In limited companies all shares carry equal rights, unless otherwise specified in the articles of association (please refer to question 2). ii. Shares may generally be transferred without restrictions. However, the transferability of the shares may be restricted in the articles of association through pre-emption rights, consent to sale-clauses, provisions on redemption etc. Provided that a shareholder holds more than 9/10 of the share capital and a proportionate share of the voting rights in the company, the shareholder may decide to buy out the remaining minority shareholders in order to obtain absolute control over the company. If the offered redemption price is challenged by one or more of the minority shareholder, the courts will appoint independent experts to assess the accurate redemption price. iii. A limited company must have at least one shareholder. b. Partnerships i. As a non-mandatory rule, the partners of a general partnership (and general partners of a limited partnership) will have equal ownership interests in the company and loss/profit are also distributed equally between them. The distribution of loss/profit of a limited partnership between general and limited partners should be specified in the partnership Page 76

78 agreement. Loss/profit is distributed between the limited partners in proportion to their contribution, unless anything else is agreed. In limited share partnerships the articles of association must specify general and limited partners ownership interests and distribution of loss/profit between them. ii. iii. Shares of a general or limited partnership are not transferable, unless otherwise agreed in the partnership agreement or unless all the partners (limited partners included) give their consent to the transfer. Something similar applies to general partners of a limited share partnership. The permission to share transfer shall be granted by the general meeting. A limited partner may transfer a share without restrictions, but other agreements may have been made. A partnership must have at least two partners. The existence of a limited partnership or a limited share partnership requires at least one general partner and one limited partner. The partners can either be natural persons or organizations, such as other companies. c. Cooperatives i. Provided that no other arrangements have been made, loss/profit is distributed between the members on the basis of their trade with the company in the accounting period. ii. iii. As a general rule, the memberships of a cooperative are not transferable without the permission of the company. However, the rules of the cooperative may specify otherwise. A cooperative must have at least two members, who can be natural persons as well as organizations. 7. Is there a minimum capitalization? The minimum capital of a public limited company is DKK 500,000 (approx. EUR 67,000) and DKK 80,000 (approx. EUR 11,000) for a private limited company. An amount equal to 25 % of the capital, but not less than DKK 80,000, must be paid up. In its articles of association, a company may decide that a higher part of the share capital must be paid up. The determination of the lower limit of DKK 80,000 corresponds to the minimum capital requirement for private limited companies. The Companies Act contains rules to ensure that contributions of assets other than cash (contribution in kind) - e.g. securities or real property - are of a value corresponding to that stated by the promoter. There is no required minimum capital for general partnerships or limited partnerships, nor is any capital contribution required when establishing cooperatives or limited cooperatives. Limited share partnerships are subject to public limited company regulations and therefore the capital requirements for public limited companies also apply. No minimum capital is required when establishing a branch. 8. Is there a security that can be issued to the public? The shares or other securities of a public limited company (or a limited share partnership) can be admitted to public trading through the Danish stock market. The Danish Securities Trading Act provides for a variety of securities or instruments that can be issued to public trading, such as bonds, derivates and money market instruments. Most trading is done on the regulated market Nasdaq OMX Copenhagen. In order to have securities admitted for listing on Nasdaq OMX Copenhagen, the issuer of the securities must submit an application to the Danish Financial Supervisory Authority ("DFSA"). An authorization to the issuer will be granted by the DFSA, provided that a number of statutory requirements are met. The most notable requirements are: The securities must be of interest to the investors. Page 77

79 The securities must be negotiable. At least 25 % of the shares within a listed class of shares must be offered to the public. The securities must have an estimated market value of an amount equal to at least EUR An initial public offering exceeding EUR must be accompanied by a complete prospectus. In general, initial offerings between EUR and must also be accompanied by a prospectus, but the prospectus is subject to less extensive require-ments. In addition to Nasdaq OMX Copenhagen, a regulated market - GXG Markets A/S - and an alternative marketplace - First North - have been established. First North is attractive to small and medium-sized companies seeking to raise capital. The companies on First North will meet with less administrative burdens than on the regulated markets due to a more flexible regulation. To have securities admitted to trade on First North, the issuer must complies with some requirements, among others: The securities must be of general interest to the public, which means that there must be a sufficient number of shareholders holding shares with a value of at least EUR 500, and at least 10 % of such shares must be held by the general public. The shares must be negotiable. All shares within the relevant class of shares must be admitted to trading on First North. The share price must, at the time of admission, be at least EUR An issuer must provide First North with a company description or an approved prospectus. The requirements for a company description are less comprehensive compared to the requirements applying to prospectuses. 9. Can the form incur debt, or grant security for debt? Each of the organizational forms can incur debts and grant security for debts. However, since a branch is not an independent legal person, the parent company of the branch is ultimately responsible for the debts that are undertaken in the name of the branch. In general, a loan should be taken on arms-length market terms to avoid alle.g.ations on undue distribution of the company s assets, which can lead to liability to pay damages for those responsible for the loan-taking. One should note that according to the Companies Act a limited company or a limited share partnership are not allowed to acquire their own shares, unless they are fully paid up by the funds that may be distributed as extraordinary dividends. An acquisition of a company s own shares must be approved by the general meeting. Such approval may be given for a specified time, which cannot exceed five years. 10. What is the duration of the form? Can it be renewed? a. Limited companies Limited companies do not have a fixed duration, unless the articles of association specify otherwise. The general meeting can decide on placing the company into (voluntary) liquidation. The decision to liquidate a company requires same majority of votes as required to amend the articles of association, which are at least two-thirds of the votes cast as well as at least two-thirds of the share capital represented at the general meeting. However, when dissolution is prescribed by the limited company s articles of association, liquidation is decided only by a simple majority of votes. Dissolution by declaration, merger and division are other possible ways to wind up a limited company voluntarily. A limited company can also be liquidated involuntary as a result of insolvency or compulsory liquidation if, inter alia, it does not satisfy the minimum capital requirements. Page 78

80 b. Partnerships The duration of a general partnership and a limited partnership are perpetual, but it can be specified in the partnership agreement that the company has certain duration or that it shall be dissolved under certain pre-determined circumstances or conditions. Such provisions are not unusual. A partnership may also come to an end on, for example, the death or bankruptcy of a partner, although that partners exclusion from the partnership can also be the result, depending on the circumstances. Under normal circumstances the partners decide on placing the company into liquidation. Provided that the assets of the partnership are sufficient to satisfy the claims of the creditors, the remaining assets are distributed to the partners and the partnership is dissolved. In case the creditors are not fully satisfied, the general partners are personally liable for the remaining debts of the company. The duration of a limited share partnership is perpetual, unless the articles of association specifies otherwise. The general partners can be excluded from the limited share partnership under the same conditions as partners of general partnerships and limited partnerships. The limited partners cannot be excluded from the company. Liquidation of a limited share partnership requires a general meeting resolution, which must be passed by the same majority of votes as required to amend the articles of association (and probably the consent of the general partners). c. Cooperatives The duration of a cooperative is perpetual, unless the rules of the cooperative specify otherwise. The cooperative can be dissolved through liquidation proceedings. The non-mandatory rule is that liquidation entails the same majority of votes at the general meeting as required to amend the rules of the cooperative. The remaining assets, after the creditors have been satisfied, are distributed between the members in proportion to their trade with the company. d. Branch A branch does not have a fixed duration. 11. Describe the process, customary time period and approximate cost of establishing the form. The registration fee charged by the DCCA for the establishment is DKK 2,150 (approx. EUR 290) for limited companies, partnerships, cooperatives or branches. Registration may happen online - via the Agency's online registration system, Webre.g. - to a reduced fee of DKK 670 (approx. EUR 90). Registration online requires the founder to be a Danish legal or natural person. If registration is made online, the company may be established in a matter of minutes, provided the required capital has been paid up. The handling time of a written application for registration at the DCCA is up to six weeks. a. Limited companies The following steps must be taken in order to incorporate a limited company: The promoters must sign a memorandum of association, which include the articles of association of the limited company and any subscription for shares. At least 25 % of the capital, but not less than DKK , must be paid up. An application for registration must be submitted to the DCCA within two weeks after the date of signing of the memorandum of association (this can be done online, cf. the above). Page 79

81 b. Partnerships General and limited partnerships are incorporated as soon as a partnership agreement has been concluded. The partnership agreement is typically made in written form, but may also be concluded orally or through silent agreement (with a substantial risk of evidential problems). General and limited partnerships consisting of merely limited companies are required to file a start-up notification with the DCCA, although registration is not a prerequisite for the partnership s existence as opposted to e.g. limited companies. Other general and limited partnerships are not required (or allowed) to file a startup notification before the start of operations. Limited share partnerships must observe the same incorporation procedure as limited companies. c. Cooperatives In cooperatives where the members are not personally liable for the company s debts, a written incorporation agreement shall be concluded, and a management elected, in accordance with the incorporation agreement. More extensive requirements apply to cooperatives with limited liability. In addition to the previous mentioned requirements, an application for registration must be submitted to the DCCA within two weeks after the date of signing of the incorporation agreement. A cooperative with limited liability comes into existence through registration. d. Branch The parent company of a branch must submit an application for registration to the DCCA before the branch starts its operations in Denmark. 12. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? No. 13. For what taxes is the form liable? 14. What is the tax treatment of payments to foreign owners? 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? Contact Information Michael Nørremark mno@kromannreumert.com Jonatan Strenov sju@kromannreumert.com Morten Schaumburg-Müller msb@kromannreumert.com Kromann Reumert Sundkrogsgade Copenhagen, Denmark Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 80

82 Issues Relating to Organizational Forms and Taxation Egypt Prepared by Lex Mundi member firm Shalakany law office 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. The most common legal forms used by foreign investors in Egypt are joint stock companies and limited liability companies. A joint stock company may be a closed company or a listed company. It may offer its shares for public subscription, subject to obtaining the necessary approvals. The name of a JSC must indicate its activity or its object. An Egyptian limited liability company is a closed company. Therefore, the shares of an LLC cannot be traded on the Stock Exchange. Consequently, an LLC cannot issue bonds or other financial debentures that are offered to the public. The name of an LLC is usually derived from its object. The number of shareholders required for the establishment of a joint stock company cannot be less than three. There is no minimum Egyptian shareholding required for the establishment of a joint stock company. The number of partners required for the establishment of an LLC cannot be less than two and cannot exceed fifty. All partners may be foreigners. The minimum issued capital required in a joint stock company is LE 250,000 of which only 10% must be paid at the time of incorporation, to be increased to 25% within three months, and the remaining amount of the nominal value of the shares is to be paid up within five years. There is no minimum capital in a limited liability company. The capital of the limited liability company must be fully paid up prior to incorporation. Unlike a joint stock company, an LLC is precluded from activities in certain limited areas, i.e. insurance, banking, savings, receiving deposits or investing funds on behalf of others. Apart from the above-mentioned areas of activity, an LLC can carry out commercial, industrial or service activities similar to other business entities, subject only to the general limitations of public policy. A JSC is managed by a Board of Directors composed of at least three members to be elected by the General Shareholders Meeting. Legal entities (Corporations) are permitted to act as directors, provided that an individual is appointed as representative to act on its behalf on the Board. Management of an LLC may be assigned to one or more managers; at least one manager must be an Egyptian national. There is no Board of Directors in an LLC. A JSC is required to distribute to employees at least 10% of the cash dividends distributed to the shareholders, subject to a maximum of the total annual salaries of the employees. As long as the capital of an LLC is below LE 250,000, there is no obligation to distribute profits to employees as profit sharing. Therefore, it is only when the capital of the company reaches LE 250,000, that at least 10% of the cash dividends distributed to the shareholders, subject to a maximum of the total annual salaries of the employees, is distributed as profit sharing. Page 81

83 The founders of a JSC may not transfer their shares except after the lapse of two fiscal years from the incorporation date, except amongst thems 2. Are there attributes of the form that you consider unique to your jurisdiction? No special attributes in the forms of organizations exist in Egypt. 3. Describe the management and governance structure for each organizational form. A joint stock company has a Board of Directors having the broadest powers to manage the company within the limits determined by the company's statutes and the resolutions of the General Shareholders Meeting. A limited liability company does not have a Board of Directors. It is run by one or more managers, who are appointed by the Shareholders to be responsible for the day to day management of the company. It must, however, have at least one Egyptian manager. 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? The shareholders and Board Members of a joint stock company may all be non- Egyptians. In a limited liability company, there must be at least one Egyptian manager; however the shareholders may all be foreigners. Egyptian Law does not oblige foreign owners or Board Members or managers to be resident in Egypt. However, if such foreigner wishes to stay in Egypt in order to carry out the scope of work empowered to him/her, he/she should obtain a work permit and residence visa. Moreover, foreign owners may practice all kinds of activities, except for a few restricted activities such as commercial agency, import of finished products for resale, and ownership of agricultural land. 5. Describe the extent to which management and owners are exposed to liability. The liability of each of the shareholders is limited to the value of their shares which he owns in the company. The civil liability of Managers depends on the decisions taken by the General Shareholders Meeting in this regard. 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? Each Shareholder shall represent and shall be liable up to the value of the shares which he owns in the company. The founders of a Joint Stock Company may not transfer their shares until the lapse of two fiscal years from the incorporation date, except amongst themselves, while partners in an LLC may transfer their shares at any time after the incorporation of the company. There is by law a right of first refusal incorporated into the Articles of Incorporation of a limited liability company, granting existing shareholders priority in purchasing new shares or shares being sold by other shareholders, while this is optional in the case of a joint stock company. Regarding the number of owners, the number of shareholders in a joint Stock Company cannot be less than three, with no maximum limit, while the number of Shareholders in a Limited Liability Company must be a minimum of two and a maximum of Is there a minimum capitalization? There is no minimum capital in a limited liability company, while the minimum capital of a joint stock company is L.E. 250, Page 82

84 The capital of the limited liability company must be fully paid up prior to incorporation; while in the case of a joint stock company, only 10% of the total capital must be deposited in an Egyptian Bank prior to incorporation. Fifteen percent of the total capital has to be deposited within three months thereafter to complete the required 25%. The balance may be paid within a maximum of 5 years. 8. Is there a security that can be issued to the public? A limited liability company is not listed on any stock exchange and may not issue bonds or other financial debentures that could be offered to the public or converted into equity. Joint stock companies, on the other hand, may list their shares on the Stock Exchange and may offer their shares for public subscription, issue bonds and convertible securities and offer them to the public, after obtaining the necessary regulatory approvals which require that certain conditions be set. 9. Can the form incur debt, or grant security for debt? Both joint stock companies and limited liability companies can do so. 10. What is the duration of the form? Can it be renewed? There is no fixed term for the company. However, in practice, the term of the Company is usually (25) years starting from the date of its registration in the Commercial Registry, which can be renewed after its termination. The maximum term is 50 years (renewable). The company cannot have an indefinite term. 11. Describe the process, customary time period and approximate cost of establishing the form. The following documents must be submitted to the General Authority for Investment: a) A certified copy of the Articles of Incorporation of each of the foreign companies which are to become shareholders in the new company, legalized by an Egyptian Consulate. b) Board resolutions from each of the new company s Egyptian corporate shareholders approving their entry into the company. c) Copies of the passports of all foreign directors/managers of the new company and of the identity card of all Egyptian directors/managers of the new company. d) A declaration from the company s auditor confirming acceptance of his appointment as auditor of the company. e) Certificate from the auditor stating that he has the right to sign on financial statements of corporations from the Accountants and Auditors Office of the Ministry of Finance. f) A duly notarized Power of Attorney from each shareholder, legalized by an Egyptian Consulate, empowering a law office to act on their behalf in all matters related to the new company s incorporation. g) A Bank certificate from an approved bank in Egypt confirming deposit of the company s issued capital (in full in the case of a limited liability company). It is to be noted that the capital should be commensurate with the new company s objects. h) A copy of the new company s Articles of Incorporation. i) A certificate from the Commercial registryconfirming that the company s name is not confusingly similar to any other name already registered. Page 83

85 j) The document evidencing the existence of the company s premises (i.e. lease agreement) or the land where it intends to start its project (Please note that the date on the lease agreement should be validated before the competent Notary Public Office in Egypt). The Governmental Fees and expenses payable to the authorities for incorporation of a limited liability company or joint stock company under Law 159/1981: a) 0.001% of the issued capital (with a minimum of LE 100 and a maximum of LE1000): incorporation fees. b) 0.001% of the issued capital (with a minimum of LE 1000 and a maximum of LE 10,000): Service charges. c) Fees to the Traders Union: LE 125 up to LE 250 if the issued capital is LE 500,000 or more. d) LE 40: for two copies of the model incorporation contract. e) 0.25% of the issued capital (with a maximum of LE 1000): registration fees at registryof Deeds. f) 0.005% of the issued capital (with a maximum of LE 5000): fees to the Bar Association. g) 0.002% of the paid up issued capital: to the Chamber of Commerce with a minimum of LE 24 and a maximum of LE 2000 (to be paid on a yearly basis). h) 0.005% of the issued capital (with a maximum of L.E 10,000) in the case of a joint stock company only, as fees to the Capital Market Authority. i) Publication Fees: LE 2000 for 100 Arabic copies orle 4000 for 100 bilingual (Arabic and English) copies of the Articles 12. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? There is no requirement for the government to be a part of the project or to receive any profit other than income taxes. 13. For what taxes is the form liable? They are subject to corporate tax at a rate of 20% of the net annual profit. 14. What is the tax treatment of payments to foreign owners? Dividends that are distributed to shareholders are exempt from taxes. However, payments that are paid to managers of a limited liability company or board members in a joint stock company are subject to income tax (maximum rate 20%). Page 84

86 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? No. Contact Information Nihal Madkour Nihal.Nasser@shalakany.com Shalakany Law Office 12 El Marashly Street Cairo 11211, Egypt Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 85

87 Issues Relating to Organizational Forms and Taxation Guatemala Prepared by Lex Mundi member firm Mayora & Mayora, S.C. 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. a) Sociedad Anónima (company by shares). This is, by far, the most used type of legal entity. b) Sociedad Colectiva (unlimited liability partnership). In this type of legal entity, the members respond with their own patrimony for the obligations for the entity. It is very rare to find a company incorporated under this model. c) Sociedad de Responsabilidad Limitada (Limited Liability Partnership). This is the second most used type of legal entity. The maximum number of members is 20. d) Sociedad en Comandita Simple (Limited/Unlimited Liability Partnership). In this type of entity, two different kinds of partners co-exist: the comanditados, respond with their personal patrimony for the obligations of the entity. And the comanditarios, are liable only for the amount of their contributions to the entity, but they are not allowed to perform as administrators of the company. It is very rare to find a company incorporated under this model. e) Sociedad en Comandita por Acciones (company by shares). In this type of entity, two different kinds of shareholders co-exist: the comanditados, respond with their personal patrimony for the obligations of the entity. And the comanditarios, are liable only for the amount of their contributions to the entity, but they are not allowed to perform as administrators of the company. It is very rare to find a company incorporated under this model. 2. Are there attributes of the form that you consider unique to your jurisdiction? No. 3. Describe the management and governance structure for each organizational form. In the companies by shares: a) The Shareholders Meeting; b) The Board of Directors / Sole Administrator; c) The General Manager. In the partnerships: a) The Member Meeting; b) The Board of Directors; c) The General Manager. 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? In general, there are no residency requirements for owners. The General Manager is considered an employee by law, therefore, in case of foreign managers, they have to apply and obtain the Residence and Work Permit. Shareholders, Member, members of the Board of Directors or Sole Page 86

88 Administrators are not considered employees; therefore no Residence or Work permits are required for them. According to the law, for certain specific activities being Guatemalan is required (i.e. Mining activities, to finance political organizations, to own Real Estate in the sea shores or in the frontiers). But those of Guatemalan companies can be owned partially/totally by foreign entities/individuals. 5. Describe the extent to which management and owners are exposed to liability. Managers are liable for the certain felonies that according to the law can be committed by the legal entities (i.e. tax related felonies, environmental related felonies). Managers are liable for their performing of the administrative matters of the entity. The owners are liable to the amount of their contributions, or in an unlimited way, subject to the type of entity, and the type of partner/shareholder they are, in the terms of the description made on number 1 above. 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? In the companies by shares: i. by shares (bearer or nominative shares), represented by Share Certificates; ii. yes, shares are transferable; iii. at least two shareholders are required according to the law. In the partnerships: i. by participations or equity, according to the content of the Articles of Incorporation; ii. yes, equity is transferable, but consent of the other partners is required; iii. at least two members are required according to the law. 7. Is there a minimum capitalization? The minimum capitalization in Guatemala is GTQ5, (approximately US$625.00). 8. Is there a security that can be issued to the public? Many different types of securities can be issued to the public, but a previous authorization of the Administrative Authority is required. 9. Can the form incur debt, or grant security for debt? Yes. Companies are allowed to incur debt, and they can grant securities in exchange. If the nature of the debt is public, or if the securities are to be set on public offering, then the previous authorization of the Administrative Authority is required. 10. What is the duration of the form? Can it be renewed? The duration of the form is subject to the will of the funding shareholders/ partners. The usual is to incorporate the entities for an unlimited period of time. 11. Describe the process, customary time period and approximate cost of establishing the form. Process and expected time: a) execution of the Articles of Incorporation. One day; b) Provisional registration before the Mercantile Registry. 4 to 6 working days. c) Publication of the Incorporation Notice (including a mandatory 8 working day period to plaint any opposition), issued by the Mercantile Registry after the provisional registration. 11 working days. Page 87

89 d) Application for the definite registration, and issuance of the Entity License. 3 to five working days. Legal fees: around US$1, Costs: around US$ Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? No, there are not. 13. For what taxes is the form liable? a) Income taxes; b) Value Added Tax; 14. What is the tax treatment of payments to foreign owners? Payments to foreign owners are taxed equally for local residents and foreign owners. A general 3% tax applies to the dividend payments. 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? There are no differences in the tax treatment applicable between the local residents and foreign owners. Contact Information Eduardo Mayora emayora@mayora-mayora.com Mayora & Mayora, S.C. 15 Calle 1-04 Zona 10 Edificio Céntrica Plaza 3 Nivel, Oficina 301 Guatemala City 01010, Guatemala Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 88

90 Issues Relating to Organizational Forms and Taxation Hungary Prepared by Lex Mundi member firm Nagy és Trócsányi 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. As of July 1, 2006 business corporations are regulated by Act IV of 2006 (New Business Corporation Act). Hungary has implemented 2157/2001/EC Regulation and 2001/86/EC Directive regarding SE, relevant Hungarian Act is Act XLV of 2004 on Societas Europea, which is being effective since Oct. 8, Hungary also implemented 1435/2003/EC Council Regulation and 2003/72/EC Council Directive regarding SCE, relevant Hungarian Act is Act LXIX of 2006 on European Cooperative Societies, which is being effective since Aug. 18, Hungarian legal notion of business (or translated literally: economic) corporations, as a collective term, similar to German Handelsgesellschaft, covers two groups of business entities. One substantially corresponds to American for-profit corporations, the other to for-profit partnerships. Corporation-like business corporations are: (1) Corporations Limited by Shares, (2) Limited Liability Company, (3) Joint Enterprise, (4) Business Associations. Partnership-like business corporations are: (5) General-Partnership and (6) Limited Partnership. Investors, domestic or foreign, private, corporate or public, may, in general, equally form and participate in corporations. As of January 1, 1991 acquisition of foreign majority or unanimous foreign ownership in corporation is not subject of any approval, permission or license, not even that of exchange control. There are no differences between public and private corporations. Corporation may be formed for any lawful business purpose or purposes. Purposes, i.e. scope of activity, for which corporation is formed, must appear in articles of incorporation. Re.g.ardless of what is contained in the articles of incorporation, the legal capacity of corporation is unlimited (no ultra vires liability) i.e., a contract beyond scope of stated corporate activity will not necessarily be invalid. A corporation has to be registered with the Court of Firms within whose jurisdiction its seat is established; and also branch offices are to be separately registered, if located in some other county. The mostly used legal entity forms are corporations limited by shares and limited liability companies. The basic difference between the two that corporations limited by shares may issue shares (i.e. securities) which are freely transferable. Limited liability companies cannot issue shares, cannot issue securities at all, they have so called quotas, representing the rights and obligations of the quotaholder. Quotas are also freely transferable, but the quota transfer is subject for a more formalized procedure than the share transfer. 2. Are there attributes of the form that you consider unique to your jurisdiction? N/A Page 89

91 3. Describe the management and governance structure for each organizational form. Corporations Limited by Shares Shareholders' Meeting is the basic forum for shareholders to exercise their property rights. Unless shorter period is required by the articles of incorporation, Shareholders' Meeting is to be called at least annually. Shareholders' Meeting may be held via electronic equipments, providing full conversation and debate between shareholders, and providing possibility to recognize shareholders. If required by the shareholders to hold such meeting, the articles of association shall provide for possibility and set forth detailed rules. Shareholders may vote in classes, in person or by proxy, unless the articles of association require personal attendance. Majority constitutes quorum, unless the law, the articles of incorporation or bylaws require more. Board of Directors, consisting of not less than three and not more than 11 directors, is to be elected by the Shareholders' Meeting for not more than five years. Directors may be reelected at any time. Unless otherwise stated in articles of incorporation, directors jointly, i.e. Board of Directors as body, manage business and act on behalf of corporation. There is no citizenship or residence requirement for act on behalf of corporation, but articles of incorporation or bylaws may prescribe such requirements or establish other qualifications. For private Rt's possibility is provided not to elect Board of Directors, but single executive officer (general director, CEO) (vezérigazgató) executes rights of Board of Directors. Supervisory Board is required for all public Rt's, except for those having single management system ( one-tier system ), and for those private Rt's where shareholders keeping at least 5% of voting rights require to have supervisory board. It consists of three to 15 members (supervisors), who must be elected by Shareholders' Meeting. For public Rt's possibility is provided not to elect separate managing and supervisory body, but only single management (igazgatótanács) responsible for both management and supervisory issues. ( One-tier system ). Limited Liability Companies Members' Meeting is governing body of Kft and forum for members to exercise their property rights. Unless otherwise required in articles of incorporation, it is to be called annually, similar to Rt's Shareholders' Meeting, with exception that notice and agenda need not be published. Managing director or directors are to be elected by Members' Meeting for period of not more than five years or indefinite term, and may be reelected. As in case of Rt, there are no citizenship or qualification requirements for directors. Meeting can remove directors, with or without cause, at any time. Managing director and directors, unless otherwise required in articles of incorporation, jointly manage business and act on behalf of company. If annual average number of full-time employees exceeds 200, Supervisory Board must be elected. 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? No. Page 90

92 5. Describe the extent to which management and owners are exposed to liability. Owner s Liability As a general rule, corporations limited by shares and limited liability companies are liable for their own obligations, the liability of the owners covers only the payment of their contribution. Nevertheless, in some cases it is possible to establish the liability of the owners. If a controlling owner (owning directly or indirectly more than 75% interest) continuously performs disadvantageous business policy on behalf of the controlled company, hence imposing substantial strain on the controlled company in meeting its liabilities, the competent court of registrymay - at the request of any creditor of the controlled company - instruct the controlling owner to provide collateral security, or may impose the judicial supervisory sanctions upon him. If the controlled company is going into liquidation, the controlling owner shall bear unlimited liability for all liabilities of the company for which the debtor controlled company is lacking sufficient cover in the process of liquidation proceedings, if the court has declared - in an action filed by the creditors during the liquidation proceedings - the unlimited and full liability of the controlling owner responsible due to its history of making unfavorable business decisions in the debtor company. Also, If the liability of the owners of the company with majority control was limited, and the court of registrystruck the company from the companies register following the winding-up proceedings, upon which outstanding debts in excess of fifty per cent of the company's equity capital remained in arrears, the court shall declare in a lawsuit filed by the company's creditors the unlimited liability of the owners for the company's outstanding debts, unless the owner is able to provide evidence that he did not contribute to the company ending up in winding-up proceedings. If the court of registrystruck the company from the companies register following the winding-up proceedings, upon which outstanding debts in excess of fifty per cent of the company's equity capital remained in arrears, the company's creditors may file charges to have the former majority onwer, who had transferred his share within three years preceding the opening of the winding-up proceedings, assume unlimited liability for the company's outstanding debts, unless the former owner is able to provide evidence that the company was solvent at the time he transferred his share and the losses occurred subsequently, or that the company was insolvent, however, that he as owner had acted in good faith when transferring his share. Similar liability may arise in liquidation procedure as well. Management Liability The business association shall be liable for damages caused to third parties by its executive officer when acting in an official capacity. Executive officers shall conduct the management of the business association with due care and diligence as generally expected from persons in such position. 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? In Corporations Limited by Shares the shares issued by the company for the name of the shareholders represent the ownership interest. Shares are actual securities. may be printed or damaterialized. In a Limited Libility Company no securities (shares or other type may be issued. The members of a Limited Liability Company hold so called quotas, which represent the ownership interest of the members, including its rights and obligations. Page 91

93 Both shares and quotas are transferable, although the transfer of quotas is a more formalized procedure from a corporate law point of view. Both Corporations Limited by Shares and Limited Liablity Companies can be established with even one owner. 7. Is there a minimum capitalization? Minimum registered capital requirement for Limited Liability Companies is HUF 500,000 (Approx. EUR 1,800). Minimum share capital requirement for Corporations Limited by Shares is HUF 5,000,000 (approx. EUR 18,000). In either case, the registered/share capital can be contributed in cash, in kind or both. The minimum capital is not required to be maintained on the bank account of the entity at all times. There are some corporate thin capitalization rules, however, stating basically that the own capital (saját toke) of the company cannot fall under half of the registered/share capital. 8. Is there a security that can be issued to the public? Corporations Limited by Shares are entitled to issue shares to the public. Shares created and issued by a Corporation LImited by Shares may be of one or more classes, which classes may differ from each other as to right to vote, sharing profit, etc. Shares of public Corporation Limited by Shares may only be dematerialized shares. Dematerialized shares must be of registered by name nature. The articles of incorporation may, defining specific conditions thereof, provide for issue of shares of registered by name nature which grant certain preferences to their holder over other classes of shares. Preference may relate to: (i) dividends; (ii) liquidation quota; (iii) voting rights; (iv) granting priority in assigning managing director, supervisory board member; (v) granting pre-emptive rights for shares of private Rt. and (vi) other preferential rights in accordance with specific other legislation. Par value of preferred shares, in total, may not exceed 50% of stated capital. 9. Can the form incur debt, or grant security for debt? 10. What is the duration of the form? Can it be renewed? Corporations limited by shares and limited liability companies can be established for definite or indefinite duration. If the duration is indefinite, the owners may decide before the end of the definite term to change such term, either to extend or change it to indefinite. 11. Describe the process, customary time period and approximate cost of establishing the form. Establishment can be done in two types of procedures, simplified and normal procedure. In case of a simplified procedure the business association shall use a sample deed of foundation provided by law, in this case the registration time is 1 business hour as of filing. In case of normal procedure the business association is entitled to draw up its own deed of foundation, in this case registration time is 15 business days as of filing. In both procedure the corporate documents shall be drafted and signed, bank account shall be opened for the new entity and new entity shall be capitalized (payment of registered capital into bank account or handing over in-kind contribution). Once all documents are ready the registration request shall be filed to the competent court of firms. The procedure is completely electronic, legal representation is mandatory. The attorney representing the entity files all documents and a special registration request form electronically (via ) and the court sends its resolution electronically (vie ) as well. Page 92

94 12. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? No. 13. For what taxes is the form liable? Corporate tax and an additional 4% surtax is to be paid by business entities. They are also liable for local government taxes. Several other small taxes and charges exist, tax incentives are also available. 14. What is the tax treatment of payments to foreign owners? Investors, domestic or foreign, private, corporate or public, may, in general, equally form and participate in corporations. As of Jan. 1, 1991, acquisition of foreign majority or unanimous foreign ownership in corporation is not subject of any approval, permission or license, not even that of exchange control. There are no differences between public and private corporations. Foreign individuals are not exempt from withholding tax on dividends, unlike foreign corporations. No special foreign investment tax exists. Treaties on avoidance of double taxation shall be considered. 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? No. Contact Information Dr. Viktória Szilágyi szilagyi.viktoria@nt.hu Nagy és Trócsányi Ugocsa utca 4/B Budapest 1126, Hungary Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 93

95 Issues Relating to Organizational Forms and Taxation Indonesia Prepared by Lex Mundi member firm Ali Budiardjo, Nugroho, Reksodiputro 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. The forms of organizations available in the jurisdiction of Indonesia are, among others: a) Limited Liability Company (locally known as Perseroan Terbatas or PT ), an advantage of a PT among others is the limited responsibility of the shareholders, the disadvantage of a PT among others is that the establishment of a PT is more complicated, time consuming, and expensive than other forms. It is, however, the single form of organization that is available to foreign equity investment under the Investment Law. b) Foundation (locally known as Yayasan), is an organizational form which is established for limited (i.e. social, religious and humanitarian) purposes. c) Co-operative (locally known as Koperasi ), an advantage of a Koperasi among others is that every member has equal voting rights; the disadvantage of a Koperasi among others is that the amount of its capital is limited; d) Commercial Partnership (locally known as Firma ), an advantage of a Firma among others is that the liability is held jointly by each partner, the disadvantage of a Firma among others is that if one partner is negligent in making a decision, the other partner(s) will also be liable. e) Limited partnership (locally known as C.V. ) an advantage of a C.V. among others is that its establishment is more simple and easier than that of a PT, the disadvantage of a C.V. among others is that there are different liabilities between the partners (some partners may have limited liability). The most common and most used type of organizational form used in Indonesia is a PT. Therefore, unless specifically mentioned otherwise, in answering the questions provided below we will emphasize on the organizational form of a PT. Regarding foreign investment, pursuant to Law No 25 of 2007 regarding Investments (the Investment Law ), foreign investments must take the form of a PT, and must be domiciled within the territory of the state of the Republic of Indonesia. 2. Are there attributes of the form that you consider unique to your jurisdiction? The attributes of a PT are, among others: a) A shareholder of a PT is not personally liable for a binding agreement entered into in the name of the Company, and shall not be liable for the Company s losses extending beyond the value of shares owned by the shareholder. b) A PT is established by two or more persons or legal entity and is drawn up in the Indonesian language in a notarial deed. c) A PT is managed by the Board of Director ( BOD ) and in conducting its duties the BOD is supervised by the Board of Commissioner ( BOC ) d) The highest authority of a PT is the General Meeting of Shareholders ( GMS ). Page 94

96 3. Describe the management and governance structure for each organizational form. PT Pursuant to Law No. 40 of 2007 regarding Limited Liability Company (the Company Law ), the management structure of a PT is as follows: a) GMS. A GMS has highest authority in a PT. the A GMS shall have the authority not vested in the Board of Directors nor the Board of Commissioners within the limits as provided for in this Law and/or the Articles of Association ( AoA ) of the company. b) BOD. The BOD shall conduct the management of a PT in the best interest of the PT within the objectives and purposes of the PT as stated in the AoA of the PT. The BOD is appointed by the GMS and is entitled to represent a PT in or out of court. c) BOC. The BOC conducts supervision on the management of the PT and provides advice to the BOD. The BOC is appointed by the GMS of a PT. Foundation A Yayasan consists of the following primary organs or boards: a) The Trustees (locally known as Pembina ). The Pembina is an organ of a foundation having all authorities which are not delegated to the Managers or the Supervisors under the Foundation Law or the foundation s AoA. b) The Managers (locally known as Pengurus ). The Pengurus are responsible for the day to day management of the foundation and are entitled to represent the foundation in all legal matters, such as in signing contracts or representing the foundation at court. c) The Supervisory Board (locally known as Pengawas ). The AoA will ordinarily provide that the Pengawas is responsible for supervising the activities of the foundation to ensure that they are in accordance with the objects and purposes of the foundation. This includes supervision of the finances of the foundation and supervision of the actions of the Pengurus and employees of the foundation. Koperasi A Kepoerasi consists of the following primary organs or boards: a) Meeting of Members ( locally known as Rapat Anggota ). The Rapat Anggota is the highest authority in a Koperasi. b) Executive Board (locally known as Pengurus ). The Pengurus conducts the management of a Koperasi and is appointed by the Rapat Anggota. c) Supervisory Board (locally known as Pengawas ). The Pengawas supervises the management of a Koperasi and is appointed by the members of the Koperasi in the Rapat Anggota. Firma A Firma consists of and is managed jointly by the partners. C.V. A CV consists of the following organs: a) One or more managing partners also known as the active partner who is authorized to act on behalf of the CV and who are severally liable for all the obligations of the partnership. b) One or more "silent" partners also known as the limited liability partner or passive partner who is only liable to the extent of their contribution to the partnership and who cannot act on behalf of the partnership. Page 95

97 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? With regard to the residency requirement for the management or owners of a Foreign Investment Company, It is the policy of the Capital Investment Coordinating Board (locally known as BKPM ) that the Manager/Director of a Foreign Investment Company whom pursuant to the AoA is fully in charge of the Foreign Investment Company has to reside within the territory in the Republic of Indonesia. There are no residency requirements for owners/shareholders. The restriction, limitation, and requirement for foreign investment in specific activities is regulated by Presidential Regulation No. 36 of 2010 concerning Lists of Business Fields that are Closed to Investments and Business Fields that are Conditionally Open for Investments (so called the Negative List for Investment, hereinafter referred to as Negative List ). The Negative List stipulates certain business fields that are closed to foreign investment and open to foreign investment but subject to certain limitations and/or conditions. When a certain line of business is not expressly specified in the Negative List, the general assumption is that such line of business is open to 100% (one hundred percent) foreign investment. 5. Describe the extent to which management and owners are exposed to liability. Liability of Shareholders Pursuant to the Company Law, a shareholder of a PT shall not be personally liable for a binding agreement entered into in the name of the Company, and shall not be liable or the Company s losses extending beyond the value of shares owned by the shareholder. This provision, however, shall not apply if: a) the PT has not fulfilled the requirements as a legal entity; b) the shareholder directly or indirectly in bad faith uses the PT for the personal interest of the shareholder; c) the shareholder is involved in an unlawful act committed by the PT; d) the shareholder directly or indirectly utilizes the PT s assets in an unlawful manner, and causes the PT to not be able to repay its debts. Liability of Management Every member of the BOD shall be fully liable personally for the losses of the PT if the BOD member concerned is at fault or negligent in the performance of his/her duties. Every member of the BOC shall be fully liable personally for the losses of the PT if the BOC member concerned is at fault or negligent in the performance of his/her duties. 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? i. Ownership interest of a PT is represented by Shares. Each Share gives the owner of such shares the right to: a) attend and vote in the GMS; b) receive payment of dividend; and c) carry out other rights pursuant to the Company Law. ii. iii. Yes, a Share is an intangible good which is transferable under Indonesian Law. Pursuant to the Company Law, a PT has to be established by two or more persons. If the shareholders of an established PT becomes less than two shareholder, within a period of not Page 96

98 exceeding six months counted from such occurrence, the shareholder concerned must transfer part of his/her/its shares to other persons/legal entity, or otherwise the PT shall issue new shares to other persons/legal entity. If the said shareholders fails to do so, and within six months there is still less than two shareholder, the shareholder shall be personally liable for any binding agreement and loss of the PT, and at the request of an interested party, the district court may dissolve the PT. 7. Is there a minimum capitalization? Pursuant to the Company Law, the minimum Authorized Capital of a PT is Rp. 50,000,000 (fifty million Rupiah) % of the Authorized Capital must be fully issued and paid-up upon establishment. 8. Is there a security that can be issued to the public? Pursuant to Law No. 8 of 1995 regarding Capital Markets ( Capital Market Law ), a PT can issue securities to the public. The Capital Market Law provides that Securities are: Promissory notes, commercial papers, shares, bonds, evidence of indebtedness, participation units of collective investment contracts, futures contracts related to securities, and all derivatives of securities. The term derivative refers to rights that are derived from either debt or equity Securities, such as option or warrant. An option is the right to purchase or sell within a certain time, a specified number of Securities at a specified price and a warrant is a certain type of Securities issued by a company which gives the holder the right, six months or more after the Securities are issued, to subscribe to shares of the company at a specified price. Further, the Capital Market Law provides that the Capital Market and Financial Institution Supervisory Agency (locally known as Badan Pengawas Pasar Modal dan Lembaga Keuangan or Bapepam- LK ) is authorized to define other instruments, which are developed down the road in the capital market practice, as Securities. 9. Can the form incur debt, or grant security for debt? Under Indonesia Law, a legal entity can incur debt, and grant security for debt. Therefore, once a PT has obtained its legal entity status, the said PT may incur debt, and grant security for debt. Pursuant to the Company Law, a PT shall obtain its legal entity status on the date of issuance of the Approval of the Minister of Law and Human Rights ( MOLHR ) regarding the validation of the legal entity status of the PT. 10. What is the duration of the form? Can it be renewed? Pursuant to the Company Law, a PT can be established for a definite or indefinite period as stated in the AoA. If a PT is established for a definite period, such duration must be stated expressly in the AoA, the same applies if a PT is established for an indefinite period, the AoA of the PT must be expressly state that the duration of the PT is indefinite. 11. Describe the process, customary time period and approximate cost of establishing the form. As aforementioned, a PT is established by at least two shareholders and a Deed of Establishment containing the AoA is drawn up by a public Notary. Once the Deed of Establishment is ready, it is submitted to the MOLHR for approval. A PT obtains its legal entity status on the date of issuance of the approval on the Deed of Establishment by the MOLHR. If approved, the MOLHR then announces the Deed of Establishment of the PT in the State Gazette. After the PMA Company has obtained its 1 Approx. US$ 5,500 (July 2010) Page 97

99 MOLHR approval for the AOA, the PMA Company must obtain other supporting licenses for its operations, which includes the following: Timeline: Once the Deed of Establishment has been drafted and submitted to the MOLHR, the approval from the MOLHR on the Deed of Establishment normally takes up to 1 to 2 months from submission. Cost: Approximately US$ 12,500 to 20,000 which includes (i) Lawyer s fee for drafting the Deed of Establishment and AoA, (ii) Notary s fee who will draw up the Deed of Establishment and AoA, submit and obtain the Deed of Establishment to the MOLHR, and obtain general supporting licenses such as the Company Registration Certificate (Tanda Daftar Perusahaan or TDP), Letter of Domicile (Surat Tanda Daftar Perusahaan or SKDP), and the Taxpayer Registration Number (Nomor Pokok Wajib Pajak or NPWP), (iii) other operational expenses. 12. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? Depending on the sector, there are several profit-sharing requirements imposed by the law with regard to investment projects. A prominent example includes royalty obligation imposed on companies in the energy sector pursuant to Law No. 4 of 2009 regarding Mineral and Coal Mining. 13. For what taxes is the form liable? Pursuant to the Taxation Laws of Indonesia, a PT is subject to several forms of taxation, which are: a) Income tax (locally known as Pajak Penghasilan or PPH); b) Value added tax (locally known as Pajak Pertambahan Nilai or PPN) and Sales Tax on Luxury Goods (Pajak Penjualan Barang Mewah or PPnBM); c) Taxes on land and property attached to the land, which consists of Land and Building Tax Pajak (locally known as Pajak Bumi Bangunan or PBB) which roughly is tax on the use of the land, and Duty on Acquisition of Land and Building Ownership Rights (or Bea Perolehan Hak atas Tanah dan Bangunan or BPHTB) which roughly is tax related to the ownership right to the land; d) Stamp duty (locally known as bea materai); e) Import and other duties. 14. What is the tax treatment of payments to foreign owners? Indonesia imposes a corporate tax at a single rate of 28% pursuant to Law No. 36 of 2008 regarding Income Tax ( Income Tax Law ). Additionally, Indonesia imposes a withholding requirement of 20% on branch profits, pursuant to Article 26 of the Income Tax Law, on income from its Indonesian branch not reinvested in Indonesia. This tax is payable without regard to profit remittance, imposed on net income after tax. However, the harsh effect is ameliorated somewhat by treaties signed by Indonesia and other countries to avoid double taxation ( Avoidance of Double Taxation Agreements ). Currently Indonesia has signed such tax treaties with 59 countries. Page 98

100 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? In addition to the discussion on branch profit above, disparity exists with regard to withholding tax on dividends, interests, royalties, prices and awards. While residents generally face withholding tax of 15% on them, non-residents are subject to a final withholding tax of 20%. However, several treaties modify this withholding rate to achieve a degree of parity with residents. Contact Information Mr. Theodoor Bakker tbakker@abnrlaw.com Ali Budiardjo, Nugroho, Reksodiputro Graha Niaga, 24th Floor Jl. Jenderal Sudirman Kav. 58 Jakarta 12190, Indonesia Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 99

101 Issues Relating to Organizational Forms and Taxation Ireland Prepared by Lex Mundi member firm Arthur Cox 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. a) Companies, including: Private Limited, Public Limited, Limited by Guarantee (with a share capital, private and without a share capital, public), Unlimited and Societas Europaea (SEs, public companies) Companies are the legal entity most commonly used by foreign investors. The primary advantages are: limited liability for members (except of an unlimited company); separate legal personality; tax advantages; the ability to raise finance on security unavailable to other business structures, i.e. create floating charges; ability to have multiple members (99 for private, unlimited for public companies); the ease of transfer of an interest; the ability to clearly define the management structure; and perpetual succession. The disadvantages include the requirement to deliver particulars of a large number of events to the registrar of companies for filing on the public register; the requirement to file financial statements (except for a certain type of unlimited company); the requirement to have financial statements audited (except for certain private companies) and associated costs; the costs of compliance and filing and being subject to the scrutiny of the Office of the Director of Corporate Enforcement. b) Partnership, which is the default method of carrying on business between two or more persons (including corporate entities). A partnership can exist without formal registration but should be regulated by a partnership agreement. The primary advantages of partnerships are: transparency from an accounting and taxation perspective; management and governance structure may be bespoke; and not being subject to Irish company law. The main disadvantages are: they do not have separate legal personality, all partners have unlimited liability for the partnership s debts (except in limited liability partnerships) and succession of ownership is not as easy as in a company. c) Cooperatives operate for the benefit of their members and are owned and controlled democratically by them. The main advantages are limited liability; continuity; ability to raise money; separate legal status to its members; and a framework within which members can formalise their relations. The main disadvantage is that decision taking can be arduous if the coop has a large number of members. Co-operatives are involved primarily in exports, employment, industrial activity and development of rural areas. Accordingly they are seldom of interest to foreign investors. d) European Economic Interest Group (EEIGs) are effectively a form of incorporated partnership, formed to facilitate or develop the economic activities of its members, but not replace them. The profits from an EEIG s activities are deemed to be profits of the members. Page 100

102 The advantages of EEIGs is transparency from an accounting and taxation perspective and that they may tailor their governance structure to their needs. The main disadvantage is the limit of 20 members per grouping. 2. Are there attributes of the form that you consider unique to your jurisdiction? Irish companies may not have corporate directors, must have at least two directors and must have at least one European Economic Area (EEA) resident director. There is very high compliance with the requirement to file annual returns and financial statements so that in consequence it is relatively easy to ascertain up to date official information about Irish companies. It is relatively inexpensive to form an Irish company and the formation and registration process can be completed within a matter of days. Same day incorporation is not unheard of, particularly where a commercial justification for expediting the process is provided to the registrar of companies. 3. Describe the management and governance structure for each organizational form. a) All Companies The ultimate authority within an Irish company rests with its members, however the members almost invariably delegate power to the board of directors to run the business of the company from day to day through the articles of association. Accordingly, an Irish company is governed by Irish law, its memorandum and articles of association and its board of directors. An Irish company must have a minimum of 2 directors and a company secretary (who may also be one of the directors, or may be a company). The authority to bind the company is delegated to the directors by the members through the articles of association. Any action taken by the directors outside of the authority delegated to them is invalid although the company may be bound by the directors actions. All directors will have equal and overall responsibility for the management of the company (although executive directors will have additional responsibilities and duties arising under their service contracts and will be expected to exercise a de.g.ree of skill and diligence commensurate with their specific executive positions). Generally an Irish company will have a single tiered or unitary board. There are certain idiosyncratic governance provisions that relate only to SEs such as the requirement for the directors to meet once in every three month period and the fact that no director may be elected to office for a period in excess of 6 years. b) Partnerships Partnerships are governed by the terms of their partnership agreement which will determine general internal governance including decision making, voting strength, profit sharing and capital contributions etc. c) EEIGs An EEIG may have a maximum of 20 and a minimum of 2 members, with at least two coming from different Members States of the EU. An EEIG must have at least one manager and such manager may be a natural person or a body corporate. Provided this requirement is met there is nothing that prohibits an EEIG from implementing a particular governance structure through its formation contract. Irish law provides for an EEIG creating organs and determining their powers through its formation contract. Each member of an EEIG must have one vote. The formation contract may provide for members having more than one vote provided no one member holds a majority of the votes. Page 101

103 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? Residency requirement a) Companies At least one of the directors of an Irish company must be resident in the EEA or else the company must put a bond in force to the value of 25, b) In the case of the SE, if it has its registered office in Ireland, it shall be treated as being incorporated in Ireland. c) Partnerships Partnerships have no meaningful concept of residency but they must have a nexus in Ireland to be considered Irish partnerships. Restrictions or prohibitions There are no restrictions or prohibitions on foreign investors to perform or have interests in specific activities. However, partnerships must have a nexus in Ireland to be considered Irish partnerships. Generally there are no restrictions or prohibitions on foreign investors performing or having interests in specific activities in Ireland. 5. Describe the extent to which management and owners are exposed to liability. a) The liability of the members of a company depends on the type of company established. For the most common type, being a company limited by shares, the liability of the company s members to contribute to the company s assets is limited to the amount (if any) unpaid on the shares for which they have subscribed. Where a company is limited by guarantee without share capital, members liability is limited to the guarantee. Where a company is limited by guarantee and also has a share capital, members liability on a winding-up is limited to the amount unpaid on the shares for which they have subscribed and the amount they have guaranteed. For an unlimited company, members and other contributories are required to contribute sufficiently to the company for the payment of its debts and liabilities, and the cost, charges and expenses of the winding-up, without any limit being placed on their liability. The liability of members is, however, secondary and only enforceable by the company s liquidator. Directors owe fiduciary duties to the company, and may be liable for negligent behaviour if he fails to act honestly and exercise the necessary care, skill and diligence. In addition, where it is shown that the directors of an insolvent company were knowingly party to reckless or fraudulent trading, or where poor record keeping has contributed to the inability to pay debts, the directors may be made personally liable for all/part of the debts. Where a director has misapplied any money or property of a company being wound up, the court may order the director to repay or restore that money or property or contribute a sum to the company s assets. b) Partners in a general partnership have unlimited liability for the debts and liabilities of the partnership. In a limited partnership there must be at least one general partner, i.e. with unlimited liability for the debts and liabilities, although this partner may be a limited liability corporation. The limited partner invests fixed amounts of money in the business but is not liable for the debts and obligations beyond the amount of their capital investment. Page 102

104 c) The members of an EEIG are jointly and severally liable for its debts and liabilities. This is a general liability for all debts and claims for damages, tortious acts and omissions, breach of contract etc. The liability of outgoing members continues in respect of liabilities incurred while they were a member for a period of 5 years. Incoming members will be liable for liabilities incurred prior to joining the EEIG. However this liability may be limited or excluded by a clause in the formation contract or in the instrument of admission provided such document is filed with the CRO. If the membership of an EEIG drops below 2, the remaining member may become liable for the debts of the EEIG. This liability can arise and can be enforced at any time without a demand for payment being issued first. This liability relates to the debts of an EEIG 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? Ownership interests are relevant to companies i. Ownership Interest The ownership interest is represented by the companies registers of members which sets out, for companies with a share capital, the number of shares held by each member and is prima facie evidence of membership of a company. For companies without a share capital there is no ownership interest, i.e. the members are determined by satisfaction of prescribed criteria set out in the articles of association. Other than subscriber members, the only members are those who: a) agree to become a member; and b) whose names are entered in the register of members. Irish law, however, recognises beneficial and legal ownership of shares. Beneficial ownership of a share cannot be equated with membership of the company. If the share is registered to a trustee / nominee then the trustee / nominee will be regarded as the member and their name entered into the register of members. Shares in an Irish company can be held via a depositary or custodian or similar arrangement. ii. Transfer of Ownership Interest Subject to any restrictions imposed by the articles of association, shares may be transferred by execution of an instrument of transfer (in Ireland this is a share transfer form) by the person transferring the share in favor of the person receiving them. This form is required to be stamped by the Revenue before the register of members can be amended to reflect such a transfer. In a private company there must by law be restrictions on the transfer of shares and generally an Irish private company s articles of association will set meet this requirement by providing for a procedure for the transfer of shares that confers an absolute discretion on the directors to decide whether or not to register a transfer of shares. Subject to certain exemptions, stamp duty of 1% of the consideration or market value (whichever is higher) is payable on all transfers of shares in an Irish company. Bearer shares do not require an executed share transfer form (duly stamped) to effect a transfer of shares; this is because title to the shares passes by delivery of the share warrant. Shares in a public limited company can be held in certificated (i.e. share certificates are issued to members) and uncertificated (e.g. shares are dematerialized and held through the CREST system) form. iii. Minimum Ownership Public limited companies (which include Companies Limited by Guarantee without a share capital) and SEs (other than those formed as subsidiary SEs) must have a minimum of 7 members. Private companies limited by shares or by guarantee are permitted to have just one member. Partnerships and EEIGs must have at least two members. Page 103

105 7. Is there a minimum capitalization? In order to obtain a trading certificate, the minimum capital requirements for an Irish public limited company (PLC) is 38, in issued share capital (of which 25% must be fully paid up).. The minimum capital requirements for an Irish SE is 120, in issued share capital. There are no other substantial minimum capital requirements for the various other types of organisation and it is common for private companies limited by shares to be formed with just 1 in issued share capital. 8. Is there a security that can be issued to the public? Public limited companies can issue shares to the public. Subject to certain exceptions in relation to certain debt issuances, private companies are not permitted to offer shares or other securities to the public. 9. Can the form incur debt, or grant security for debt? Subject to any restrictions imposed by its constituent documents, then each form can generally incur, and grant security for, debt. Mortgages, charges, liens and pledges are the most usual forms of consensual security created by entities; only companies may create floating charges although there are certain exceptions to this and all entities can, for example, create floating chattel mortgages over agricultural stock. 10. What is the duration of the form? Can it be renewed? a) Company A company validly incorporated continues to exist in perpetuity until it is dissolved, even if it is in the process of being wound up, or if all its members have died. A company will be dissolved only when one of the following events occurs: an order is made by the court dissolving the company; in the case of a voluntary winding-up, the period of three months, or such other time as the court thinks fit, from the registration of the liquidator s final return, has expired; in the case of a company struck off for failure to carry on business or failure to make an annual return, the Registrar publishes a notice to that effect in Iris Oifigiuil (the Irish State Gazette) Indeed if any of the above dissolutions are within two years declared void by the court, or where within twenty years the court restores the company to the register, the company is treated as never having been dissolved. b) EEIG An EEIG is a body corporate, and from the date of its registration similarly has perpetual succession. c) Partnership For a partnership, the partnership agreement is key in establishing the duration. It may specify a term for the partnership, or provide that the agreement of a particular number or proportion of partners is required to terminate the partnership. If the partnership agreement is silent in respect of these points, any partner may terminate the partnership at any time on giving notice. Provisions will also usually be included in the partnership agreement whereby the death, retirement, bankruptcy, or any other event whereby any partner shall cease to be a partner shall not terminate Page 104

106 the partnership as to the other partners. If the partnership agreement is silent on this point, the partnership will generally cease should any partner cease to be a partner. 11. Describe the process, customary time period and approximate cost of establishing the form. a) To register a company one must file a registration form and a set of constitutional documents with the CRO. The form records particulars of the company's directors, shareholders and secretary and appends the constitution of the proposed company. This generally takes working days from the date of filing with the CRO. On registration of the new company the CRO issues a certificate of incorporation. The cost of registering a new company is 100. Law firms or company formation agents will charge a professional fee for incorporating a company. b) SEs may be formed: By merger between 2 or more public companies with registered offices in the Community provided at least two of such companies are governed by the laws of a different Members State. Companies formed under the law of a Member State may form a holding SE provided at least two of them are from different Member States or has had a subsidiary company in a different Member State for at least 2 years. Companies may form a subsidiary SE by subscribing for its shares provided at least two of them are governed by the law of different Member States, or has had a subsidiary company in a different Member State for at least 2 years. A public limited company may transform itself into a SE provided it has had a subsidiary company in a different Member State for at least 2 years. The length of time and cost involved in setting up an SE varies significantly depending on what method is used and the companies involved. c) A General Partnership (where the liability of the partners for the debts of the partnership is unlimited) can be formed without making a filing with the CRO, however if the name of the partnership does not consist of the true names of all partners then the partners will have to register the business name with the CRO. The registration of a limited partnership (i.e. where one of the partners liability is limited) will require that the partners file 2 forms (first details the general and limited partners and second is a statement of the capital contributed by the limited partners) with the CRO. The partnership will be required to register a business name if its proposed name does not consist of the true names of all partners. Each filing costs 15 and registration of a limited partnership will generally take 5 10 working days. However, the main cost and time involved in setting up a partnership is in drafting the partnership agreement. d) Registration of an EEIG is straightforward: The contract of formation; and The prescribed form must be filed with the CRO. Registration generally takes working days from the date of filing. The form contains basic particulars of an EEIG, such as its name, address, particulars of its members, its objects and duration. The contract of formation must contain the following information: name; address; objects; particulars of its members; and duration. The cost of filing is Page 105

107 12. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? There are no such general requirements in Ireland. 13. For what taxes is the form liable? a) Companies Corporation tax. All companies resident in Ireland and all non-resident companies which carry on a trade in Ireland through a branch or agency are generally liable to corporation tax. Trading income is subject to corporation tax at 12.5%, and non-trading income (e.g. investment income) and income of certain trades (e.g. mining) is subject to corporation tax at a rate of 25%. Where a company is not resident in Ireland, the extent of its Irish corporation tax liability is limited to trading income arising directly or indirectly through a branch or agency in Ireland, and any income from property owned or used by, or held by or for, a branch or agency in Ireland. Capital Gains Tax (CGT). Gains arising to companies are generally chargeable to corporation tax, however, the taxable amount is calculated in accordance with the capital gains tax rules and the effective rate of tax on gains is 25%; Stamp Duty is charged on certain documents executed in Ireland, for example, 1% of the value of the transfer of shares. There are also a number of exemptions from stamp duty, for example, for intra-group (90%) transfers and certain reconstructions and amalgamation transactions which may be available depending on the particular circumstances; Income Tax is currently charged at the lower rate of 20% and the higher rate of 41%. A non-irish resident company with no fixed place of business is also liable for income tax on Irish-source branch income and gains. Examples of this include rental income from property held in Ireland and Irish deposit interest; Capital Acquisitions Tax (CAT) is a tax on both gifts and inheritances and applies at the rate of 25%; Customs and Excise Duty is generally levied on imported goods from outside the EU at a rate determined by the EU s common customs tariff system; Value Added Tax (VAT). The standard VAT rate is 21%. b) Partnerships and EEIGs A partnership is a transparent entity so of itself is not liable to tax, but the individual partners in the partnership are liable. For the purposes of taxation each partner is regarded as individually carrying on a separate trade; this concept is referred to as the partner s several trade and is taxed accordingly. Similarly if there is a tax loss in the partnership trade for any period in which he is a partner, he is entitled to claim any available loss relief for his share of that tax loss as if it were a loss of his several trade. He is entitled also to his share of any capital allowances (deductions against tax in respect of fixed asset depreciation) attributable to the partnership trade. An EEIG is treated as a partnership for the purposes of income tax, capital gains tax and corporation tax. 14. What is the tax treatment of payments to foreign owners? Non-residents doing business in Ireland are subject to tax on Irish-source income and gains arising from an Irish permanent establishment or branch and from certain Irish assets (e.g. land). This applies whether the asset is owned directly or through a partnership or an EEIG. a) Companies Page 106

108 Dividends paid by an Irish resident company are generally subject to withholding tax (currently 20%) unless the shareholder qualifies for an exemption and the requisite documentation is in place prior to payment. The main exemptions are: where the recipient is resident in an EU Member State (other than Ireland) or in a country with which Ireland has a double taxation treaty (termed a relevant territory ) and not under the control of Irish residents; where the recipient is a company not resident in a relevant territory but controlled by a person or persons who are so resident (and who is/are not under the control of a person or persons not resident in a relevant territory); or where the principal class of shares of the recipient company or its 75% parent are substantially and regularly traded on a recognised stock exchange in a relevant territory. The above exemptions apply irrespective of the provisions of a double tax treaty. A further domestic exemption is available in respect of certain arrangements in the US in respect of listed shares of Irish resident companies where the persons beneficially entitled to the dividends are the holders of American depositary receipts and are registered with a US address. Interest An Irish resident company will generally be required to deduct withholding tax at 20% on interest payments unless treaty relief or one of the many domestic exemptions from withholding tax applies. These exemptions include where: The interest is paid in the ordinary course of business and the recipient is a company tax resident in an EU Member State (other than Ireland), or in a territory with which Ireland has a double tax treaty; and does not have an Irish branch or agency, with which the interest is connected. The interest is paid on securities quoted on a recognised stock exchange and the interest payments are made: by a non-irish paying agent; or by, or through, an Irish paying agent; and an appropriate form of declaration of non-residence is provided; or the notes are held in a recognised clearing system (e.g. Euroclear, Clearstream or DTC). The interest is paid to a person resident in a jurisdiction with which Ireland has a double taxation agreement and which provides for a 0% rate of withholding tax. b) Partnerships and EEIGs Partnerships and EEIGs are treated as transparent, so a foreign entity that is a partner in a partnership or a member of an EEIG is treated as owning its share of interest in the underlying activities of the partnership or EEIG. 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? Dividend payments between Irish companies can be made free of withholding but foreign owners will be subject to withholding tax at 20% unless they fall within any of the following exemptions : where the recipient company or person is resident in another EU Member State (other than Ireland) or in a country with which Ireland has a double taxation treaty (defined as a relevant territory for tax purposes) and is not under the control of Irish residents; Page 107

109 where the recipient is a company that is not resident in a relevant territory but is controlled by a person or persons who are so resident (and who is/are not under the control of a person or persons who are not resident in a relevant territory); or where the principal class of shares of the company receiving the dividend or its 75% parent company are substantially and regularly traded on a recognised stock exchange in a relevant territory. Contact Information Dr Thomas B. Courtney Tom.Courtney@arthurcox.com Arthur Cox Earlsfort Centre, Earlsfort Terrace Dublin 2, Ireland Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 108

110 Issues Relating to Organizational Forms and Taxation Lebanon Prepared by Lex Mundi member firm Moghaizel Law Offices 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. In Lebanon, the forms of organization are joint stock companies, limited liability companies, partnerships, partnerships limited by shares, and not-for-profit organizations. The most common corporate legal entities used by foreign investors in Lebanon are joint stock companies ( JSC ) (designated in Lebanon as Société Anonyme Libanaise or its acronym SAL) and limited liability companies ( LLC ) (designated in Lebanon as Société A Responsabilité Limitée or its acronym SARL). The difference between the two forms can be summarized as follows: The LLC must have a minimum capital of LL 5,000,000 (approximately US $ 3,334). It should be formed by three partners at least, all of whom can be foreigners, except in specific situations, such as if the company were to act as a commercial agent. Also, all of the partners can be legal entities. The LLC can be run by one or more manager(s) who can act jointly or separately as provided for in the company's articles of association. The manager must be a natural person. If the manager is a foreigner and resides in Lebanon, then he/she should hold a work permit and a residency permit. An LLC is generally recommended for businesses that do not require the involvement of more than one party in management decisions and when it is not anticipated that the shares will change hands frequently. When more than one party needs to have a say in the management of the company's affairs, a JSC is generally recommended since it has a Board of Directors. The minimum number of shareholders is three and the minimum capital of the JSC is LL 30,000,000 (approximately US $ 20,000). Shares are freely negotiable, unlike the SARL s shares. The JSC is managed by a board of directors, which takes the company's major decisions. The board is formed of at least three directors and is headed by a chairman (who must be a natural person). The chairman of the board may be a foreign person. He/she should hold a work permit and a residency permit if he/she is residing in Lebanon. The majority of the board members must be Lebanese (e.g. two out of three, three out of four, three out of five, four out of six, etc.). In specific cases, such as if the object of the JSC is to carry out, inter alia, agency activities, then two thirds of its Board members should be Lebanese, as well as its chairman/general manager and all persons entrusted with management powers. In such case too, the company's shares must be registered shares and the majority of the company's shares should be held by Lebanese. Board members of a JSC must hold qualification shares (actions de garantie) to cover their liability in case of mismanagement acts. The number of qualification shares is not specified by law, and could be quite small. 2. Are there attributes of the form that you consider unique to your jurisdiction? No. Page 109

111 3. Describe the management and governance structure for each organizational form. As mentioned under question 1, JSCs are managed by a Board of Directors. The Chairman of the Board is by law the General Manager. For LLCs, there is one or several managers enjoying the authority granted to them by the law and the Articles of Association. 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? Not assuch 5. Describe the extent to which management and owners are exposed to liability. Shareholders are liable only to the extent of their contribution to the capital. Managers of a limited liability company are personally liable in specific circumstances such as fraud and mismanagement. As a matter of principle, the liability of Board members in a joint stock company (including the Chairman-General Manager) falls mainly in the context of (i) liability for fraud or violation of applicable laws and/or the company s Articles of Association, or (ii) liability for mismanagement. (i) Pursuant to article 166 of the Lebanese Code of Commerce, Board members/chairman-general Manager are liable for damage caused as a result of their fraudulent actions, such as breach of trust, distribution of fictitious dividends and for the violation of applicable laws and the company s Articles of Association. The legal action under said article 166 against Board members is an individual action that can only be brought by the party (whether a shareholder or a third party) who has suffered a loss or damage as a result of the Board member acts. (ii) Pursuant to article 167 of the Lebanese Code of Commerce, Board members/chairman-general Manager are liable for mismanagement. Mismanagement actions comprise, inter alia, fraudulent acts and violation of applicable laws and the company s Articles of Association, in addition to other faults not included in such category. Lebanese courts enjoy broad powers of assessment of the mismanagement actions. In this context, the legal action against Board members/chairman-general Manager is brought by the company, more specifically, by the company s representative. If the company fails to sue the Board members/chairman General Manager, shareholders may sue in lieu of the company (article 168 of the Lebanese Code of Commerce). In this case, the shareholder files the lawsuit in his personal name (not on behalf of the company) and he is not entitled to claim the inte.g.ral indemnity for the damage caused to the company, but should restrict his claim to the portion of the indemnity pertaining to him. Both legal actions under (i) and (ii) are subject to a time limitation of 5 years as of the Annual General Meeting of Shareholders held to approve the company s accounts. 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? There is a minimum of three owners. Ownership interests are represented by shares. In the JSC, shares are freely negociable subject to the shareholders' right of first refusal. In the LLC, the assignement of shares must be authorized by a vote of the shareholders. 7. Is there a minimum capitalization? See response under question 1. Page 110

112 8. Is there a security that can be issued to the public? JSCs can issue bonds. 9. Can the form incur debt, or grant security for debt? Yes, both. 10. What is the duration of the form? Can it be renewed? The duration can reach a maximum of 99 years renewable. 11. Describe the process, customary time period and approximate cost of establishing the form. The company's articles must be signed before a notary public, and the incorporation documents should then be filed at the appropriate Registerof Commerce following the deposit of the capital at a local bank. Costs, for the minimum statutory capital, should not exceed US $ 3,000 to US $ 5,000 including legal fees. The company can be formed within three to four business days. Costs increase with the size of the capital. 12. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? No. 13. For what taxes is the form liable? The form is liable to income tax at the rate of 15% of net profits. Income from stocks and other financial instruments is taxed at 10%. Dividends distributed to shareholders are taxed at source at 10%. A betterment tax applies in certain circumstances. 14. What is the tax treatment of payments to foreign owners? There is no special treatment. 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? No. Contact Information Fadi Moghaizel fjm@mlof.com Moghaizel Law Offices Ashrafieh 5585 Building Pierre Gemayel Avenue Beirut , Lebanon Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 111

113 Issues Relating to Organizational Forms and Taxation Lithuania Prepared by Lex Mundi member firm LAWIN 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. According to Lithuanian laws, the following types of enterprises may be incorporated: (i) a public or private limited liability company ( LLC ); (ii) a general partnership or a limited partnership; (iii) a personal enterprise (sole proprietorship); (iv) an agricultural company; or (v) a cooperative company. In addition, e.g. European company (Societas Europaea), European cooperative society and European economic interest group are available. (i) For a client seeking to establish a company in Lithuania we usually recommend incorporation of a private company (in Lithuanian uždaroji akcinė bendrovė or UAB ), analogous to Latvian SIA, German GmbH, French SARL or BV in the Netherlands. This type of a company is preferable for many investors as it provides the largest range of advantages if compared with other legal forms. A private company is a universal vehicle for all business operations, which ensures the maximum flexibility in its usage and strong protection of the investor against the company s liabilities. A Lithuanian private company (UAB) is a limited liability company the authorised capital of which is divided into shares. A private company is considered to be a legal entity and its owners (shareholders) enjoy limited liability. A private company is liable for its obligations only to the extent of its assets. The shareholders have no financial obligations to the company, except for the obligation to pay under the established procedure for the subscribed shares at their issue price. However, some exceptions apply. If a company becomes unable to perform its obligations due to unfair actions of a shareholder, the shareholder may be personally liable for the obligations of the company. The number of shareholders in a private company may not exceed 249. (ii) The partnerships are either composed of general partners (general partnership) or general partners and limited partners (limited partnership) acting on a basis of partnership agreement. General partnership and limited partnership may only act through the general partners and only general partners participate in the decisions making of the partnership. The rights of the limited partners are basically limited to the partnership s share of profit. The decisions are adopted by unanimous consent of the general partners, however in almost all cases the partnership agreement may provide that decisions shall be taken by a majority vote of the general partners. When implementing the adopted decisions, each general partner shall have the right to act on behalf of the partnership, unless otherwise provided in the partnership agreement. The main advantages are: no minimum share capital, lower standards for accounting in comparison with LLC, participation in a day-to-day operation of the entity (if needed). The main disadvantages are: subsidiary responsibility of the general partners for the liabilities of the partnership, the risk of deadlock in cases of disagreement among the partners or death of one of the partners. Page 112

114 (iii) (iv) (v) Personal enterprise limits the ownership to the sole owner natural person, whose personal assets are separate, but easily transferable to the personal enterprise. The owner and the private enterprise are subsidiary responsible for their liabilities to the third persons. The advantages of the personal enterprise are: no minimum share capital is required and the accounting of the personal enterprises is simplified. The disadvantage is: the subsidiary responsibility of the owner. Agricultural company is a limited liability company, which revenues from production and commercial activities in agriculture makes no less than 50% of all the revenues of the company. The owner of the agricultural company may be a real member or a shareholder (however, not in the sense of a shareholder in the LLC). The latter is basically entitled only to the profit share of the agricultural company. The main benefit for establishing an agricultural company is the taxation the agricultural companies are exempted to some extent from profit and real estate taxes. Some state funding programs, e.g. EU SAPARD program, exclude from funding the legal entities except for persons engaged in the agricultural activities, including the agricultural companies. Cooperative company is a limited liability company with a changeable composition and capital, which legal framework is focused on satisfying members business, economic and social needs, e.g. possibility for the members to use the property of the company, member s right to the profit share of the company proportionate to the company s turnover through that member, simplified company s crediting through its members, lower profit and real estate tax rates in comparison with other entities, etc. The main disadvantage is that the members of the cooperative company may only be natural persons or legal entities registered in EU or EEA member states. 2. Are there attributes of the form that you consider unique to your jurisdiction? We do not perceive the legal forms available in Lithuania to be particularly unique in comparison to other continental jurisdictions. 3. Describe the management and governance structure for each organizational form. Management structure of LLC According to Lithuanian laws, each LLC must have the general meeting of shareholders and the chief executive officer (CEO, also named as head of the company in Lithuania). The supervisory council and/or the management board are not mandatory in the LLC. The general meeting of shareholders is referred to as the supreme body of LLC which has the exclusive competence in LLC, such as adoption of decisions on amendment of articles of association, approval of annual financial statements, increase/decrease of authorized (share) capital, reorganization, change of legal form of LLC, etc. The general meeting of shareholders may adopt decisions and shall be deemed held if the participating shareholders have more than 1/2 of the total number of votes. Most of decisions at the general meeting of shareholders are adopted by 2/3 majority of votes, e.g. increase/decrease of authorized (share) capital, reorganization, change of legal form, etc. Decisions, such as approval of annual financial statements, appointment of an auditor etc. require a simple majority of vote, and the decision to waive for all the shareholders their pre-emptive right to acquire newly issued shares or convertible bonds requires 3/4 majority of votes. The Law on Companies distinguishes the general meeting of shareholders and management bodies of the company, as the functions of the management bodies may not be assigned to the competence of the shareholders meeting. The articles of association of LLC may establish a larger majority of votes required for adoption of decisions. The supervisory council, which performs the supervision of the activity of management bodies, is not a mandatory body and in practice are seldom formed in the LLCs. Minimum number of members of Page 113

115 the supervisory council is 3, maximum - 15; maximum term of election of the supervisory council is 4 years. The management board of LLC (in Lithuania called simply as a board ) is also not a mandatory management body which performs strate.g.ic management of LLC. However, to the contrary of the management powers that boards usually have in foreign countries, in Lithuania, the board and/or a single member of the board does not have the direct executive powers, except for appointment of CEO and, if provided in the articles of association, approval of certain material transactions. According to the laws, the board meeting may adopt decisions and its meeting shall be deemed valid when the meeting is attended by 2/3 or more board members if the articles of association do not require a larger number of the members present at the meeting. The decision of the board shall be adopted if more votes for it are received than the votes against it, if the articles of association do not require a larger number votes required for adoption of decisions. Minimum number of members of the board is 3, maximum term of election of the board is 4 years. The CEO of LLC is the sole management body. Each LLC must to have the CEO (the president, the general director, director, etc) which may by only a natural person. The Law on Companies establishes a common principle that the CEO represents the company and is entitled to enter into contracts on behalf of LLC. Therefore, as a general rule the CEO is the only person who has the signature right and acts on behalf of LLC. The articles of association of LCC may establish the rule of collective representation when contracts will be binding over LCC only in case if signed jointly be CEO and one of board members Management structure of other forms of organization The management bodies of the personal enterprise are limited to one single person managing body who is usually the owner of the personal enterprise. The partnership acts through its general partners which make decisions in the partnership by consent or majority vote if the partnership agreement provides so. The management bodies of the agricultural company are the meeting of the members and the board (administration). The management of the cooperative company is composed of the meeting of the members, the board and the head of the company. The board may be omitted if the number of the members of the cooperative company does not exceed Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? The laws of the Republic of Lithuania do not prohibit foreign persons to acquire shares in the legal entities incorporated in Lithuania. The foreign investments are restricted only in the business activities related to guaranteeing state security and defense. Also, there are no limitations for the foreign persons to become members of management bodies of the legal entities. If a foreign person, who is a citizen of any non-european Union member state, intends to stay in Lithuania, such person generally can stay in Lithuania without special visa and/or permit for 3 months in a half-year period; if a longer stay is intended, such person may be required to apply for issuance of the work permit and/or the residence permit. There is one exception that applies to cooperative companies the members of the cooperative company may only be natural persons or legal entities registered in EU or EEA countries. 5. Describe the extent to which management and owners are exposed to liability. Liability of the management bodies Under the laws of the Republic of Lithuania the head of the company (e.g. CEO in case of LLC, general partner in case of partnership or head of the company in case of personal enterprise) is directly involved in the management of the company having the competence to adopt decisions on Page 114

116 everyday activities. This, by nature of the functions, involves larger scope of liability of the head of the company. In particular, the liability of the head of the company may be threefold: (i) civil, (ii) administrative and (iii) criminal liability. (i) Generally, the civil liability of the head of the company may arise as a result of a failure to fulfil or improper fulfilment of obligations provided for in the laws of the Republic of Lithuania, in the company s internal documents (e.g. articles of association.) or in cases of violation of the general duty to behave in good faith and reasonable manner. The head of the company who fails to perform or performs improperly his duties is obliged to cover all damages incurred by the company, except if the law, articles of association or agreement provide otherwise. Thus, there is a possibility to execute an agreement between the company and the head of the company (or to include relevant provision in the articles of association) which would limit or re.g.ulate the possible liability of the head of the company. Generally, neither the creditors, employees nor any other persons are entitled to bring a claim against the head of the company directly. All their claims, if any, should be filed against the company and not the head of the company, and only later the company may sue the head of the company personally for the reimbursement of the damages (by recourse action). Despite this general principle, the Civil Code establishes the possibility of the subsidiary liability of the head of the company in cases when the company fails to satisfy in full the claim of a third person arising from the contract which has been entered into by a head of the company who was not authorised to conclude it. It should be noted that, even if the creditors and employees may not directly raise the question of liability of the head of the company, they are granted with a right to influence the head of the company otherwise, namely, they may challenge in court the decisions adopted by the head of the company, if such decisions violate their rights or interests and breach the laws, the Articles of Association, or the principles of proportionality and rationality. It should be noted that resignation or revocation of the head of the company does not eliminate his obligation to compensate to the company (or in the abovementioned case to the third parties) damages incurred due to his faulty unlawful actions. (ii) According to Lithuanian law administrative liability for administrative offences specified in the Code of Administrative Offences could be applied only for natural persons. Legal entities, contrary to natural persons, can not be held liable for administrative offences specified in the Code of Administrative Offences. Thus, administrative liability for offences committed by the company as a general rule is applied directly to the head of the company. However, such model applies only in those cases if there is no other employee of the company who is directly responsible for a supervision/performance of a specific duty/obligation/requirement. The liability of other employees is usually established by internal company documents. The administrative liability of the head of the company is very extensive the head of the company can be found liable and punished for all actions of the company, including, but not limited to violations of labour law, tax law, environmental law, health law, company law, etc. In such cases the penalties for head of the company may be either the warning (as the minimum penalty) or the fine in the amount up to 10,000 Litas (approximately EUR 2,900), or, in certain cases, even up to 50,000 Litas (approximately EUR 14,500). (iii) According to the Criminal Code of the Republic of Lithuania, the head of the company can be held liable for a number of crimes related to property rights and interests, business order and other economic crimes (e.g. fraud, embezzlement, dissipation of property, malfeasant bankruptcy, disclosure of commercial secret, etc.). The sanctions for this type of crimes vary from a fine or Page 115

117 divestment of a right to hold certain offices up to imprisonment. It should be noted that, differently from the administrative liability, criminal liability is strictly personalised, i.e. the head of the company could be held liable for criminal offences only if certain illegal actions were committed personally by him (but not some other employee of the company). The principles of liability of the members of the supervisory council and/or the management board is the same as the principles of liability of the head of the company. However, if it is proven that the illegal act was performed by the supervisory council and/or the management board in corpore, the members are liable solidary. Liability of the owners The liability of the owners of the legal entities such as LLC, agricultural company or a cooperative company is limited and they may only be liable up to the issue price due to be paid for all the shares they have subscribed for. However, in case a company becomes unable to perform its obligations due to unfair actions of the owner, the owner is held liable for the obligations with its personal property. The owners of the personal enterprises or the general partners of the partnerships are liable for the obligations of the entity to the extent of the unfunded liability of that entity (subsidiary liability). 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? (i) The ownership interest in the LLC is represented through the shares which are securities certifying the participation on the company s capital and entitling to: property rights (e.g. rights to receive dividends or assets of the company in liquidation, receive shares if the authorized capital is increased from the funds of the company, etc.); and non-property rights (e.g. right to attend meetings of shareholders and to vote, to receive information about the company, challenge the resolutions of the general meeting of the shareholders, etc.). Similarly, by the way of owning shares entitling the shareholder with similar rights to those in case of LLC, the ownership is represented in other legal entities agricultural company, cooperative company. In cases of partnerships, the partners assume rights and obligations by signing the agreement with the rest of the partners and paying the contributions to the partnership. (ii) The ownership in LLC, cooperative and agricultural company is transferrable. However, the seller, before selling shares of LLC, is obligated to provide the pre-emption right to acquire the shares to other shareholders of LLC under the same conditions as proposed to the third person. This legal requirement is not applicable if 100% of shares of LLC are intended to be purchased. The shareholder must notify LLC of his intention to sell shares and ensure equal rights of all shareholders on the moment of the notification to acquire shares offered for sale. The preemption right is not absolute the articles of association may establish that shareholders are withdrawn the pre-emption right to acquire transferred shares. Yet, even in such case a part of shareholders may agree in the shareholders agreement that when selling shares to a person other than a party to such shareholders agreement the pre-emption right to such shareholders shall apply. The general partner of the partnership, unless otherwise established in the partnership agreement, may transfer the general partner s rights to another person only after having received the consent of all the general partners. The right of the limited partner to transfer the ownership in the partnership is not restricted. The transfer of the ownership in the agricultural company is generally not restricted, unless the participants agreement provides otherwise. Page 116

118 (iii) The minimum number of shareholders in the private LLC is 1 and the maximum 249. The number of shareholders in the public LLC is not limited. In cases of partnerships the number of owners is from 2 to 20 in the general partnership and from 3 to 20 in the limited partnership, of which at least 2 members have to be general partners. There may only be 1 owner in the personal enterprise. The agricultural company has to be composed of at least 2 members, the cooperative company of at least 5 members, the maximum number of the owners in both cases is not limited. 7. Is there a minimum capitalization? The amount of the authorised capital of a private LLC may not be less than LTL 10,000 (approximately EUR 2,900) and of the public LLC not less than LTL 150,000 (approximately EUR 43,000). There is no statutory requirement for the minimum capitalization to the other legal entities. 8. Is there a security that can be issued to the public? Only shares of the public LLC may be offered for sale and traded publicly. 9. Can the form incur debt, or grant security for debt? All the legal entities incorporated in Lithuania may incur debt and grant security for debt, however, under some circumstances this right is restricted for LLCs. If the LLC borrows from its shareholders, it may not pledge its assets to the shareholders. Moreover, the interest may not be higher than the average interest rate offered by commercial banks of the locality where the lender has his place of residence or business, which was in effect on the day of conclusion of the loan agreement. 10. What is the duration of the form? Can it be renewed? Lithuanian laws set no limitation on the duration of the legal entities. However, articles of association of the company or equivalent bylaws of the other legal entities may prescribe a limited duration of the entity. Even in such cases, the duration of the legal entity may be extended, accordingly amending legal entity s bylaws. 11. Describe the process, customary time period and approximate cost of establishing the form. There are five major stages in a LLC s founding process, which are similar to the process of establishing other legal entities: (i) Selection of the company s name and its preliminary registration; (ii) Execution of incorporation documents: signing of the Act of Incorporation or the Incorporation Agreement if the private company is incorporated by two or more incorporators; and signing the Articles of Association of the company. (iii) Opening an accumulative bank account and payment of initial capital; (iv) Execution of the decision of the Incorporator and formation of all managing bodies in the company: approval of the Articles of Association of the company; election of an audit company (mandatory under some circumstances); election of the members of the managing bodies of the company; and (v) Filing with the Registerof Legal Entities for registration of a company. Subsequent to the founding of the company, the following post-registration steps take place: (i) (ii) obtaining of the corporate seal; employment of CEO; Page 117

119 (iii) (iv) (v) company s registration with the Tax Inspectorate as tax payer and VAT payer, opening of the settlement account; acquisition of special accountancy documents; obtaining of necessary licences, residence permits, etc. In practice, the procedure of incorporation of LLC in Lithuania takes about 2-3 weeks. Performance of post-registration steps may last for 1-2 weeks. 12. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? There are no legal entities where the government or municipality must hold certain stake together with the private investor or derive profit from it, except the cases laid down in the Law on Enterprises and Facilities of Strate.g.ic Importance to National Security and Other Enterprises of Importance to Ensuring National Security. This Law states the particular enterprises which are recognized as being of strate.g.ic importance to national security and in which a proportion of the capital may be held by the private national and foreign persons conforming to the national security interests, provided the power of decision is retained by the State. In this Law, the power of decision of the State shall mean that in the enterprises indicated in this Law the State directly or through other companies controlled thereby must hold over ½ of the voting shares of these enterprises. In Lithuania government or municipality may establish specific public legal entities called state entities of which sole owner may be either government or municipality. 13. For what taxes is the form liable? Corporate income tax The tax base for the company (i.e. those registered in Lithuania) comprises all income sourced inside and outside Lithuania and all or part of the undistributed income of the controlled foreign entities. The tax base for foreign entities (i.e. those registered in foreign countries) comprises income received from activities carried out through permanent establishments in Lithuania and other income sourced in Lithuania, such as: Interest; Dividends; Royalties; Proceeds from rent/sale of immovable property, etc. The rate of corporate income tax in Lithuania is 15%. Capital gains are considered as ordinary business income and are subject to the standard tax rate. Companies are allowed to transfer their tax loss accrued for a tax period to another group company which would reduce its taxable profit for the same tax period by the amount of the loss transferred to it. Investments into substantial technological improvements (acquisition of machinery, equipment, software, rights, etc.), which are required for provision of services or for implementation of new technologies, will entitle to reduce the taxable profit down to 50%. A company with investments of EUR 1 million or more operating in a free economic zone is exempt from corporate income tax for six taxable years and is subject to a 50% reduced tax rate in the 10 subsequent years. The agricultural companies and the cooperative companies acting in the agricultural sector are subject to 5% profit tax. Dividends, paid by a Lithuanian company to either a Lithuanian or a foreign company, are subject to the withholding tax at a rate of 15%. However, owners may be exempted from the corporate income Page 118

120 tax imposed on dividends if that foreign legal entity holds continuously, at least for 12 months shares carrying more than 10% of the total number of votes in the Lithuanian legal entity (the payer of dividends). Other taxes The standard VAT rate is 21%. Real estate tax is imposed on the real estate (except for land) located in Lithuania and owned by (i) Lithuanian or foreign entities, or (ii) Lithuanian or foreign individuals and used for their business or individual activities or if the buildings are transferred to legal entities for their use for a period longer than 1 month. The annual rate of the tax is set every year by the local municipality in the range of 0.3% - 1%. Land tax is imposed on the land owned by the legal entities and individuals. The annual rate of the tax is 1.5% of the taxable value of the land determined by the Lithuanian Tax Authorities. All persons working under an employment contract in Lithuania must be covered by a social security scheme. At present no lower or upper limit is set for social security contributions on employment related income. For persons working under employment contracts the current social security rates are 30.98% % for employers and 9% for employees (including 6% of mandatory health tax). 14. What is the tax treatment of payments to foreign owners? The exemption from taxation of the dividends cannot be applied in case the recipient of dividends is established or otherwise organized in the target countries. Interest paid by a Lithuanian company to foreign companies is subject to 10% withholding tax. However, interest is not subject to the withholding tax provided such foreign companies are registered in a country of the EEA member state or in a country which is a contracting state to an effective double taxation treaty with Lithuania. Royalties paid to foreign companies are subject to a 10% withholding tax. Royalties include various types of copyright payments, license, or franchise fees and payments for know-how. It should be noted that the tax rate may be reduced to 0% under the EC Interest and Royalty Directive. 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? There are no tax laws treating differently foreign investors in comparison with local investors. However, the local investor in comparison to the foreign investor established in the target countries (tax heavens) are treated more favorable with respect to the exemption from taxation of the dividends applicable under certain circumstances mentioned above. Double taxation treaties under some circumstances exempt foreign investors from certain taxes paid in Lithuania, e.g. interests, royalties, etc. (see above). Contact Information Gintare Jakuntaviciute gintare.jakuntaviciute@lawin.lt LAWIN Jogailos 9/1 LT Vilnius, Lithuania Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 119

121 Issues Relating to Organizational Forms and Taxation Malaysia Prepared by Lex Mundi member firm Skrine 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. In Malaysia, any business enterprise may take one of the following forms - (i) a sole proprietorship; (ii) a partnership; (iii) a locally incorporated company; or (iv) branch of a foreign company. A locally incorporated company is most commonly used by foreign investors as it is commonly a requirement under the local laws to conduct business in Malaysia. All sole proprietorships and partnerships must be registered with the Companies Commission of Malaysia ( CCM ) under the Registration of Businesses Act The Companies Act 1965 ("CA") governs all companies in Malaysia, and the most common company structure in Malaysia is a company limited by shares. A foreign corporation may operate a branch in Malaysia by registering the branch with the CCM before commencing business or establishing a place of business within Malaysia in accordance with the CA. In addition, there are also other business forms which are available in Malaysia such as Operational Headquarters, Regional Distribution Centres, International Procurement Centres and Regional/Representative Office. 2. Are there attributes of the form that you consider unique to your jurisdiction? No. 3. Describe the management and governance structure for each organizational form. The structure of a company would typically include (a) Board of Directors which manages the business and affairs of a company (minimum of two resident directors whose principal or place of residence in Malaysia is required); (b) company secretary (whom shall be a natural person of full age who has his principal or only place of residence in Malaysia); and (c) auditor. 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? Every company must have at least two resident directors who have their principal or only place of residence within Malaysia. One of the main restrictions on foreign investors in carrying out business in Malaysia is the foreign equity restriction imposed by the Government in specific activities. The Foreign Investment Committee continues to formulate policy guidelines imposing Bumiputera (the indigenous race of Malaysia) equity restrictions in certain sectors such as that of national interest, ports and airports, Page 120

122 property, defence, public transportation and telecommunications. For other sectors such as, in the tourism industry, foreign participation is not allowed in outbound operators in the tourism business. In the insurance and takaful industry, foreign equity participation is allowed up to 70%. 5. Describe the extent to which management and owners are exposed to liability. Directors - A director s duties arise under common law fiduciary duty, statutory duties under the CA and the requirements as specified in the Bursa Securities Listing Requirement (for public listed companies). The remedy at common law for a breach of fiduciary duty is an action for damages for loss sustained by the corporation. Breach of statutory duty is an offence under the CA where the director if found guilty, could be ordered to pay damages to the company or repay any profit he had made. In addition, he may also liable to a fine or a term of imprisonment (section 132(3) of CA). In the event of any breach of the Bursa Securities Listing Requirements by the directors, Bursa Malaysia has the power to take enforcement actions and impose penalties on directors who are in default. Actions include issuance of a caution letter, imposition of a fine not exceeding RM1 million, imposition of a moratorium on or prohibition of dealings in the listed company s and/or other listed securities by the relevant director or any other action which Bursa Malaysia may deem appropriate. Shareholders - The liability of the members of a company limited by shares is limited by the Memorandum of Association to the amount (if any) unpaid on their respective shares. The maximum amount of the member s liability to the company is the unpaid portion of then nominal value of his shares, and once this is paid the shareholder need not contribute further to the company, even on an insolvent winding up. The liability of the members of a company limited by guarantee is limited by the Memorandum of Association of the company to such amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound up. When members at the date of the liquidation are unable to fulfill their obligations, the liquidator may have access to those who were members during the year prior to the commencement of liquidation in respect of liabilities whilst they were members (section 18(1) of CA). An unlimited company is formed on the principle of having no limit placed on the liability of its members. Members are liable to contribute to the assets on a winding up if the company has insufficient assets to satisfy its debt and liabilities. Former members who ceased to be members within the previous year may be liable in respect of debt incurred before they ceased to be members. 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? i. The subscribers to the memorandum shall be deemed to have agreed to become members of the company and on the incorporation of the company shall be entered as members in its registers of members; and every other person who agrees to become a member of a company and whose name is entered in is register of members shall be a member of the company (section 16(6) of CA). Apart from subscribing to memorandum, other persons who wish to become a member of a company may do so by subscribing for shares of the company. The evidentiary title to a share is provided by the share certificates. A share certificate which specifies the shares held by a member of the company will be prima facie the evidence of the title of the member to those shares. Ownership of shares and membership in a company are established by registering and entering the name of the new member into the register of members (section 158 of CA). Page 121

123 ii. The right to transfer shares is incidental to the ownership of those shares. Unless the Articles of Association or a statute prohibits or imposes restrictions, the right of a shareholder to make and have registered a bona fide transfer is unrestricted. In many public companies, there is usually no restriction on the right to transfer shares but private companies are required by CA to provide in their Articles of Association some form of restriction on the right to transfer shares (section 15(1)(a) of CA). An example of a provision that restricts the right to transfer shares is a provision vesting a right in the directors to refuse to register a transfer. Section 103(1) of CA provides that notwithstanding anything in the Articles of Association a company may not register a transfer of shares unless a proper instrument of transfer in the prescribed form has been delivered to the company. The prescribed form of an instrument of transfer is Form 32A (Transfer Form). The Transfer Form must be completed and signed by, or on behalf of, both the transferor and the transferee. Although the term proper instrument of transfer is not defined, case law has established that a proper instrument of transfer is one which must be duly stamped, unless exempted from stamp duty. The transfer is effected when the instrument is registered and the name of the transferee is entered in the register of members in respect of the shares. iii. Section 14(1) of the CA provides that the minimum number of members of a company is two. It requires two or more persons to subscribe their names to the memorandum for the purpose of incorporating a company. With the exception of a private company, whose number of members is limited to 50, there is no limit imposed by the CA as to the maximum number of members a company may have. 7. Is there a minimum capitalization? Section 14(1) of the CA provides for two or more persons to subscribe their names to the memorandum for the purpose of incorporation of company. In certain sectors, the Government and regulatory authorities have imposed capital conditions on companies intending to conduct certain types of businesses. For example, to establish a hypermarket, the minimum capital investment imposed by the Ministry of Domestic Trade Consumerism and Co-operatives in terms of shareholders funds (paid-up capital plus reserve) is RM50 million, to be reviewed every 3 years. The paid-up capital for each additional outlet is RM10 million. 8. Is there a security that can be issued to the public? Under the CA, there are various situations where a company may create a charge for the public such as to secure any issue of debentures, on uncalled share capital of a company, shares of a subsidiary of the company which are owned by the company, on land wherever situate or any interest therein or on book debts of the company. These charges shall be registered with the CCM within 30 days after its creation (section 108 of CA). With regard to the issuance or offer of securities to the public, such transactions are governed by the Capital Markets and Services Act 2007 ("CMSA"). Section 2 of the CMSA defines securities as (a) debentures, stocks or bonds issued or proposed to be issued by any government; (b) shares in or debentures of, a body corporate or an unincorporated body; or (c) unit trusts or prescribed investments. A private company is prohibited from inviting the public to subscribe for any shares in or debentures of the company (section 15(1)(c) of CA). Only a public company is allowed to invite public to subscribe for any shares or debentures. Page 122

124 9. Can the form incur debt, or grant security for debt? Yes. Section 19(1)(c) of the CA provides that the powers of a company shall include, unless expressly excluded or modified by the memorandum or articles, the powers set fourth in the Third Schedule of the Act. Paragraph 13 of the Third Schedule empowers a company to borrow or raise or secure the payment of money in such manner as the company may think fit and to secure the same or the repayment or performance of any debt, liability, contract, guarantee or other engagement incurred or to be entered into by the company in any way and in particular by the issue of debentures perpetual or otherwise, charged upon all or any of the company's property (both present and future), including its uncalled capital; and to purchase, redeem, or pay off any such securities. 10. What is the duration of the form? Can it be renewed? A company, once created by the law, is an independent legal entity with perpetual succession and can only be dissolved by a process of the law, or by way of a winding up. There are two primary methods of winding up under the CA as follows: a) Winding up by the courts: The list of persons who may present petition for the winding up of a company is provided under section 217(1) of CA. Grounds for winding up (section 218 of CA) include where a special resolution is passed, default in filing statutory report, failure to commence business, reduction of members below two or inability to pay debts. b) Voluntary winding up which involves two types of voluntary winding up: Member s voluntary winding up - a winding up of a company where a declaration of solvency has been made and lodged in pursuance to section 257 of CA. It must be preceded by a declaration of solvency. The conduct of liquidation is dominated by the members. Creditor s voluntary winding up - a winding up under Division 3 of Part X of CA other than a members voluntary winding up (section 4(1)). It is a winding up where no declaration of solvency has been made and lodged. The CA gives the control of a creditor s voluntary winding up largely in the hands of the creditors. It is possible to renew the life span of certain forms of entities. Some establishments are renewable for example a representative/regional office of a foreign company. The approval for the establishment of representative/regional office is valid for a period of 2 years and is renewable by an application being made to the Ministry of Industrial Development Authority. 11. Describe the process, customary time period and approximate cost of establishing the form. To incorporate a company in Malaysia, one must apply to the CCM using Form 13A together with a payment in order to determine if the proposed name of the intended company is available. The application will be approved if a name is available and the proposed name will be reserved for the applicant for three months. Certain documents are required to be submitted to the CCM within the three months period to secure the use of the proposed name such as (i) Memorandum and Articles of Association; (ii) Declaration of Compliance (Form 6); (iii) Statutory Declaration by a person before appointment as a director, or by a promoter before incorporation of a company (Form 48A); (iv) additional documents such as original Form 13A, a copy of the letter from CCM approving the name of the company and a copy of identity card of each director and company secretary. Page 123

125 The Memorandum of Association documents the company's name, the objectives, the amount of its authorised capital (if any) proposed for registration and its division into shares of a fixed amount. The Articles of Association describe the regulations governing the internal management of the affairs of the company and the conduct of its business. The registration fees payable for incorporation of a company is determined based on the authorized share capital of the company. AUTHORISED SHARE CAPITAL (RM) FEES (RM) 0-100,000 1, , ,000 3, ,001 1 Million 5,000 1,000,001 5 Million 8,000 5,000, Million 10,000 10,000, Million 20,000 25,000, Million 40,000 50,000, Million 50, ,000,001 and above 70,000 The procedure (including the documents to be lodged with the CCM) for registering a foreign company with CCM differs slightly but does not detract from the registration requirement with the CCM. Every foreign company shall, within a month of establishing a place of business or commencing business within Malaysia, lodge with the CCM the registration notice of the situation of its registered office in Malaysia using the prescribed form. The above registration fees payable to CCM also apply to registration of a foreign company. 12. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? None that we are aware of. 13. For what taxes is the form liable? A company is treated as a taxable entity separate from its shareholders and is chargeable to income tax in respect of any trade or business carried on in Malaysia. A company is resident if its business is controlled and managed in Malaysia. Save for such companies in the banking, shipping, insurance and air traffic sectors who are taxed on their global income, a resident company is chargeable to tax on its income derived from, or accruing in Malaysia. Such income derived from outside Malaysia (i.e. foreign sourced income) but remitted to Malaysia, are exempted from tax with effect from the year of assessment (Y/A) A non-resident company is only chargeable to tax in respect of its income derived from, or accruing in Malaysia, but not on its foreign sourced income, irrespective of whether such foreign sourced income is remitted to Malaysia. The income tax rate applicable to a company in Malaysia for Y/A 2009 is 25%. 14. What is the tax treatment of payments to foreign owners? A non-resident who has an investment in a Malaysian company, by way of share or stock holdings, can receive a payment from such a company by way of: a) a dividend; or b) a reduction of the paid-up capital of the company; or c) a distribution in the course of the liquidation of the company. Page 124

126 In the case of (b) and (c), no Malaysian tax is payable as the receipts are of a capital nature. In the case of dividends, although these receipts are of an income nature, they too are not taxable in the hands of the non-resident recipients. This is so because under the single tier tax system which was implemented from Y/A 2008, the tax on profits of companies is a final tax and the dividends distributed to the shareholders are tax-exempted in their hands. 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? The tax treatment on dividend payouts and distribution of funds on the capital reduction or liquidation of a company applies equally to a resident and non-resident of Malaysia. Withholding tax is not applicable to dividends. However, the income of a non-resident consisting of interest derived from Malaysia is subject to a withholding tax at the rate of 15%, unless: a) it is varied by the Director General; or b) a relevant double tax treaty applies which supersedes the rate provided in the Income Tax Act, In the case of royalty payments to a non-resident, such payments are subject to a withholding tax chargeable at the rate of 10%. Contact Information Harold Tan Kok Leng tkl@skrine.com Skrine Unit.No , 8th Floor, Wisma UOA Damansara 50, Jalan Dungun, Damansara Heights Kuala Lumpur, Malaysia Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 125

127 Issues Relating to Organizational Forms and Taxation Malta Prepared by Lex Mundi member firm Ganado & Associates, Advocates 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. A mix of vehicles, which are found in both civil and common law jurisdictions, are also available under Maltese law. Such vehicles include the limited liability company (which is the most popular vehicle used), civil and commercial partnerships (such as the partnership en nom collectif and the partnerships en commandite) and foundations. It is also possible to set up other types of organizations such as cooperatives, associations, clubs, associations en participation and European Economic Interest Grouping ( EEIG ) Maltese law contemplates the use of trusts, although these are not organizations and do not have legal personality. While the use of a Maltese limited liability company has been widespread and is particularly utilized in a variety of activities of both a trading and holding nature, in recent years there has been an increased interest and use of alternative vehicles such as partnerships and trusts particularly where transparency is required from a tax perspective. Given the breadth of the questions below, we are going to limit our response to the most common form i.e. limited liability company. 2. Are there attributes of the form that you consider unique to your jurisdiction? Maltese companies engaged in international trading and/or holding activities are normal, taxable, onshore limited liability companies registered in Malta in terms of the Companies Act, 1995 and are the same limited liability companies that can be used for any activities, whether domestic or international or both. Malta has no multiple (and often confusing) types of companies that can be incorporated depending on the particular needs of the promoters of the company, but rather has one type of limited liability company. Companies incorporated in Malta are considered to be both resident and domiciled in Malta and thus chargeable to tax in Malta on their worldwide income at the standard corporate tax rate of 35%. Malta operates a full imputation system of taxation whereby the tax suffered at the level of the company on its profits is imputed to the shareholder. Thus, assuming a rate of taxation at the level of both the company and the shareholder at 35% (the maximum rate of tax applicable) no further tax is due by the shareholder in respect of dividends received. Subject to certain conditions, tax refunds may be due to the shareholder upon a distribution of dividends. Tax refunds may be due either because the shareholder is taxable at a lower rate of tax than that suffered by the distributing company or because of the availability of refunds in respect of income allocated to certain tax accounts (please refer to Question 14 for further details on the entitlement for refunds under Maltese law). Page 126

128 3. Describe the management and governance structure for each organizational form. In case of a limited liability company, the management and administration of the company would be vested in the board of directors. In case of the partnership en nom collectif (this is a type of commercial partnership which has its obligations guaranteed by the unlimited, joint and several liability of all partners) the administration and representation of the partnership is vested in each of the partners severally, unless otherwise provided in the deed of partnership. The partnership en commandite is a type of limited partnership which can have its capital divided into shares (where such partnership has its capital divided into shares it is treated as a company for income tax purposes). The partnership has its obligations guaranteed by the unlimited, joint and several liability of the general partners. The limited partner would have his liability limited to the amount, if any, unpaid on his contribution. In case of partnerships en commandite, the administration and representation would be vested in the general partners and unless the deed of partnership provides otherwise, such administration and representation is vested in each of the general partners severally. The management of foundations would be vested in the board of administrators with the possibility to have a supervisory council or protector appointed in order, amongst other things, to oversee the administrators of the foundation. 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? There are no residence requirements for management or owners. Non-Maltese may freely be a shareholder or a beneficiary of a Maltese vehicle or occupy the office of director. However, appropriate non-maltese advisors should be consulted to verify whether there would be any adverse tax implications outside Malta in view of the residence of the directors of a Maltese company and the place where the board meetings of the Maltese company are held. One can also note that, due to substance requirements driven by foreign tax considerations, it is typical that Maltese qualified persons having the knowledge in the particular industry in which the vehicle is operating are appointed to the board of management. 5. Describe the extent to which management and owners are exposed to liability. A company has a legal personality distinct from that of its members. The members liability is generally limited to the amount, if any, unpaid on the shares respectively held by each of them. Naturally this limitation would not apply in the case of fraudulent or wrongful trading. Under Maltese law, the directors of a limited liability company are bound by certain statutory fiduciary and other duties and obligations, and will also be bound by the relevant provisions contained in the Memorandum and Articles of Association of the particular company. A director of a Maltese company has a general duty to act honestly and in good faith and in the best interest of the company. The general duties of directors are provided for in Article 136A of the Companies Act (Chapter 386 of the laws of Malta) whereby a director is obliged to promote the well-being of the company and is responsible for the general governance of the company and its proper administration and management, including compliance by the company with all applicable laws and regulations together with the general supervision of its affairs. Page 127

129 Any breach of duty or negligence on the part of directors in the performance of their duties will render the directors liable for damages sustained by the company (apart from penalties prescribed by the Companies Act). The personal liability of the directors in damages for any breach of duty is joint and several subject to the following two exceptions: a) where a particular duty has been entrusted to one or more of the directors, only such director/s shall be liable; b) a director shall not be liable for the acts of his co-directors if he proves either that he did not know of the breach of duty before or at time of occurrence and that on becoming aware of it he signified his dissent in writing or that, knowing that the co-directors intended to commit a breach of duty, he took all reasonable steps to prevent it. The Companies Act also provides for director liability in the following scenarios: a) wrongful trading where a director allows an insolvent company to continue trading or incurring debts when there was no reasonable prospect that the company would avoid being dissolved due to its insolvency. In such a case, no fraud needs to be proven for the directors to be held liable; b) fraudulent trading if a director carries on the company business fraudulently; c) fraudulent offences under the Act; d) any breach of duty. A director may be compelled (i) to repay, restore or account for money or property with interest and (ii) to contribute such sum to the company s assets by way of compensation in respect of improper performance or breach of duty as the court thinks fit; e) for bad accounting records unless the director could prove that he acted diligently and that the default was excusable in the circumstances. Directors also face potential liability under Maltese fiscal laws. 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? The ownership interest in a limited liability company will be represented in the form of shares that would be subscribed by the said owner/shareholder. Shares held in a Maltese company are freely transferable. However, in case of private limited liability companies, Maltese company law requires some form of restriction on the transferability of shares (such as directors consent or pre-emption rights) and this can further be limited in the Memorandum and Articles of Association of the company. Under Maltese company law there is a minimum two shareholder requirement save in the case of single member companies (which are specifically regulated). The second shareholder could hold just one share with limited rights (in such a way as to satisfy the two shareholder requirement). Maltese company law also allows for the constitution of single member companies in limited circumstances. 7. Is there a minimum capitalization? The minimum share capital as required under Maltese Company law is as follows: a) In the case of a private company 1, % of which must be paid up. b) In case of a public company, 46, % of which must be paid up. 8. Is there a security that can be issued to the public? A private company is prohibited from offering shares or debentures to the public. Page 128

130 Naturally such a prohibition does not apply in case of a public company which can offer equity and debt securities to the public, subject to any requirements laid out by law such as the publication of a prospectus. 9. Can the form incur debt, or grant security for debt? There are no thin-capitalization rules in terms of Maltese tax laws. Thus a company may be highly leveraged (in the absence of the application of any capital adequacy requirements that typically apply in case of licensed entities). Though there are no thin-cap rules, from an income tax perspective interest expenses would only be deductible to the extent that it is wholly and exclusively incurred in the production of the income. Thus a strict link must exist between the interest expense and the taxable income generated by the company. If any capital asset acquired by the company through debt financing does not produce income, the interest expense would be lost and may not be carried forward against any income produced in future years. The Companies Act provides that a company shall, unless otherwise provided in its memorandum or articles, have the power to borrow money and to guarantee the obligations of any third party and, for such purpose, to hypothecate or charge its undertakings, property and uncalled capital or any part thereof including as security for its obligations or for those of any third party, and to issue debentures, debenture stock and other securities whether outright or as security for its liabilities or obligations or for those of any third party. Typical types of security under Maltese law are pledges, privileges, special and general hypothecs. 10. What is the duration of the form? Can it be renewed? The duration of a limited liability company is generally unlimited 11. Describe the process, customary time period and approximate cost of establishing the form. The process for the incorporation of a Maltese company is a straightforward one and first requires the preparation of the Memorandum and Articles of Association which have to be signed by the shareholders or by their attorneys under a written power of attorney. The Memorandum and Articles of Association duly signed in original is to be presented for filing with the Maltese registryof Companies together with accompanying incorporation documents which would include: a) in the case of individual shareholders and/or director s of the Maltese company, a color copy of a valid passport or means of identification; b) in the case of corporate shareholders and/or directors, a certified copy of the certificate of incorporation or a certificate of good standing; c) A copy of a valid passport or means of identification of the company secretary d) Executed Powers of Attorney authorising the signatory on the Memorandum and Articles (if applicable); e) Bank references of the Shareholders in cases where the shareholders are non-eu residents; f) an original bank deposit slip showing that an amount (in the same currency denomination as the share capital) at least equivalent to the value of the Company s Issued Share Capital has been credited to an account in the name of and allocated to the Maltese company indicating the correct company name and the fact that it is a company in formation. Upon the filing of the incorporation documents, the payment of the registryfees would need to be catered for. The Company registrycharge is calculated on the authorised share capital of the company with a minimum charge of 245 (on authorized share capital not exceeding 1,500) and a maximum of 2,250 (on authorized share capital of more than 2,500,000). Page 129

131 An Annual registryfee is also due on each anniversary of incorporation. The said fee is again calculated on the authorised share capital of the company with a minimum annual charge of 100 on authorized share capital not exceeding 1,500) and a maximum of 1,400 (on authorized share capital of more than 2,500,000). Upon the delivery of the incorporation documents and the payment of the incorporation fees with the Registry, the documents would be reviewed by the Registrar of Companies. Once such a stage is concluded, the registrywould allocate a unique company registration number to the company and proceed in uploading the Memorandum and Articles of Association of the company together with the certificate of incorporation and a copy of the bank deposit slip on the registryof Companies website which confirms that the company has successfully been incorporated. The time-frame for the completion of the incorporation process by the registryof Companies can be as little as 24 hours provided all documents are in order. 12. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? No such requirements are present in Malta 13. For what taxes is the form liable? Maltese incorporated companies are fiscally resident in Malta and are taxed in Malta on their worldwide income at the standard flat corporate rate of 35% irrespective of their place of management and control subject to any applicable exemptions. 14. What is the tax treatment of payments to foreign owners? Malta operates a full imputation system of taxation whereby the tax suffered at the level of the company on its profits is imputed to the shareholder.thus, assuming a rate of taxation at the level of both the company and the shareholder at 35% (the maximum rate of tax applicable) no further tax is due by the shareholder in respect of dividends received. In this manner, double taxation in the hands of both the company and its shareholders is avoided. Indeed shareholders who are either not resident in Malta or who are individuals resident in Malta are not required to declare the dividends in any tax return for Maltese tax purpose. In certain circumstances tax refunds may be due to the shareholders either because the shareholder is taxable at a lower rate of tax than that suffered by the distributing company or because of the availability of refunds in respect of income allocated to certain tax accounts.tax refunds are available in respect of profits allocated to the foreign income account and the Maltese taxed account. The extent of the refund depends on a number of factors (including whether the profits consist of passive interest and royalties and whether double taxation relief has been claimed by the company in respect of the profits). The standard refund is of 6/7ths, which could be reduced to 5/7ths or 2/rds. The refunds are gross of any actual foreign tax suffered by the company in respect of the distributed profits. In terms of Maltese domestic law, royalties and interest (including discounts and premia)derived by persons not resident in Malta are exempt from Maltese tax, subject to the satisfaction of a number of straight-forward conditions, namely that: (i) the beneficial owner of the royalty/interest is a person not resident in Malta and is not owned and controlled by, directly or indirectly, nor act on behalf of individuals who are ordinarily resident and domiciled in Malta and (ii) the non-resident person is not engaged in any trade or business in Malta through a permanent establishment situated herein to which the royalties/debt-claim are effectively connected. This applies irrespective of the existence or otherwise of a double tax treaty between Malta and the country of residence of the recipient. Similarly Maltese domestic law contains an exemption from tax in respect of capital gains arising on a transfer (including redemption; liquidation or cancellation) of securities in a Maltese company which is Page 130

132 not a property company. This exemption applies where such gain is derived by a non-resident who is not owned and controlled, directly or indirectly nor acts on behalf of individuals who are ordinarily resident and domiciled in Malta. This exemption is not reliant on the existence of a double tax treaty or otherwise between Malta and the country of residence of the recipient. 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? There is no discrimination in Maltese tax system against foreign residents who are shareholders of Maltese companies. The imputational system of taxation of dividends applies irrespective of the residence of the shareholders. Naturally any tax liability on any refunds received by shareholders of Maltese companies would have to be assessed in terms of the tax rules applicable in the shareholders country of residence. Contact Information Dr. Anthony Cremona acremona@jmganado.com Dr. Nikolai Muscat Farrugia nmfarrugia@jmganado.com Ganado & Associates, Advocates 171, Old Bakery Street Valletta VLT 09, Malta Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 131

133 Issues Relating to Organizational Forms and Taxation Mexico Prepared by Lex Mundi member firm Basham, Ringe Y Correa, S.C. 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. Pursuant to the General Corporation and Partnership Law, there are 6 types of business corporations: a) General Partnership (sociedad en nombre colectivo): A partnership where all of the partners are jointly, severally and absolutely liable for the partnership s business, though they may contractually agree among themselves to limit their individual liability; its corporate name must always be followed by the words y compañia (and company). b) Limited Liability Partnership (sociedad en comandita simple): A partnership in which one or more general partners (socios comanditados) are absolutely and jointly and severally liable for the partnership s business, and one or more limited partners or partners in commendam (socios comanditarios) are only liable for the partnership s liabilities up to the amount of their investment; its corporate name must always be followed by the words sociedad en comandita or the abbreviation S. en C.. c) Limited Liability Company (sociedad de responsabilidad limitada): A company formed by no more than 50 members who are only liable up to the amount of the ownership interest (partes sociales) that they hold; since a regular partnership cannot switch to this type of business entity without being deemed to have altered its legal nature, this business form more closely approximates a limited liability company in the U.S. than a limited liability partnership (this latter often allows partnership to switch to it without this being deemed the creation of a new business entity); its corporate name must always be followed by the words sociedad de responsabilidad limitada or the abbreviation S. de R.L.. d) Corporation (sociedad anónima): A legal entity owned by shareholders whose liability is limited to the amount of their ownership share in the entity; a corporation s name always must be followed by the words sociedad anonima or the abbreviation S.A.. e) Limited Liability Stock Partnership (sociedad en comandita por acciones): A type of limited liability partnership that issues shares of stock; its corporate name must be followed by the words sociedad en comandita por acciones or the abbreviation S. en C. por A. f) Cooperative (sociedad cooperativa). This type of company is contained in the General Corporation and Partnership Law but has its own regulatory law called the General Law of Cooperatives. It is a form of corporate organization formed by individuals with common interests based in the principles of cooperation and for the purpose of satisfying its individual and common needs through producing, distributing and consuming goods and services. The corporation and the limited liability company are the type of legal entities most used in Mexico, the latter being the one most used by foreign investors due to tax benefits. 2. Are there attributes of the form that you consider unique to your jurisdiction? Pursuant to Mexican Law, every business corporation requires at least two shareholders/partners. Page 132

134 3. Describe the management and governance structure for each organizational form. As stated above, the corporation and the limited liability company are the two most used types of legal entity; thus we will refer in this section only to them: a) Corporation: The management of a corporation is entrusted to one or more directors who need not be shareholders. Two or more directors will constitute a board of directors and when there is only one director, the director will be referred to as a sole administrator or a sole director. The corporation, by shareholders meeting or decision of the board of directors or the sole director, as the case may be, may appoint one or more officers to manage the affairs of the corporation. It is important to point out that in Mexico, officers only have the authority expressly vested in them by powers of attorney granted to them. Under Mexican law, one or more statutory examiners must be appointed by shareholders meeting to supervise the affairs of the corporation. Statutory examiners need not be shareholders. A statutory examiner has certain supervisory and other statutory powers designed to protect the interests of shareholders by watching over the affairs of the corporation. In general terms, the obligation of the statutory examiner is to supervise the performance of the board of directors or the sole director, as the case may be, make reports to the shareholders and protect shareholder rights in the corporation. Among other disqualifications, a statutory examiner may not be an employee of the corporation, or broadly speaking, an employee of a related corporation or a relative of a director of the corporation. Normally the external auditing firm appoints a partner to act as the statutory examiner. b) Limited Liability Company: The management of a limited liability company is entrusted to one or more managers (who would be called directors in a Corporation) who need not be members. Any member has the right to withdraw from the limited liability company when an outsider is appointed as a manager in opposition to that member's vote. As in the case of a corporation, the limited liability company may designate one or more officers to manage its affairs. Such officers will only have the authority granted to them by the limited liability company in powers of attorney. The appointment of a statutory examiner in a limited liability company is optional. 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? There are no restrictions on residency for managers or shareholders of Mexican companies, provided that they comply with the immigration laws with respect to its resident status. Mexico s Foreign Investment Law and its regulations impose some restrictions on foreign investment in Mexico, which while considerably relaxed in recent years, still have an impact upon foreign investors in Mexico. In this respect, there are some strate.g.ic areas reserved exclusively for the state such as petroleum, basic petrochemicals, electricity, nuclear energy generation, radioactive minerals, tele.g.raph, post services, coinage, control, monitoring and surveillance of ports, airports and heliports. There are also some activities reserved exclusively for Mexican individuals or entities such as national land transport of passengers, tourists and cargo, retail gasoline sales and distribution of liquid gas, broadcasting and other radio and television services other than cable television, and development banking. Page 133

135 Finally there are some activities and entities which have certain limitations as to the percentage of foreign investment such as: a) Up to the 10% in production cooperatives. b) Up to 25% in national air transport, aero taxi services and specialized air transport. c) Up to 49% in insurance and bond companies, money exchange companies, public warehouses, pension funds, manufacturing and marketing of explosives, firearms, cartridge, ammunition and fireworks (without including the acquisition and use of explosives for industrial and mining, printing and publication of newspapers within Mexico, Series T shares of companies owning livestock, farms, and forests, freshwater and coastal fishing (including in the exclusive economic zone), port administration, port services for piling, shipping companies engaged in the commercial operation of vessels in inland navigation, supply of fuel and lubricants for ships, aircrafts and railroad equipment, public telecommunication network concessions. 5. Describe the extent to which management and owners are exposed to liability. The liability of stock owners depends on the type of legal entity (see answer No. 1 above). Managers in all cases are liable for the performance of their duties. 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? In some types of legal entities, the ownership interest is represented by shares, such as in corporations. The ownership interest in other type of legal entities, such as the limited liability company (although the members may be issued a type of participation certificate), is not represented by shares and in these cases the ownership interests are recorded in the companies corporate books. In general terms, stock must be considered to be freely transferable unless the contrary is agreed to in the by-laws or in a shareholders agreement. The company s bylaws may foresee that a transfer of shares may only be carried out with the board s previous authorization. As stated above, every business corporation requires at least two shareholders/members. 7. Is there a minimum capitalization? Minimum capital requirements are applicable under Mexican law which provides that a corporation s capital stock may not be less than $50,000 (fifty thousand pesos 00/100 Mexican Cy) and as for the limited liability company, the capital may never be less than $3,000 (three thousand pesos 00/100 M.N.). 8. Is there a security that can be issued to the public? Yes. According to the Mexican Securities Law (the Securities Law ), a Public Offering is defined as any offering, with or without consideration, made in Mexico through any means of communication to the general public and to unspecified persons for purposes of subscribing, acquiring or transferring securities. The Securities Law defines securities as the shares of stock, equity interests, debentures, bonds, títulos opcionales (or warrants), certificates, notes, drafts or bills of exchange and other negotiable instruments, known or unknown, registered or not with the Registry, which are subject to being traded on the securities exchanges referred to in the Securities Law, issued in series or otherwise, and representing the capital stock of an entity or a share in a good or participation in a collective credit or any right under an individual credit, under any applicable national or foreign laws. The public offering of securities requires prior registration with the National Securities Registry. Page 134

136 9. Can the form incur debt, or grant security for debt? Yes provided that its bylaws have an express provision thereto. 10. What is the duration of the form? Can it be renewed? There are no restrictions on duration; the law allows shareholders/members to agree upon it. However, it is very common to establish a duration of 99 years or leave the duration indefinite. 11. Describe the process, customary time period and approximate cost of establishing the form. a) An authorization from the Department of Foreign Relations must be obtained in order to use the corporate name of the entity. b) The shareholders/members must agree upon the by-laws of the entity. c) The by-laws must be notarized before a notary public. d) The incorporation deed must be filed before the Public registryof Commerce. e) If the entity has foreign investment, it must be registered with the National registryof Foreign Investment. f) The entity must be registered as a taxpayer with the Federal Taxpayer Registry. As to the customary period of time, an entity can be formed within a week. However, the federal government launched a website called Tu Empresa (Your Company) which supposedly allows the people to incorporate an entity in 45 minutes, subject to the fulfillment of all the requirements and payments therefor. As to the costs, an entity can be incorporated with approximately $10,000 (ten thousand pesos) which is approximately US $770 (seven hundred dollars) his amount includes registration fees and notary fees but does not include other fees such as lawyers fees. 12. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? As a principle of law, the authorities may only carry out the activities which they are expressly allowed to, thus they may take part in a project or an investment vehicle provided that its investment regime allows them to. As a general rule, no government participation in a project is necessary unless the specific project so requires this, usually because of the investment of public funds or you use of public property. 13. For what taxes is the form liable? a) Income Tax Mexican corporations are under an obligation to pay income tax at the rate of 30%. Net profits are obtained by deducting from all taxable income earned in the fiscal year, the deductions authorized by law, as well as workers profit sharing and tax loss carry forwards. Should the amount of the authorized deductions exceed the amount of gross income, a tax loss is incurred which may be carried forward up to ten years and set off against profits in those years. Mexican taxpayers are required to file annual tax returns, which must be filed within three months following the closing date of the fiscal year. In Mexico, the fiscal year runs from January 1 to December 31. Nevertheless, short fiscal years apply in certain cases, such as the year in which operations begin. During the fiscal year, corporations must calculate monthly estimated tax payments, which are credited against annual income tax. No estimated payments have to be made during the fiscal year of incorporation. Page 135

137 b) Single Rate Business Tax As of 2008 a new tax came into effect, called the Impuesto Empresarial a Tasa Única or IETU. This new tax is introduced as a minimum tax, supplementary to income tax. The tax applies to individuals and entities resident in Mexico as well as to foreign residents with a permanent establishment in Mexico, in connection with sales of goods, provision of independent services and lease of goods. This tax would apply to taxpayer s net income at the rate of 17.5%. Exemptions would apply to certain transactions, such as sales of shares, as well as to certain entities, such as charities, provided that certain requirements are met. c) Value Added Tax ( VAT ) Taxpayers are required to pay VAT upon any of the following activities when carried out in Mexico: (i) transferring goods; (ii) providing independent services; (iii) granting the temporary use of goods; or (iv) importing goods or services. The tax is calculated by applying a 16% rate to the value of the transactions. In very few cases, such as a sale of food or export of goods or services, the tax is at a 0% rate. d) Cash Deposit Tax This tax is triggered when monthly bank cash deposits exceed MXP $15, (about $ USD). All cash deposits in the same financial institution carried out within the same month must be considered to determine whether the threshold is exceeded. The tax is calculated and withheld directly by financial institutions at the rate of 3% on the total amount of the qualified deposits. This tax may be offset against taxpayer income tax. e) State Taxes These taxes are triggered depending on the local laws of every State. The most common state taxes are property tax, the tax on the acquisition of real estate, and the payroll tax. 14. What is the tax treatment of payments to foreign owners? Foreign owners may receive income from different sources. Accordingly, a specific analysis of the tax regime in Mexico applicable to each type of income is required to be able to answer this question. Nonetheless, if a Mexican entity pays dividends to foreign shareholders, the tax regime in Mexico applicable to those dividends is the following: If dividends are paid out of profits on which the company has already paid corporate income tax, such dividends are tax-free in Mexico. For this purpose, companies are entitled to create an after tax profits account or Cuenta de Utilidad Fiscal Neta ( CUFIN ), where after-tax profits are recorded. Once the applicable corporate tax has been paid, any dividend or profit distribution made from this account is not subject to further taxation regardless of the nationality or residence of the recipient. If corporate income tax has been not paid on the profits from where the dividends arise, then the corporation must pay a dividend tax, on a grossed up basis, and then apply the 28% corporate rate (30% from 2010 through 2012; 29% in 2013; and 28% again as of 2014). In this case, no tax withholding is applicable regardless of the tax residence or nationality of the recipient. Conversely, if the foreign owner receives payments for income other than dividends (i.e. interest, royalties, sale of shares, among others), then according to the Mexican Income Tax Law, in principle, Page 136

138 tax withholding would be applicable to the income. It is noteworthy to mention that tax treaties may provide relief from the tax treatment applicable under Mexican law. 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? No, it is the same tax treatment. Contact Information Miguel A. Peralta peralta@basham.com.mx Christian Dorantes Picazo cdorantes@basham.com.mx Basham, Ringe Y Correa, S.C. Paseo de los Tamarindos No. 400-A, Piso 9 Bosques de las Lomas Mexico, D.F Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 137

139 Issues Relating to Organizational Forms and Taxation Nicaragua Prepared by Lex Mundi member firm Alvarado y Asociados 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. In Nicaragua there are the following forms of organization: a) Sociedad en Nombre Colectivo (Limited Liability Company LLC-): This is an organization whose members are severe and joint responsible for the Company s obligations unless the legal name include the word "limited. The capital stock is not represented in shares, therefore, investors choosing LLCs are not so interested in stock or complex capital transactions but rather in family businesses or, are investors that do not want the participation of additional members; and are often chosen for businesses where a future sale of the Company is not part of the original plan. b) Sociedad en Comandita Simple (Limited Partnership LP-): It is formed by two categories of partners: (i) The ones that are severe and joint responsible for the Company s obligations and, (ii) Those whose responsibility is up only to the amount of their capital in the Company. This Company basically shares the same characteristics of LLCs; however it is rarely used in the country. Investors interested in this kind of companies choose LLCs. c) Sociedad Anónima (Corporation): It is formed by the reunion of a common fund, which is given by shareholders responsible only for the amount of their respective shares. Corporations are mostly used by investors in the country, given the smooth of transactions, including stock transactions, and because corporations allow them to keep the corporate structure with foreign parent companies in a more practical way. d) Sociedad en Comandita por Acciones (Joint Stock Company): It is formed like LPs, except for the capital stock which is represented in shares. The distinction between the two groups of members is also included in this company: a group joint and severe liable for the Company s obligations and, the other responsible only to the amount of their shares. This Company has most of the characteristics of corporations, but they are rarely used in Nicaragua; investors prefer corporations. e) Cooperativa (Cooperative): Cooperative is an autonomous association of individuals that unite efforts to cope with their necessities, economic and cultural aspirations, through a jointly owned and democratically controlled company. Foreign investors do not use cooperatives given that the structure, organization and administration of these companies are very bureaucratic, require the presence of a large number or members, are subject to the Labor Ministry s control and, only 10% of its members can be foreign. f) Asociaciones Sin Fines de Lucro (Non Profit Associations): It requires the approval of the Nicaraguan Parliament, which is the one granting the Association its legal personality and; it is subject to the further control of the Governmental Ministry. This Association is chosen by investors interested in cooperate with education, health, agriculture, microfinance and small producers sectors. These Associations have special fiscal benefits. Page 138

140 2. Are there attributes of the form that you consider unique to your jurisdiction? In Nicaragua, corporations should have at least three partners; otherwise, if after six months of existence the corporation continue having only two partners, then any of them can ask for the corporation s dissolution without the consent of the other partner. The Nicaraguan legal system does not contemplate sole proprietorship companies. 3. Describe the management and governance structure for each organizational form. a) LLC: Partners, or one of the partners, are often the Company s administrators as well, being directly involved in the operations of the Company; however, partners may appoint a third party to hold such position. The administrator(s) is entitled to use the legal name of the Company and to act on its behalf; if no administrator is appointed then any of the partners is entitled to use the legal name and to act on behalf of the Company. b) LP: It shares the LLC s administration characteristics. c) Corporation: It is governed by two main bodies: the Shareholders Meeting and, the Board of Directors. There is also the Comptroller position, which watches over the corporation s good administration and finance. The Shareholders Meeting is the highest authority and, from such shareholders each member of the Board of Directors is elected; that is, in Nicaragua the members of the Board of Directors are also shareholders. The Board of Directors manages and administrates the corporation s business, reporting results to the Shareholders. Legal entities may be Shareholders and Directors as well, which are represented by the individuals they designate for such purposes. Most Board of Directors are conformed by a President, which is also the President of the corporation, a Secretary and a Treasurer; however, the parties are free to appoint and designate any positions and members as they want to according to the Corporation s By-laws. d) Joint Stock Company: It has a similar administration structure of corporations, aggre.g.ating that they require also the conformation of a Vigilance Board that must include at least three members of the group of partners that are not severe and joint responsible for the Company s obligations in order to carry out the vigilance of books, records, etc e) Cooperative: It has the following administration structure: Associates General Meeting; Administration Board; Comptroller Board and; Commission for the Education and Promotion of Cooperatvism (CEPC). The maximum authority is the Associates General Meeting, while the Administration Board takes care of the operational and administrative aspects. The Comptroller Board watches over the Cooperative s administrative and finance course and, the CEPC is in charge of planning and execute education policies and promotion plans of the cooperative movement. f) Non Profit Association: The Governance and Administration depends directly on what their Articles of Incorporation and By-laws establish. Usually, the maximum authority is the General Associates Meeting and, a Board of Directors is in charge of the Association s operations and management in accordance with their By-laws. The election of members, their status and conditions are also established in the By-laws. The Government Ministry of Nicaragua makes sure that the governance of this Associations and election, suspension or expulsion of members are in full accordance with their by-laws. Page 139

141 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? In Nicaragua, legal representatives of companies (i.e., Presidents of companies, POAs, etc.) must be legal residents in the country in order to exercise their legal representation without any hindrances. Otherwise, some institutions (banking and financial institutions, as well as public offices such as Tax Authority, Public Registries, Customs Authorities, etc.) and third parties may not recognize the legal representation of foreign individuals. The following sectors have some restrictions on foreign ownership and/or foreign interests: a) Aerial Transportation Activities: Aerial cabotage transportation activities are to be carried out exclusively by Nicaraguan individuals or Nicaraguan legal entities. Regarding legal entities, the President of the Board of Directors or at least 51% of the Board of Directors must be from Nicaraguan origin. Foreign companies are not allowed to carry out cabotage activities. b) Media and Television Broadcasting: Program and Broadcasting TV channels require a license issued by the Government and, such licenses can be issued to Nicaraguan individuals or legal entities with 51% of their capital stock constituted by Nicaraguan nationals. c) Ground Transportation: Foreign shipping companies established in Nicaragua, may only use trucks from their Nicaraguan partners, or trucks from any other Nicaraguan company or individual rendering ground transportation services, in order to transport their specialized load in Nicaragua. Furthermore, internal load transportation services may only be rendered by Nicaraguan persons. 5. Describe the extent to which management and owners are exposed to liability. Under the Nicaraguan Code of Commerce, partners (that is, owners) and companies are different legal persons. However, depending on the form of organization, partners may be severe and joint liable for the company s obligations (i.e., LLCs if the word limited is not added in the legal name; the first group of partners in LPs and Joint Stock Companies). In the case of corporations, the obligations are paid with the corporation s common fund, assets, etc., and shareholders respond only up to the amount of their respective shares. However, under the Nicaraguan Criminal Law partners, directors, representatives, auditors, managers, administrators, etc., are personally responsible for crimes committed through the company and/or against the company (i.e, abusive management and/or authorization of improper acts) and, such crimes are punished with prison, pecuniary sanctions and prohibition to exercise profession or commerce. 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? The ownership interest in corporations is represented in shares. Shares are transferable securities under the Nicaraguan Securities Law and Code of Commerce, but such transferability may be restricted, conditioned and regulated by the corporation s by-laws. This is also valid for shareholders partners in Joint Stock Companies. Ownership interest in LLCs is represented in participation quotas of each of its partners and, given that it is not represented in shares, its transfer requires the execution of further legal formalities. Additionally, LLCs legal name must include at least one of its member s name; therefore, if all of the company s interest is transferred to a third party, then an amendment to the by-laws must be carried Page 140

142 out in order to change the legal name and aggregate the words Successors. This is also valid for LPs. By-laws may also re.g.ulate this topic (conditions, restrictions, etc.). Ownership interest in Cooperatives is represented in Contribution Certificates; transfer s conditions must be established in the Cooperative s by-laws. Corporations, LLCs, LPs and Joint Stock Companies, are conformed by at least two members. However, in corporations, if the number of partners remains in two after six months it was created, then any of them can ask for the dissolution of the company without the consent of the other partner. Cooperatives, depending on the economic sector/activity they develop, require 10 or 20 members as a minimum; Non Profit Associations are conformed by at least 5 members. 7. Is there a minimum capitalization? There is no a minimum capitalization requirement in Nicaragua, except for the banking and financial sector (Banking: US$12 millions, approximately; Financial Institutions: US$2 millions, approximately). 8. Is there a security that can be issued to the public? Securities that can be issued to the public in the securities primary market are only those serialized that have been previously approved by the Nicaraguan Superintendence of Banks and Other Financial Institutions. 9. Can the form incur debt, or grant security for debt? Yes. Promissory Notes, bills of exchange, etc., are recognized forms under the Nicaraguan Securities Law and, they do incur debt and/or grant security for debt. Enforcement of these documents takes place via litigation before the competent civil court. 10. What is the duration of the form? Can it be renewed? Generally, the duration of the form (validity term of the form itself) depends on the type of security agreed by the Parties, and the conditions incorporated therein. It can be renewed as long as the security provides for such renewal. 11. Describe the process, customary time period and approximate cost of establishing the form. The process involves the draft of the form, which implies a full description of the obligation the form is covering, form of payment of principal and interest, periodicity, waiver of some procedural requirements and conditions, maturity, and the debtor s signature (i.e., a promissory note), among others. It is also worth mentioning that a due diligence on the debtor s legal documentation (i.e., corporate, POAs, bylaws, etc.) is usually carried out before the form is finally issued. The time the debtor takes to provide the creditor with satisfactory documents, is an important factor to determine the time period for establishing the form. Generally, it takes from 1 to 3 weeks. The cost depends on the complexity of the form itself, the obligation and amount secured. An approximated amount would be one between US$500 and US$ Page 141

143 12. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? Some Terms and Conditions issued by the Government for specific public or restricted bids that have to do with natural resources (owned by the State), have included a clause whereby the State has a percentage on the investment s total amount. This is apart from royalties for use of land and other conditions or governmental benefits. 13. For what taxes is the form liable? The form is liable for Income Tax. 14. What is the tax treatment of payments to foreign owners? Foreign owners are subject to a Withholding Tax of 10% over dividends or utilities paid for participation in companies in Nicaragua. 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? Both local and foreign owners are subject to a Withholding Tax of 10% over dividends or utilities paid for participation in companies in Nicaragua. On another matter, there are some other fiscal matters to be taken into consideration when delivering on whether or not to establish a company or open a branch in Nicaragua. In this sense, we comment that a foreign company (non domiciled in Nicaragua) is charged with 10.5% Withholding Tax, while a company in Nicaragua is charged with 2%. Of course, the Nicaraguan company would be subject to the whole Nicaraguan fiscal system, including social security, VAT, municipality, etc. Finally, depending on the investment sector, there are tax benefits for Nicaraguan companies appealing foreign investors to incorporate a company under the Nicaraguan Law (i.e., tourism, free trade zones, etc.). Contact Information Favio J. Batres fbatres@alvaradoyasociados.com.ni Alvarado y Asociados Planes de Altamira, III Etapa De los semáforos de Enitel de Villa Fontana 2 c. al Este, 2 ½ al Norte P.O. Box 5983 Managua, Nicaragua Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 142

144 Issues Relating to Organizational Forms and Taxation Pakistan Prepared by Lex Mundi member firm Rizvi, Isa, Arfidi & Angell 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. The following forms of organization are available in Pakistan: a) Company: Companies in Pakistan are regulated by the Companies Ordinance, 1984 (the CO ). The following types of companies can be formed under the CO: i) unlimited company; ii) company limited by guarantee; and iii) company limited by shares. A company can either be a private limited company (which is prohibited from any invitations to the public to subscribe for the shares, if any, or debentures) or a public limited company. The advantage of having a limited liability company is that the liability of its shareholders is limited to their shareholding. Furthermore, a public limited company has the advantage of raising capital by listing its shares. The disadvantage of a company is the mandatory compliance with numerous legal regulatory and reporting requirements it is subject to under the CO. b) Partnership: Partnerships in Pakistan are governed pursuant to the Partnership Act, 1932 (the Partnership Act ). Section 4 of the Partnership Act defines a Partnership as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. There are no limited liability partnerships in Pakistan. The main advantages of a partnership involve limited legal formalities and a high level of flexibility allowing the partners to agree upon a suitable arrangement between them. However, the main disadvantages include lack of a limited liability partnership in Pakistan, and joint and several liabilities of all partners. c) Statutory Corporation: Statutory corporations are entities created and managed pursuant to the provisions of its governing legislation. d) Co-operative Societies: Co-operative Societies in Pakistan are registered and regulated pursuant to the provisions of the Cooperative Societies Act, 1925 ( CSA ). The CSA allows societies to be registered with or without limited liability. The advantages and disadvantages or the suitability of the above-mentioned forms also depends on the activities that the form intends to perform. The type of legal entity mostly used by foreign companies to conduct business in Pakistan is a private limited company. Page 143

145 e) Societies Any seven or more persons associated for the promotion of science, literature, or the fine arts, for instruction, the diffusion of useful knowledge, the foundation or maintenance of libraries or reading rooms, or any literary, scientific or charitable purpose may form themselves into a society under the Societies Registration Act, Are there attributes of the form that you consider unique to your jurisdiction? No. 3. Describe the management and governance structure for each organizational form. Company: The management of the company is dealt with by its board of directors who are appointed for a term of 3 years unless they resign, are disqualified, or cease to hold office. However, some decisions have to be approved by the shareholders in a general meeting such as the election of directors, appointment of auditors; investment is associated entities, alteration of memorandum and articles of association, and increase in the share capital of the company etc. It is also mandatory for a company to appoint a chief executive officer by a board resolution or a general meeting. The CEO is deemed to be a director and is entitled to all the rights and privileges and subject to all the liabilities of that office. Partnership: The management of a partnership firm is usually handled by the managing partner of the firm. The governance structure depends upon the partnership arrangement agreed between the partners. Statutory Corporation: The management and governance structure of a statutory corporation depends on the provisions of the statute creating the corporation. Co-operative Society: The powers and management of a society vest in its general body consisting of all its members. A society shall have a managing committee, constituted in accordance with the rules and the by-laws, which shall exercise such powers and functions as may be delegated to it by the general body. Societies: The society is managed by the managing body which is appointed by its members according to its memorandum/rules. 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? Pursuant to section 13(1) of the Foreign Exchange Regulation Act, 1947 ( FERA ) securities can only be issued to persons resident outside Pakistan with the general or special permission of the State Bank of Pakistan (the SBP ). Page 144

146 Under the latest foreign investment policy of Pakistan, all economic sectors are open to foreign investment. Prior government approval is required for certain specified industries, such as those relating to: a) high explosives; b) radioactive substances; c) arms and ammunitions; and d) security printing. 5. Describe the extent to which management and owners are exposed to liability. The shareholders of a limited company are liable to the extent of their shareholding. The management of a company comprises of the directors. Pursuant to the CO, the directors are liable to ensure that the company complies with the regulatory provisions of the CO. 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? In a company limited by shares, the ownership interested is represented by shares. These shares are transferable. Please note that in the case of sale or transfer of shares to a non-resident, the provisions of the Foreign Exchange Regulation Act, 1947 must be complied with. There must be at least three or more persons required to form a public company, however, there is no minimum owner requirement for a private company. 7. Is there a minimum capitalization? Foreign investors are required to invest a minimum of USD 300,000 in the agricultural and social infrastructure sectors, and a minimum of USD 150,000 in the services sector, including IT services and telecom. 8. Is there a security that can be issued to the public? Only a public limited company can invite the public to subscribe to its shares or debentures. 9. Can the form incur debt, or grant security for debt? Yes, any of the above-mentioned forms can incur debt and/or grant security for debt. 10. What is the duration of the form? Can it be renewed? A company will only cease to exist till it is legally wound up. There is no specific duration. 11. Describe the process, customary time period and approximate cost of establishing the form. The requirements that need to be complied with and the information that is required for the purposes of incorporating a private limited company in Pakistan are as follows: In practice, an application for confirmation of availability of the proposed name of the company must be made to the SECP. In the event that the proposed name is found to be available, a certificate of Confirmation of Availability of Name shall be issued by the SECP within a period of two days from the date of the application. Upon issuance of the Confirmation of Availability of Name certificate, the following documents and prescribed forms shall be required to be submitted to the SECP for the purposes of the incorporation of a private limited company: a) Memorandum and Articles of the company; b) Form 1- Declaration of compliance with the requirements for registration: Page 145

147 This Form is required to be completed by an advocate entitled to appear before the High Court in Pakistan. c) Form 21 - Notice of Situation of Registered Office: The address where the registered office of the company is contemplated to be situated at will be required. d) Form 29 - Particulars of Directors and others Officers of a company; e) Additional Documents: In addition to the above, the following documents will need to be submitted to the SECP for the purposes of the incorporation of the company: a) copies of the National Identity Cards, in case of resident subscribers and copies of the passport, duly certified and attested by the Pakistan embassy of the relevant country, in case of non-resident subscribers; and b) a special power of attorney, duly notarized by the Notary Public and signed by all the subscribers to the Memorandum and Articles of the company, authorizing an attorney to procure incorporation on behalf of the company. Public, Pakistan). Upon satisfaction of the SECP with regard to the aforementioned documents submitted for the purposes of the incorporation of the company, a certificate of incorporation, containing the registration number allotted to the company, along with an acknowledgment of filing of the prescribed documents, will be issued by the SECP to the company. Please note that the process of incorporation of a private limited company generally takes a period of 5-7 days from the day the requisite documentation for the incorporation of the company is submitted to the SECP. 12. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? Requirements of this nature depend on the industry the company intends to operate in. 13. For what taxes is the form liable? The tax liability of a company varies according to the sector it operates in. The current rate of tax imposed on the taxable income of a company shall be 35%. Please note that the rate is subject to change. 14. What is the tax treatment of payments to foreign owners? Non-Resident individuals are liable to pay tax only for the Pakistan-source income. The tax treatment of a payment made to a foreign owner will depend on the type of payment that is being made. Tax is required to be deducted at source by the payer from certain types of income paid to non-resident taxpayers. A dividend shall be Pakistan-source income if it is paid by a resident company. Any gain on the disposal of shares in a resident company shall be Pakistan-source income. Page 146

148 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? Non-Resident individuals are liable to pay tax only for the Pakistan-source income. Please refer to the answer to the question above. However, it is important to note that Pakistan has double taxation treaties with various countries which may be advantageous for Non-Resident individuals. Contact Information Bilal Shaukat bshaukat@riaalaw.com Rizvi, Isa, Arfidi & Angell RIAALAW Chambers D-67 Block 4, Clifton Karachi-75600, Pakistan Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 147

149 Issues Relating to Organizational Forms and Taxation Peru Prepared by Lex Mundi member firm Estudio Olaechea 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. The guidelines and specific regulations of forms of organizations available are collected in the General Corporations Law (LGS). Corporation: the capital is represented by registered shares and is made up of contributions from shareholders, who are not personally liable for company debts. It must have articles of incorporation (data) and bylaws (data, guidelines and regulations for the conduct of its members). The corporation has specific types: Closely Held Corporation (SAC): it has no more than twenty shareholders and its shares cannot be listed on the Public Registerof Securities Market. It is governed under the same parameters above, subject to certain special provisions on the transfer of the shares. Openly Held Corporation (SAA): It is forcedly created when a corporation is under one or more of the following cases: when it has one or more of the following: i. It has made primary public offering of shares or bonds convertible into shares ii. It has more than seven hundred fifty shareholders; iii. Over 35% of its capital belongs to 175 or more shareholders, regardless those individual shareholders whose shareholding does not amount to 2 X 1000 of the capital or exceeds 5% of the capital; iv. It is incorporated as such, or, v. All voting shareholders unanimously approved the adjustment to this form. The National Supervisory Commission for Companies and Securities (CONASEV) is responsible for oversight them. It is governed under the same parameters above, subject to certain additional provisions of the LGS. Partnership (SC): it has a fixed term of duration and an extension requires unanimous consent of the partners. Limited Partnership: it can be simple or by shares. It operates under a name that inte.g.rates with the names of all the general partners, or of some or one of them. Limited Liability Company (SRL): those where the capital is divided into equal, cumulative and indivisible participations, that can not be incorporated in any securities or be named as shares. The partners can not exceed of twenty. Civil Company: it is created for a common economic purpose by the personal exercise of a profession, trade, skill, practice or other personal activities done by one, some or all partners. It can be regular or of limited liability (where the partners may not exceed thirty) 2. Are there attributes of the form that you consider unique to your jurisdiction? No. Page 148

150 3. Describe the management and governance structure for each organizational form. Corporation: It has a General Shareholders Meeting which is the supreme corporate body of the society and decides by majority the subjects within its jurisdiction. It must also have a Board of Directors elected by the General Shareholders Meeting which must be conformed by 3 or more members, including a president. The Board is in charge of the management of the company for not less than 1 year and over 3. The Board shall appoint one or more managers (including the general manager) for an indefinite period. Partnership: its agreements are adopted by the majority of its members considering the number of people. The administration of the company is vested separately and individually, to each of the partners. The exclusion of a partner must be agreed by the majority of them, regardless of the vote of the member whose exclusion is being discussed. If the company has only two partners, the exclusion of one of them can only be resolved by a judge. Limited Liability Company: the administration is carried out by one or more managers who are members or not. Managers can not work in the same kind of business which is the subject of society. Managers or administrators have the general powers and special legal representation for the sole merit of their appointment; they can be removed upon agreement of a simple majority of the capital, except when their appointment would have been a condition of the incorporation act, where they may only be removed legally and by deceit, guilt, or inability to exercise their charge. Civil Company: the administration is governed, unless otherwise provided in the incorporation act, by the following rules: i. The administration is in charge of one or more partners and which can only be revoked for a justify cause, in case the person is not a member, he may be revoked at any time; ii. They are not allowed to use the name of the society to obtain different duties outside the corporate purpose; iii. They must render accounts in the terms indicated, if the company has not indicated the terms, they must do it quarterly. The Partners Meeting is the supreme corporate body of the society, and exercises the rights and powers of decision which legally corresponds, except those who have been ordered to the administrators. The agreements are adopted by majority. The amendments to the articles of the incorporation must be done with the unanimous agreement of the partners. 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? It is not necessary that managers or owners have their residence in Peru. However, they will need to have legal representatives duly registered in the country. According to the Peruvian Constitution: Private enterprise is free and is exercised in a social market economy. The government promotes and monitors free competition. The domestic and foreign investments are treated with the same conditions. The production of goods and services and foreign trade are free. Any contract of the State and of public entities with foreign residents requires their subjection to the laws and courts of Peru and waives to any diplomatic claim. As for the property, foreigners, whether individual or legal entities, are in the same condition as Peruvians. However, within fifty kilometers of the border, foreigners can not acquire or possess, under any title, mines, land, forests, water, fuel or energy sources, directly or indirectly, individually or in partnership, under penalty of losing the right thus acquired. An exception is the case of public need expressly declared by Supreme Decree approved by the Cabinet of Ministers in accordance with the law. Page 149

151 The law may, only because of national security, establish temporary restrictions and prohibitions for the acquisition, possession, use and transfer of certain assets. 5. Describe the extent to which management and owners are exposed to liability. Corporation: Directors respond jointly and unlimitedly, to the company, shareholders and third parties for damages caused by agreements or acts that are contrary to law, bylaws or by the acts realized with fraud, abuse of authority or gross negligence. They are also jointly liable with the directors who preceded them by the irregularities they had committed if, knowing them, did not denounce them by a written document to the General Shareholders Meeting. They are exempted from responsibility, the directors who have expressed at the time of the agreement or when they get to know it, their opposition to the same which has to be respectively recorded in the act or in a notarial letter. The liability of the directors will expire two years from the date of the adoption of the agreement or of the performance of the act which caused the damage. The General Manager is responsible to the company, shareholders and third parties for damages caused by the breach of his obligations, fraud, abuse of authority and gross negligence. It is also responsible, jointly with the Board members when participating in events that give rise to the liability for them or when, knowing the existence of these acts, he does not report them to the Board or the General Meeting. The liability of the Directors and Managers do not preclude criminal liability. Their liability will expire two years from the act which caused the damage. Partnership: the partners are liable jointly and unlimited for the social obligations. Any agreement to the contrary has no effect against third parties. In the case of separation or exclusion, the member remains liable to third parties for the social obligations incurred until the date in which his relationship with the society ends. The heirs of a partner account for the social obligations incurred until the date of his death. Such liability is limited to the estate of the deceased. Limited Partnership: the general partners respond with unlimited jointly liability for social obligations. Limited partners respond only to the extent of the capital with which they have been pledged. The incorporation act must indicate who the general partners and limited partners are. Limited Liability Company: the partners are not personally liable for the social obligations. Managers are responsible for the damages caused by fraud, abuse of authority or gross negligence. The society action for damages against the managers requires the prior agreement of the partners representing a majority of the equity. The manager's liability expires after two years of the act done or omitted, without prejudice to criminal liability. Civil Company: If it is ordinary, its members are personally liable and additionally, with benefit of excussio for the social obligations in proportion to their contributions, unless otherwise different. If it is limited, the liability is not personal for 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? i. It is represented by shares and participations. The shares are the contributions in goods or money of the shareholders. They represent aliquots of the capital, they all have the same nominal value and are entitled to one vote, with some exceptions. The participations are for individual partnerships, this means that anyone who has a participation is contributing with his work according to his profession, trade or, in general, services to be made personally, according to the object of the company. ii. Yes, both are transferable, its transferences may be subject to restrictions. iii. Yes, the LGS states that the owners must be at least 2. Page 150

152 7. Is there a minimum capitalization? No. The juridical person has patrimonial autonomy. According to the LGS the only requirement with respect to the capital is that it needs to be fully subscribed and each subscribed share must be paid (at least a quarter of it). The company's capital can be increased and reduced by decision of its members. However, Peruvian law provides certain specific exceptions for companies engaged in special activities such as financial entities, banking and insurance, which are subject to the rules of the Superintendence of Banking, Insurance and AFP (SBS). 8. Is there a security that can be issued to the public? We understand by public, third parties and by form, the document issuing the security. In Peru, the securities that may be issued may be real (in relation to movable or immovable assets of the company) and personal (such as a bond). A company may issue numbered series of obligations which recognize or create a debt in favor of the owners. A single bond issuance may be done in one or more stages or in one or more series, if agreed by the General Shareholders' or Partners Meeting, as appropriate. The terms of each issuance, and the ability of the company to formalize it as they are not regulated by law, shall be as provided in the bylaws and agreed by the General Shareholders or Partners Meeting, as appropriate. 9. Can the form incur debt, or grant security for debt? Yes. It is possible to incur debt when you establish an obligation. A bond issuance can incur debt, but with some limits established by law: the total amount of the bonds, at the date of issuance, shall not exceed the net assets of the company unless: i. There has been granted an specific security, ii. The transaction is being done to settle the price of the goods which acquisition or construction had been contracted in advance by the company, iii. Special cases permitted by law. 10. What is the duration of the form? Can it be renewed? Normally, an obligation is extinguished when it has been completely canceled to the creditor. In the case of the bonds, they last the time it is established at the time of the issuance, unless they are renewed. Yes, it can be renewed because they are private issuances, but only by agreement of the parties. 11. Describe the process, customary time period and approximate cost of establishing the form. The process consists in evaluating the bond issuance,, preparing the terms and conditions, establishing a Board of Bondholders with a designated president who will be in charge of signing the bond issuance contract. Finally, the bonds should be recorded by public deed. The placement of the obligations will start from the date of the public deed. If there are securities to be registered, it may only be initiated after the registration thereof. To record them in public deed, it takes about 2 days and costs depend on the amounts involved but cannot surpass US$ Page 151

153 12. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? No, the State can be part of a project or investment vehicle and receive profits arising their form. Pursuant to the Peruvian Law, the Peruvian State can act as private party in an agreement and will be treated as such. 13. For what taxes is the form liable? The most important taxes by which a form could be liable are the following: a) Income Tax (IT): A business entity resident in Peru will be subject to the IT on their worldwide income. The aforementioned applies to companies, partnerships and any other form used to conduct business, resident partnerships, limited liability companies, taxable foundations and associations, as well as joint ventures keeping independent accounting from that of the venturers, established in Peru. Branches and other permanent establishments of non-resident entities, established in our country, are considered as Peruvian resident entities, but only are levied with the IT on their Peruvian source income. Income obtained by a business entity resident in Peru, branches and other permanent establishments of non-resident entities established in our country, is considered as third category income and is generally subject to a 30% tax rate on the annual net income. b) Value Added Tax (IGV): The Value Added Tax levies the sale of goods in the country, the rendering or utilization of services in the country, construction contracts, the first sale of real estate property performed by the constructor; and, the importation of goods. The current IGV rate is 19%. c) Excise Tax (ISC): The Excise Tax is applied on the sale of fuels (gas, gas-oils and diesel), alcoholic beverages, vehicles, soft drinks (including mineral water), cigarettes and tobacco, as well as gambling, lottery games, raffles and other related activities. Tax rates are variable and for some items this tax is applied by charging a fix amount per unit sold. d) Financial Transactions Tax (ITF) The ITF levies a series of financial transactions made through the Peruvian banking system, irrespective of the amount. The ITF paid may be credited against the corporate Income Tax. For 2010, the rate is 0.05%. e) Temporary Tax on Net Assets (ITAN): This tax levies the value of a company s Net Assets as of December 31 of the foregoing year. In this case applies a rate of 0.4% on the excess of S/. 1,000, (approx. US$354,610) in net assets. f) Real Estate Property Tax (IP) IP is a local tax applied on the total value of real estate property owned by a person or an entity within a local jurisdiction. The tax base is determined on the value of the real estate property declared by the owner. The corresponding rates are applied according to the following cumulative progressive scale: up to 15 UIT (0.2%), from 15 UIT to 60 UIT (0.6%), more than 60 UIT (1.0%). Page 152

154 14. What is the tax treatment of payments to foreign owners? Non resident entities only are levied with the IT on their Peruvian source income. If the foreign owner of a Peruvian company is established in a country that has not signed a Double Taxation Avoidance Agreement with Peru, the withholding Income Tax rates that could apply on the Peruvian source income paid by the Peruvian company are the following: (a) Interests: 30% (this rate will apply having in consideration that the foreign owner and the Peruvian company are related companies), (b) Royalties: 30%, (c) Dividends: 4.1%, (d) Technical Assistance: 15%, (e) Other Services and capital gains: 30%. It is necessary to bear in mind that the application of the withholding Income Tax rate of 15% in case of Technical Assistance is subject to the fulfillment of certain requirements (otherwise, will apply the withholding Income Tax rate of 30%). Also, digital services used in Peru are subject to a 30% withholding tax irrespective on where they are rendered. On the other side, if the Peruvian source income is obtained by non domiciled companies as a consequence of the transfer of goods, titles or rights, the cost incurred in their acquisition and improvement, if any, may be deducted provided certain requirements are met. In order to perform said deduction, non-resident entities should obtain a certification by the Tax Administration. Also, in regard to the exploitation of goods that can suffer deterioration, an amount equal to 20% of the sum paid or credited may also be deducted. Likewise, due to their international nature, several activities (such as rental of ships, international transport, rental of containers, among others) performed by non-resident entities are deemed to generate different percentages of Peruvian source net income. Thus, the effective tax rate is obtained in those cases by applying the corresponding withholding tax rate to the percentage of said income considered of a Peruvian source. 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? The foreign owners will be subject to withholding when the Peruvian source income is paid or credited. In case of Peruvian owners, these will be levied directly by its annual income. In general, if the owner is a foreign company and renders services to a Peruvian related company will apply a withholding Income Tax of 30% on gross income (unless the service qualifies as Technical assistance, in which case could apply a rate of 15%). Notwithstanding if the owner is a Peruvian company will apply the Income Tax rate of 30% on its annual net income, if it is the case. On the other side, the distribution of dividends by a Peruvian company in favor of its owner, a company resident in Peru, will not be levied with the Income Tax, but until the latter distributes dividends in favor of a non resident individual or entity, or in favor of a resident individual. Page 153

155 Likewise, a company resident in Peru, must comply with other formal obligations, such as obtaining a taxpayer identification number, filing Tax Returns, maintaining complete accounting and records and issuing the corresponding payment documents, among others. Contact Information Martìn Serkovic martinserkovic@esola.com.pe Estudio Olaechea Bernardo Monteagudo 201 San Isidro Lima 27, Peru Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 154

156 Issues Relating to Organizational Forms and Taxation Poland Prepared by Lex Mundi member firm Wardyński & Partners 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. Various forms of organizations are available under the Polish law. In particular, these are: registered partnership, limited partnership, professional partnerships, joint-stock limited partnership, limitedliability company, joint-stock company. The form of a cooperative is also available, but it is not very common because it has to be established by a certain number of natural persons or legal persons. Not all of these forms are available to every foreign investor: some of them (e.g. those who are not from EU or EEA member states) can do business only in the form of a limited partnership, joint-stock limited partnership, limited-liability company or joint-stock company. Partnerships are associations of two or more persons operating a business under its own name they are not considered separate legal entities but can acquire rights in its own name, incur obligations, sue and be sued. A limited partnership is a partnership in which at least one partner is liable to creditors for the obligations of the partnership without limitation (the general partner) and the liability of at least one partner (the limited partner) is limited to a fixed amount. A professional partnership is a partnership formed by natural persons practising a specific profession (e.g. lawyers, tax advisors). A limited joint-stock partnership combines elements of a partnership and a corporation: at least one partner is liable to creditors for the obligations of the partnership without limitation (the general partner) and at least one partner merely holds shares. Companies are legal persons, and the shareholders are not liable for the companies debts. However, in order to establish a company, the shareholders must contribute share capital to the company. In order to operate, companies need to have appointed members of their authorities (a management board, and in some cases a supervisory board and/or audit committee). Companies may be formed by a sole shareholder (however, with the exception that a limited-liability company cannot be formed solely by another single-shareholder limited-liability company). Foreign investors may also choose to establish: a) a branch of a foreign business, b) a representative office. A branch of a foreign business may be established on the basis of reciprocity. Such branches may conduct commercial activity only within the scope of that undertaken by the foreign business. The activity of a representative office is limited exclusively to advertising and promotion of the foreign business. Currently the vehicle mostly used in business (by both Polish and foreign owners) is the limitedliability company, mostly because of the fact that it is a capital company with liability separate from its shareholders, but the regulations for this type of company are not as detailed as for a joint-stock company. Please note that for some types of business, e.g. banking and insurance, forming a jointstock company is compulsory. 2. Are there attributes of the form that you consider unique to your jurisdiction? Page 155

157 We do not perceive the legal forms available in Poland to be particularly unique in comparison to other Continental jurisdictions. Similar to countries like Germany and France, Poland has a codebased legal system. A legal institution that is commonly used in Polish business operation but is not well-known, for instance, in common-law jurisdictions, is the commercial proxy. The commercial proxy is a form of power of attorney which may be granted only by a business that is required to be entered in the commercial register. The commercial proxy is also disclosed in the commercial register. The authority of a commercial proxy extends to all acts, in court or out-of-court, connected with the operation of an enterprise, with the exception of transfer or usufruct of the enterprise and transfer or encumbrance of real estate, which require a separate power of attorney). 3. Describe the management and governance structure for each organizational form. In the case of general partnerships, unless the parties decide otherwise, each partner has the right and obligation to manage the affairs of the partnership. He or she is also entitled to represent the partnership (this right cannot be limited with effect towards third parties). These rules may be altered in the case of other types of partnerships in favor of some particular partners (e.g. the general partner of a general partnership) or management board (in a professional partnership). The authorities of companies consist of: a) management board: the body responsible for day-to-day operations and representing the company; b) supervisory board: the body exercising permanent supervision over all areas of the activities of the company (in a limited-liability company it is mandatory to have a supervisory board only in case of companies with higher share capital and a large number of shareholders); c) audit committee: a non-mandatory body of a limited-liability company whose duties include evaluating the financial reports; d) shareholders meeting (the highest decision-making body, which is convened in as an ordinary meeting (i.e. the annual meeting to approve the company s actions during the previous financial year) or as an extraordinary meeting (e.g. to enable the shareholders to decide on some specific actions of the company as needed). The management board may consist of one person only, while the supervisory board and audit committee are always collective. There is also a rule of no overlapping functions: a member of the management board, a commercial proxy, a liquidator, the manager of a branch or establishment, and persons employed in the company as chief accountant, legal advisor or advocate may not serve at the same time as a member of the supervisory board or the audit committee. 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? In general, no residency is required for management or owners. However some limitations exist with respect to particular industries. For example, a licence for television or radio broadcasting will not be issued to a company in which the participation of foreign persons exceeds 49% (this restriction does not apply to companies from the EEA or their subsidiaries). Moreover, some actions by foreign businesses may be subject to governmental control, e.g. acquiring real estate. 5. Describe the extent to which management and owners are exposed to liability. With respect to partnerships, the liability of the partners is subsidiary and unlimited. Partners are jointly and severally liable with all their assets for the partnership s debts if execution against the partnership s assets is ineffective. Page 156

158 This rule is modified in the case of a limited partnership, where the liability of the limited partner is limited to a fixed amount described in the partnership agreement and disclosed in the commercial register. The limited partner is free from liability for the partnership s debts in case that his paid-in share is equal to the amount specified in the partnership agreement. If his paid-in share is lower than the amount described in the partnership agreement, the limited partner is liable up to the difference. There is a similar rule in a joint-stock limited partnership; there, however, the shareholder s liability is excluded completely. A partner in a registered or professional partnership and a general partner in a limited partnership or in a limited joint stock partnership is responsible with all his assets jointly and severally with the partnership or the other partners for tax arrears of the partnership. In case of companies, the rule is that management board members may be responsible for the company s debts and tax arrears (if execution against the company s assets is ineffective), whereas the shareholders are not. Where members of the management board have intentionally or negligently given false information in a statement, they are jointly and severally liable to creditors of the company. Management board members may be jointly and severally liable for a loss to the company through their action or omission contrary to the law or provisions of the articles of association, unless they are at no fault. With respect to responsibility for books and accounts, not only the management board, but also the supervisory board members are jointly and severally liable for any loss to the company through their action or omission in performing duties of preparing the financial statements and business reports. Whenever an infringement of tax law by a company is penalized, management board members and persons responsible for tax settlements of the company can be subject to individual penal fiscal liability, depending on their fault and level of participation in the fiscal offence. With respect to a branch office or representative office, only the shareholder is always liable for any debts, since the branch or representative office has no legal personality. Additional liability is provided under bankruptcy law. Each and every person authorised to represent the partnership or company (i.e. partner or management board member) is required to file for the bankruptcy of the entity within a specific time if the entity becomes insolvent. Otherwise, such persons are liable for a loss occurring failure to file for bankruptcy by the legal deadline. 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? Partnerships have to be formed by at least two partners. Companies may have only one shareholder; however, a limited-liability company cannot be formed solely by another single-shareholder limitedliability company. In partnerships, partners have the right and obligation to manage the affairs of the partnership. However this duty may vary with respect to different types of partnerships (e.g. in a limited partnership the limited partner has no such right or obligation unless the partnership agreement provides otherwise) and is also subject to the partners decision (e.g. the partnership agreement of a registered partnership may provide that management of the affairs of the partnership may be entrusted to one partner or several partners). In companies, the owners interest is represented by shares in the company s share capital. Usually, the number of shares provides the same number of votes for the shareholder at the shareholders meeting. However, a different approach may be provided for, e.g. in the articles of association. In joint-stock companies shares may be in the form of tangible documents. Page 157

159 The interest is transferable. However, all rights and obligations of a partner in a partnership may be transferred to another person only where the partnership agreement so provides, and unless the partnership agreement provides otherwise, all rights and obligations may be transferred to another person only upon written consent of all the other partners. In the case of a transfer, the withdrawing partner and acceding partner are jointly and severally liable for the obligations of the withdrawing partner arising in connection with his membership of the partnership and for the obligations of the partnership. In the case of companies, the transfer of shares is not subject to restrictions, but the articles of association may provide that transfer of shares is subject to consent of the company or otherwise restricted. 7. Is there a minimum capitalization? There is a minimum capitalization level established only in the case of a joint-stock limited partnership (PLN 50,000), limited-liability company (PLN 5,000) and a joint-stock company (PLN 100,000). 8. Is there a security that can be issued to the public? Public companies can issue shares (equity securities) that can be offered to the public. It is also possible for companies to issue debt securities, such as bonds and notes. Securities can be issued to the regulated market (at the Warsaw Stock Exchange) and to the deregulated market (New Connect, which is organized by the Warsaw Stock Exchange). Debt securities can also be listed on the BondSpot. Trade in securities (either equity or debt securities) can take two forms: primary and secondary public trading. Primary public trading involves the issuer or underwriter proposing acquisition of securities that are newly issued, or acquisition thereof. A public offering is effected by addressing the offer of securities to more than 100 persons or to unspecified addressees in a manner that allows them to decide to purchase the securities. A public offer or allowance of securities into trading on a regulated market requires: a) preparation of an issue prospectus (in accordance with EU Regulation 809/2004), b) approval of it by the Financial Supervision Authority and c) availability of it to the public. Polish law can exempt the necessity for an issue prospectus; especially, when a public offering is addressed exclusively to qualified investors. The single-passport rule in EU Directive 2003/71/EC of 4 November 2003 is a part of Polish law. It provides that when shares are to be admitted into trading on regulated markets in several Member States, the issue prospectus approved in a home member state (e.g., in Poland) is valid to admit the shares into trading in the other EU member states. Secondary public trading involves an entity other than the issuer or underwriter proposing acquisition of securities. The same rules apply in cases when bonds are issued; see the answer to point 9 dealing with debt securities. Page 158

160 9. Can the form incur debt, or grant security for debt? Polish law allows companies, including partnerships, to incur debt; assets, specifically, can be security, e.g.,immovable property, such as land and buildings, can be mortgaged; movable assets, inventory, products, as well as rights, including receivables, can be pledged. Most popular is a registered pledge, whereby the asset remains with the debtor and can also cover a collection of assets (floating charge). It is created in writing and is registered in a special public court re.g.istry. Other security rights can include: a) transfer of title for security, b) bills of exchange, c) bank guarantees (Banking Law Act), d) personal guarantees (guarantee issued by a natural person or an entity, Civil Code), e) insurance company guarantees (issued by an insurance company, Insurance Activity Act), f) transfer of rights under an insurance policy, issued under the Insurance Activity Act. It is also possible for a shareholder to pledge the shares in a company. Public companies, limited liability companies, and partnerships limited by shares can issue bonds. Bonds are debt securities and can be traded publicly and on the stock exchange. See answers to point 8 on public trading in bonds. Polish legislation provides for other, more sophisticated legal structures for issuing securities; specifically, investment funds can issue publicly traded certificates, for securitisation of liabilities, so to gain sources to purchase the liabilities. Further, mortgage banks can issue letters of mortgage (a security that can be publicly traded), based on the mortgage the bank has. 10. What is the duration of the form? Can it be renewed? Companies and partnerships may be established for a definite or indefinite period. In case of a definite period, it may be extended by amending the articles of association. Apart from lapse of the time for which the company or partnership was established, the form may be dissolved for other reasons. In general, the reasons for dissolution of partnerships include: a) reasons set forth in the partnership agreement; b) unanimous resolution of all partners; c) declaration of bankruptcy of the partnership; d) the death or bankruptcy of a partner; e) termination of the partnership agreement by a partner or a creditor of a partner; f) a final court judgment. The reasons for dissolution of companies include: a) reasons set forth in the articles of association; b) a resolution of the shareholders on dissolution of the company or on transfer of the seat of the company abroad; c) declaration of the bankruptcy of the company. Page 159

161 11. Describe the process, customary time period and approximate cost of establishing the form. Partnerships and companies are established upon registration by the court. This process requires: a) execution of the articles of association or partnership agreement; b) a declaration of the management board that the company s share capital was paid in (in case of companies; in a limited-liability company the entire share capital must be paid in prior to registration); c) appointment of the members of the company s governing bodies (in the case of companies); d) establishing a bank account and rights to the company s registered office (e.g. a lease). In practice, once the relevant documentation is submitted to the registrycourt, it takes around 2-3 weeks to register the form in the National Court Register. Within 3 days of registration, the court is required to send registration applications to the statistical office (for issuance of a REGON statistical number) and the tax office. As a whole, the registration of the form, including proceedings before the registrycourt, the tax office and the statistical office, usually take up to 6 weeks. The management board of the company is obliged to file an application to enter the company in the National Court Registerwithin six months after execution of the articles of association, otherwise the company is dissolved. 12. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? The rules for concluding contracts between private entities and public finance sector entities or other entities financed from public sources are regulated by the Public Procurement Law dated 29 January 2004, which applies to supply and construction work as well as service contracts. Entities obligated to follow public procurement procedures are state and local authorities, bodies governed by public law, associations formed by one or more of such bodies or other public bodies, as well as companies operating in the water, energy, transport and postal services sectors. This is also a public-private partnership (PPP) model, using a PPP contract or a concession agreement (regulated by the Public-Private Partnership Act dated 19 December 2008, and by the Construction Work and Service Concession Act dated 9 January 2009). The specific nature of this type of order lies in the way in which the contractor receives its fee, which is the right to operate the facility, with or without an additional monetary fee. Also important in this type of transaction is the fact that the payment made by the public party cannot result in the public party covering the full amount of expenses incurred by the contractor. In other words, the economic risk associated with performing the concession must be borne to a decisive extent by the contractor. The basic principles of public procurement procedures are fair competition, equal treatment of contractors, impartiality and objectivity of persons involved in proceedings for awarding contacts, the public nature of procurement procedures, and the primacy of open and restricted procedures. The Polish market is fully open to foreign bidders. Any national or even European preference is forbidden. Openness of the procedure is also the rule, with an exception when bidders request that trade secrets not be disclosed. Unless otherwise provided by law, proceedings are conducted in written form and in the Polish language. This means above all that the contracting authority will draw up necessary procurement documentation in Polish, such as the announcement of the proceedings, the terms of reference, and the minutes of the proceedings. Commercial operators may compete for a contract jointly. In such case, they appoint an agent to represent them in the proceedings. Page 160

162 All documents must be submitted in the original or a certified copy. It should be stressed that documents in a foreign language must be submitted with a certified Polish translation. The contracting authority may waive the translation requirement, however. 13. For what taxes is the form liable? a) Corporate Income Tax (CIT) According to the Polish CIT Act, taxpayers having their seat or place of management in Poland (Polish tax residents) are subject to tax liability on their world-wide income, irrespective of the source of that income (unlimited tax liability rule). Taxpayers who do not have their seat or place of management in Poland (non-polish tax residents) are subject to taxation in Poland only on the income earned in Poland (limited tax liability rule). Polish capital companies, other legal entities (including co-operatives) and organizational units without legal personality (except partnerships) are subject to CIT at the rate of 19%. Generally, partnerships are transparent entities from the CIT perspective. There is, however, one exception that refers to partnerships between non-polish tax residents if under the law of their country of origin they are considered to be legal entities and are taxed on their world-wide income regardless of its source. Revenues generated and costs borne by partnerships are subject to CIT at the partner level in proportion to the partner s share of interest. b) Value added tax (VAT) and excise tax Generally, VAT payers are legal entities and organizational units without legal personality (including partnerships) that independently carry on a business activity, regardless of the purpose or the effect of such activity. Additionally, an entity performing intra-community transactions is a VAT/EU payer. Under Polish VAT law, the standard 22% VAT rate applies to all supplies of goods or services, unless a specific provision allows a reduced rate (7%, 3%, 0%) or total exemption. 0% supplies include exports of goods outside the European Union and intra-community supplies of goods. Generally, legal entities and organizational units without legal personality (including partnerships) are excise tax payers if they carry on activities subject to excise tax. c) Civil law activities tax (CLAT) Both capital companies and partnerships are, generally, subject to CLAT levied on civil law transactions such as sale agreements, loan agreements, etc. For example, capital companies are subject to 0.5% CLAT on the increase of the share capital and on additional contributions thereto. Loans received from shareholders in a capital company are exempt from CLAT but loans granted by a partner to the partnership are subject to 2% CLAT. d) Other taxes Legal entities (including capital companies) and organizational units without legal personality (including partnerships) may also be subject to real estate tax, agricultural tax, forest tax, vehicle tax, tonnage tax. Page 161

163 14. What is the tax treatment of payments to foreign owners? a) Dividends Dividends and other income from participation in the profits of legal entities paid by resident companies to non-resident companies are subject to withholding tax (WHT) at the rate of 19%. This tax is withheld and remitted by the company paying the dividend. The WHT rate on dividends can be reduced under the applicable double taxation treaty (DTT). Additionally, an exemption from WHT on dividends payable to companies residing in EU/EEA member states is available, based on the EU Parent Subsidiary Directive, which was implemented into the Polish CIT Act. To benefit from this exemption, all the following conditions need to be satisfied: The company paying the dividend must be an income tax payer that has a registered office or the management board in Poland; The receiving company is subject to corporate income tax on its world-wide income in an EU/EEA member state (or in Switzerland); The receiving company holds at least 10% (25% in case of Switzerland) of the shares of the Polish company which is paying the dividend for an uninterrupted period of at least two years. Polish CIT law currently provides that the WHT exemption also applies when the holding period is expected to expire after the distribution of dividends for which that benefit is claimed. To be able to benefit from the reduced WHT rate or exemption, a certificate of residence of the recipient of the dividend is required. b) Profits of the partnerships Taking into account the transparency of the Polish partnerships, in case of the foreign partners, (although the Polish income tax provisions do not expressly address that issue), the partnership's income attributable to a Polish permanent establishment of each partner (the existence of which would be, generally, claimed as a result of being the partner in the Polish partnership) would be subject to tax in Poland. As a rule, both in the treaty and non-treaty situations, foreign partners' income from sharing the interest in profits of the partnership would be taxed on current basis accordingly to the business profits regime (pro rata to partner's share in the partnerships' profits, or in equal parts if not agreed otherwise). c) Interest / Royalties Generally, interest/royalties paid by a Polish company to a non-polish resident company are subject to 20% WTH, unless the applicable DTT states otherwise. The tax is withheld and remitted by the Polish company paying the interest/royalties. Based on the European Interest/Royalty Directive, which was implemented into the Polish CIT Act, WHT on interest/royalties is reduced up to 5% from 1 July 2009 until 30 June 2013 and from 1 July 2013 there will be full WHT exemption. Generally, to be able to benefit from that reduction (and later exemption) certain conditions need to be satisfied (specifically the 25% holding requirement). In order to benefit from the reduced WHT rate or exemption, a certificate of residence will need to be presented. Page 162

164 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? Domestic regulations Sale of shares in a Polish company by a Polish-resident shareholder would be taxable in Poland. In a situation where shares in a Polish company are sold by a foreign shareholder, the capital gains from such transaction, if any, should not be taxable in Poland. However, this general rule, according to the standpoint of the Polish Minister of Finance, cannot be applied to sales of shares which result in a transfer of the rights to an immovable property located in Poland (i.e. when assets of the company whose shares are being sold consist mainly of real estate) and to sale of securities in a Polish joint stock company on the Polish stock exchange. Capital gains from such transactions generated by a foreign shareholder should be, as a rule, taxable in Poland (they constitute a separate source of income on the territory of Poland), taking into consideration applicable DTT. DTT regulations In most Polish DTTs, the right to levy tax on the sale of shares of a Polish company is given to the country where the shareholder is tax resident. If so, Polish tax rules would not apply. Certain Polish DTTs provide, however, that the sale of shares in a company whose main business involves real estate is to be considered to be subject to taxation in the country where the real estate is located. Partnerships Sale of interest in a Polish partnership by a Polish-resident partner would be taxable in Poland. However, if the interest in a Polish partnership is sold by a foreign partner, tax treatment of such transaction will vary taking into consideration applicable DTT. Contact Information Michal Barlowski michal.barlowski@wardynski.com.pl Wardyński & Partners Aleje Ujazdowskie 10 Warsaw , Poland Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 163

165 Issues Relating to Organizational Forms and Taxation Portugal Prepared by Lex Mundi member firm Morais Leitão, Galvão Teles, Soares da Silva & Associados 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. Five different types of companies are set forth and regulated in the Portuguese Companies Code. The choice of the most suitable business vehicle for the development of an economic activity mainly relies on the nature of the partners liability for company s debts, on the company s dimension and on the potential growth of the business. The main features of each type of company are the following: a) General Partnership ( Sociedades em nome colectivo ) In a general partnership, the liability of a partner for the debts is subsidiary but unlimited, meaning that company has primary liability for its obligations. Moreover, partners are jointly and severally liable for the other partner s obligations. Contributions to the company by means of services (as opposed to capital contributions) are allowed, however their value is not taken into consideration when determining the company s share capital. b) Limited liability company by quotas ( Sociedade por Quotas or SQ ) In such a company quota-holders liability for the company s debts is limited to the amount of their investment (represented by the nominal value of the quotas), unless otherwise stipulated in the by-laws. Notwithstanding the foregoing, quota-holders are jointly and severally liable for paying up the company s entire capital. This investment vehicle has been traditionally used for small businesses, usually of a family nature, but may also be adopted by corporate investors in case the characteristics of the business do not justify the recourse to a limited liability company by shares. c) Limited liability company by shares ( Sociedade Anónima or S.A.) In this type of business vehicle shareholders liability for the company s debts is limited to the amount of their investment (represented by the number of shares subscribed) in the company. This type of organizational form is suitable for businesses of medium/large dimension since the shares are qualified as negotiable securities. Under certain conditions, shares may be listed on the Lisbon Stock Exchange. d) Simple Commandite or limited liability partnership ( Sociedade em comandita simples ) This and the following types of company are frequently described as a hybrid between a partnership and a limited liability company. At least one of the partners (the general partner or sócio comanditado ) must have unlimited liability for the company s debts, whereas the liability of the other partners (the limited partners or sócios comanditários ) is limited to the amount of capital each of them has subscribed. The general partner can be a limited liability company by shares or a limited liability company by quotas. e) Stock Commandite or partnership limited by shares ( Sociedade em comandita por acções ) Similarly to the simple commandite, this type of company has one or more general partners and one or more limited partners, but the latter s participation is represented by shares. The same regime described in the above par Page 164

166 2. Are there attributes of the form that you consider unique to your jurisdiction? The way in which the capital of limited liability companies by quotas is represented is considered to be a peculiar feature of Portuguese law. In order to better understand its idiosyncrasies, please refer to question 6 of this survey. 3. Describe the management and governance structure for each organizational form. In what concerns limited liability companies by shares, one of the following managing and supervision models may be adopted: a) the traditional unitary model, with a board of directors ( conselho de administração ) and an internal auditing board ( conselho fiscal ); b) the German-inspired two-tier model, with an executive board of directors ( conselho de administração executivo ), a supervisory board ( conselho geral e de supervisão ) and a certified chartered accountant ( revisor oficial de contas ); and c) the Anglo-Saxon model, with a board of directors ( conselho de administração ), an auditing committee ( comissão de auditoria ) and a certified chartered accountant ( revisor oficial de contas ). The management of this type of company may be attributed to a single director instead of a board of directors provided that the company s share capital is under 200, The members of the board of directors may be shareholders or otherwise and corporate shareholders may also be appointed as directors, in which case an individual must be appointed as their representative to perform the director s duties on their behalf. As a general rule, the supervision of a limited liability company by shares may also be attributed to an internal single auditor as an alternative to an internal auditing board. Please note that Portuguese law requires that at least one of the members of the above-mentioned internal auditing board or the internal auditor, as the case may be, be a certified chartered accountant. Private companies limited by quotas may be managed either by a single director ( gerente ) or by a board of directors ( gerência ), depending on what is established in the company s by-laws. Directors must be individuals, but need not be quota-holders. As a general principle, limited liability companies by quotas are not required to have a supervisory body but the by-laws may establish that the company will have an auditing board, case in which it will be ruled according to the provisions applicable to limited liability companies by shares. Notwithstanding the above, these business entities shall appoint a certified chartered accountant in case they surpass two of the three following limits for two consecutive fiscal years: (i) the total amount of its balance sheet exceeds 1,500,000.00; (ii) the total amount of net sales and profits exceeds 3,000,000.00; (iii) the average number of employees in the relevant financial year is higher than 50. This provision is not applicable in case the company appoints an auditing board or if, for two more consecutive years, two of the above mentioned limits are not met. 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? No. Page 165

167 5. Describe the extent to which management and owners are exposed to liability. Under the Portuguese Companies Code, directors may be held liable towards the company and, in certain circumstances, towards the shareholders, the company s creditors and other third parties for any damage caused in the course of their activity. a) Liability towards the company According to article 72 of the Portuguese Companies Code, a director is liable for damage caused by acts or omissions performed in breach of legal or contractual duties, unless the director can prove that s/he has acted without fault. This means that in what concerns directors liability, they are presumed to be at fault, thus the burden of proof that they are not lies with the directors. Moreover, such breach may occur not only regarding specific duties, but also regarding general fundamental duties, such as the duty of care and the duty of loyalty. Notwithstanding the general rule referred to above, Portuguese law excludes the directors liability towards the company in some situations, namely (i) if the director proves s/he has not acted in pursuit of his or her personal interest, in a well-informed manner, and with reasonable skill and prudence; (ii) if the director did not vote or voted against a board of directors resolution which caused damage to the company; or (iii) if the act or omission was imposed by a quota or shareholders resolution, even if such resolution can be deemed voidable. All directors are jointly and severally liable towards the company and the law presumes that fault is apportioned equally to each director. b) Liability towards company s creditors Article 78 states that directors are liable towards the company s creditors if, due to a breach of legal or contractual rules intended to protect these creditors, the company s assets become insufficient to satisfy their respective credits. Differently from what was said in the previous paragraph, in this case fault is not presumed, thus the burden of proof lies with the creditors. c) Liability towards the shareholders or third parties According to article 79, directors are liable under the general rules of law for any damage they have directly caused to shareholders or ant third parties (e.g. employees, customers) in their capacity as directors..in these situations, fault is not presumed, thus the burden of proof lies with the shareholders or with third parties. All directors are jointly and severally liable towards the shareholders or third parties and the law presumes that fault is apportioned equally to each director. Please note that the director s liability cannot be limited or excluded in the by-laws or in a contract between the company and the director. Additionally, other forms of liability are established and admitted in other areas such as: Theft and fraud; Securities law; Insolvency; Health and safety and environment; Antitrust; and Tax and social security contributions. Page 166

168 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? a) Share capital The share capital of a limited liability company by shares is divided into shares which may be represented by paper certificates or registered in book-entry form. There may be nominative or bearer shares and they may be converted from one type into the other. Shares must always be nominative in case any of the following situations occur: a) shares have not been fully paid up yet; b) there is a statutory restriction on shares transferability; c) there is a provision in the company s by laws under which shareholders are required to make ancillary contributions. As a general rule, shares must have a minimum nominal value of one-hundredth of a euro (one cent). However, pursuant to DL 49/2010 of 19 May 2010, it is now possible to issue no par value shares ( acções sem valor nominal ). This class of shares has, however, an issue value ( valor de emissão ), which represents part of the total amount of the share capital and has been implemented mainly for the purposes of raising finance. b) Transferability As a general rule, shares may be freely transferred to third parties, although the company s by-laws may impose some restrictions on the transferability of shares within the limits established in law. c) Minimum number of owners As a general rule, limited liability companies by shares must be incorporated by a minimum of five founding shareholders (or two, if a public entity holds more than 50% of the share capital). However, it is possible to incorporate a limited liability company by shares with a single founding shareholder provided that such shareholder is a corporate shareholder. Please note that in such case, the single shareholder is severally and jointly liable for the company s liabilities. In what concerns limited liability companies by quotas the capital stock is divided into equity participations (the quotas ) which cannot be represented by certificates nor held in book-entry form. Quotas shall have a minimum nominal value of 100,00. d) Transferability According to Portuguese law, unless otherwise provided in the company s by-laws, the inter vivos transfer of quotas to third parties must be authorized by the company (except for transfers between ascendants and descendants, between spouses or between quota holders). In case such authorization is refused, quota-holders have a pre-emptive right to purchase the quotas which transfer was refused. e) Minimum number of owners As a general rule, limited liability companies by quotas must be incorporated by a minimum of two founding equity holders, either individuals or corporate investors. However, the Portuguese Companies Code allows for the possibility of a limited liability company by quotas to have only one founding quota-holder, in which case the company must add to its corporate name the word unipessoal and is subject to certain special legal requirements regarding the relationship between the company and the sole quota holder. Page 167

169 7. Is there a minimum capitalization? Limited liability companies by shares must be incorporated with a minimum share capital of 50, The Portuguese Companies Code requires that at least 30% of the share capital is paid up at the time of incorporation and the remaining 70% of the share capital shall be paid up by shareholders within a period of five years counted as from the company s incorporation. Limited liability companies by quotas must be incorporated with a minimum amount of 5, If the company s share capital exceeds the minimum capitalization amount required to this type of companies, it is possible to postpone the subscription of up to 50% of the company s share capital only to the extent that the amount paid up at the time of incorporation is equivalent to 5, In addition, in order for companies to be able to carry out a number of regulated activities, a higher limit than the above is set in the applicable law. 8. Is there a security that can be issued to the public? The relevant provisions in relation to the issuance of securities to the public are set forth in the Portuguese Companies Code as well as in the Portuguese Securities Code. Please note that the offer of new securities in Portugal is made either through a public offer or a private placement. The main differences between them arise from the nature and number of investors addressed by a determined offer. Moreover, a private placement is not subject to (i) registration with or (ii) prospectus approval by the Portuguese Securities Market Commission. For the purposes of this survey our answer will be limited to the analysis of bonds as the most frequent type of security issued by limited liability companies by shares, apart from shares, whose main features have already been explained in question 6. There are different types of bonds foreseen in the Portuguese Companies Code including but not limited to convertible bonds (i.e bonds that at their maturity, or at some other stated date, may be converted to a stated number of shares), bonds with issue premiums and bonds with warrants. There are some quantitative restrictions (please refer to question 9 below) imposed on the issue of bonds, although they do not apply when the issuer is (i) a company admitted to trading on a regulated market, (ii) a company with a rating granted by a credit rating agency registered before the Portuguese Securities Market Commission, or (iii) when redemption of the bonds issued is ensured by special guarantees established in favor of the bondholders. Bonds may be represented by certificates or registered in book-entry form. Furthermore, there may be nominative or bearer bonds. Besides the issuance of shares and bonds, the Portuguese Securities Code contains a list (not exhaustive) of several other types of securities, such as: a) Equity instruments; b) Units in undertakings for collective investments; c) Warrants; d) Rights detached from the securities described in a) to d); e) Other documents representing interchangeable legal positions provided they may be traded on the market. Pursuant to Decree-Law 160/87 of 3 April limited liability companies by quotas may also issue bonds according to the rules set forth in the Portuguese Companies Code. However, not all companies may issue such securities. We have limited our answer to those types of securities that are generally available to limited liability companies regardless of their characteristics. Page 168

170 9. Can the form incur debt, or grant security for debt? There are no legal restrictions (namely with respect to the maximum amount that may be borrowed by companies) on the companies capacity to enter into financing agreements. According to the Portuguese Companies Code, bond issues are subject to, inter alia, the following restrictions: a) Only companies whose by-laws have been permanently registered for over a year are allowed to issue bonds; b) The total amount of the issued bonds cannot exceed twice the amount of the company s equity (i.e., share capital, disposable reserves and legal reserves). Please note that there are some situations to which these restrictions do not apply (e.g., certain quantitative restrictions do not apply where the issuer is a listed company). As a rule, a Portuguese company may only grant security for its own indebtedness. The Portuguese Companies Code establishes that the granting by a company of real or personal guarantees does not fall within the company s business scope, except where the company has a justified own interest in such or where the guaranteed company is part of the same group. Any guarantee issued in violation of these rules is null and void. 10. What is the duration of the form? Can it be renewed? According to the Portuguese Companies Code, all companies are considered to have been incorporated for an indefinite period of time, except as otherwise foreseen in the company s by-laws. In case the company s by-laws envisage a specific duration for the company, such may be extended by means of a shareholders resolution. 11. Describe the process, customary time period and approximate cost of establishing the form. Companies can, in certain circumstances, be incorporated in 24 hours. This process restricts the choice of the company s name to a list of names previously approved and entails the adoption of standardized by-laws. The cost of incorporating a company through this procedure is approximately 360 (including the cost of all the necessary publications). Companies can also be incorporated online and the price may vary from 180,00 (in case a preapproved company name and/or standardized by-laws are adopted) up to a maximum of 380,00. Please note that it is not possible to incorporate a company through the foregoing procedures if immovable assets are to be transferred as an entry in kind to the company s share capital. The stages of the traditional process of incorporation can take up to a month and require the following formalities: a) Request of a certificate of admissibility of the company s name before the Companies National registry( Registo Nacional de Pessoas Colectivas ); b) Deposit of the capital in a bank account under the name of the company to be incorporated c) Incorporation of the company by signing a written contract containing its by-laws, followed by registration at the Commercial registry(a public deed or authenticated private deed is required if immovable assets are to be transferred as an entry in kind to the company s capital); The price is approximately Page 169

171 12. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? There are no specific requirements for the state to be part of a project or investment vehicle or receive part of the profits arising therefrom. The state may, however, become a shareholder or quotaholder by acquiring a stake in existing companies or it may incorporate companies as the single or one of more founding shareholders or quota-holders. The criteria for defining the state s entrepreneurial activity should take into account the essence and institutional goals of state ownership and the defense of the public interest which is defined on an ad hoc basis. 13. For what taxes is the form liable? Corporate Income Tax (IRC) With reference to taxes levied on profits of both limited liability companies by quotas and by shares, companies that have their legal seat or place of effective management in Portugal are liable to corporate income tax (IRC) at the general rate of 25 per cent. Companies are also subject to an additional surcharge on taxable profits over 2,000, of 2.5 per cent, and to a municipal surcharge of 1.5% on all taxable profits subject and not exempt from IRC, which is levied by most Portuguese municipalities. The corporate income tax taxable base is made of net profit for the year plus certain changes in equity not included therein, less allowable prior year losses and tax incentives. VAT All entities that independently carry out an economic activity, including all corporate entrepreneurs subject to corporate income tax, such as limited liability companies, are taxable persons for VAT purposes in Portugal. Vat is levied on the supply of goods and services taking place in Portugal according to the VAT place of supply rules, including intra-community transactions and imports of goods. The standard VAT rate is 21 per cent. The reduced rate of 6 per cent and the «intermediate» reduced rate of 13 per cent apply to certain of goods and services as mentioned respectively in annexes Lists I and II to the VAT Code. Municipal Tax on Immovable Property (IMI) A municipal tax is levied annually on the immovable property located within each municipality. The tax is due by the person registered as the owner/usufructuary or the user on December 31. Tax rates may vary from 0.2 to 0.4 per cent on the taxable value of urban buildings registered in the cadastre and/or owned from December 1, 2003 and from 0.4 to 0.7 per cent for urban buildings subject to transitional scheme of evaluations. For rural property, the tax rate is 0.8 per cent. Municipal Tax on the Transfer of Immovable Property (IMT) A municipal transfer tax is levied on the acquisition of immovable property and certain similar events. The acquisition of quotas of a limited liability company by quotas that owns real estate is considered as a transfer of immovable property for IMT purposes, whenever one of the quota holders becomes the owner of more than 75 per cent of the company s equity as a result of that acquisition, amortization of the quotas or any other event. The tax is due by the acquirer of the real estate and it is calculated on the higher of two values: the value for which the immovable property was transferred or the property taxable value as registered in the tax authorities cadastre. The general tax rates are 5 per cent for rural property and 6.5 per cent for urban property. Urban buildings for dwelling purposes are taxed at progressive rates that can go up to 6 per cent. Stamp duty Stamp duty is levied on all acts, agreements, documents and other events listed on the General Table annex to the Stamp Duty Code, including gratuity. Page 170

172 14. What is the tax treatment of payments to foreign owners? Dividends are subject to withholding tax at the general rate of 21.5 per cent, when paid to individuals and at the rate of 20 per cent when paid to companies. An exemption from withholding tax may apply in respect of dividends qualifying for the participation exemption, dividends paid within a group of companies taxed under the group treatment regime, provided that the dividends relate to profits derived in a tax period in which the regime applies and stock dividends representing capitalized profits and reserves. The general withholding tax rates may also be reduced in accordance with double-tax treaties or rules that implement the Parent-Subsidiary Directive. Interest payments are subject to withholding tax at the rate of 20 per cent when maid to corporate non-resident owners and at the rate of 21.5 per cent when maid to individual non-resident owners. However, there are specific exemptions in accordance with domestic provisions (e.g. interest from public bonds), double-tax treaties rules and the rules that implement the Interest and Royalties Directive that may reduce that rate. Royalty payments made to non-resident corporate owners are subject to withholding tax at the rate of 15 per cent, while payments made to non-resident individual owners are subject do withholding tax at the rate of 21.5 per cent. Double-tax treaties provisions, as well as the rules that implement the Interest and Royalties Directive, if applicable, may reduce these rates. 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? Yes. Resident owners are taxed for their world wide income. Therefore, generally the tax withheld in respect of income earned by resident owners is an advance levy of corporate income tax or personal income tax (IRS) while tax withheld in respect of income earned by non-resident companies or individuals is final. Even when the law establishes that the tax withheld in respect to income earned by residents is final, in some cases the taxable person may opt for the aggregation of the income for purposes of determining the applicable tax rate (e.g. dividends paid by resident corporations to resident individual owners). Contact Information Margarida Lima Re.g.o mlre.g.o@mlgts.pt Morais Leitão, Galvão Teles, Soares da Silva & Associados Rua Castilho, Lisbon, Portugal Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 171

173 Issues Relating to Organizational Forms and Taxation Romania Prepared by Lex Mundi member firm Nestor Nestor Diculescu Kingston Petersen 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. The following types of commercial companies can be incorporated in Romania, according to Law No. 31/1990 regarding commercial companies, as republished and subsequently modified and completed (the Company Law ): a) joint stock company (in Romanian: societate pe actiuni or SA ) The SA is selected in case of commercial activities requiring significant capital contributions (due to the possibility to establish such companies via public subscription and further issuance of bonds, floatation of shares on capital markets etc.), while for certain type of activities (e.g., banking, insurance, financial services, etc.), the SA form is mandatory under special regulations. The share capital is divided by shares, the shareholders being liable towards the creditors only up to the limit of their contributions to the share capital (with exceptions). Joint stock companies represent 2.4% of the total number of Romanian companies. b) limited liability companies (in Romanian: societate cu raspundere limitata or SRL ) The SRL is suitable for the activities which do not require a large number of investors or public capital (due also to the impossibility to issue bonds or float the shares on regulated markets). The share capital is divided by social parts and the shareholders are, with exceptions, liable only up to the limit of their contributions to the share capital. 95.1% of Romanian companies are established as SRL, due to the advantages offered by this form of company (e.g. corporate governance rules flexibility etc.) which is also the only option available where the company is owned by a sole shareholder. c) general partnerships (in Romanian: societate in nume colectiv or SNC ); General partnerships are the simplest type of company, in which the activity is collectively performed by the shareholders, jointly and unlimitedly liable for the company s debts. Due to its intuitu personae character, the shares may not be transferred to any third parties. This type of company represents 2.3% of Romanian companies. d) limited partnerships (in Romanian: societate in comandita simpla or SCS ) In a SCS, there are 2 types of shareholders: (a) the active partners, jointly and unlimitedly liable towards the creditors for the company s debts, and (b) the silent partners, liable up to the limit of their contributions to the share capital. In a limited partnership, the silent partners, having capital, contribute these amounts to the active partners, who shall perform the commercial activity in view of obtaining profit. Limited partnerships represent 0.1% of the Romanian companies. e) partnerships limited by shares (in Romanian: societate in comandita pe actiuni or SCA ) The partnership limited by shares comprises two types of associates: the active partners and the silent partners, while the share capital is divided by shares. The rules mentioned for the limited partnerships in relation to active/ silent partners are applicable as well. Page 172

174 2. Are there attributes of the form that you consider unique to your jurisdiction? N/A 3. Describe the management and governance structure for each organizational form. Given that most Romanian companies are established as SA or SRL, the presentation below details the rules pertaining to these two types of companies: 3.1 Rules applicable to SA a) General Meeting of Shareholders ( GMS ) The number of votes for each shareholder is determined pro rata with the participation to the share capital. There are 2 types of GMS: the ordinary general meeting of shareholders ( OGMS) and the extraordinary general meeting of shareholders ( EGMS ). The Company Law provides the decisions which are mandatory to be taken by the EGMS and those which must be taken by the OGMS, the quorum and voting requirements being provided differently for the 2 types of GMS. b) Management bodies The administration system of an SA may be either a one-tier system or a two-tier system. i. One-tier administration system The management is undertaken by one director or by several directors, organized as a board of directors (the BoD ) and, if the case, by one or several managers (the Managers ), led by a General Manager. In case of companies having the legal obligation to have their financial statements audited, at least 3 directors must be appointed and the BoD must delegate the management to the Managers, save for certain powers. The BoD represents the company in relation to third parties and before the courts of law. When management powers have been delegated to Managers, the representation powers are held by the General Manager. The Managers are in charge with the day-to-day management of the company. ii. Two-tier administration system The management is undertaken by the Directorate and the Supervisory Board. The Directorate manages the company, except for the matters incumbent upon the GMS or the Supervisory Board, having representation powers in relation to third parties and before the courts of law. The Supervisory Board has the supervising duties in the company, such as permanent control rendered over the management performed by the Directorate. c) Controlling bodies Control of the management activity within an SA can be ensured by: i. a number of censors or by ii. external financial auditors selected by the GMS. 3.2 Rules applicable to SRL a) GMS Each share grants the right to one vote. The Company Law provides for the decisions and deliberation that are mandatory to be taken by the GMS. The GMS passes resolutions by the vote of the absolute majority of shareholders and shares. For resolutions concerning the outstanding amendment of the incorporation document, unanimity is required. b) Management bodies Page 173

175 An SRL is managed by one or more directors, every director being entitled to represent the company towards third parties. The management systems regulated for the SAs are not applicable to SRLs. c) Controlling bodies Control of the management activity can be ensured by: i. one or more censors; ii. external financial auditors or iii. the shareholders who are not directors. 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? Both the management and the owners of Romanian companies may be Romanian or foreign legal or natural persons, in any proportion, no residency restrictions/ prohibitions being applicable thereto. In order for a foreign legal entity to become a shareholder of an SA/SRL, in accordance with the Company Law such entity must not: a) have been declared as incapable (not having the capacity, according to its laws of incorporation to acquire shares in other jurisdiction), bankrupt or subject to pending bankruptcy/insolvency proceedings opened against it; b) have been convicted for fraudulent management, abuse of trust, forgery, use of forgery, fraud, peculation, perjury, bribe taking or giving; c) have been convicted for the crimes provided by Law no. 656/2002 regarding the prevention and sanctioning of money laundering, and for establishing certain measures for preventing and fighting against financing terrorist acts, as subsequently amended ( Law no.656/2002 ), namely: money laundering crimes consisting of: i. the action of transferring or changing assets knowing that the respective amounts of money are the result of criminal offences with the purpose of dissimulating or hiding the illicit nature of the respective assets or with the purpose to assist the person having committed the respective offences to escape criminal liability; ii. the hiding or dissimulating of the real nature of the source, disposition, circulation or ownership of the assets or of the rights thereof, knowing that the respective assets iii. are the result of a criminal offence; the acquisition, the possession, usage of assets knowing that the respective assets are the result of a criminal offence; non-observance of disclosure obligation: failure by the legal entities subject to provisions of Law no. 656/2002 on the observance of the obligations to disclose any type of information held by them in connection to the money laundering activities during their activity and after its termination. d) have been convicted for the offences provided by art of Insolvency Law no. 85/2006 ( Insolvency Law ), namely: simple fraudulent bankruptcy: such offence consists in the failure of the natural person or the legal representative of the company to file in due time a request for the commencement of the insolvency procedure once the company has become insolvent. fraudulent management: such offence consists of acts committed in bad faith by a specific category of persons (liquidator, debtor under the insolvency procedure) that was supposed to make preservation or administration acts in favor of a company, which resulted into damages for the respective company. Page 174

176 actions of the judicial director or that of the liquidator in the insolvency procedure or by any of its representatives to acquire, use, dispose of assets, money or other values that such manages. e) have been convicted for any of the offences provided by the Company Law. 5. Describe the extent to which management and owners are exposed to liability. 5.1 Management liability Directors are liable to the company if they do not perform their duties in accordance with the applicable provisions of the Company Law, the constitutive document and, as the case may be, any management agreement. Such liability is not extended to directors who can prove that they disapproved of a certain decision. The members of the Board of Directors, the Directorate and of the Supervisory Board are liable for the damage caused to the company by the non-observance of obligations in case of interests contrary to the company. The members of the Board of Directors or of the Directorate are jointly liable for: a) the reality of the amounts paid by the shareholders; b) the existence of the dividends paid; c) the existence and correct keeping of the registers; d) the fulfillment of the decisions of the general meeting of shareholders; e) the fulfillment of the duties provided by the law and the constitutive act. Such members are jointly liable with their immediate predecessors in case they have become aware of irregularities committed by predecessors and failed to communicate them to the censors/internal auditors and financial auditors. Under criminal law, Directors are responsible for damage caused to a company or bankruptcy caused by fraud. The Company Law lists criminal offences for which directors may be liable, including: a) the use of the company s assets or credit for their own benefit or for a purpose contrary to the company s interests; b) spreading false information or using other fraudulent means to obtain a benefit to the detriment of the company; c) payment of dividends from false profits in the absence of financial statements or based on false financial statements etc. According to the Company Law, the company s creditors may also sue the Directors for nonperformance of certain duties (i.e. on the commencement of bankruptcy proceedings if such failure has caused the entry into bankruptcy). 1. Shareholders liability As a rule, shareholders are not liable for the company s obligations. In principle, in case of SA and SRL, they are responsible only up to the limit of their participation to the share capital. Thus, shareholders are not liable for the debts of the company, except for the subscribed and unpaid capital. Certain cases when the said limitation of liability is not applicable (i.e. an exception known as piercing the corporate veil ) are contemplated by the Company Law. Thus, a shareholder can be held responsible unlimitedly for the unpaid debts of the dissolved/ liquidated company, including if (i) it uses the assets of the company as if they were its own or (ii) it diminishes the company s assets to its own/ a third party s benefit, knowing that this may determine the company s impossibility to pay its debts. Provisions regarding cases of piercing the corporate veil can be found in special regulations in the insolvency, environmental protection and fiscal fields. Page 175

177 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? The share capital of the SA is divided in shares, each having a minimum nominal value of RON 0.1, while the share capital of the SRL is divided in social parts (hereinafter referred to also as shares ) having a minimum value of RON 10. SA may also issue preference shares (the only type of preference shares regulated by the Company Law is the preference shares with priority dividends without voting rights attached). Unless otherwise provided in the articles of association, shares in an SA are freely transferable between shareholders and/ or to third parties. In case of SRL, shares can be freely assigned between shareholders, while to third parties they can only be assigned with the approval of associates representing at least 75% of the share capital and the transfer only becomes effective on the expiration of a 30 day-term from the publication in the Official Gazette of the shareholders resolution approving the respective shares transfer. In addition, other transfer restrictions may be agreed between shareholders under the articles of association. An SA should have at least 2 shareholders, without an upper limit being provided by law. An SRL may be established with a sole shareholder, provided that the latter is not (i) a sole associate in another Romanian company or (ii) a limited liability company with a single shareholder. An SRL cannot have more than 50 shareholders. 7. Is there a minimum capitalization? An SA must have a minimum registered capital of RON 90,000 (approx. EUR 22,500), out of which at least 30% of the subscribed capital has to be paid upon registration, and the remaining part within 12 months as of registration in case of cash contributions, respectively within 2 years as of registration, in case of in-kind contributions. In case the SA is set up by public subscription, the shares representing in-kind contributions shall be paid in full. A SRL must have a minimum registered capital of RON 200 (approx. EUR 50), to be paid entirely upon incorporation. 8. Is there a security that can be issued to the public? Only an SA company can be listed and therefore issue floating shares, and bonds, the issue and the trading of which is done on regulated markets, subject to specific rules. 9. Can the form incur debt, or grant security for debt? Both joint stock companies and limited liability companies may, in principle, incur debts during carrying on their day to day business activity, and can grant security for debts. There are however restrictions imposed by law in connection with incurrence of debt or grant of security in relation to the securitization of third party debts (e.g. as fidejusor / third party guarantor). Other restrictions in connection with incurring of debts are applicable in case of companies undergoing judicial reorganization or bankruptcy. 10. What is the duration of the form? Can it be renewed? The duration of a Romanian SA or SRL may be limited or unlimited. In case of limited duration, the company shall be automatically dissolved upon the expiry of the pre-agreed term, unless the duration is extended for another limited or an unlimited period, in compliance with the applicable law. Page 176

178 11. Describe the process, customary time period and approximate cost of establishing the form. The incorporation of an SA/SRL entails the performance of certain legal/administrative operations: a) Verifying availability of the company s name and reservation The availability of the name must be verified and reserved with the Trade Registry. A reservation of a name is valid for a period of 3 months from the date of its issuance. b) Execution of the articles of association and of the other incorporation-related documents The companies shareholders must prepare and execute the articles of associations, which must include certain elements: i. for all types of companies: identification data of the founders; corporate form, corporate name and registered office; business object (i.e. the business field and the main business); subscribed and paid-in share capital, value of in-kind contributions and the evaluation method thereof; each shareholder s participation to profits and losses; identity of directors/ managers of the company and powers vested in them; secondary offices (branches, agencies, representative offices) or the conditions to be met when setting them up at a later date; duration of the company; method for the dissolution and liquidation of the company. ii. for SA companies: number of shares in exchange of in-kind contribution and the corporate name of the persons making the contribution; value of such capital, if case; number and nominal value of the shares, whether they are nominative or bearer shares; if there are several categories of shares, the number, the nominal value and the rights attached to each category; any restriction on the share transfer, if case; identification data of the first censors/ financial auditors; provisions regarding the administration, management, operation and control of the company s management; any special benefits granted to any persons who participated to the establishment of the company, and the identity of the beneficiaries of such benefits; total or estimate amount of all the establishment expenses. iii. for SRL companies: number and nominal value of all shares, contribution of each shareholder and number of shares per each shareholder; shareholders representing and managing the company or the non-associated directors, their identification data, the powers vested in them and the manner of exercising them; identification data of the first censors/ financial auditors. c) Execution of the lease agreement for the headquarters space and registration thereof with the fiscal authorities d) Opening of the share capital bank account and depositing the relevant cash contributions e) Preparation and submission of the incorporation file to the Trade Registry. Page 177

179 The certificate of registration for the Romanian company would be issued in maximum 5 (five) working days from the submission of the corporate file with the Trade Registry. The registration costs amount to a maximum of Euro Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? As a general rule, there is no obligation generally applicable to central government, or to local public authorities to be part of a project or investment vehicle or to receive part of the profits arising therefrom. Nevertheless, in specific fields of activity such as public services of local interest (e.g. sewage system, waste management, water supply, etc.), the public service could be granted under concession to mixed companies the share capital of which is both public and private, if so decided by the local authorities, but this is merely a commercial decision based on feasibility of the proposal rather than a legal requirement (for instance, the concession could, if more feasible, be granted to a publicly owned company or to a private investor, as well). 13. For what taxes is the form liable? Please find below a brief presentation of the main taxes applicable to a form of organization (e.g. a company) in Romania Corporate income tax ( CIT ) Romanian legal entities and legal entities having their headquarters in Romania, incorporated as per the European legislation, are subject to CIT on their worldwide income. Foreign legal persons carrying out activities in Romania through a permanent establishment ( PE ) (branches included) are required to pay CIT for the taxable profit attributable to the PE. The standard CIT rate is 16% and applies to the accounting profits adjusted for non-taxable income and non-deductible expenses. Expenses are generally deductible for CIT purposes provided they are incurred in relation to earning taxable income. Certain deductibility criteria apply for specific expenses (e.g. interest, sponsorships, services, etc.) and non-compliance with these rules leads to disallowance of their deductibility for CIT purposes. Starting May 2009, taxpayers are liable to pay, under certain conditions, a minimum tax which ranges between RON 2,200 and RON 43,000 per year, depending on the previous year revenues. 1. Withholding tax The standard rate is 16% (see details under question 14). 2. Value added tax ( VAT ) The Romanian VAT rules are aligned with the provisions of the EU VAT Directive 2006/112. In Romania, the standard rate was increased from 19% to 24% starting 1 July This rate is generally applicable to supplies of goods or services which are not subject to VAT exemptions or to the reduced rates. The reduced rates are 9% (applicable to certain supplies of goods and services - e.g. books, hotel accommodation) and 5% (applicable, under certain conditions, to supplies of social dwellings, including the related land). 3. Local taxes Local taxes are payable to the relevant local budgets. These taxes include inter-alia building tax, land tax, vehicle tax, and advertising tax. 4. Payroll contributions Page 178

180 Payroll contributions are due both at the employer and employee level. Please find below the main contributions payable by employers: a) social security contribution between 20.8% and 30.8% depending on working conditions, applied to the total gross amounts paid to employees on a monthly basis ( the taxable base ); b) health fund contribution 5.2% applied to the taxable base; c) unemployment fund contribution 0.5% applied to the taxable base. Excise duties are applicable for the consumption of certain categories of goods (e.g. tobacco products, alcoholic beverages, electricity). The Romanian excise duty legislation is generally aligned with the relevant EU Directives. 14. What is the tax treatment of payments to foreign owners? Withholding tax ( WHT ) is applicable on a number of payments made by Romanian tax residents to non-resident recipients, such as dividends, interests, royalties, commissions, services rendered in Romania, management and consultancy services irrespective of whether such services are rendered in Romania. The Romanian income payer is liable to withhold and pay the tax from the gross income payable to the foreign beneficiary. The standard WHT rate is 16%. However, such rate can be reduced or even eliminated, under certain conditions, based on the provisions of the relevant Double Tax Treaty ( DTT ) concluded between Romania and the country of residence of the foreign beneficiary, or based on the EU Parent- Subsidiary Directive and Interest-Royalty Directive, as implemented in the Romanian tax legislation. The provisions of a DTT may be invoked provided that the foreign beneficiary makes available its tax residency certificate to the Romanian income payer, valid for the period when the income is derived by the foreign beneficiary. The payment of dividends to a foreign shareholder-legal entity is subject to WHT as follows: 0% if the shareholder(s) are companies residing in EU or EFTA member states, in case of a minimum 10% shareholding, held for an uninterrupted period of two years at the payment date (other conditions refer to the legal form of the Romanian and the EU/EFTA companies, the tax residency of the EU/EFTA company and the fact that these companies should be subject to profits tax without the possibility of an exemption or option); or 10% in case of shareholder(s) from EU or EFTA member states, not fulfilling the conditions above; or 16% in the other cases. If the minimum holding period of two years is met after the date of the dividend payment, the Romanian paying company can request a refund of the WHT paid until then. Under the EU Interest & Royalties Directive implemented in the Fiscal Code, interest/royalty payments made by a resident legal entity to companies residing in an EU or EFTA member state are exempt from withholding tax in Romania if inter-alia the beneficiary holds minimum 25% of the share capital of the domestic legal entity for an uninterrupted two-year period at the date of the payment. This Directive was incorporated in the Fiscal Code with a transition period lasting until 31 December 2010 during which the WHT rate for interest/royalty payments will be 10%. If the above conditions are not met, the 16% tax rate applies to the interest/royalty payments made to EU/EFTA resident legal entities (or a tax rate available under a tax treaty, if favorable). Similar to the dividend payments, if the shareholding period condition is fulfilled at a later stage, refund may be requested. Page 179

181 The domestic law does not allow application of DTT in case of net-of-tax arrangements, whereby it is the Romanian payer of income, and not the foreign beneficiary, that bears the tax. 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? Our comments below refer to shareholders - legal entities and include several main aspects that may impact foreign companies differently in comparison with Romanian residents Capital gains In case of resident companies, capital gains derived from the disposal of shares held in other Romanian entities are treated as business income, being subject to the standard 16% CIT rate. Capital gains derived by non-resident entities from the sale of shares held in Romanian companies are generally subject to the standard 16% CIT rate, as well. However, under the majority of the DTTs concluded between Romania and other countries, such tax may be reduced to nil in Romania, provided that the foreign beneficiary makes available its tax residency certificate, valid for the period when the income is derived by the foreign beneficiary. 1. Dividends The standard dividend WHT rate applicable between Romanian companies was recently increased from 10% to 16%. By comparison, as mentioned under question 14, the WHT rate applicable to dividends paid to foreign companies may be reduced from 16% (or 10% in case of EU/EFTA companies)(see explanations under question 14), based on DTTs concluded by Romania or the EU Parent-Subsidiary Directive. Dividends paid by a Romanian company to another Romanian company should not be subject to WHT if the dividend beneficiary holds at least 10% of the Romanian company s shares for a period of at least two years (ending on the date when the dividends are paid). If the minimum holding period of two years is met after the date of the dividend payment, the Romanian legislation does not stipulate the possibility of recovery of the WHT paid until then based on the domestic 16% rate. As described under question 14, such possibility is stipulated only in the case of the dividend payments made to EU/EFTA beneficiaries based on the relevant European Court of Justice cases. Contact Information Dragos Apostol Dragos.Apostol@nndkp.ro Nestor Nestor Diculescu Kingston Petersen Bucharest Business Park, Entrance A, 4th floor 1A Bucuresti-Ploiesti National Road 1st District Bucharest , Romania Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 180

182 Issues Relating to Organizational Forms and Taxation Slovak Republic Prepared by Lex Mundi member firm Čechová & Partners 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. Under Slovak law, following four forms of business companies exist: a) Unlimited Company (in Slovak verejná obchodná spoločnosť ) b) Limited Partnership Company (in Slovak komanditná spoločnosť ) c) Limited Liability Company ( LLC ), d) Joint Stock Company ( JSC ). The most common types of legal entities used by foreign investors in the Slovak Republic are LLC and JSC, especially as consequence of the fact that these two forms of business companies implies limited liability of owners (i.e. shareholders) for the obligations of the company, i.e. in LLC the shareholder is liable for the obligations of the company to the extent of its unpaid contribution registered in the Commercial Register and in JSC the shareholder shall not be liable in any way whatsoever for the obligations of the company. Unlimited Company is a company where at least two persons perform their business activity under the common business name, and they are liable for the obligations of the company jointly and severally to the extent of their entire asset. The main disadvantage of this form of the company is unlimited liability for the company s obligations. On the other hand, there is no statutory requirement of minimum registered capital. Limited Partnership Company is a company where one or more shareholders are liable for the obligations of the company to the extent of its unpaid contribution (limited partner) and one or more shareholders are liable for the obligations of the company to the extent of their entire asset (general partner). A limited partner is obliged to pay a contribution at least in the amount EUR 250. Position of a general partner in Limited Partnership Company is similar to partner in Unlimited Company and position of limited partner is similar to shareholder of LLC. LLC is a company which registered capital is formed by predetermined contributions of shareholders. The minimum contribution of one shareholder is EUR 750; however the condition of minimum registered capital as specified in 7 below shall be met. The company may be established by one person and maximum number of shareholders is limited to 50. LLC with one shareholder may not be a sole shareholder in other company. One natural person may be a sole shareholder in three companies at most. The minimum share capital must be EUR 5,000. JSC is a company which registered capital is distributed into specific number of shares with specific nominal value. The JSC may be either public or private. JSC may be established by one founder, if such founder is a legal entity, otherwise the company may be established by at least two or more persons. The minimum share capital must be EUR 25,000. Next to the companies there is a legal form of cooperative ( družstvo ). Moreover, there is an association of natural persons ( združenie ) and some legal forms of nonprofit organizations, however we will further deal only with the above mentioned four forms of business companies and cooperative. Page 181

183 2. Are there attributes of the form that you consider unique to your jurisdiction? No. 3. Describe the management and governance structure for each organizational form. In Unlimited Company any partner, i.e. shareholder is entitled to business management of the company. Unless the foundation deed provides for joint action, statutory representative of the company is any partner and thus is entitled to act in the name and on behalf of the company independently. In Limited Partnership Company only general partners are entitled to business management of the company. Statutory representative of the company are general partners, and unless provided otherwise in the foundation deed any partner is entitled to act in the name and on behalf of the company independently. Statutory representative of LLC is one or more executive directors, which are entitled to act in the name and on behalf of the company independently, unless otherwise provided in the foundation deed. Executive directors are also entitled to business management of the company. LLC is not obliged to create supervisory board. General meeting is the supreme body of LLC and decides on all matters in respect to company, e.g. approves of ordinary financial statement of the company, decides on division of profit and payment of loss, appoints and withdraws the executive directors, decides on liquidation of company. Statutory body of JSC is a board of directors which manage its activity and act in the name of the company. Each member of the board of directors is entitled to act individually, unless provided otherwise in statutes. The board of directors decides on all matters related to the company, unless such decision making is assigned by operation of law or statutes into the competence of the general meeting (for details see above) or the supervisory board. JSC is obliged to create supervisory board at its establishment. The Cooperative is a corporation of unlimited number of persons established for the purposes of performance of business activity or to ensure economic, social or other need of its member. It shall have at least five members, or in case of legal entities at least two members. The members are not liable for the obligations of the cooperative. The minimum share capital must be EUR 1,250. In respect to statutory body the similar applies to Cooperative as to JSC. The supreme body of Cooperative is a members meeting having similar competencies as general meeting in LLC and JSC. The Cooperative has also a controlling body with similar competencies as supervisory board which is called control commission. 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? A statutory representative of any form of business company shall be either a Slovak resident or a foreigner holding a long term residence permit for the Slovak Republic, unless such foreigner is a citizen of a member state of the European Union or a member state of the Organization for Economic Co-operation and Development (OECD) in such a case no residence permit is required. Subject to special regulation (e.g. restrictions related to trade with special goods, i.e. military equipment, broadcasting and retransmission, acquirement of agricultural land and gambling), no restrictions or prohibitions apply to the owners of any form of business company, whereas according to the Slovak law a foreign person (i.e. natural person or legal entity) may establish or participate in any form of business company in the Slovak Republic and such foreign person shall have the same rights as the Slovak persons. Page 182

184 5. Describe the extent to which management and owners are exposed to liability. The extent of liability of shareholders of LLC, JSC and Cooperative, i.e. owners is described in 1 and 3 above. As per partners of Unlimited Company and general partners of Limited Partnership Company, as owners and statutory representatives of the company at the same time they are liable for the obligations of the company and therefore they action up to the extent of their entire asset. Limited partners of Limited Partnership Company are not participating in the management of the company and they are liable for the obligations of the company only up to the extent of their unpaid contribution. In LLC and JSC executive directors or member of the board of directors are personally liable for breach of their duties towards the company and are obliged to perform their functions with due professional care. Any arrangements between the company and executive directors or member of board of directors restricting their liability are forbidden. 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? In Unlimited Company ownership interest is not exactly represented as such, however, unless provided otherwise in the foundation deed, the profit shall be divided between the partners of the company equally. In Limited Partnership Company, the ratio of division of profit between general partners and limited partners shall be provided in foundation deed; otherwise the profit shall be divided in half. Ownership interest, i.e. a share in LLC represents the rights and duties of the shareholder and thus corresponding participation in the company. The amount of a share is determined by the relation of the contribution to the registered capital, unless provided otherwise by the foundation deed. The share is perfectly transferable under conditions stipulated by the specific law. In JSC, a share as a type of the security represents the rights and duties of shareholder to participate in management and profit of the company under condition stipulated by the law or statutes. The extent of the participation in the company depends on the nominal value of share, number of shares owned by one shareholder and also on the type of the share (whether it implies voting right or not or other rights related to the ownership of a share etc.) in relation to the registered capital. The shares are generally transferable under condition stipulated by special law (i.e. the Commercial Code and Act on Securities). Furthermore, the transferability of shared may be limited but not entirely prohibited by the statutes. As regards, the minimum number of owners, please see 1 and 3 above. 7. Is there a minimum capitalization? Under Slovak regulation the requirement of minimum capitalization applies only for business companies in form of LLC or JSC. Therefore, in LLC the minimum registered capital is EUR 5,000 (in case of a sole shareholder the whole must be fully paid up and at least 50% of the minimum registered capital must be paid up at the incorporation) and in JSC the minimum registered capital is EUR 25,000 (at least 30% of cash contributions must be fully paid up at the incorporation). 8. Is there a security that can be issued to the public? No special security that can be issued to the public exists. Page 183

185 9. Can the form incur debt, or grant security for debt? Certainly yes, any form of the business company may incur debt as a result of its business activity. Any form of business company may grant a security for the debt, however the form of the security depends on the form of the company, i.e. LLC may pledge its business interest, JCS may pledge the shares, any form of the business company may issue a guarantee etc. 10. What is the duration of the form? Can it be renewed? No limits for the duration of any form of business company are prescribed by the law. Generally business companies are established for indefinite period of time. 11. Describe the process, customary time period and approximate cost of establishing the form. In general, the time period of incorporation of any form of the business company is approximately 3 weeks (under a condition that all necessary documents are prepared). Every person intending to conduct business in Slovakia is required to obtain necessary permission (i.e. trade licenses or other permission required by special laws). The administrative cost for each trade license is EUR 5. The court fee for registration of JSC is EUR and for registration of any other form of business company the court fee is EUR Additional administrative costs for translation and certification by notary public of necessary documents and legal costs shall be added to the above costs. 12. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? No specific requirements shall apply in this respect. 13. For what taxes is the form liable? In general, the company is liable for every tax existing in Slovak jurisdiction if the statutory conditions are met, i.e. any profit made by the company is subject to income tax at the rate of 19%. Furthermore, if the company is registered as VAT payer, it shall be subject to payment of VAT at the rate of 19%. Depending on the business activity and while performing its business activity, the company might be subject to payment of special consumer taxes (such as consumer taxes applicable to tobacco products, alcohol, mineral oils, beer and vine) and local taxes and contributions applicable in the municipality where the company has its registered seat (such as real estate tax, motor vehicle tax and local contribution for communal waste). 14. What is the tax treatment of payments to foreign owners? No special tax treatment of payments to foreign owners shall apply. Furthermore, the dividends paid to the shareholders of the company are free of tax as consequence of prohibition of double taxation, while the dividends are paid from the profit after deduction of all taxes applicable. Page 184

186 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? In compliance with answer to the question 14 above, there are no differences in tax treatment of foreign owners and residents. Contact Information Martin Fabry martin.fabry@cechova.sk Čechová&Partners Sturova Bratislava, Slovak Republic Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 185

187 Issues Relating to Organizational Forms and Taxation South Africa Prepared by Lex Mundi member firm Bowman Gilfillan 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. There are various legal entities or organizations available to conduct business in South Africa. These are the company, external company (local branch of a foreign company), close corporation, partnership, business and sole proprietorship. Companies are the most common investment vehicles for foreign investors in South Africa. A company has a separate legal personality from its members who enjoy limited liability, and continues to exist despite changes in shareholding. There are two types of companies, a private company (with between one and seven members) and a public company (with 50 or more members). The right to transfer shares in a private company is restricted and offers to the public for the subscription of shares or debentures are prohibited. Both natural and juristic persons can hold shares in a company. An external company presents a unique investment vehicle for foreign investors in South Africa. This is discussed further in 2 below. A close corporation is not appropriate for foreign investors as only natural persons (a maximum of ten) may hold an interest in it. Close corporations are cheaper and quicker to establish and maintain than companies. A close corporation also has a separate legal personality from its members who enjoy limited liability, and continues to exist despite changes in membership. There is no statutory audit requirement for close corporations however the accounting officer must report that the annual financial statements accord with the accounting records. Partnerships are often used to create joint ventures. There are no specific formalities required to set up a partnership which is governed by common law and may be formed by agreement or implication between two but no more than twenty persons (except for certain professional partnerships). A partnership does not have a separate legal personality from the partners who do not generally have the protection of limited liability (undisclosed partners are not liable to third parties). A partnership terminates each time there is a change in partnership. Generally, a trust is created by entering into a trust deed which is lodged with the Master of the High Court. A trust enables trustees to carry on a business for the benefit of nominated beneficiaries. Although a trust does not have a separate legal personality, it affords limited liability in that the trustees and beneficiaries are not liable for the obligations of the trust. A trust does not have to submit financial statements or appoint an auditor. A sole proprietorship exists where an individual conducts business in their personal capacity under a trading name or otherwise. There are no formal requirements for establishing and running a sole proprietorship. The sole proprietor is taxed as a natural person. There is no perpetual succession or limited liability. This is obviously not an appropriate investment vehicle. Page 186

188 2. Are there attributes of the form that you consider unique to your jurisdiction? The external company creates a unique investment vehicle in that it allows any foreign company, with the exception of banking and insurance companies, to establish a place of business and carry on its activities in South Africa without forming a separate locally incorporated company. The external company is a company incorporated outside South Africa that establishes a place of business in South Africa. A foreign company is deemed to have established a place of business in South Africa where it acquires immovable property in the country. A foreign company that wishes to conduct business in South Africa through a branch in its own name must register with the Registrar of Companies as an external company within twenty one days of establishing a place of business. The external company does not have a separate existence from the foreign head office. The external company must comply with the provisions of the Companies Act, including the submission of statutory returns and the filing of annual financial statements for its entire operations (not only its South African operations) with the Registrar of Companies. An exemption may be granted in respect of these filing requirements. The external company must appoint a South African resident authorised to accept notices served on the company. Once registered with the Registrar of Companies, an external company will effectively be treated like a South African incorporated company. An external company may be converted to a local private company, subject to certain requirements. 3. Describe the management and governance structure for each organizational form. Generally speaking, the shareholders retain ultimate responsibility for the company and have the power to appoint and remove directors, they in effect delegate the day to day running of the company to the directors who in turn appoint and supervise management. The board of directors must manage the company within the limits of legislation and the memorandum and articles. The board may delegate certain powers to managers and at the same time impose appropriate restrictions and conditions which can be varied or revoked at any time. The directors have a duty to monitor management s performance and ensure that management work within their delegated powers. In the absence of specific cause for suspicion, directors are generally entitled to trust management to perform their duties honestly and to accept and rely on the judgment, information and advice of management when reaching their own decisions. Directors remain ultimately liable, both jointly as a board and individually, for the well being of the company. The directors of a company are natural persons and cannot be corporations. The directors of an external company are the same individuals as the directors of the foreign parent company. Every member of a close corporation may participate in management unless disqualified by law or the association agreement determines otherwise. All partners may take part in the management of a partnership unless the parties create a more sophisticated management structure by agreement. The assets of a trust are managed by the trustee in accordance with the trust deed. A sole proprietor may manage the business as he or she sees fit. 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? There is no such requirement. However, certain ownership and control restrictions and specific authorizations may be required in regulated sectors such as broadcasting, telecommunications, banking, insurance, defence and mining. Furthermore, the non-resident status of individuals, shareholders or directors has a number of consequences. For example, certain investments are Page 187

189 required to be marked as non resident in terms of the exchange control regulations; thin capitalization rules may apply where financial assistance, such as a loan, is granted by non-residents to connected or related companies; and the nationality of non-south African directors must be disclosed on all documents where directors names are required to be listed. 5. Describe the extent to which management and owners are exposed to liability. In general, the shareholders of a company are not liable for the obligations of the company because the company has a separate legal personality from its members. In very limited circumstances, the corporate veil will be pierced. There are very few statutory obligations which apply to owners and managers under our current legislation. At common law, the directors of a company are personally liable for the company s actions if they cannot show that they acted honestly and with the knowledge, skill and experience which can reasonably be expected of them. Statutory personal liability can arise for fraud or trading when the director knows, or ought to know, that the company cannot avoid insolvent liquidation. Criminal liability may apply to the breach of environmental and health and safety legislation. In general, the members of a close corporation are not personally liable for the obligations of the close corporation because the corporation has a separate legal personality from its members. Although a trust does not have separate legal personality, the debts of a trust are normally paid out of the trust estate. As such, trusts offer a form of limited liability in that neither the trustees nor the beneficiaries can be held liable for the obligations of the trust in the absence of fraud. Partnerships do not generally offer limited liability and the partners are each jointly and severally liable for the obligations of the partnership. Undisclosed partners are not liable for the obligations of a partnership owed to third parties. A sole proprietor is liable for the obligations of a sole proprietorship. 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? Ownership interest in a company is represented in the form of shares. The members of a company may freely transfer their shares, except where the right to transfer is restricted, as is the case with private companies. Furthermore, shares in a private company may not be offered to the public. The number of shareholders in a private company must be between one and fifty. A public company may have at least seven or more shareholders. Ownership interest in a close corporation is represented by a member s interests expressed as a percentage of all the members interests. A member s interest in a close corporation can only be transferred with the consent of all the members. A close corporation may have up to ten members who must all be natural persons. Ownership interest in a partnership is represented by the partners contribution to the partnership. A member of a partnership cannot transfer their interest in a partnership without the express agreement of all the partners. When a new partner joins or an existing partner leaves a partnership, a new partnership is created. A partnership must be made up of between two and twenty persons (except in the case of certain professional partnerships, where there is no limitation on the number of partners). Ownership interest in a trust is as set out in the trust deed. The ability to transfer the interests in a trust depends on the trust deed. There is no limitation on the number of trustees or beneficiaries to a trust. Page 188

190 The sole proprietor and the business are one and the same. As such, only the business can be transferred. As the name suggests, a sole proprietorship has one member. 7. Is there a minimum capitalization? There are no minimum capitalization requirements in South Africa. 8. Is there a security that can be issued to the public? Generally shares in companies can be issued to the public, subject to certain restrictions and formalities. [Note: It is not clear to us what this question relates to or if the answer satisfies the question] 9. Can the form incur debt, or grant security for debt? In general, any one of the entities discussed above can incur debt or grant security. 10. What is the duration of the form? Can it be renewed? Companies and close corporations have perpetual succession and can therefore continue unless dissolved. Partnerships, trusts and sole proprietorships do not have perpetual succession. 11. Describe the process, customary time period and approximate cost of establishing the form. A company must register its name and constitutional documents with the Registrar of Companies at the Companies Office. Registration of a new company takes between seven and fourteen days from submission of the relevant documents. It is also possible to buy a shelf company. To operate through a branch, a foreign company must submit certain information and its memorandum and articles of association (constitutional documents) to the Companies Office within 21 days of establishing a place of business in South Africa. The total fee for lodging documents is R400 / US$53 (an amount will also have to be paid on the authorised share capital of the company). Once all the formalities of the Companies Act have been met, the Registrar must register the company. On Registration, the registrar will issue an incorporation certificate and a certificate to commence business. Only when the latter certificate has been issued may the company commence business. The Companies Act 1973 is in the process of being replaced by a new Act. It is intended that the new Act will streamline the registration requirements. The new Act has been promulgated but will only take effect some time in Close corporations must be registered in accordance with the requirements of the Close Corporations Act. A close corporation is formed by complying with the requirements for registering a founding statement. A prescribed fee of R150 / US$20 is payable. The registration process is much simpler and quicker for close corporations than it is for companies. In general, a trust is formed by means of a trust deed that is lodged with the Master of the High Court. A prescribed fee of R100 / US$ 13 is payable on lodging the trust deed. There are no specific formalities for establishing a partnership which is governed by common law. A partnership is based on an agreement between the parties and requires nothing more. A sole proprietorship comes into being when a person starts a business. There are no specific formalities for establishing a sole proprietorship. Page 189

191 12. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? There is no such requirement. 13. For what taxes is the form liable? Companies incorporated, established or formed in South Africa, or "effectively managed" in South Africa are subject to South African income tax on their worldwide income and capital gains tax (CGT) on their worldwide capital gains. For tax purposes, a company includes private companies, public companies and close corporations. Companies are taxed at a flat rate of 28% on any income received or accruing to them. Companies are also subject to CGT at a rate of 14% on the disposal of a capital asset. In addition, South African companies are also subject to secondary tax on companies ( STC ) at a rate of 10% on declared dividends. As a result of the income tax rate of 28% and STC rate of 10%, South African companies have an effective tax rate of 34.55%. STC is a tax on the profits of the company and is paid when a company distributes its profits to shareholders. The beneficiaries of trusts, partners in a partnership and the sole proprietor pay individual tax based on a sliding scale with a maximum marginal rate of 40%. A beneficiary of a trust will be subject to income tax if he or she has vested rights to the income and assets of the trust. If the beneficiary has no vested rights, the trust will be subject to income tax at a rate of 40%. The beneficiaries of trusts with vested rights, the partners in a partnership and the sole proprietor are subject to CGT on the disposal of a capital asset at a rate of 10%. A trust with no vested beneficiaries is subject to CGT at the rate of 20%. 14. What is the tax treatment of payments to foreign owners? Non-resident companies, such as external companies (braches), are taxed on income derived from South African sources and on capital gains made on the disposal of immovable assets situated in South Africa, interests in immovable property or assets of their permanent establishments in South Africa at a rate of 33%, unless a double tax treaty provides otherwise. There is generally no tax on interest paid to foreign corporate shareholders exceptions include interests attributable to a South African permanent establishment or paid in the form of an annuity. The proposed amendments to the Income Tax Act ( ITA ) seek to tax interest paid to non-residents in certain circumstances. The interest exemption will apply to savings that flow into the general economy i.e. interest received from products listed on the JSE, interest paid to any one of the three spheres of governments, interest from dealer or brokerage accounts etc. If the proposed amendments become law, they will icome nto operation on 1 March A double tax treaty may reduce the rate of tax payable by the non-resident or provide that the interest is taxable in the nonresident s home country. Royalties paid to non-residents from a South African source are subject to a withholding tax imposed at the rate of 12%. This rate may be reduced by a double tax treaty, if any. 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? Foreign shareholders need to comply with transfer pricing and thin capitalisation rules contained in the ITA. The transfer pricing provisions require transactions between related/connected parties to be Page 190

192 effected at an arm s length price and empower SARS to adjust prices that do not reflect an arm s length price, in other words, prices that are artificially high or low. Thin capitalisation rules apply where a foreign shareholder gives financial assistance (includes the making of a loan, advance or debt and the provision of any security or guarantee) to a resident, and the non-resident and resident are connected persons in relation to each other. If the financial assistance is considered to be excessive in relation to the fixed capital, any interest, finance charge or other consideration payable in respect of the loan which relates to the excessive amount will not be allowed as a deduction in the hands of the resident borrower. An excessive debt to equity ratio is one that exceeds the ratio of 3:1. The resident borrower cannot deduct interest of the excessive amount from its taxable income and in addition, the excessive amount will be deemed to be a dividend and be subject to STC. Contact Information Kim Goss k.goss@bowman.co.za Twaambo Muleza t.muleza@bowman.co.za Bowman Gilfillan 165 West Street Sandton, Johannesburg, South Africa Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 191

193 Issues Relating to Organizational Forms and Taxation Spain Prepared by Lex Mundi member firm Uría Menéndez 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. a) Corporation (Sociedad Anónima, S.A. ) satisfies the needs of large enterprises and must be used if there exists the possibility of a future stock market listing. The main advantage of an S.A. lies in the fact that the capital is divided into shares, which have the status of marketable securities. Additionally, the risk born by shareholders is limited to the capital represented by the shares held. Consequently, an S.A. is the most suitable form for attracting private savings of investors towards commercial activities. b) Limited liability company (Sociedad de Responsabilidad Limitada, S.L. ) is the corporate form typically used for small and medium companies. Partners of an S.L. are not personally liable for the company s debts and S.L. regulations grant their partners a wide range of self-governing personalized to their own needs. However, the participations into which its capital is divided are not freely transferable and S.L.s cannot issue bonds or securities. The most common form of business vehicle used by foreign companies is an S.L., but an S.A. is also frequently used. c) General partnership (sociedad colectiva): The personal and unlimited liability imposed on partners for company debts reduces the appeal of this form. Its current importance derives from the fact that its regime applies to any non-registered companies that perform a commercial activity. d) A limited partnership (sociedad comanditaria simple) is a variation of general partnership with a special class of partners - the limited partners - which coexist with general partners and whose liability is limited to the funds they have contributed or undertaken to contribute. e) A limited share partnership (sociedad comanditaria por acciones) combines a limited partnership and an S.A. Its capital is divided into shares representing the contributions made by the limited and general partners. S.A. regulations apply to this form, but unlike S.A.s, directors must be partners and carry personal liability for corporate debts. This form may be interesting for large or medium companies which require significant capital injections to finance their expansion, but which also need to guarantee the stability of directors. f) A co-operative joins individuals under a principle of free entrance and voluntary exit for the performance of a commercial activity aimed at satisfying their common needs. This structure may be useful for entrepreneurs who desire to join efforts to compete in the market. g) An Economic Purpose Entity ( AIE ) is particularly attractive for companies seeking to join efforts and develop projects that exceed their individual capacities. Its corporate purpose is limited to activities which are auxiliary to those performed by its members. Page 192

194 h) A Temporary Business Union ( UTE ) is not an independent legal entity, but rather a see through vehicle created, on a temporary basis, for a specific project that exceeds the individual capacities of its members. 2. Are there attributes of the form that you consider unique to your jurisdiction? All the forms previously analyzed may be found with similar features to those in other countries. However, AIEs and UTEs may be particularly attractive given their tax advantages. 3. Describe the management and governance structure for each organizational form. S.A.s and S.L.s are governed and managed by: a) The general shareholders/partners meeting, which must be held within six months from the end of the financial year in order to approve, if appropriate, the directors management, financial statements and allocation of profits or losses. Additionally, directors must call an extraordinary meeting whenever deemed appropriate in the corporate interest, or at the request of shareholders/partners representing at least 5% of the capital. In both cases, a notice for the call of the meeting must be published. However, if the company is an S.L., the bylaws may alternatively provide for the call to be made by written notice individually sent to all partners. For both forms, there is no need to call the meeting if the holders of the entire capital are present or represented and those attending unanimously agree to hold the meeting (the so-called universal general meeting). No quorum requirements are established for an S.L. by law. On the contrary, in the case of an S.A., as a general rule, the general shareholders meeting may only be held on first call if a quorum of at least 25% of the voting share capital is present or duly represented; on second call no minimum capital is required. As regards voting requirements, resolutions of S.A.s are normally passed by the majority of votes of the shareholders attending the meeting. In S.L.s, resolutions are generally passed by the majority of votes cast by the partners attending the meeting, provided that they represent at least 1/3 of the capital. The management of the company may be entrusted to: (a) a sole director; (b) two directors acting jointly (there can be more than two joint directors in an S.L.); (c) multiple directors acting jointly and severally; or (d) a board of directors (composed of at least 3 members and no more than 12 for S.L.s). Unless otherwise established in the bylaws, there is no requirement that directors be shareholders or partners. For S.L.s, the bylaws may provide for several of the management structures listed above in order for the general partners meeting to choose amongst them. In general partnerships, unless otherwise agreed, all the partners will be in charge of the partnership s management. In limited partnerships, limited partners may not perform any act of management of the company. Management of a limited share partnership must be performed by the general partners, who will have the powers, rights and duties of directors of S.A.s, although with some particularities. Co-operatives perform their activity essentially through (i) the general partners meeting; (ii) the executive committee; and (iii) the controllers. The partners of an AIE have extensive freedom to adopt resolutions. As a general rule, resolutions must be adopted unanimously by the partners. Directors of an AIE do not need to be partners. The members of an UTE must appoint a manager, who will represent the UTE vis-à-vis third parties. Page 193

195 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? No. 5. Describe the extent to which management and owners are exposed to liability. Shareholders of S.A.s and partners of S.L.s are not subject to personal liability for the company s debts. Directors of S.A.s and S.L.s will be liable towards the company, the shareholders/partners and third parties for any damage caused by actions or omissions in breach of law, the bylaws or directors duties in case of negligence or wilful misconduct. Civil liability is based on negligence and the existence of an actual harm, elements that, together with the existence of a causal link between the director s conduct and the damage, must be evidenced by the claimant. Liability arising from any such conduct would be imposed jointly and severally on all directors. The regime is also expressly applicable to de facto directors. In contrast, this regime does not apply to directors who can evidence that they (i) did not participate in the adoption and implementation of the harmful resolution (e.g., because they were absent) and were unaware of the resolution; or (ii) were aware of the adoption of the harmful resolution, but took all appropriate steps to avoid the damages caused; or (iii) at least expressed their opposition to the adoption of the harmful resolution. The limitation period for such claims is 4 years after the director s dismissal. All partners forming a general partnership (including managing partners) will be both personally and jointly and severally liable for the company s debts, without the possibility of limiting the liability contractually. Limited partners in limited general partnerships are not subject to personal liability. Directors of general and limited partnerships are liable for damages arising to the corporate interests due to (i) malice, (ii) ultra vires acts or (iii) gross negligence and will be obliged to compensate damages if other partners so demand. Partners-directors of limited share partnerships are subject to the personal liability imposed on general partners. The remaining partners are not personally liable for corporate debts. Partners of co-operatives are not personally liable for corporate debts. Directors of the executive committee and controllers of co-operatives are subject to the rules governing liability for directors of S.A.s, although the liability of controllers is not joint and several. Partners of AIEs are personally, jointly and severally liable for the company s debts. Directors are liable for damages to the AIE involving negligence. Members of UTEs are personally, jointly and severally liable to third parties for actions attributable to the UTE in a manner identical to that involving general partners. Managers are liable for damages to the corporate interests resulting from (i) wilful misconduct, (ii) ultra vires acts or (iii) fault. Directors will be also subject to liability if they do not take the measures required by law in a situation of insolvency. Additionally, directors can be subject to administrative, tax and criminal liability. Page 194

196 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? In S.A.s and S.L.s: i. The capital of an S.A. is divided into shares, which are considered securities and may be represented by means of certificates or book entries. S.L.s have their capital divided into equal parts called participations (participaciones), which may neither (a) be considered securities; nor (b) be represented by certificates or book entries; nor (c) be called shares. ii. Shares are freely transferable unless otherwise provided for in the company s bylaws (it must be noted that provisions that render the shares essentially non-transferable will be considered null). In contrast, unless otherwise provided in the bylaws, transfer of participations of an S.L. to third parties (i.e., other than partners, spouses, ascendants or descendants or companies within the same group) is subject to the prior authorisation of the company - which may only be denied if the company identifies other partners or third parties interested in acquiring the offered participations. Provisions that would essentially allow the free transfer of participations of an S.L. will be considered null. Additionally, the bylaws of an S.L. may prohibit the transfer of participations for a maximum period of 5 years from the incorporation or the public deed executing a capital increase. iii. One or more shareholders or partners may incorporate the company (although some formal obligations are applicable to companies with a sole shareholder or partner). For general partnerships, (i) capital is divided into parts called stakes, which are determined in connection with each partner and represented by an amount expressing the value held by each partner; (ii) the stake of a partner is not freely transferable without the prior consent of the remaining partners; and (iii) there must be at least two partners to incorporate a partnership. S.A. rules apply to limited share partnerships, although some particularities must be highlighted: (a) the transfer of all shares held by a general partner will imply the loss of his/her position as director; and (b) at least one general partner-director is required to incorporate the form. In co-operatives, (i) capital is represented by the contributions of the partners, which cannot be considered securities; (ii) the transfer of contributions and thus the condition of partner may be made exclusively in favor of other partners; and (iii) there must be at least 3 partners to incorporate a cooperative. As regards AIEs and UTEs, (i) the deed of incorporation must establish the interest held by each member; (ii) any transfer of a membership interest requires the consent of all the members; and (iii) there must be at least 2 members to incorporate an AIE or an UTE. 7. Is there a minimum capitalization? An S.A. requires a share capital of at least 60, and the minimum capital required for S.L.s is 3, (from 1 September, 2010, such amounts will be 60,000 and 3,000, respectively). For both forms, the capital must be fully subscribed. However, while the capital of an S.L. must be fully paid-up upon its incorporation, only 25% of the capital of an S.A. must be paid-up upon its incorporation. There is no required capital amount for general partnerships or limited partnerships (neither a maximum nor minimum). Limited share partnerships are subject to S.A. regulations and therefore the capital requirements for S.A.s also apply. Page 195

197 Co-operatives are not subject to a specific capital amount. However, applicable law requires that the bylaws of co-operatives establish a minimum capital, which must be fully paid-up upon the incorporation of the form. Applicable law does not establish minimum capitalization requirements for AIEs and UTEs. 8. Is there a security that can be issued to the public? Only S.A.s with a minimum capital of 1,202, may issue equity securities to the public through the Spanish stock market. In general, the admission to trading on a Spanish regulated market requires the prior publication of an informative prospectus approved by the National Securities Market Commission ( CNMV ), and also requires compliance with eligibility and information requirements, as verified by the CNMV. The eligibility requirement implies that the issuer must be duly incorporated and perform its activity in accordance with its deed of incorporation, bylaws or analogous documents and that the securities comply with the relevant legal regime. The informational requirement implies that, among other documents, the bylaws, the corporate resolutions approving the issuance of securities and the financial statements of the issuer must be filed with the CNMV. As regards debt securities, any of the forms which are entitled to issue debt (see 9 below) may do so publicly, even they are not publicly traded companies. Regulatory requirements for the issuance of debt within the stock market are somewhat less stringent than those applicable to equity. 9. Can the form incur debt, or grant security for debt? In general, all companies may incur debt and grant security for debt by means of commercial and financial transactions; however, among the forms analysed herein, only S.A.s, limited share partnerships, co-operatives and AIEs may issue bonds or other securities that acknowledge or create a debt. The S.A. is the common form to be adopted if an issuance of debt is intended. Bonds issued by a company are considered securities by virtue of which the issuer acknowledges a monetary debt in favor of the bondholders and, depending on the terms of the bond, is obliged to pay interest and/or repay the principal on the redemption date. There are also convertible or exchangeable bonds, which redemption entails conversion into, or exchange for, shares in the company. As a general rule, S.A. regulations establish that the cumulated amount of debt issued may not be greater than the paid-up share capital plus the reserves as indicated on the last balance sheet approved by the company. Such limitation does not apply to S.A.s which shares are publicly traded. 10. What is the duration of the form? Can it be renewed? S.A.s, S.L.s, general partnerships, limited partnerships, limited share partnerships, co-operatives and AIEs may be incorporated for (a) a fixed and finite period or (b) an indefinite duration, the latter being the most common. The duration of S.A.s, general partnerships, limited partnerships, limited share partnerships, cooperatives and AIEs must be established in their constitutional documents or bylaws. An S.L. will have an indefinite duration unless otherwise established in the bylaws. Renewal of the above-mentioned forms may be agreed for companies with a finite duration. For S.A.s, S.L.s and co-operatives, applicable law establishes that the company will be dissolved upon termination of the company s duration as set forth in the bylaws unless the period has been extended and the extension filed with the Commercial registry(or with the Co-operatives Registry, as appropriate) prior to the moment of the lapsing of that period. Page 196

198 In contrast, UTEs are incorporated for a finite duration, which is determined in connection with the end of its corporate purpose (i.e., the supply, the services or the construction). The maximum duration of an UTE is 25 years. However, if the corporate purpose involves public construction or the provision of public services, its maximum duration will be 50 years. 11. Describe the process, customary time period and approximate cost of establishing the form. The following steps must be taken in order to incorporate an S.A., an S.L. or a limited share partnership: a) Obtaining of a certificate from the Central Commercial registrystating that the intended name is available in Spain as a corporate name. b) The provisional tax identification number ( NIF ) for the company must be requested from the Spanish tax authorities. Foreign shareholders and partners must also apply for a NIF. c) Monetary contributions made to the capital must be transferred by shareholders or partners to the company s bank account; the contributions must be evidenced by a certificate issued by the bank. Alternatively, monetary contributions may be delivered to the notary upon the granting of the deed of incorporation (in which case, the notary will carry out the deposit on behalf of the company). Special rules for non-monetary contributions aimed at ensuring their value and actual disbursement are applicable. d) Granting of the deed of incorporation before a Spanish notary. The deed of incorporation must include, inter alia, the corporate name certificate and the company bylaws. e) Payment of a capital tax amounting to 1% of the initial capital of the company plus, if appropriate, the issue premium. f) The foreign investment, if any, must be declared to the Foreign Investment registryof the General Directorate on Trade and Investments by virtue of a specific form. g) Filing of the public deed of incorporation with the Commercial Registry. h) Application for a definitive NIF for the company. Prior to starting its activities, the company must fulfil additional commercial, tax and labour obligations (e.g., the legalization of corporate books). The mentioned steps apply to general partnerships, limited partnerships, co-operatives, AIEs and UTEs with some specialities, such as the following: (a) co-operatives must be filed with the Cooperatives Registry, (b) AIEs and UTEs are not subject to the capital tax referred to in (v), and (c) UTEs must be filed with a special registryof the Spanish Treasury in order to benefit from the special tax regime. The incorporation procedure (up to the execution of the deed of incorporation) may be completed in approximately one week. Afterwards, the filing of the deed of incorporation with the Commercial registry may take up to 15 working days. The costs for establishing each form depends on the type chosen, the amount of the capital and the complexity of each particular process. On average, the approximate cost for establishing an S.A. based on the minimum capital required (i.e., 60,101.21) will range from 1,200 to 1,400; and for S.L.s based on the minimum capital required (i.e., 3,005.06), the cost ranges between 500 and Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? Under Spanish law, the stockholding of a public authority in a project of investment vehicle can essentially be examined from two different perspectives, each one with its own legal framework: a) Financial investment. From a purely financial perspective, the acquisition of a stake in a private company or investment vehicle by public authorities must comply with specific rules and procedures established by law. Most significantly, acquisitions carried out by the General Page 197

199 State Administration must be agreed by the Minister of the Treasure including, in some instances, the previous authorisation of the cabinet. Notably, management and transfer of company stakes must be consistent with the general principles of publicity, openness, competition and objectivity. b) Investment for the provision of public services. From a public procurement perspective: Among other methods, public authorities that need private capital to perform a public service can call a tendering process in accordance with the guidelines established in Directive 2004/18/EC (free access, publicity, transparency, etc.) to join their efforts with private funds. Public authorities will enter into a public contract with the bidder offering the best tender. The result of the union is called combined business ( sociedad mixta ). The so-called institutionalized public and private cooperation is a recent instrument in the field of public procurement. It involves a situation in which public authorities seek to carry out modern and complex projects with a domestic scope, which require experience from private sector. In these cases, the public authorities must also call a tendering process in order to enter into a contract with the bidder offering the best tender. Profits in (a) and (b)(i) may be freely distributed in favor of public authorities, as expressly stated in the company s bylaws. However, the distribution of profits generated from institutionalized public and private cooperation is subject to specific criteria. 13. For what taxes is the form liable? a) Corporate Income Tax ( CIT ). Companies resident in Spain are subject to CIT on their worldwide income. In general, expenses incurred by companies are tax deductible. The general CIT rate is 30%. Small and medium size companies benefit from a reduced rate of 25% on the first 120, of taxable profits. Special tax regimes may apply, such as those for collective investment undertakings, venture capital entities and holding companies. Also, specific CIT laws apply in the Basque provinces and in Navarre. AIEs and UTEs are not subject to CIT on the profits attributable to their Spanish-resident members, which are taxed at the level of the latter. b) Value Added Tax ( VAT ). Spanish VAT is charged on supplies of goods and services, intra-eu acquisitions and imports, when located in Spanish territory for VAT purposes. VAT rates depend on the type of goods or services being supplied. The standard rate applicable since 1 July 2010 is 18%, although reduced rates of 8% and 4% are applicable for specific transactions. Companies must charge output VAT to their clients and offset it against input VAT borne by the companies themselves. Any excess of output VAT must be paid to the Spanish Treasury, and any excess of input VAT can either be offset against future output VAT or refunded by the Spanish Treasury upon request. The supply of certain goods and services, such as specific financial transactions and sales of securities, is exempt from VAT. The provision of services by AIEs and UTEs to their members may be exempt from VAT if specific requirements are met. A special VAT law with lower rates applies for the Spanish Canary Islands and there is no VAT in the Spanish cities of Ceuta and Melilla. Page 198

200 c) Transfer Tax, Capital Tax and Stamp Duty: Transfer Tax applies to transfers of assets and rights not subject to or exempt from VAT. The standard rates range from 1% to 8%, depending on the transaction and the Spanish region in which the asset is located. Capital Tax of 1% is charged on the incorporation, capital increase and reduction and winding-up of a company; contributions made by shareholders not involving a capital increase; and transfer of the registered office of the company or of its management from a non-eu country. Certain contributions in kind and certain corporate reorganizations are not subject to Capital Tax. Stamp Duty is payable on notarial documents and specific corporate and administrative documents. AIEs and UTEs are exempt from Capital Tax on the incorporation, winding-up and capital increase and decrease, and from Stamp Duty on documents which execution is necessary for establishing the company. d) Business Activities Tax ( IAE ). Spanish-resident entities are generally subject to IAE, which is a local tax levied on the performance of any business or professional activities in Spain. The tax liability is a lump sum that varies depending on the type of activities carried out and the municipality. 14. What is the tax treatment of payments to foreign owners? Cross-border payments of dividends, interest and royalties to foreign owners are generally subject to the following withholding taxes: a) Dividends Under Spanish law, dividends paid by a Spanish-resident company to a foreign owner are subject to a withholding tax of 19%. Under the Spanish implementation of the EU Parent-Subsidiary Directive, dividends paid by Spanishresident subsidiaries to their EU parent companies or EU permanent establishments of the latter are exempt, provided that (i) the parent company holds at least a 10% direct stake in the subsidiary for at least one year (if the one year period is completed following the dividend distribution, the tax will be refunded); (ii) the subsidiary and parent company are subject to, and not exempt from, CIT or other similar taxation; (iii) the distribution of dividends does not derive from a winding-up of the subsidiary; and (iv) the subsidiary and the parent company take one of the legal forms mentioned in the Directive. The exemption does not generally apply if the majority of the votes in the parent company are held by non-eu residents, or if the parent company is located in a tax haven jurisdiction. In a recent ruling on case C-487/08, the European Court of Justice (ECJ) concluded that the requirement for a minimum 10% shareholding was contrary to the EU Treaty and that it should be reduced to 5%. b) Interest Under Spanish law, interest paid by a Spanish company to a foreign owner are subject to a withholding tax of 19%. However, under the Spanish implementation of the EU Interest and Royalties Directive, no withholding taxes are levied on interest payments made by a Spanish company or a permanent establishment located in Spain if the beneficial owner is a person resident in a EU Member State, or a permanent establishment located in a EU Member State of a person located in a third EU Member State. c) Royalties Page 199

201 Royalties paid by a person resident in Spain to a non-resident taxpayer are generally subject to a withholding tax of 24%. However, under the Spanish implementation of the EU Interest and Royalties Directive, a reduced rate of 10% applies to royalty payments made by a Spanish-resident company or by a permanent establishment located in Spain of another EU resident company for the benefit of a related company resident in a EU Member State or a permanent establishment located in a EU Member State of a person located in a third EU Member State, if specific requirements are met. As of 1 July 2011, royalty payments to EU companies or permanent establishments in the EU will be exempt from withholding taxes in Spain. Spain has entered into more than 70 bilateral treaties for the avoidance of double taxation which provide for reduced rates or exemptions on dividends, interest and royalties. Under such treaties, capital gains on the transfer of Spanish assets (other than real estate assets) are generally exempt from Spanish tax and business income is not be taxable in Spain. 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? Non resident taxpayers will only be subject to tax on their Spanish source income: a) Dividends Dividends paid to Spanish- and non-spanish-resident shareholders are both generally subject to a withholding tax of 19% at source, unless otherwise provided by an applicable bilateral treaty. Nevertheless: Spanish-resident companies receiving a dividend from another Spanish-resident company will benefit from a tax deduction of 100% if the following conditions are met: the resident company receiving the dividends owns, directly or indirectly, at least a 5% stake in the resident company paying the dividend; and (ii) the stake has been held for at least one year before the dividend becomes due (the period may be completed after the dividend distribution). If these requirements are not met, the tax deduction will be 50% on the gross dividend received. Dividends paid by non-residents to Spanish-resident companies are also exempt from Spanish CIT if the following conditions are met: the Spanish shareholders own, directly or indirectly, at least a 5% stake in the non-resident company paying the dividends; the stake has been held for at least one year before the dividend becomes due (the period may be completed after the dividend distribution); the company in which the investment is held is not resident in a tax haven; the company is subject to, and not exempt from, a taxation of an identical or similar nature to that of Spanish CIT; and (v) the dividends are derived from business activities conducted abroad, as defined in the CIT law. Concerning EU resident companies, the exemption under the EU Parent-Subsidiary Directive will apply if the requirements referred to in 14 (a) are met. As previously indicated, the ECJ has reduced the minimum percentage of ownership from 10% to 5% A tax of 19% will apply to individuals resident in Spain on the first 6,000 of savings income, the excess being subject to tax at 21%. Individuals non-resident in Spain will be subject to a flat tax of 19%. In both cases, under certain circumstances, the first 1,500 of dividends are exempt. b) Interest Page 200

202 Interest paid to both resident in Spain and non-resident owners are generally subject to a withholding tax of 19% at source, unless otherwise provided by an applicable bilateral treaty. Concerning EU resident companies, the exemption under the EU Interest and Royalties Directive will apply if the requirements referred to in 14 (b) are met. Interest paid by a borrowing Spanish-resident company to its foreign lender are considered an expense that is deductible from CIT. However, Spanish-resident companies financed by a related non EU-resident company (other than a financial institution) will not benefit from a full deduction if the debt exceeds three times the amount of the net equity of the Spanish-resident company. In this case, the excess will be treated as a dividend and therefore not be deductible from the taxable income of the CIT. Contact Information Carlos Paredes Galego cpg@uria.com Rafael Núñez-Lagos rnl@uria.com Uría Menéndez Calle Principe de Vergara, 187 Plaza de Rodrigo Uría Madrid, Spain Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 201

203 Issues Relating to Organizational Forms and Taxation Switzerland Prepared by Lex Mundi member firm Pestalozzi 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. In Switzerland, the main available forms of organization are share corporation, limited liability company, general partnership, limited partnership, simple partnership, cooperative and foundation. In addition, a branch office may be established by a domestic or foreign company to conduct business in Switzerland. The most commonly used forms for establishing a legal entity in Switzerland are the corporation and the limited liability company. In the remaining questions we will only discuss the features of these two forms as well as the establishment of a branch office, which is a common way for foreign businesses to carry on trade in Switzerland. Corporation Most Swiss enterprises are organized in the form of a corporation. This form is used for privately held businesses as well as for listed companies. A corporation is governed by Swiss Code of Obligations ("CO") and the articles of incorporation of the company in question. A corporation is a legal entity with a fixed nominal capital divided into shares. There is no personal liability of shareholders for debts and obligations of a company. A corporation may have any defined lawful purpose (mostly business). Limited liability company These are companies with a more personal form than a corporation, typically used for smaller businesses. A limited liability company is governed by the CO and the articles of incorporation. Limited liability articles may oblige to supplementary financial contributions or ancillary performances. Branch A branch office is a part of a foreign or domestic company that conducts business or trade from a permanent place of business located in Switzerland on behalf of the principal company. A branch office is commercially but not legally independent. It is a part of the principal company. The principal company is fully responsible for the liabilities of its branch office. 2. Are there attributes of the form that you consider unique to your jurisdiction? No. 3. Describe the management and governance structure for each organizational form. Corporation Shareholders of a corporation exercise their power of decision at the general shareholders' meeting and have the right to vote in proportion to the total par value of owned shares. They also have information rights, the right of representation in the board of directors for each category of shares (if such exist), the right to challenge resolutions of the shareholders' meeting which violate the law or the Page 202

204 articles, and the right to file an action for damages caused by an intentional or negligent violation of the duties of board members, managing officers or auditors. The board of directors consists of one or more members who do not have to be shareholders. If there are several groups of shareholders with different legal status, articles must provide the right for each group to elect at least one representative to the board of directors. Members of the board of directors are elected and dismissed by decision of the general shareholders' meeting. They hold office for three years unless otherwise provided by articles. A term of office shall, however, not exceed six years. Vacancies are filled only at a general shareholders' meeting. Reelection of the board members is possible. Unless articles or by-laws provide otherwise, all directors manage and act and sign for the corporation individually. Articles may empower the board of directors to delegate management or any part thereof to one or more members of board (managing directors), or to third persons (managers) in accordance with regulations. The nontransferable and inalienable powers of the board of directors are: ultimate management of the corporation and giving of necessary directives, establishment of the organization, structuring of the accounting system and financial controls, appointment and removal of persons entrusted with the management and representations, ultimate supervision of persons entrusted with management, preparation of business reports and preparation of general meetings of shareholders and implementation of its resolutions, notification of court in case of negative equity. The general meeting of shareholders elects one or more statutory auditors to check the balance sheet and the profit and loss statement against the books, and check whether the result and financial position of the corporation so represented comply with legal requirements as to accounting and any special provisions of articles, as well as the existence of internal control system. Corporations must appoint licensed auditors, or in the case of public corporations, an audit firm under government oversight according to provisions of the Federal Audit Supervisory Act. Auditors must be independent and reach the audit opinion on an objective basis. In particular, independence is not reconcilable with: membership on the board of directors, another decision-making function within the corporation, or an employment relationship; direct or considerable indirect participation in the share capital or considerable claim or debt against the corporation; a close relationship with a member of the board of directors, or with a person who functions as decision-maker, or an important shareholder; bookkeeping personnel as well as the rendering of other services, giving rise to the risk of having to examine their own work; acceptance of a mandate that entails economic independence; a contract conclusion with conditions not in line with the market, or a contract by which auditors acquire interest in audit result; acceptance of valuable gifts or special benefits. Provisions on independence may also apply to certain other members of the audit firm or persons close to the audit firm. Statutory auditors must submit comprehensive reports to the board of directors with findings on the rendering of accounts, internal control system, execution and result of an audit. Auditors submit summary written reports to the general meeting. Limited liability company The meeting of members is the supreme body of a company. Voting rights of members are determined according to par value of company shares with each member having at least one vote. All members participate jointly in the management and representation, unless articles or resolution of the company provide otherwise. The articles or resolution of a company may confer management and representation upon nonmembers. Each managing officer has the power to represent the company unless reserved by law or articles to the meeting of members of the managing officers competent for all business affairs. Nontransferable and unalienable duties are e.g., ultimate management of the company and giving necessary directives, establishment of organization, structuring of accounting system, financial controls, financial planning, supervision of persons entrusted with management and compliance, preparation of annual financial statements, annual report, consolidated financial Page 203

205 statements, preparation of meeting of members and implementing resolutions, court notification in case of overindebtedness. For statutory auditors provisions for share corporations apply. Branch A branch must have its own management. 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? Corporation and limited liability company It is no longer necessary that the majority of board members of a corporation must be Swiss citizens residing in Switzerland. However, the corporation must be represented by at least one person domiciled in Switzerland. This person can be a board member or a manager. Further, at least one auditor of the company must have its domicile, seat or registered branch office in Switzerland. A limited liability company must be represented by at least one person, such as a managing officer or an executive director, domiciled in Switzerland. If persons or entities residing or domiciled abroad participate in the not publicly listed company with intent to own or to purchase Swiss real property, and such property will not be used as permanent business establishments, a special authorization is needed. Branch An agent residing in Switzerland and having power of representation must be appointed for branch offices of foreign corporations. 5. Describe the extent to which management and owners are exposed to liability. Corporation There is no personal liability of shareholders for debts and obligations of a corporation. The only duty of a shareholder is to pay the issue price for the subscribed shares. Persons with power to represent the corporation may carry out in the name of the corporation all acts which the purpose of the corporation may require. A corporation is liable for all acts, including torts, that its directors and officers commit in business capacity. Directors and other officers in charge of management, founders, statutory auditors and liquidators of a corporation are responsible to the corporation and its shareholders for damage caused by their willful misconduct or negligence in performing their duties. An officer who rightfully delegates duties to another legal entity is liable for any damage caused by it unless the officer proves that the necessary care in selection, instruction and supervision was applied. Except for direct damages, a shareholder can only bring derivative suit. Creditors of a corporation have similar claims in case the corporation has been declared bankrupt. The claim of a shareholder is barred if brought after the expiration of six months after discharge by general shareholders' meeting, or if the shareholder has consented to the discharge, or if the shareholder has acquired shares with knowledge of discharge. Page 204

206 Limited liability company Members of the company are only liable for supplementary financial contributions or other ancillary performances connected with their own company share. The amount of such supplementary contribution must not exceed twice the amount of the company share. Managers and other officers have the same liability as directors of a corporation. Branch As a branch acts on behalf and for the benefit of the principal company, the principal company is generally responsible for the debts and other obligations that the branch may undertake. However, for the purpose of better enforcement a branch office of a foreign company could be subject to independent enforcement execution for its debts and other obligations in Switzerland. 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? Corporation (i) The ownership interest in a corporation is represented by shares. Shares may be issued in registered or bearer form. The minimum par value of a share is CHF Articles may provide for participation capital (like nonvoting shares), which shall not exceed twice the amount of the share capital. Participation certificates are issued against contribution, they have par value and do not grant voting rights. Articles may provide for shares with preferential rights as to dividends, shares in case of liquidation, subscription of newly issued shares (preferred shares); founder's shares, dividend-right certificates or bonds convertible into shares. In lieu of printed share certificates, a corporation may elect to issue shares in uncertificated form and, if need be, transform them into easy tradable book-entry securities. (ii) (iii) Share certificates are negotiable instruments. Bearer shares are transferred by mere transfer of instrument; registered shares must also be endorsed or assigned, and with respect to the corporation, a shareholder must be entered in the shareholders register. There are special rules in case of restrictions on transfer by articles. They differ between registered shares listed and not listed on the stock exchange. A corporation must have at least one shareholder. Limited liability company (i) (ii) The capital contribution of a member corresponds with the issue amount of the company share. The document issued for a company share is only documentary proof or may be established as a security issued in a specific name. All members shall be entered in the Registerof Commerce with name, domicile, place of origin, number and par value of company shares. The partial assignment rt must be in written form. The assignment of company shares requires approval by meeting of the members, which can deny approval without indication of reason. Articles may deviate by waiving requirement of approval of assignment, establishing reasons for justification of denial or approval, denial in case of company offer for taking over company shares at real value, excluding assignment, Page 205

207 denial in case of doubtful fulfillment of obligation to make supplementary financial contributions or to provide ancillary performances and security claimed by the company is not furnished. If articles exclude assignment or if the meeting of members denies approval of the assignment, the right to withdraw for valid reasons remains reserved. If the assignment requires approval of the meeting of members, the assignment only becomes effective upon such approval. Approval is deemed to be granted if the meeting of members does not deny application for approval within six months. Company shares acquired by succession, division of estate, marital property law, debt enforcement, rights and duties attached pass without approval of the meeting of members. (iii) A company must have at least one member. 7. Is there a minimum capitalization? Corporation The minimum share capital is CHF 100'000. Upon incorporation of the company, a contribution of at least 20% of the par value of each share must have been made either in cash or by contribution of other assets. Contributions made, however, must total at least CHF 50'000. Special provisions apply for bearer shares that may only be issued after payment of the full par value and for voting stocks that are only admissible if they were fully paid up. Limited liability company The minimum quota capital is CHF 20'000. Capital contribution must be fully paid in at time of incorporation. Branch No. 8. Is there a security that can be issued to the public? The shares of a corporation can issued in certificated form (bearer or registered shares). 9. Can the form incur debt, or grant security for debt? Corporation and limited liability company Yes, a corporation and limited liability company can incur debt or grant security for debt provided this is in the best interest of the company and the share capital protection requirements are observed. A loan should generally be taken on arm-length market terms. Branch office A branch office can incur debt and grant security in its own name, but as the branch is not an independent legal person, the principal company of the branch is generally responsible for the debts and other obligations that are undertaken in the name of the branch. However, a branch office of a foreign company could be subject to independent enforcement execution in Switzerland. 10. What is the duration of the form? Can it be renewed? The duration of a corporation and limited liability company is generally perpetual. However, it may be limited by the articles. A branch office can be freely opened and closed by the principal company. Page 206

208 11. Describe the process, customary time period and approximate cost of establishing the form. Costs involved in setting up a corporation, include lawyer's fees (usually on a time-spent basis) for preparing the necessary corporate documents, the notary public's fee as well as a registration fee of the Commercial Register. For a standard share corporation with minimum share capital, the total of these fees typically amounts to between CHF 6'000 and CHF 7'000 (approx. EUR 5'000 to 6'000). Depending on the canton of registration the handling time of a start-up notification at the Commercial Registeris approximately two to three weeks. The incorporation process for different entities is described below in more detail. Corporation In order to incorporate a corporation, articles and incorporation resolutions shall be executed. Articles may provide for regulations (by-laws) specifying powers of various bodies in charge of management. Resolutions adopted in organizing meetings must be embodied in publicly authenticated deed with basic documents attached. Ordinance of Commercial Registeras of Oct. 17, 2007 specifies necessary information for recording, namely, but not limited to, the following information: date when articles were passed, corporate name and place of registered office, purpose, proposed length of existence, amount of capital, amount paid up, number and par value of shares, types of shares issued, transferability of shares, preferential rights of certain classes of shares, property received in payment of shares, privileges granted to certain classes of shareholders or to incorporators, number of profit sharing certificates indicating content of rights connected therewith, manner in which directors and officers may act and sign for corporation, names, residences and nationalities of directors and officers, name or corporate name of auditors and their seat or registered office, and manner in which corporate announcements will be made. A corporation is incorporated upon its entry in the Registerof Commerce. Shares issued prior to registration are void. A federal issuance stamp tax in the amount of 1,0 % of the par value of the newly issued shares (with a deductible amount of CHF 1'000'000) shall be paid for these shares. The notary drawing up the public deed of constituent meeting is entitled to a fee, fixed by cantonal law. Limited liability company In order to incorporate a limited liability company, articles and incorporation resolutions shall be executed. Resolutions adopted in organizing meetings must be embodied in the publicly authenticated deed with basic documents attached. A company is incorporated upon its entry in the Register of Commerce. The federal issuance stamp tax as well as notary fees are similar to those for the establishment of a corporation. Branch In order to establish a branch, office minutes of the authorized persons of the principal company regarding establishment of the branch shall be executed. Branch offices shall be registered in the canton or the district in which the branch office has its place of business after registration of main office in its own district/country. The name of the foreign company branch shall include the place of incorporation of the principal company, the place of business of the branch office, and the words "branch/branch office". Page 207

209 However, non-registered branch offices may still do business in Switzerland. 12. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? Depending on the purpose of a company a special authorization may be required (e.g., for banks and insurance companies as well as for foreign investors participating in real estate companies). 13. For what taxes is the form liable? General remarks In Switzerland, corporations are taxed on both their income and their capital. The Confederation, each canton and commune and, sometimes, churches have taxing jurisdiction. Certain types of corporations, including holding, domiciliary, mixed and service companies, receive special tax treatment. Usually, foreign controlled corporations operating in Switzerland are taxed in the same way as Swiss domestic corporations. Nonresident corporations with a branch in Switzerland are subject to tax on branch income and branch capital the same as resident corporations, subject however to special allocation rules. Income tax charge Currently, the income tax charge for corporations in Switzerland varies from approx 12% to 24%, depending on the location (cantons/communes). For corporations receiving a special tax treatment the tax charge usually varies from 6% to 12%. Capital gains tax There is no separate federal capital gains tax for companies. However, some cantons levy a capital gains tax on the sale of real estate. Non real estate capital gains are part of the ordinary income and are taxed accordingly. Capital tax This is a cantonal tax levied on the company's tax-adjusted net equity at the end of the accounting year concerned. Rates vary from between 0.001% and 0.5%. Withholding tax A 35% withholding tax is levied on the following: Dividends. Interest payable on bonds and other similar instruments. Interest credited by a bank to its clients. No tax is withheld on: Interest on accounts payable. Inter-company accounts. Royalities Page 208

210 Straight mortgage interest. Stamp duty Stamp duty is levied on the following: Shares issued and shareholders contribution, at the rate of 1% of their value. Bonds, at the rate of between 0.06% and 0.12% for each year of their term. Insurance premiums, at the rate of between 2.5 % and 5. Transfer of domestic or foreign securities and similar negotiable instruments if a Swiss securities dealer (that is a domestic bank, securities broker, or corporations with more than CHF 10 million balance sheet assets in taxable securities) is involved as party or intermediary, at a rate of 0.15% for domestic and 0.3% for foreign securities (split between the parties). Exemptions are available for restructurings. Swiss Real Estate A corporation owning Swiss real estate is liable to Swiss taxes as follows: real property transfer tax (Handänderungssteuer, droits de mutation) on the acquisition and disposition of Swiss real estate (up to 3%); income tax on net income derived from, and capital gains realized on the disposition of, Swiss real estate; a proportion of interest expense is tax deductible; capital tax on the net asset value of the Swiss real estate; and where applicable, special property taxes imposed by the canton or commune in which the real estate is located. Value added tax (VAT) VAT is levied at federal level on the sale of goods and services supplied in, or imported to, Switzerland. The standard tax rate is 8%. However, a special rate of 3.8% applies to accommodation and directly-related supplemental services, and a reduced rate of 2.5% applies to certain other goods and services. 14. What is the tax treatment of payments to foreign owners? Swiss corporations distributing dividends or proceeds from liquidation exceeding the nominal share capital and capital contributions are generally required to withhold tax at a rate of 35%. Under the new capital contribution principle, which is effective since 1 January 2011, contributions to equity made on or after 31 December 1996 can be distributed without triggering withholding tax consequences, provided certain requirements are met. Under the Notification Procedure, Swiss companies distributing qualifying dividends may apply the treaty withholding rates prospectively without making the full 35% prepayment. The Notification Procedure applies to dividends distributed on "substantial participations." These are participations that qualify for an additional reduction or a full exemption from Swiss withholding tax under an income tax treaty or under the Switzerland-EU Savings-Agreement. To distribute dividends under the Notification Procedure, companies must file an application with the Swiss Federal Tax Administration before distributing dividends. Page 209

211 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? Liability to Swiss Tax Liability to Swiss Tax arises when a nonresident entity: receives dividend income from Swiss sources; maintains a permanent establishment in Switzerland; is a partner in a Swiss partnership; or owns real estate in Switzerland Permanent Establishment The following are considered permanent establishments: place of management; branch, office or factory; and long-term building, construction, or installation project. A permanent establishment may also be created if an agent in Switzerland habitually exercises authority to contract in the name of and on behalf of a foreign principal. A foreign entity is not deemed to maintain a permanent establishment in Switzerland and is therefore not liable to Swiss taxes if it operates: a representative office, or a warehouse where goods are stored for convenience of delivery. The foreign entity is liable to Swiss corporate income tax on income and capital attributable to the permanent establishment. In general, taxable income of a permanent establishment is determined on the basis of its separate financial statements. A percentage of foreign head-office administrative expenses may be deducted in arriving at the profits of the permanent establishment. Swiss-based permanent establishments may remit their net after-tax profits abroad free of Swiss withholding tax. Swiss Partnership Swiss partnerships are fiscally transparent. The foreign partners are liable to Swiss income tax on their share of partnership profits and on capital/wealth tax their equity invested in the partnership. Contact Information Christoph Lang christoph.lang@pestalozzilaw.com Pestalozzi Loewenstrasse 1 CH-8001 Zürich, Switzerland Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 210

212 Issues Relating to Organizational Forms and Taxation Taiwan Prepared by Lex Mundi member firm Tsar & Tsai Law Firm 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. The forms of organization available under ROC laws include sole proprietorship, partnership, unlimited company, limited company, unlimited company with limited liabilities shareholders, and company limited by shares. A foreign company can also establish a branch in ROC. The most common form used by foreign investors in the manufacturing industry is company limited by shares; the most commonly used business vehicles in the service industry by foreign investors are company limited by shares or branches, depending on foreign companies' corporate structure and/or tax needs. In practice, unlimited company and unlimited company with limited liability shareholders are rarely used and of little importance. Also, considering sole proprietorship and partnership do not have legal personality and the owner/ partners shall bear unlimited liability to the debtor of the sole proprietorship/partnership, these two forms are rarely used by foreign investors as well. We will then focus on the discussion of limited company and company limited by shares in this survey. The advantages of limited company include that it has legal personality and the shareholder only bears limited liability. Nevertheless, pursuant to the Company Law, certain important matters like merger and acquisition shall be agreed upon by all shareholders unanimously and the transfer of ownership interest is subject to the consent of a majority of all other shareholders. As to the company limited by shares, its shareholder is not liable to the debtor of the company but only liable to the company to the extent of his/her capital contribution. Also, the share is freely transferrable (with certain limitations provided under the laws). 2. Are there attributes of the form that you consider unique to your jurisdiction? The ROC legal system is based on civil law. Our Civil Code and Company Act are promulgated by reference to other civil law countries regulations and there is no unique attributes compared to other countries. 3. Describe the management and governance structure for each organizational form. As for the limited company, the shareholders being elected as directors are responsible for managing the company and the shareholders who are not elected as directors will supervise the operation of the company. As to the company limited by shares, pursuant to the Company Law, the board of directors is responsible for managing the company and the supervisor is responsible for monitoring the operation of the company. However, under the amendment of Securities and Exchange Act in 2006, a public company can establish audit committee instead of supervisor to play the overseer role. Page 211

213 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? Foreign investors can invest in all sectors, except those on the restricted and prohibited list. The restricted area includes industries like telecommunications, cable or satellite broadcast and television; prohibited area includes industries like postal services, terrestrial television and radio broadcasting. Managers of the company shall have residence or domicile in ROC but there is no residency requirement for the company directors. 5. Describe the extent to which management and owners are exposed to liability. The directors of the company must conduct the company s business in accordance with any applicable laws or regulations, the company s article of incorporation, and the resolution adopted at a shareholders meeting. If a director violates the above, he can be liable to the company or the third parties. A director can also be liable to the company if he breaches his fiduciary duty to the company or does not exercise due care in conducting the business operation. 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? Limited company: (i) amount of contribution; (ii) yes, with the consent of a majority of all other shareholders; (iii) at least one person. Company limited by shares: (i) number of shares; (ii) yes; (iii) there must have at least two individual shareholders, or one government shareholder or one corporate shareholder. 7. Is there a minimum capitalization? Except for some highly-regulated business such as banking, insurance, and airline companies, there is no minimum capital requirement. However, the share capital of the company should be sufficient to cover the set-up expenses as certified by a CPA. 8. Is there a security that can be issued to the public? Yes, the company limited by shares can issue its shares, bonds or other securities to the public. 9. Can the form incur debt, or grant security for debt? For all forms of business vehicle, they can incur debt or grant security for debt. 10. What is the duration of the form? Can it be renewed? For organizations in the form of a company, except for being dissolved and liquidated, the company can exist forever. 11. Describe the process, customary time period and approximate cost of establishing the form. To set up a company, the process is as follows: i. Search the Ministry of Economic Affairs ( MOEA ) register to check that the chosen company name is not already in use; ii. Apply for foreign investment approval if foreign investment is involved; iii. iv. Transfer fund into the approved equity investment; Call the first shareholders meeting to approve the articles of association and elect directors and a supervisor; Page 212

214 v. Call the first board of directors meeting to elect the chairman; and vi. File applications for registration of the incorporation and for business (tax) registration with the competent government authorities. The customary time period for the incorporation process with no foreign investment involved is 1-2 weeks, but if foreign investment is involved, the period will be extended to 6-8 weeks. As to the cost, the fee to check the company name is NT$300 and the fee for registration of incorporation is the higher of 1/4000 of the capital of the company or NT$1, Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? There are no special requirements on this. 13. For what taxes is the form liable? The main taxes imposed on the company include the following: i. Business income tax: Pursuant to the Income Tax Act, the business income tax applies to all profit-seeking enterprises. For the company incorporated under ROC laws, its worldwide income (if exceeding NT$120,000) will be taxed at a flat rate of 17%. For a foreign company, the taxable income is its ROC source income only. ii. Alternative minimum tax ( AMT ): If the basic income of a ROC company or a foreign company with fixed place of business or business agent in ROC as prescribed by the Income Basic Tax Act exceeds NT 2 million, the company shall be subject to the AMT at a flat rate of 10%. The scope of basic income is broader than the taxable income as defined under Income Tax Act and includes certain items that are not taxable or exempted under the Income Tax Act or other regulations. iii. Securities transaction tax: Securities transaction tax is imposed on the seller at a rate of 0.3% on the sale price of shares and 0.1% for corporate bonds and other securities approved by the government. However, starting from January, 2010, the securities transaction tax levied on corporate bonds and finance bonds is exempted for seven years. iv. Business tax (value-added tax and non-value added tax): all forms of companies which engage in sale of goods or services within the territory of the ROC or the import of goods will be subject to the value-added or non-value-added business tax. v. Land value incremental tax: In case of sale of land, the difference between the value of the land at the time of previous transfer of title and its current value is taxed at a rate between 20% and 40%. 14. What is the tax treatment of payments to foreign owners? The tax treatment of the foreign owners depends upon whether the foreign owner is ROC resident under Income Tax Act (in case where the foreign owner is an individual) and whether the foreign owner has fixed place of business or business agent in ROC (in case where the foreign owner is an organization). A foreign individual will not be a ROC resident if he is not physically present in ROC for 183 days or more during any calendar year. For the foreign owner who is not ROC resident, the payment to him will be subject to withholding tax but there is no need for him to file the annual tax return. On the other hand, the payment to a foreign individual who is ROC resident will be withheld by the tax withholder first and the foreign individual shall file an annual individual income tax return to the tax collection authority-in-charge declaring his income. A ROC resident shall also be subject to AMT. As to the foreign organization that has fixed place of business (such as branch) or business agent in ROC, the payment to it (such as dividend) will be withheld by the tax withholder first and it shall file an annual business income tax return to the tax collection authority-in-charge to declare its ROC source income and be subject to the AMT. Please note that there is no tax imposed on the remittance of Page 213

215 profit by a ROC branch to its foreign corporation. On the other hand, if the foreign organization does not have fixed place of business or business agent in ROC, the payment to it will be subject to withholding tax but there is no need for the foreign owner to file a tax return. 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? The taxable income of a foreign company is limited to ROC source income only while that of a ROC company will be its worldwide income (See Question 13). In addition, for the foreign owners who are not ROC resident or do not have fixed place of business nor business agent in ROC, there is no AMT imposed on them. Contact Information I-Chen Wu ichenwu@tsartsai.com.tw Janice Lin janicelin@tsartsai.com.tw Tsar & Tsai Law Firm 8th Floor, 245, DunHua S. Road, Section 1 Taipei 106, Taiwan Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 214

216 Issues Relating to Organizational Forms and Taxation Thailand Prepared by Lex Mundi member firm Tilleke & Gibbins 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. Under Thai law, the forms of business organization are: Sole Proprietorship With a sole proprietorship, all of a proprietor s assets, business and personal, are subject to attachment or any other legal action, whether connected to the business or not. Partnership Three forms of partnership are permitted, as follows: a) An unregistered ordinary partnership is one in which all partners are jointly liable for all the obligations and debts of the partnership. Each partner must contribute money, property, or services to the partnership. It is not registered with the Ministry of Commerce (MOC) and is not a legal entity (juristic person). b) A registered ordinary partnership is registered with the MOC, which makes it a juristic entity with a separate and distinct personality from each of the partners. All the partners are jointly and unlimitedly liable for all the obligations of the partnership. A registered ordinary partnership partner may pursue any claim of, or any right acquired by, the partnership against third persons, even if the third person did not actually participate in the transaction. c) A limited partnership is also registered with the MOC and considered a juristic entity with a separate and distinct personality from each of the partners. A limited partnership is one in which the individual liabilities of one or more partners (called limited partner ) are limited to their respective contributions, and one or more partners (called general partner ) are jointly liable without any limitation for all the obligations of the partnership. Branch Office A foreign company may establish a branch office to conduct business in Thailand. Having a branch office in Thailand, the foreign company will be exposed to civil, criminal, and tax liability if the branch office violates any law in Thailand. Limited Company A limited company is generally the form of business establishment most preferred by foreign investors because, among other things, shareholders liability is limited (to the remaining amount unpaid, if any, of the registered capital due on the shares respectively held by them). The incorporation of a limited company must be registered with the Department of Business Development of the MOC. Page 215

217 A public limited company is a company established for the purpose of offering the sale of shares to the public. A public limited company is subject to more stringent rules and regulations compared to other forms of business organization. 2. Are there attributes of the form that you consider unique to your jurisdiction? The attributes of forms of business organization which are unique to Thailand are regional office and representative office. Regional office or representative office is technically a branch office of a foreign company which carries on permissible non-income-generating service activities on behalf of the head office in Thailand. The only distinction between a regional office and a representative office is the scope of their respective permissible activities enumerated below. Regional Office: a) To contact, coordinate, and supervise on behalf of the head office the activities of the branch office, affiliate, and/or subsidiary of the head office located in the same region as the regional office. b) To provide services to the head office s branch office, affiliate, and/or subsidiary of the head office, such services being advisory services, management services, training and personnel development services, financial management services, marketing control and sales promotion planning, product development, and research and development services. Representative Office: a) To find sources for the purchase of goods or services in Thailand for the head office or affiliates or subsidiaries of the head office. b) To check and control the quality and quantity of goods purchased or manufactured in Thailand by the head office or affiliates or subsidiaries of the head office. c) To provide advice and assistance concerning goods of the head office or affiliates or subsidiaries of the head office sold to agents or consumers in Thailand. d) To disseminate information concerning goods or new services of the head office or affiliates or subsidiaries of the head office. e) To report on business developments in Thailand to the head office or affiliates or subsidiaries of the head office. 3. Describe the management and governance structure for each organizational form. Sole Proprietorship Sole proprietorship is managed and controlled by only one person the owner. Partnership a) With an unregistered ordinary partnership, all partners are jointly responsible for managing the partnership and are jointly and unlimitedly liable for all the obligations of the partnership. Although it is not a juristic person, it is considered a separate entity for tax purposes. b) With a registered ordinary partnership, all partners are jointly responsible for managing the partnership and are jointly and unlimitedly liable for all the obligations of the partnership. Page 216

218 c) A limited partnership can only be managed by the partners with unlimited liability. A partner with limited liability who participates actively in the management of the partnership becomes jointly liable, without any limitation, for the partnership s obligations. Branch Office The head office must appoint at least one branch office manager to be in charge of operations in Thailand. Regional Office and Representative Office Regional office and representative office are strictly prohibited from accepting purchase orders or making sale offers and negotiating and entering into any business arrangement with any customer, sales agent, or other party in Thailand. The operations of these offices can be financed only by the head office. Even though their income is nil and, thus, pay no income tax, these offices still have the duty to file audited financial statements with the Thai authority annually. Limited Company A limited company is managed by a Board of Directors (consisting of at least one director) appointed by the shareholders under the control of the general meeting of shareholders. Meetings of shareholders and directors must conform to the requirements set forth under the law and/or the Articles of Association of the company. An annual general meeting of shareholders is required to be held. Public limited companies are subject to the Public Limited Company Act The Board of Directors of a public limited company must consist of at least five directors, the majority of whom must reside in Thailand. Joint Venture A joint venture may or may not be registered as a legal entity. Even if it is not registered as a legal entity, the unincorporated joint venture is treated as a juristic entity by the Revenue Department for the purposes of tax liability. 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? The most important law governing foreign direct investment in business in Thailand is the Foreign Business Act 1999 (FBA), which reserves certain business activities for Thais. Under the FBA, the definition of alien includes: a) A non-thai natural person. b) A legal person not incorporated in Thailand. c) A legal person incorporated in Thailand with at least half of its company shares held by persons under the two foregoing categories, or a legal person with at least half of its total registered capital invested by such persons. d) A limited partnership or registered ordinary partnership, the managing partner or manager of which is a non-thai natural person. Basically, alien ownership in businesses which are reserved under Lists 1, 2, and 3 of the FBA is limited to 49%. Business activities indicated in List 1 of the FBA, such as farming, forestry, antiques trading, and broadcasting, are strictly closed to aliens. Page 217

219 Aliens wishing to exceed the ownership limit in business activities indicated in List 2 of the FBA, which involve national safety, arts and culture, natural resources, and environment, must obtain an alien business license (ABL) from the MOC with the approval of the Cabinet. Business activities indicated in List 3 of the FBA, which include professional services, construction, wholesale, retail, hotel and restaurant, and any kind of service, can be 100% owned by aliens if an ABL is granted by the Director-General of the Department of Business Development with the approval of the Foreign Business Committee. An ABL application is a time-consuming process with an unpredictable outcome and is normally granted only to the extent necessary. The alien ownership restrictions under the FBA do not apply to U.S. nationals and U.S. corporations. The Treaty of Amity and Economic Relations between the United States and Thailand allows Americans to own and operate almost all reserved businesses in Thailand except for businesses reserved under the Treaty which, among others, are land, inland transportation, and communication, provided that the MOC is notified and a certificate is applied for. There is generally no nationality or residency requirements on directors, with the exception of companies seeking permission to conduct businesses listed under List 2 of the FBA, in which case a minimum of two-fifths of the total number of directors must be Thai nationals. The same is true under special laws such as the Insurance Act, Air Navigation Act, Thai Vessel Act, Land Transport Act, and Travel Agency Business Act. For a company established under Thai-U.S. Treaty protection, a majority of its directors must be American and/or Thai nationals. In addition, for a public limited company there is a requirement that the Board of Directors consists of at least five directors, the majority of whom must reside in Thailand. 5. Describe the extent to which management and owners are exposed to liability. Sole proprietors, partners in unregistered/registered ordinary partnerships, and unlimited liability partners in limited partnerships are unlimitedly liable for the obligations of the sole proprietorship or the partnership, as the case may be. For registered ordinary partnerships and limited partnerships, the partner s liability for the partnership s obligations ceases two years after he/she leaves the partnership. The foreign head office will be liable for the obligations of the branch office, representative office, and regional office in Thailand. Limited liability partners in limited partnerships and shareholders of limited companies are liable for their contribution in the partnership or, in limited companies, to the remaining amount unpaid, if any, of the registered capital due on the shares respectively held by them. A partner with limited liability who participates actively in the management of the partnership becomes jointly liable, without any limitation, for the partnership s obligations. Directors of a limited liability company must exercise their powers honestly and in the best interests of the shareholders and the company using the judgment of careful business persons. Directors and persons representing directors are jointly responsible for: a) Payment being made for shares by the shareholders. b) Maintenance of company books, records, and documents as prescribed by law. c) Proper distribution of dividends or interest as prescribed by law. d) Proper enforcement of resolutions of general meetings of the shareholders. Directors, acting in a fiduciary relationship with a company, must not directly or indirectly enter into a competing business or into a business dealing with the company for their own benefit, or into a business in which they have a special interest without the consent of the shareholders and/or the Board of Directors. If they do so, they will be accountable to the company for all profits or losses. The liability of the directors of a limited company may be unlimited, if specified in the Memorandum of Association. The unlimited liability of a director terminates at the expiration of two years after the date at which a director ceased to hold office. Page 218

220 Directors or managers of a juristic person are criminally liable only when they commit criminal offences or if they are held to be co-principal, employing person, or accessory. However, in certain cases, the law specifically imposes criminal liability on them without any criminal intent, unless the individual directors or managers can show they had no knowledge of the act or omission, or did not consent thereto. For example, directors are subject to certain penalties, including fines and possible imprisonment, if they or their companies fail to make the appropriate registrations under the Act on Offenses Concerning Registered Partnerships, Limited Partnerships, Limited Companies, Associations, and Foundations B.E (A.D. 1956), as amended 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? i. For sole proprietorships, unregistered/registered ordinary partnerships, and limited partnerships, ownership interest is represented by the value of their respective contributions which may be money, other properties, or labor. For limited companies, ownership interest is represented by the company s shares capital divided into shares, each having a minimum equal value of THB 5. ii. iii. Ownership in sole proprietorships is transferrable with the agreement of the sole proprietor. Partners in unregistered/registered ordinary partnerships and unlimited partners in limited partnerships cannot transfer their ownership without the consent of all partners (unregistered/registered ordinary partnerships are dissolved by the death, bankruptcy, or incapacity of any partner and unlimited partnerships are dissolved by the death, bankruptcy, or incapacity of any unlimited partner), unless there is an agreement providing otherwise. Limited partners in limited partnerships can transfer their ownership without the consent of the partners. Shares in limited companies can be transferred without the consent of the company or other shareholders, unless the shares were entered in a name certificate for which the company s Articles of Association provided otherwise. Sole proprietorships must have only one owner. Unregistered/registered ordinary partnerships must have at least 2 partners. Limited partnerships must have at least one limited partner and one unlimited partner. For private limited companies, three shareholders are required to be maintained at all times while the company is in operation. A public limited company is required to have at least 15 shareholders. Branch offices, representative offices, and regional offices are not separate legal entities from the foreign head office and, therefore, there is no ownership interest therein. 7. Is there a minimum capitalization? For business entities which are majority-owned by Thai nationals, in general, there is no minimum capitalization requirement. For limited companies, the initial paid-up capital must be at least 25% of the registered capital. However, a minimum capitalization requirement may be imposed on certain businesses such as banking, insurance, etc. If, however, for entities regarded as alien under the FBA (for more details on the FBA definition of alien, please refer to Question 4), a minimum of Baht 2 million capital is required. A foreign company granted an ABL under the FBA must have minimum capital of Baht 3 million. 8. Is there a security that can be issued to the public? Public limited companies are allowed to offer shares for sale to the public, provided that such purpose is indicated in the company s Memorandum of Association. The offer of shares for sale to the public shall be in accordance with the law governing securities and exchange. Sole proprietorships, partnerships, branch offices, representative/regional offices, and private limited companies are not allowed to offer/issue partnership/shares to the public. Page 219

221 9. Can the form incur debt, or grant security for debt? Sole proprietorships, partnerships, branch offices, representative/regional offices, private limited companies, and public limited companies are allowed to incur debt or grant security for its own debt for the purpose of engaging in activities or businesses within the scope of its power and duties, or its objectives provided in its regulations, Memorandum of Association, or constitution documents. 10. What is the duration of the form? Can it be renewed? Generally, there is no statutory duration for each form of business organization. Sole proprietorships, partnerships, private limited companies, and public limited companies will continue to exist until they are dissolved in accordance with the law. However, the partners/shareholders may agree that the form of business entity shall dissolve (i) upon the occurrence of certain agreed causes, (ii) the expiration of a certain period of time, or (iii) the completion of certain undertakings. The duration of a branch office and representative/regional office shall be throughout the period of approved activities, which are generally not specified, meaning that they will continue to exist for an indefinite period until the relevant permit, license, or certificate is cancelled or terminated. 11. Describe the process, customary time period and approximate cost of establishing the form. Registration of sole proprietorships and unregistered ordinary partnerships is made at the Revenue Department, where the sole proprietor must acquire a taxpayer number. Sole proprietors/ unregistered ordinary partnerships doing certain types of business may be required to obtain a commercial registration at the MOC. The costs thereof include THB 1,000 for registration as well as transportation and counsel fees. The process takes about three to five days. Registration for a Value Added Tax (VAT) certificate may also be required if gross income is expected to exceed THB 1.8 million per year. Registered ordinary partnerships and limited partnerships are required to be registered with the MOC. The registration fee is THB 1,000 for up to three partners. If there are more than three partners, the registration fee is THB 200 for each additional partner. Also, THB 50 is charged to receive the registration certificate. Branch offices and representative/regional offices are also required to be registered with the MOC. The government fee for a representative office and a branch office is THB 5 or THB 10 for every THB 1,000 capital, with a minimum of THB 20,000 or THB 40,000 and a maximum of THB 250,000 or THB 500,000. For registration of a private limited company, the first step is to reserve the company name; second, file a Memorandum of Association with the Registrar; and third, convene a statutory meeting. During the statutory meeting, among other things, the Articles of Association must be adopted, auditors appointed and directors elected, any pre-incorporation contracts entered into by promoters ratified, expenses incurred by promoters paid, preference shares (if any) established, and the number of ordinary shares or preference shares to be allotted and their prices fixed. The fourth step is to register the company. The company registration fee is THB 5,500 per THB 1 million registered capital, with a maximum fee of THB 275,000. If necessary documents are complete and duly signed by all promoters, directors, and shareholders, registration with MOC could be done in one day. The process of preparing documents for forming a company generally takes about two to three weeks. After the registration with the MOC, registered ordinary partnership, limited partnership, limited company will also be required to be register for a Tax ID and VAT certificate with the Revenue Department, the process, timeframe, and costs of which are the same as those set out in the registration of sole proprietorships and unregistered ordinary partnerships. If an ABL is also needed, registration will take an additional three to five months. Page 220

222 12. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? There is no explicit requirement that the government be part of a project or investment vehicle. However, state monopolies/interventions do exist over transport (air, rail, and certain other kinds of transport), communications, arms manufacture, etc., whether directly by the government or indirectly by state enterprises. The Thai government may, depending on the nature of the business, such as those involving communications, radio, television, newspapers, internet service providers, defense, national security, transportation (air, rail, and some land transportation), upstream petroleum, and mineral resources activities, seek to participate in the ownership or operation of certain business entities through a public-private partnership arrangement or through the granting of licenses/concessions to private entities. In such events, the government or state enterprises are entitled to receive part of the profits arising therefrom in the form of profit/revenue sharing or concession fees, as the case may be. Some protection for foreign investors against government intervention exists. The Investment Promotion Act and the Industrial Estate Act provide that the state shall not nationalize the activities of the promoted person. However, under the FBA, the MOC can re.g.ulate the operation of certain aspects of a permit holder s business such as the ratio of capital to loans, funds brought in from overseas, the ratio of capital of Thais to that of aliens in the business, and the ratio of Thais to alien persons responsible for the management of the business. 13. For what taxes is the form liable? Sole proprietorships and unregistered partnerships are subject to personal income tax at progressive rates ranging from 5% to 37%. After-tax profits when distributed to partners are not their taxable income. Registered ordinary partnerships, limited partnerships, and limited companies generally pay corporate income tax at a rate of 30% on net profits. Presently, Small and Medium-Sized Enterprises with paidup capital as at the end of an accounting period not exceeding THB 5 million enjoy discounted corporate income tax at rates of 15% to 30%, depending on the amount of net profits, with a tax exemption for the first THB 150,000 of net profits. A branch office is subject to corporate income tax at the rate of 30% on net profits derived from its business operations in Thailand. A regional office or representative office is permitted to engage in non-income-generating service activities on behalf of the head office in Thailand. They are strictly prohibited from accepting purchase orders or making sale offers and negotiating and entering into any business arrangement with any customer, sales agent, or other party in Thailand. Therefore, they cannot generate income and pay no income tax. 14. What is the tax treatment of payments to foreign owners? Non-resident investors, whether individual or juristic person, are subject to income tax in the form of a withholding tax at the rate of 10% on dividends or share of profits received from a company or a partnership established under Thai law. 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? Dividends distributed by a company or share of profits paid by a partnership to a resident investor, whether individual or juristic person, are subject to 10% withholding tax (the same rate as nonresident investors). For a resident investor, the 10% withholding tax is deemed as an advance tax payment which can be used as a credit against the annual income tax payable. However, for a non- Page 221

223 resident investor, the 10% withholding tax is deemed as the final tax payment and there will be no further Thai income tax imposed on such dividend. For dividend received from a Thai company, an individual shareholder who is domiciled or is a resident of Thailand may choose to: (1) treat the 10% withholding tax as a final tax payment of such dividend, or (2) include the dividend with other income in computing individual income tax payable in filing an annual income tax return. Under alternative 2, the individual will receive a tax credit equal to the amount of dividend multiplied by the corporate income tax rate divided by the result of 100 minus the corporate income tax rate. The tax credit is required to be first included as assessable income and then deducted from the total amount of tax payable. Dividend paid by a Thai company to another Thai company may be exempt from Thai income tax (e.g., 10% withholding tax and 30% corporate income tax) if the holder of the shares in the payer company is in compliance with conditions prescribed in the Revenue Code. For a non-resident investor, capital gains from the sale of non-listed securities will be subject to withholding tax at the rate of 15% and tax may be exempted under an applicable double tax treaty. For a resident investor, capital gains are generally taxed as ordinary income of the seller, which shall be subject to a progressive rate of 5% - 37% (if the seller is an individual) or included in computation of paying tax at 30% of net profits (if the seller is a juristic person), as the case may be. Contact Information Yingyong Karnchanapayap yingyong.k@tillekeandgibbins.com Sriwan Puapondh sriwan.p@tillekeandgibbins.com Tilleke & Gibbins Supalai Grand Tower, 26th Floor 1011 Rama 3 Road Chongnonsi, Yannawa Bangkok 10120, Thailand Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 222

224 Issues Relating to Organizational Forms and Taxation Turkey Prepared by Lex Mundi member firm Pekin &Pekin 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. The most common forms of organization in Turkey are Limited (Liability) Company (the LLC ) and Joint Stock Company (the JSC ). The other two forms of organization are Commandite and Collective Companies both of which are rarely incorporated in practice, especially by foreign investors. Below is a comparison between a JSC and a LLC; a) The minimum number of shareholders required for a JSC is five and two for a LLC. A LLC may not have more than fifty shareholders; however there is no maximum shareholder number applicable to a JSC. Neither a JSC nor a LLC require any Turkish shareholders (i.e., they may be 100% foreign owned); b) The minimum capital required for a LLC is TL 5,000 and TL 50,000 for a JSC; c) A JSC is managed by its Board of Directors and a LLC does not have a Board of Directors but is managed by its General Manager(s) and its shareholders. All authorities of the shareholders relating to the management of a LLC may be granted to a Director(s) or one of the existing shareholders; d) In some cases, such as amendment of the Articles of Association, the Turkish Commercial Code provides LLC minority shareholders more protection than JSC minority shareholders. However, similar protection may also be provided for in the Articles of Association of a JSC; e) A LLC with less than twenty shareholders does not need to comply with various procedural requirements applicable to a JSC for meetings of its shareholders; f) A LLC with less than twenty shareholders does not need to have statutory, i.e. internal, auditors, unlike a JSC. Instead the shareholders are empowered to review and approve the accounts of the company; g) LLC shareholders, unlike JSC shareholders, may be liable for amounts owed by the LLC to government authorities for taxes, duties, levies and charges without any limitation in proportion to their capital contribution if the company is unable to make the required payments. In other words, their liability is not limited to their own capital contribution; Consequently, the JSC is specifically preferred where shareholders with potentially conflicting interests come together, such as in a joint venture. In addition, a JSC is the only possible option where a public offering of securities is anticipated. Furthermore, there are number of public procurement/concession tender specifications whereby the bidders are requested to be in the legal form of JSCs. Moreover, JSC offers far better protection in relation to tax and similar fiscal liabilities in which JSC shareholders enjoy limited liability for tax obligations. The LLC is a rather simpler Page 223

225 structure and may in the long run be easier to administer. While the JSC is by far the more common choice the LLC may be preferable when the primary objective is to establish a fully-owned subsidiary with minimum capital and administrative requirements. 2. Are there attributes of the form that you consider unique to your jurisdiction? Incorporation of business entities in some spesific sectors is subject to additional approvals by supervisory authorities such as the Banking Regulatory Supervisory Authority. Main regulated sectors are: Banking, Private Finance Institutions, Insurance, Financial Leasing, Factoring, Holdings, Foreign Currency Exchange Offices, Public Warehousing, founders and operators of Free Trade Zones and companies subject to the Capital Markets Law. 3. Describe the management and governance structure for each organizational form. A joint stock company is composed of three statutory organs: a) General Assembly The General Assembly, is authorized and empowered to pass certain material decisions related to the company its meetings. The authorizations and duties of the General Assembly with respect to, among others, amending the articles of association, appointment and release of members of the Board of Directors and Statutory Auditors, distribution of profit, ratification of the balance sheet and profit and loss account, liquidation, issue of securities, public offerings cannot be assigned to another organ or individual. General Assembly meetings shall convene by the invitation of the Board of Directors or in case of mandatory and pressing grounds by the invitation of the auditors. b) Board of Directors The Board of Directors consists of at least three members elected by the General Assembly for a period of minimum one and maximum three years. All such members can be foreign nationals. The Board of Directors is authorized and empowered to manage and represent the company. By virtue of Article 323 of the Turkish Commercial Code, the Board of Directors may assign its duties and authorization to one or several directors, managers and/or officers of the company and authorize them to represent and sign on behalf of the company. c) Statutory Auditor(s) A minimum of one Statutory (internal) Auditor is required to be elected by the General Assembly to serve for a period of one to two years. Please be informed that the Statutory Auditor is authorized and empowered to audit the books and accounts of the company. Additionally, the majority of the Statutory Auditors are required to be Turkish nationals. Limited Liability Companies, on the other hand, do not have a board of directors; instead they are managed by their director(s). Principally, all shareholders of a LLC are also its directors and they are collectively entitled and obligated to manage company affairs and the company. However, the management and representation of the company can be assigned to one or more of the shareholders through articles of association or a resolution of the Shareholders Committee. Shareholders Committee of a LLC, similar to the General Assembly of a JSC, is authorized and empowered to pass decisions on material issues such as amending the Articles of Association, appoint, dismiss and discharge the Directors and the Statutory Auditors (if any), approve the balance Page 224

226 sheet and the loss and profit account and determine the allocation of the profits and increase the share capital. Shareholders Committee shall convene ordinarily once a year and extra ordinarily when deemed necessary by the Director(s). Shareholder(s) holding 10% or more of the capital may request from the Director(s) to convene the Shareholders Committee. LLCs with more then twenty shareholders should also appoint at least one Statutory Auditor. 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? Neither managers nor shareholders of a Turkish joint stock (or limited liability) company are required to be Turkish citizens or residents of Turkiye. In general, foreign investors are free to perform or have interests in businee activities. However, in certain sectors the regulations limit the maximum foreign shareholding; such as broadcasting companies (up to 25% foreign participation is permitted) and maritime companies (up to 49% foreign participation is permitted). In addition, according to Title Deed Law, Companies incorporated in Turkey by foreign investors (or companies with foreign shareholders) can only acquire and use real properties in order to conduct the activities stated in their articles of association. These real properties cannot be in military or private security zones. Moreover, foreign companies can only acquire real property in limited circumstances, under certain laws such as the Petroleum Law, Encouragement of Tourism Law, Banking Law and the Industrial Zones Law. 5. Describe the extent to which management and owners are exposed to liability. Liability of a JSC s shareholder is only against the company and limited with his/its capital contribution. However, LLC shareholders, unlike JSC shareholders, may be liable for amounts owed by the LLC to government authorities for taxes, duties, levies and charges without any limitation in proportion to their capital contribution if the company is unable to make the required payments. However, legal representatives (please see our explanation under question 3 regarding the representation of JSCs and LLCs) of legal entities are personally liable for any unpaid tax and other fiscal liability that cannot be collected from the entity. In fact, following a recent change of Law on Collection Procedure of Public Assets not only the legal representatives who are in office at the time a public receivable is due but also those who were in the office at the time of the occurrence of the fiscal obligation (e.g. underlying taxable event) would be jointly and severally liable. 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? The capital of a JSC is divided into shares of equal value which are treated as a negotiable insturement. The shares could be represented via share certificates or temporary share certificates; which could either be in the form of bearer share certificate or registered share certificate. In any case, the shares of a JSC are transferable unless otherwise is explicitly provided in the articles of association. On the other hand, shares of a LLC, unlike those of a JSC, cannot be represented by negotiable share certificates and any transfer of shares in a LLC must be approved by ¾ of the shareholders and those shareholders representing at least ¾ of the capital of the company. The minimum number of shareholders for a LLC is 2 and 5 for a JSC. Also a LLC cannot have more then 50 shareholders whereas there is no limit to the number of a JSC s shareholders. Page 225

227 7. Is there a minimum capitalization? The minimum capital required for a LLC is TL 5,000 and TL 50,000 for a JSC. 8. Is there a security that can be issued to the public? In compliance with the requirements of Turkish Capital Market Law and respective legislation, JSCs may issue various types of securities (equity or debts). LLCs may not issue securties to the public, therefore LLC shareholders have to convert their entity to a JSC in order to issue securities. 9. Can the form incur debt, or grant security for debt? Both JSCs and LLCs can incur debt. In Turkey, security mechanisms which are commonly used by entites are; a) Mortgage on Real Property; b) Commercial Enterprise Pledge; c) Pledge on Movables; d) Share Pledge; e) Pledge on Receivables; f) Bank Account Pledge; g) Assigment of Receivables; h) Guarantee Aggrement; i) Suretyship. 10. What is the duration of the form? Can it be renewed? A JSC may be established for an indefinite period of time, yet the term of an LLC is required to be defined in its Articles of Association. Shareholders of a LLC could always extend the duration of the form by amending its Articles of Association accordingly. 11. Describe the process, customary time period and approximate cost of establishing the form. Registration and establishment of a company in Turkiye can be completed in a few days time after the required documentation is duly prepared. Investors who envisage to incorporate a JSC (or LLC) shall submit 3 copies of signed and notarized Articles of Association together with the below listed documents to the Trade registrylocated at the province where the entity will be established. The company can start to operate its business activity after the approval and registration of Trade registryby receiving registration number which is unique for every established company. Company registrations and participations are announced to the third person or related parties by the publication of Turkish Trade registry Gazette. Documents for the Company Establishment 1. Company Establishment Petition and Notification Form, duly filled in and signed by persons authorized to represent the company; 2. Notarized signatures of persons authorized to represent the company together with the company trade name; 3. Bank receipt of the deposit to Turkish Competition Authority s account, amounting to 0.04% of the registered capital; Page 226

228 4.1 Certified copies of the ID certificates of the real person founders and their residence certificates (if they have Turkish citizenship); 4.2 In case there are any real persons of foreign citizenship among the founders of the company, the copy of his/her passport to be presented together with the passport itself or its notarized copy; 4.3 In case the foreign shareholder(s) is a legal entity; the original copy of the Certificate of Activity issued by the competent authorities and approved by the relavant Turkish Consulate or apostilled and its notarized translation; 7. In case there are any rights and movable and immovable assets to be put in as capital for a company to be established; expert report of the assesment made to ascertain the value of these and the related court decision for the expert assignment. In addition to the above described procedure, Joint Stock Companies of which the Foundation and Amendments to the Articles of Association are Subject to the Prior Permit of the Ministry of Industry and Commerce. According to Article 273 of the TCC, the foundation and amendments to the Articles of Association of banks, special financial institutions, insurance companies, financial leasing companies, factoring companies, holding companies, foreign exchange dealers, public bonded warehouse operators, public companies subject to the Capital Market Law and free trade zone founders and operators are subject to the prior permission of the Ministry of Industry and Commerce. 12. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? In general there are no requirements for the government to participate in investment vehicles or receive part of the profits arising there from. However, although very limited, there are exceptions to the above principle. Namely, in few special sectors such as mining and energy, specific laws and regulations require that entities active in such business to pay a portion of their profits to the government as State s Right. 13. For what taxes is the form liable? The Turkish tax system comprises direct and indirect taxes. Direct taxes include individual income tax and corporate income tax. Indirect taxes include value added tax (VAT), excise taxes which are charged on the sale and importation of certain goods, raw materials, energy, natural gas, oil, etc. and transaction taxes, such as stamp tax, banking and insurance transaction tax, real estate sale and purchase tax, etc. As corporate entities, the net incomes of JSCs and LLCs are subject to corporation tax. Besides they can be subject to value added tax, excise and transaction taxes, depending on the scope of the company. Corporate Income Tax: Pursuant to Article 1 of the Corporation Tax Law, the net income of corporations generated from their commercial and agricultural activities in Turkey is subject to corporate income tax at a rate of 20%. Value Added Tax: The transfer of all goods and the rendering of all services including importation the same into Turkey are, in general, subject to VAT at a rate of 18%. There are, however, reduced or increased rates depending on the subject matter of taxation. For instance, the rate of VAT on lease payments of financial lease arrangements in relation to investment (non-consumer) goods (including those provided by non-resident financial lessors via cross-border financial leasing) is 1% whereas increased rates of VAT are charged on the sale of some luxury goods and cars. Excise Tax: Page 227

229 The sale of certain goods such as cars, cigarettes, oil, energy and natural gas is also subject to additional excise and special consumption taxes that could be as high as 50+% for certain cars for example. Banking and Insurance Transaction Tax: All revenues of resident banks, finance and insurance companies, such as interest, commission, premiums and other fees and charges, are subject to banking and insurance transaction tax ( BITT ) at a general rate of 5%. Real Estate Sale and Purchase Tax: The sale and purchase of real estate is levied at a rate of 3.3% over the sale and purchase price, half of which is payable by the seller and the other half by the purchaser. It is possible, however, to cap the sale and purchase price at the amount of minimum real estate values declared periodically by the municipalities. Stamp Tax: All documents that contain a monetary amount of undertaking are subject to stamp tax at a general rate of 0.825% over the amount of monetary undertaking. However, exemptions are available in relation to certain transactions, such as cross border financing, issuance and transfer of securities, exportation, etc., provided that such exemptions are explicitly granted by law. 14. What is the tax treatment of payments to foreign owners? Any distribution of dividend would be subject, in addition to the 20% corporate income tax, to a 15% withholding tax according to Turkish (domestic) tax law. Tax treaties often provide discounted rates of withholding for shareholders who are residents of treaty countries. 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? Turkey follows a non-discrimination and equal treatment policy towards foreign (non-resident) investors. The foreign investment legislation is based on the principle of equal treatment for the domestic (resident) and foreign investors. Accordingly, foreign (non-resident) investors have the same privileges and obligations as the Turkish (resident) investors. Contact Information Okan Or okano@pekin-pekin.com Duygu Oner charlotte@pekin-pekin.com Pekin&Pekin Lamartine Caddesi 10 Taksim Istanbul, Turkey Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 228

230 Issues Relating to Organizational Forms and Taxation United Kingdom Prepared by Lex Mundi member firm Maclay Murray & Spens LLP 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. There are various forms of business organization in which a person or persons may choose to operate a business, each of which may offer a number of advantages and disadvantages compared with alternative forms of business organization. The most common forms are: a private limited company; a public limited company; an unlimited company; a partnership; a limited partnership; and a limited liability partnership. Private Limited Company A big advantage is the limited liability it allows the members, and consequent protection for members and directors. A company also has a distinct identity in law. Another advantage is that there are fewer provisions regulating directors dealings with their company if the company is private. Private companies may be limited by shares subscribed for by the members or by a guarantee of a limited sum of money given by each member. Companies limited by guarantee are rare and tend to be used by charitable or members club type organizations. A private company limited by shares is prohibited from offering to issue its shares to the public at large. Private companies are also under an obligation to file their accounts/annual returns etc. at Companies House. This is the form most commonly used in the UK by foreign investors and local businesses. Public Limited Company A PLC can offer shares to the public. However, there is an increased formality of internal procedures compared to a private company and is therefore rarely used by foreign investors. Unlimited Companies There are, albeit not that common, still unlimited companies incorporated in the UK as they benefit from reduced disclosure obligations. An individual in an unlimited company is liable for the debts of the business, unlike a limited company. There is no limit to the liability an individual can incur, and this is why they are not as common as the other two forms of company. A Partnership The major disadvantage, as with an unlimited company, is unlimited liability for the debts of the partnership. A partnership may also find it harder to raise capital than a company as it cannot issue debentures or create floating charges. However, overall there are fewer formalities, so there is less expense and publicity than in the case of a company. Limited Partnership A limited partner s liability is limited to their capital contributions although there must be at least one general partner who has unlimited liability. As a Scottish LP has separate legal personality and no Page 229

231 limit on the number of partners unlike an English LP, Scottish LPs are often used as vehicles by foreign investors. Limited Liability Partnership An LLP is essentially a hybrid between a partnership and limited company. It offers the protection from liability of a limited company and the informality of a partnership. Liability is limited to the partners' capital interest and can be suitable as an alternative to the private company, particularly for services based businesses. 2. Are there attributes of the form that you consider unique to your jurisdiction? No. 3. Describe the management and governance structure for each organizational form. Private and Public Companies In both private and public companies most decisions affecting the company or its assets are made by its directors. The directors are appointed by the members to manage the company and its day-to-day affairs, for example, in relation to approving corporate transactions, allotting shares and recommending dividends. These decisions are normally made at board meetings although written resolutions can also be used. Companies typically have a single tier board with at least one director who is a natural person. Certain decisions affecting the company (for example, changing the articles of association, putting the company into liquidation and buying back shares) are reserved by law to the members. Furthermore, the directors powers can also be restricted by the articles of association. Directors owe statutory duties to the members. Private limited companies can operate through one director. Public limited companies must have a minimum of two directors and a company secretary. The members can also enter into contractual agreements between themselves and the company which set out the day-to-day running of the company and certain decisions require shareholder approval. It is possible for shareholders to pass written resolutions in lieu of holding general meetings. Partnerships There are no directors in relation to a partnership, only partners or members. Subject to the points below, the law does not impose any form of management structure on partnerships which are therefore free to arrange their management and governance structure as they think fit in their partnership agreement. At least one partner is required to be a general partner in a limited partnership. It is the general partners that have management control and authority. A limited partner s liability is limited provided he does not participate in the management of the partnership. With an LLP there must be at least two designated members. The members are those persons named in the incorporation document. There is no management structure imposed on an LLP. That said, the LLP agreement often sets out the operation and management of the partnership. 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? Private and Public Companies There are no restrictions on foreign directors for private or public companies. They can be non-uk resident and live anywhere in the world. There is no requirement for them to live in the UK during or after their appointment, nor any requirement to have visited the UK at any point in the past. The only Page 230

232 exemption to this rule would be where the person requires a visa or work permit to work in the UK as a company director. There are no restrictions on foreign members of companies, except in certain limited situations in regulated industries such as financial services. Partnerships There are no restrictions on foreign partners in partnerships, whether general, limited or LLPs. 5. Describe the extent to which management and owners are exposed to liability. Private and Public Companies The liability of members of a private or public limited company is limited in the manner described under question one. A director owes various duties to the company and may have personal liability in the event of any negligence, default, breach of duty or breach of trust by him in relation to the company. A director is not generally personally liable for the debts of a company. However, if a director has given a personal guarantee in respect of the liabilities of the company, personal liability may be incurred under the guarantee. A director of a company which gets into financial difficulties could face personal liability in respect of fraudulent trading or wrongful trading. Fraudulent trading is more difficult to prove as the liquidator would have to show that the director had carried on the business of the company with an intention to defraud creditors. However, if found guilty, a director could be required to make a personal contribution to the assets of the company as well as facing disqualification as a director and possible criminal sanctions. Wrongful trading is easier to establish as a liquidator does not have to prove dishonesty on the part of the director (unlike in the case of fraudulent trading) but only has to show that, prior to the winding up of the company, the director knew or ought to have known that there was no reasonable prospect that the company would avoid insolvent liquidation. If found guilty, the director may have to make a contribution to the assets of the company and may be disqualified as a director. Partnerships With a limited partnership, the general partner has unlimited liability while the limited partner(s) liability is limited to their capital contributions. The liability of the partners in a LLP is limited to the partner's capital interest. 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? (i) Private and Public Companies The ownership interest in a company limited by shares and in an unlimited company is represented by the shares which are allotted by the directors. Members will be given a share certificate as evidence of title. Shares may also be held in uncertificated form in CREST. CREST is an electronic settlement system for UK and Irish quoted securities and offers investors the opportunity of holding shares in uncertificated form and transferring them electronically. A company limited by guarantee does not have a share capital and members instead guarantee a nominal sum of money which represents their interest in the company. Unlike a company limited by shares, a company limited by guarantee does not have an obligation to issue membership certificates. Page 231

233 Partnerships In relation to a partnership, ownership rests with all the partners, although not necessarily in equal shares. The partnership agreement will stipulate how the partnership interest will be represented although it would be unusual for a certificate representing the partnership interest to be issued. (ii) Private and Public Companies Shares in limited and in unlimited companies are transferrable subject to the provisions of the articles of association which may impose restrictions on the transfer. In order to transfer shares a stock transfer form must be executed by the transferor and delivered to the company for registration of the transfer. The transferee will also be liable for stamp duty on the transfer (unless the value is less than 1,000) calculated at 0.5% of the consideration rounded up to the nearest 5. When the company receives a transfer of shares, it must either register the transfer or give notice to the transferee of its refusal to register the transfer together with reasons, as soon as practicable and in any event within two months of receipt of the transfer. Once registered, the company will arrange for a share certificate to be executed and delivered to the transferee. Legal title in the shares will only transfer once the transfer has been registered in the company s register of members. Uncertificated shares may be transferred through CREST as set out in part (i) above. The transfer of membership in a company limited by guarantee is subject to the company's articles, but it is common for the articles to state that membership of such a company may not be transferred. Partnerships Any interest in the partnership may be transferred but it is dependent upon the provisions contained in the partnership agreement. Technically a partnership would be dissolved if one of the partners gave notice of their intention to leave the partnership. However, the partnership agreement would normally provide that dissolution would not occur in such circumstances and would instead specify what happens on a transfer and in what circumstances the partnership may come to an end. (iii) A private company can have just one shareholder whereas a public company must have at least two shareholders. In relation to a partnership there must be at least two partners. 7. Is there a security that can be issued to the public? Private and Public Companies A public company is required to have an allotted share capital of a nominal value that is not less than 50,000 or 57,100, of which at least 25% must be paid up. For a private company there is no requirement to have a minimum capitalization unless a restriction has been included in the company s articles of association. Partnerships In partnerships, there is no minimum capitalization. Page 232

234 8. Can the form incur debt, or grant security for debt? A public company may offer its registered securities for sale to the general public, typically through a stock exchange. A private company is prohibited from offering shares to the public. Similarly, a partnership does not issue securities to the public. 9. What is the duration of the form? Can it be renewed? Private and Public Companies A company can borrow from banks and other lenders (on a secured or unsecured basis) and therefore incur debt. The company may also grant security for debt. If a company gets into debt, the members are not personally liable for the business debts or any claims made against the company. Partnerships A partnership can incur debt and may also grant security over its assets in the same way as a company (although a partnership, unlike a limited liability partnership, may not issue debentures or create a floating charge). A creditor can sue the partnership as a group or can sue individually any of the persons who are liable as partners, provided that a partner in a limited liability partnership is entitled to an indemnity from the LLP in respect of any payments made or personal liability incurred by him in the ordinary course and proper conduct of the business. 10. Describe the process, customary time period and approximate cost of establishing the form. Private and Public Companies A company does not have a fixed duration (unless the articles of association specify otherwise) and shall continue unless struck off the register of companies or wound up. A winding up may be voluntary or by order of the court. Once a company has been dissolved and struck off the register it may only be restored by order of the Court or in very limited circumstances, on application by a former director or member to the registrar. Partnerships The duration of a partnership will depend upon the terms of the partnership agreement, but will either be for a fixed term which therefore automatically dissolves at the expiration of the term, an indefinite term which may be terminated at any time by notice given by one partner to the others (unless the agreement provides otherwise) or for a single purpose or undertaking which therefore dissolves at the termination of that purpose or undertaking. A partnership may also come to an end on the death or bankruptcy of a partner, although in practice the partnership agreement will usually state that it will not cease to exist if one of those circumstances occurs. Once dissolved a partnership cannot be renewed unless restored to the register in the same way as for companies above. 11. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? Private and Public Companies A new company must be created or an existing dormant company bought off the shelf. A shelf company will often be used for speed and is a company which has already been incorporated by company formation agents. It is usually formed with standard articles making it suitable for most purposes. For a shelf company, nominees will have been appointed as the first members and Page 233

235 directors. Before using the shelf company, the directors will need to hold a board meeting appointing the buyers as the new directors and the original directors will resign. The subscriber shares are transferred to the buyers and the company s name and registered office will be changed. If the paperwork is completed and returned to the formation agents in time, these changes can be completed, and the company acquired, within a day. To create a new company Form IN01, the company's memorandum and articles of association must be filed at Companies House. The standard registration fee is 20 and the company will be incorporated within eight to ten working days. Companies House also offers a same day incorporation service for 50. Companies House will then deliver a certificate of incorporation. Partnership A general partnership arises where two or more persons agree to run a business in common with a view to profit. For a limited partnership or LLP to be incorporated, it must be registered at Companies House by submitting Form LP5 or LL IN01, respectively, and the relevant fee. The cost and time taken to incorporate a limited partnership or LLP is the same as for a company. The limited partnership or LLP agreement can be oral or in writing or may even by implied by the parties conduct. In practice most partners opt for a written agreement to evidence the relationship and its terms. 12. For what taxes is the form liable? There are no requirements for the government to be part of a project/investment vehicle or receive part of the profits in the UK. 13. What is the tax treatment of payments to foreign owners? Private and Public Companies A company s income, profits and capital gains are charged to corporation tax. Corporation tax is calculated by taking the income profits of a company, adding the chargeable gains and then deducting any charges on income and capital. If the company is resident in the UK, corporation tax will be payable on the whole of its worldwide profits. If the company isn't UK resident but operates in the UK, for example, through an office or branch (known for tax purposes as a 'permanent establishment') the company will only have to pay corporation tax on any taxable profits arising from its UK activities. Corporation tax is payable within nine months of the end of the relevant accounting period. Large companies (annual profits of 1,500,000 and over) are required to pay the tax in quarterly installments. A company which makes chargeable supplies in excess of 70,000 in any 12 month period will be required to register for VAT (Value Added Tax). When a company is registered for VAT it must charge VAT on any supplies it makes and then account to HM Revenue & Customs for that VAT. If a VAT registered company incurs VAT on supplies made to it by other VAT registered business it will generally be able to set this off against the VAT it charges on its own taxable supplies or claim repayment from HM Revenue & Customs. If a company has employees it will be obliged to deduct income tax and employee s national insurance contributions at source from salary payments under the pay as you earn (PAYE) system. Additionally the company will be liable to pay employers' national insurance contributions in respect of its employees. Page 234

236 Partnerships For most tax purposes a partnership is treated as 'transparent' so that any tax liability arising from the partnership's business is assessed not against the partnership as a body, but against each of the members of the partnership. Accordingly, the partnership as a whole does not pay tax on its income, profit or gains. Each individual partner must consider his liability for income tax, capital gains tax and inheritance tax. Where one or more partners is a company (a corporate member) additional provisions must be considered, given that a company pays corporation tax rather than income tax or capital gains tax. VAT, PAYE and employers' national insurance contributions apply to partnerships in the same way as they apply to companies. 14. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? Private and Public Companies The UK does not apply a withholding tax to dividends paid to foreign owners. Although such dividends represent UK source-income, foreign (i.e. non-resident) owners have no liability to UK income or corporation tax in respect of the dividends. Interest payments from UK companies to foreign owners will be subject to withholding tax at 20%. However, the rate of withholding tax may be reduced or eliminated if the foreign owner is resident in a country with which the UK has a double tax treaty. Distributions in the course of a winding up are taxed as a capital receipt in the hands of a UK owner. Foreign owners will only be subject to UK capital gains tax on such distributions if they carry on a trade through a branch or an agency in the UK and the shares in respect of which the distribution is made are used or held for the purposes of that branch or agency. Partnerships Partnerships are generally treated as tax transparent in the UK and therefore the partners are taxed on their share of the income and gains of the partnership directly. Accordingly, payments by a partnership to its partners do not generally have a tax consequence for UK tax purposes. Instead, a UK partner will be subject to UK income or corporation tax on their share of the income, and UK capital gains tax or corporation tax on their share of any gains, as the income and gains arise. This treatment applies in the same way to a foreign partner whose income or gains are within the scope of UK taxes on income or chargeable gains as to UK partners. 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? Private and Public Companies Dividends paid to individual UK residents, EEA nationals and Commonwealth citizens are paid with a tax credit equal to 1/9th of the value of the dividend. This tax credit can then be set off against the individual's UK income tax liability but cannot be carried forward or create a refund of tax where no UK income tax liability exists. Certain individuals resident in countries with which the UK has a double tax treaty may be able to claim a refund of all or part of the tax credit. Dividends paid to individuals resident outside the UK who are not EEA nationals or Commonwealth citizens are not entitled to the tax credit. Page 235

237 The treatment of interest payments from a company to its owners may be different depending on whether the owners are UK resident. The 20% withholding tax on interest payments referred to above will not apply to interest payments by a company to any other UK resident companies. Please see the comments above regarding the capital gains tax liability on distributions in the course of a winding up. Partnerships The treatment of a partnership with only UK-resident partners may be different to that of a partnership with foreign partners depending on the source of the income. Where payments are being made to a partnership with a partner resident overseas, a withholding tax may apply to interest, royalties or rental income which would not apply on payments to a partnership with UK resident partners only. Partners who are not UK resident will only pay UK tax on UK source income, including their share of profits arising in the UK if the partnership carries on trade in the UK. Contact Information Chris Woodruff, Partner chris.woodruff@mms.co.uk Maclay Murray & Spens LLP 1 George Square Glasgow G2 1AL, Scotland Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 236

238 Issues Relating to Organizational Forms and Taxation USA, Alabama Prepared by Lex Mundi member firm Maynard, Cooper & Gale, P.C. 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. a) Corporation The corporation is one of the oldest and most traditional forms of business organization, which makes it one of the most understandable structures with extensive statutory and case law interpretation. The corporation form is more beneficial for an entity that has a complex capital structure (such as various classes of ownership), has the need to accumulate earnings at the entity level for expansion or other purposes or is planning to go public. However, the organization of a corporation may be more complex than some other forms of business organization, and corporations may require more regular maintenance, e.g., minutes, resolutions, etc. The concept of double taxation exists for corporations, unless the entity qualifies as an S corporation and makes an S election under the rules of the Internal Revenue Service. A corporation s ability to make an S election is limited by its ownership structure (generally S corporations are owned by a limited number of individuals), among other things. Because of its established history, the corporation is often used by foreign investors who are forming a local company. b) Limited Liability Company ( LLC ) The LLC allows for pass-through tax treatment (no entity level taxation) and also provides limited liability to its members. Although the LLC form is a relatively new form of business organization, it is now widely used for numerous business purposes and would likely be of interest to foreign investors. It is relatively easy and lessexpensive to organize than some other forms of business organization, although LLCs with multiple members may require complex operating agreements for which there exists less law to aid in interpreting the respective rights and obligations of members. The LLC form is often used by foreign investors making acquisitions and is particularly popular for ownership of real estate or the operation of small, specific-purpose businesses. The LLC form is not practical for companies that are considering going public or that receive venture capital or private equity funding. c) General Partnership The general partnership is easy to establish (virtually no paperwork required to organize and can be formed by operation of law), and there is no entity level taxation. However, partners in a general partnership have no limited liability and can be liable for acts of their co-partners. d) Limited Partnership ( LP ) While similar in structure to the general partnership with respect to taxation, etc., the LP provides limited liability to limited partners who do not have any liability beyond their investment in the LP. However, one or more general partners retain unlimited liability (including personal liability if an individual). The documentation for LPs can be complex, and tax qualification can be difficult. At present, the LP form is rarely used; however, this structure is often chosen by mutual funds and similar investment vehicles. e) Limited Liability Partnership ( LLP ) The LLP form is similar to the LLC form. General partnerships may convert to this form of business organization to enable the limited liability protection that it provides. This form is often used by professional services firms as an Page 237

239 alternative to the professional corporation or LLC structure. The LLP structure is rarely used by foreign entities. 2. Are there attributes of the form that you consider unique to your jurisdiction? No. 3. Describe the management and governance structure for each organizational form. a) Corporation Corporations are governed by a board of directors, which board is elected by the shareholders. The board of directors appoint the officers. Rights are governed by articles of incorporation, bylaws and any existing shareholder agreements. b) LLC LLCs can be governed by either the members (the owners) or one or more managers elected by the members. Manager-managed LLCs often involve a management committee or board of managers. Rights are governed by articles of organization and an operating agreement, if one exists. If no operating agreement exists, the Alabama LLC statute governs where issues are not otherwise addressed by the articles of organization. c) General Partnership A general partnership is run by its partners, who may enter into a partnership agreement to further define the rights and obligations of the partners. d) LP LPs are governed by the general partner. A limited partnership agreement defines the rights and obligations of the partners. e) LLP LLPs typically have a managing partner. A limited liability partnership agreement defines the rights and obligations of the partners. 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? No. 5. Describe the extent to which management and owners are exposed to liability. Partners in general partnerships have unlimited liability. As discussed above, in LPs, general partners who are individuals can have personal liability. However, LPs often include an LLC or other entity to serve as general partner, which limits the possibility of personal liability. Limited partners have no liability unless they are deemed to be general partners by becoming too involved in the business of the LP or otherwise engage in wrongful personal conduct. With respect to the other forms of business organization (corporations and LLCs), so long as legal considerations and other formalities are adhered to (such as not commingling personal and entity assets, keeping books and records in order, etc.), there is low risk of personal liability, resulting in the exposure of the owners being limited to the amount of their investment in the entity. 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? a) Corporation Corporations have shareholders whose ownership interest is represented by stock, which may be certificated or not. The stock is transferable, subject to any restrictions in shareholder agreements or restrictions that may apply under state or federal securities laws. Only one owner is necessary. b) LLC LLCs have members who own either units or membership interests. No evidence of ownership is required, although certificates are occasionally used. Units are transferable, Page 238

240 although transfers are often subject to restrictions set forth in the operating agreement and restrictions that may apply under state or federal securities laws. Only one owner is necessary. c) General Partnership There is generally no evidence of ownership unless represented in a written partnership agreement. Ownership is transferable subject to an agreement not to transfer. Only one owner is necessary. d) LP LPs must have at least one general partner and one limited partner. Ownership is usually evidenced by a limited partnership agreement, which may limit transfer, as may state or federal securities laws. e) LLP The ownership interest structure of LLPs is similar to that of LLCs. Only one owner is necessary. 7. Is there a minimum capitalization? No, although being undercapitalized is one factor that could lead to a claim that the limited liability protection of a limited liability entity should be pierced and the entity s owners held personally liable. 8. Is there a security that can be issued to the public? 9. Yes corporations may issue their stock to public markets. Interests in LLCs and partnerships are rarely offered to the public. 10. Can the form incur debt, or grant security for debt? 11. Yes, in all cases. 12. What is the duration of the form? Can it be renewed? The duration of the entity is stated in its organizational documents. All forms may be perpetual in existence, subject to the occurrence of certain stated events included in their organizational documents. 13. Describe the process, customary time period and approximate cost of establishing the form. Counsel conducts interviews with the client to determine the client s goals in forming a business organization and then advises the client on which form of business organization is most appropriate. The client is further counseled on issues relating to how the entity will operate, how and whether ownership can be transferred, how various events will be handled by the entity, etc. Accountants may be involved in the process. The timeline and cost associated with the process can vary significantly depending on the complexity of the formation and the number of issues that the client needs to address in the formation stage. A single member LLC is a relatively simple formation and may be accomplished within a few hours for a few hundred dollars. Most entities are more complicated and require more time, resulting in more cost. On average, an entity probably takes 2-3 weeks to organize at a cost of $1,000-$5,000. The filing fees and initial taxes charged by the state may add another $200-$500 to the process. 14. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? 15. No, although, for most entities, the state requires a filing with the Probate Judge in the county of formation and/or the Secretary of State and the payment of a filing fee. Page 239

241 16. For what taxes is the form liable? Corporations pay corporate income taxes. The other entities described are pass through entities, resulting in income taxes being paid by the individual owners with no entity level tax. All of the entities also pay various other taxes, e.g., employment-related taxes, etc. Alabama imposes an annual franchise or business privilege tax on corporations and limited liability entities (including disregarded entities like single member LLCs) for the privilege of conducting business in Alabama. 17. What is the tax treatment of payments to foreign owners? S corporations doing business in Alabama must either (1) file a composite return on behalf of their nonresident shareholders and make a composite payment of the Alabama income tax on their behalf or (2) file with the Department of Revenue a consent agreement executed by each nonresident shareholder that does not participate in the composite filing, whereby the nonresident shareholder agrees (i) to file and to make timely payment of all income taxes imposed on the shareholder with respect to the income of the S corporation and (ii) to be subject to personal jurisdiction in Alabama for income tax collection purposes. For partnerships, LLCs and other entities taxed under Subchapter K of the Internal Revenue Code and doing business in Alabama, the composite return requirements are mandatory, requiring them to file annual composite returns and remit Alabama income tax on behalf of each of their non-resident partners. There are certain exceptions from this mandatory composite return requirement for Subchapter K entities, including an exception for investment partnerships invested primarily in securities. 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? See explanation in item 14. Contact Information Christopher B. Harmon charmon@maynardcooper.com Maynard, Cooper & Gale, P.C Sixth Avenue North Suite2400, Regions Harbert Plaza Birmingham, Alabama Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 240

242 Issues Relating to Organizational Forms and Taxation USA, Arkansas Prepared by Lex Mundi member firm Rose Law Firm, a Professional Association 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. The main forms of organization available in Arkansas are sole proprietorships, partnerships, corporations, and limited liability companies. A brief summary of each is set forth below. Counsel should be consulted to answer specific organizational or operating issues. a) Sole Proprietorship. A sole proprietorship is a business in which one person owns all of the assets and normally operates the business under an assumed name. There are a few organizational formalities that must be complied with in order to operate a sole proprietorship, but not nearly as many as must be complied with if a business is operated as a formal entity. The owner receives all the profits, suffers all the losses, and holds all management rights. The owner is personally liable for all business liabilities. b) Partnership. A partnership is an entity composed of two or more partners. A partnership does not pay an entity level tax and all items of income and loss flow through to its partners. There are 4 types of partnerships recognized under Arkansas law: general partnerships, limited partnerships, limited liability partnerships, and limited liability limited partnerships. General partnerships contain only general partners. Limited partnerships, limited liability partnerships, and limited liability limited partnerships contain both general and limited partners. As set forth below, the liability of general partners differs depending on which type of partnership is utilized. c) Corporation. A corporation is an entity that provides centralization of management in a board of directors and a limitation on liability for its shareholders. It is the most common entity utilized in Arkansas. Arkansas corporations consist of for profit corporations and non-profit corporations. Arkansas for profit corporations are taxed as subchapter C corporations unless a federal and Arkansas subchapter S election is made. d) Limited Liability Company. A limited liability company is an entity that provides limitation on liability for all members. However, other features, such as management flexibility and the possibility of pass-through taxation, are similar to a partnership. 2. Are there attributes of the form that you consider unique to your jurisdiction? Arkansas has largely adopted uniform laws. However, in some cases Arkansas law may differ from uniform laws and therefore it is recommended that counsel be consulted to answer specific organizational or operating issues. 3. Describe the management and governance structure for each organizational form. a) Sole Proprietorship. A sole proprietor has full rights of management and control over the sole proprietorship s business affairs. b) Partnerships. Page 241

243 General Partnership; Limited Liability Partnership. In a general partnership and limited liability partnership, each party has equal rights in management and conduct of the partnership business so long as no agreement to the contrary exists. Ark. Code Ann Matters in the ordinary course of business are decided by a majority of partners while those outside the scope of the business require a unanimous vote of the partners. Ark. Code Ann (1). Limited Partnership; Limited Liability Limited Partnership. In a limited partnership and limited liability limited partnership, limited partners may not exercise control or management over the partnership. Ark. Code Ann General partners have equal rights in management. Ark. Code Ann Unless otherwise provided in the partnership agreement or by law, a general partner is an agent of the partnership for purposes of its activities. Ark. Code Ann Therefore, the partnership is liable for the general partner s conduct in carrying out those activities. Ark. Code Ann c) Corporations. Corporations are managed by officers subject to supervision and control of a board of directors. The board of directors is elected by the shareholders. Ark. Code Ann The officers are appointed by the board of directors. Ark. Code Ann Unless otherwise provided in the articles of incorporation or bylaws, a director does not have to be a resident of Arkansas or a shareholder of the corporation. Ark. Code Ann If a corporation has 50 or less shareholders, it may dispense with or limit the authority of the Board of Directors. Ark. Code Ann (c). d) Limited Liability Company. Management of a limited liability company may be vested either in its members or in one or more managers who need not be members of the limited liability company or natural persons. If the articles of organization do not provide that management is vested in a manager or managers, management is vested in the members. If management of a limited liability company is vested in a manager or managers, the limited liability company is operated similar to a corporation. If the management of the limited liability company is vested in members, the limited liability company is operated similar to a partnership. If management of a limited liability company is vested in its members, and unless there is an agreement to the contrary, the approval of more than one-half (1/2) by number of the members is required to decide most matters. Ark. Code Ann (a). The approval of all members is required to amend the operating agreement or authorize a member or manager to perform an act which contravenes the operating agreement. 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? Generally, there are no residency requirements for management or owners. However, a subchapter S corporation cannot have a nonresident alien as a shareholder. A nonresident alien may generally serve as director or officer of a subchapter S corporation. 5. Describe the extent to which management and owners are exposed to liability. a) Sole Proprietorship. The sole proprietor is personally liable for all liabilities of the business. b) Partnership. General Partnership. All partners in a general partnership are liable jointly and severally for all obligations of the partnership unless otherwise agreed by the claimant or provided by law. Ark. Code Ann (a). Each partner owes the partnership and the other partners the duties of loyalty and care. Ark. Code Ann If a partner breaches one of these Page 242

244 duties, the partner may be liable to the partnership or the other partners. Ark. Code Ann Limited Partnership. A limited partner, unless also a general partner, is not liable for the limited partnership s obligations whether arising in contract, tort, or otherwise. Ark. Code Ann General partners are liable jointly and severally for all obligations of the limited partnership unless otherwise agreed by the claimant or provided by law. Ark. Code Ann Limited Liability Partnership. A partner in a limited liability partnership is not personally liable for the limited liability partnership s obligations. The obligations belong solely to the limited liability partnership. Ark. Code Ann (c). Each partner owes the partnership and the other partners the duty of loyalty and care. Ark. Code Ann If a partner breaches one of these duties, the partner may be liable to the partnership or the other partners. Ark. Code Ann Limited Liability Limited Partnership. An obligation of a limited partnership incurred while the limited partnership is a limited liability limited partnership, whether arising in contract, tort, or otherwise, is solely the obligation of the limited partnership. Ark. Code Ann (a). A general partner is not personally liable, directly or indirectly, by way or contribution or otherwise, for such an obligation solely by reasons being or acting as a general partner. Id. c) Corporation. Generally, a shareholder s liability to a corporation or its creditors is limited to the consideration paid for the shareholder s shares, and a shareholder is not personally liable for a corporation s acts or debts. Ark. Code Ann If a corporation is illegally used to injure a third party or if a corporation is under capitalized or does not comply with corporate formalities, it is possible that a third party may be allowed to pierce the corporate veil and hold the shareholders personally liable for the debts of the corporation. d) Limited Liability Company. The default rule is that a manager or member is not liable to the limited liability company or its members [f]or any action taken or failure to act on behalf of the limited liability company unless the act or omission constitutes gross negligence or willful misconduct. Ark. Code Ann (1). 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? a) Sole Proprietorship: i. The owner of a sole proprietorship holds title to the assets of the business in his own name. ii. A sole proprietorship can be transferred by the sale of the assets of the business. iii. The minimum number of owners is one. b) Partnerships: i. Ownership interests in a partnership are set forth in a partnership agreement. The partnership agreement may express the partnership interests as percentages or in the form of units. ii. Interests in a partnership are generally freely transferable unless transferability is limited by a partnership agreement. The interest transferred may be limited to an assignee interest, which generally differs from a partnership interest in regard to management and voting rights. iii. The minimum number of partners in a partnership is two. c) Corporation: i. Ownership interests in a corporation are represented through shares of stock. If authorized by its articles of incorporation, a corporation may have more than one class of stock, which may have preferences on distributions and special or limited voting rights. Ark. Code Ann (c). ii. The shares of a corporation are generally freely transferable unless transferability is limited by an agreement between the shareholders. Page 243

245 iii. The minimum number of shareholders is one. d) Limited Liability Company: ii. Ownership interests in a limited liability company are set forth in an operating agreement. The operating agreement may express the membership interests as percentages or in the form of units. ii. Interests in a limited liability company are generally freely transferable unless transferability is limited by an operating agreement. The interest transferred may be limited to an assignee interest, which generally differs from a membership interest in regard to management and voting rights. iii. The minimum number of members in a limited liability company is one. 7. Is there a minimum capitalization? a) Sole Proprietorship. There are no express capitalization requirements for sole proprietorships. b) Partnerships. Normally, the partnership agreement provides the amount of capital that is to be contributed to the partnership by each partner at formation in exchange for an interest in the partnership. Unless otherwise specified in the partnership agreement, a partner s capital contribution may be property or the performance of services. A partnership may also receive capital in the form of loans from its partners and third parties. c) Corporation. A corporation receives its capital in exchange for its shares. The shareholders or board of directors may authorize shares to be issued in exchange for money paid, labor done, or property actually received. Shares cannot be issued in exchange for promissory notes or the promise of future services. Ark. Code Ann (b). Shares having a par value may not be issued for consideration less than the par value of the shares. Ark. Code Ann (c). Before shares are issued, the board of directors must determine if the consideration received or to be received is adequate. Ark. Code Ann (d). d) Limited Liability Company. A limited liability company interest may be issued in exchange for property, services rendered, or a promissory note or other obligation to contribute cash or property or to perform services. Ark. Code Ann Is there a security that can be issued to the public? Under Arkansas law, the term security or securities includes notes, stock, bonds, debentures, or other evidences of indebtedness, treasury stock, certificates of interest or participation in any profitsharing agreement, collateral-trust certificates, pre-organization certificates or subscriptions, investment contracts, variable annuity contracts, viatical settlement contracts or fractionalized or pooled interests, voting-trust certificates, certificates of deposit for security, certificates of interest for participation in an oil, gas or mining title or lease for payments out of production under such title or lease, or in general, any other interest or instrument commonly known as a security or any certificate of interest or participation in, temporary or interim certificate for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. Ark. Code Ann (15)(A). Generally, Arkansas securities law will apply any time there is an offer to sell or buy a security when the offer or sale is deemed to have been made in Arkansas; however, an offer to sell or buy may be made in Arkansas even if neither party is then present in Arkansas when the offer originates. Ark. Code Ann Security transactions in Arkansas are regulated by the Arkansas Securities Commission through the Arkansas Securities Department, which has promulgated rules and regulations pursuant to applicable state statutes regulating the issuance, registration, and sale of securities. There are various exemptions from registration of securities. The most recent exemption rules may be found at Page 244

246 9. Can the form incur debt, or grant security for debt? Sole proprietorships cannot incur debt since the business is not a separate entity from the owner. Partnerships, corporations, and limited liability companies can both incur debt and grant security for debts. 10. What is the duration of the form? Can it be renewed? Sole proprietorships, partnerships, corporations, and limited liability companies generally have perpetual duration unless their existence is limited by their organizational documents. Notwithstanding the above, under Arkansas law, entities must be dissolved upon the occurrence of certain events. See Ark. Code Ann (dissolution of a general partnership or a limited liability partnership); Ark. Code Ann (dissolution of a limited partnership or a limited liability limited partnership); Ark. Code Ann (dissolution of a limited liability company); Ark. Code Ann (dissolution of a corporation). 11. Describe the process, customary time period and approximate cost of establishing the form. a) Sole Proprietorship. If a person operates a sole proprietorship under an assumed name, the person must file a certificate in the county clerk s office in the counties in which the person operates or intends to operate the business. Ark. Code Ann b) Partnerships. General Partnership. No documents are required to be filed with the Secretary of State in order to form a general partnership. Limited Partnership. A limited partnership is formed when its certificate of limited partnership is filed with the Secretary of State. Ark. Code Ann (a). Limited Liability Partnership. In order to be classified as a limited liability partnership a general partnership must approve of the general partnership becoming a limited liability partnership. After approval, the general partnership must file a statement of qualification with the Arkansas Secretary of State. Ark. Code Ann Limited Liability Limited Partnership. In order to be classified as a limited liability limited partnership, a limited partnership must file an application for registration as a limited liability limited partnership with the Secretary of State. Ark. Code Ann (9). If the limited partnership s partnership agreement does not permit its registering as a registered limited liability limited partnership, then the partners must approve the registration. c) Corporation. Unless a later date is specified, a corporation is formed when its articles of incorporation are filed with the Secretary of State. Ark. Code Ann (a). Either the incorporator(s) or directors may complete the organization of the corporation. Ark. Code Ann (a). d) Limited Liability Company. A limited liability company is formed when its articles of organization are filed with the Arkansas Secretary of State, unless the articles of organization specify a delayed effective date. Ark. Code Ann (a). e) Filing Fees; Forms. Filing fees and sample forms may be found at the Arkansas Secretary of State s website: For additional information, call (501) Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? Generally, there are no such requirements under Arkansas law. Page 245

247 13. For what taxes is the form liable? a) Sole Proprietorship. A sole proprietorship reports the income and deductions of the business on the individual tax return of the owner. Also, an individual with a sole proprietorship pays federal self employment tax on the net profits of the business. b) Partnerships. A partnership is not a separate taxable entity and is thus not subject to income tax. However, since a partnership is a pass through tax entity, the income or loss flows through to the partners. Partnership income must be allocated to the state where income was earned. c) Corporations. Subchapter C Corporation. C corporations are separate entities subject to corporate taxation. Corporations may deduct the cost of doing business from profits. Once taxable income is calculated, liability is determined through multiplying net taxable income by the applicable Arkansas tax rates. All corporate organizations under Arkansas law or doing business in Arkansas are subject to a net income tax of 1% to 6.5%. When remaining profits are distributed to shareholders, they are taxed as a dividend which is also subject to Arkansas taxes. Subchapter S Corporation. S Corporations are generally not treated as separate taxable entities for income tax purposes. The income and loss of the S corporation generally flows through to the shareholders. S Corporations must elect Arkansas subchapter S status after a federal subchapter S election has been made. d) Limited Liability Company. Limited liability companies are hybrids between partnerships and corporations, and are treated as disregarded entities for tax purposes if there is only one (1) member. If a limited liability company has more than one (1) member, then it is treated as a partnership for tax purposes unless an election is made to treat the limited liability company as a Subchapter C or Subchapter S corporation for tax purposes. e) General. The following information applies to sole proprietorships, partnerships, corporations, and limited liability companies. If an entity has employees, then Arkansas may impose income tax withholding requirements. Form AR4ER Withholding Registration must be filed with the Revenue Division of the Arkansas Department of Finance and Administration. If an entity sells goods or services in Arkansas, the owner must obtain a Sales and Use Tax Permit and collect and remit Arkansas sales and use tax in accordance with Arkansas law. A permit is obtained by completing Form ST-1 Application for Sales and Use Tax Permit. If an entity owns Arkansas real or personal property, then it is responsible for the payment of property taxes. 14. What is the tax treatment of payments to foreign owners? Nonresidents with income from an Arkansas partnership, corporation, or limited liability company generally must file an Arkansas nonresident individual tax return to report that income. However, if the entity is an investment partnership, the non-resident may not need to file a non-resident tax return for income from qualifying investment securities. Ark. Code Ann (e). Page 246

248 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? Pass-through entities (such as subchapter S corporations, partnerships, and limited liability companies) are required to withhold Arkansas income tax at the highest income tax rate levied under Arkansas law on the share of income of the pass-through entity that is derived from or attributable to sources within the State of Arkansas and distributed to non-resident members. Ark. Code Ann (b). On or before the due date for the pass-through entity s composite income tax return, the pass-through entity is required to file an annual return with the Director of the Arkansas Department of Finance & Administration showing the total amount of income distributed or credited to its nonresident members and the amount of tax withheld and remit the tax withheld. Id. Notwithstanding the above, Ark. Code Ann (c) provides that a pass-through entity is not required to withhold tax for a nonresident member if: The nonresident member has a pro rata or distributive share of income of the pass-through entity from doing business in or deriving income from sources within Arkansas of less than one thousand dollars ($1,000) per year; The Director of the Arkansas Department of Finance & Administration has determined that the nonresident member's income is not subject to withholding; The nonresident member elects to have the tax due paid as part of a composite return filed by the pass-through entity; The pass-through entity: (A) Is a publicly traded partnership as defined by 7704(b) of the Internal Revenue Code, as in effect on January 1, 2005, that is treated as a partnership for the purposes of federal income taxation; and (B) Has agreed to file an annual information return reporting the name, address, and taxpayer identification number of each member with an annual Arkansas income greater than five hundred dollars ($500) along with any other information requested by the Director of the Arkansas Department of Finance & Administration; The pass-through entity has filed with the Director of the Arkansas Department of Finance & Administration on forms prescribed by the Director the nonresident member's signed agreement to timely file an Arkansas nonresident individual or trust income tax return, to pay any tax due on the return, and to be subject to the jurisdiction of the Department of Finance and Administration in the courts of Arkansas for the purpose of determining and collecting any Arkansas income tax together with interest and penalties owed by the nonresident member; or The income received by the nonresident member is exempt from Arkansas income tax pursuant to Ark. Code Ann (e)(which exempts income from qualifying investment partnerships from Arkansas taxation). Id. Contact Information Adam H. Crow acrow@roselawfirm.com Rose Law Firm, a Professional Association 120 East Fourth Street Little Rock, Arkansas Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 247

249 Issues Relating to Organizational Forms and Taxation USA, Connecticut Prepared by Lex Mundi member firm Murtha Cullina LLP 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. Connecticut provides statutory authority for the following forms of organization: stock corporations (which can be taxed as C corporations or S corporations), general partnerships, limited partnerships, limited liability partnerships, limited liability companies, cooperative associations and statutory trusts. Connecticut also provides statutory authority for non-stock corporations, which are generally used for charitable and other tax-exempt purposes. The discussion that follows focuses on the first set of organizations, and all references to corporations shall be deemed to mean and refer to stock corporations, as opposed to non-stock corporations. It is purposefully brief and is not intended to serve as a complete discussion of the issues presented. The choice-of-entity analysis depends primarily on the inherent characteristics of the entities involved (which are generally similar across state lines) and related characterizations and treatments under the United States Internal Revenue Code of 1986, as amended. Rarely, if ever, is the choice-of-entity analysis driven primarily by considerations that are unique to the State of Connecticut. Often investors who are not United States persons will invest in a Connecticut business through a C corporation. A C corporation serves as a blocker corporation that is interposed between the United States and Connecticut income source and the foreign investors. The blocker corporation rather than the foreign investors will incur and pay federal and Connecticut tax on the income of the blocker corporation. Such interposition generally prevents the foreign investors from being engaged in a United States business merely because they own the C corporation. Corporations Connecticut has adopted the Model Business Corporation Act (the MBCA ), which generally governs the creation, operation and dissolution of a corporation organized and existing under Connecticut law. The Connecticut version of the MBCA is known as the Connecticut Business Corporation Act (the CBCA ). Under the CBCA, one or more persons may act as the incorporator or incorporators of a corporation by filing a certificate of incorporation with the Office of the Secretary of the State. The corporate existence begins when the certificate of incorporation is filed. Generally speaking, the corporate form of organization is advantageous because it protects the owners of the business (i.e., the shareholders) from incurring personal liability for the debts and obligations of the corporation. The corporate form of organization is also very well understood. Because shareholders have limited liability and the corporate form of organization is so well understood, a corporation generally has easy access to capital. A Connecticut corporation may engage in almost any lawful business. The primary disadvantage of a corporation is that its earnings are subject to double taxation, first at the corporate level and then again at the shareholder level when earnings are distributed to shareholders as dividends. Double taxation generally can be avoided if the corporation elects to be taxed under Subchapter S of the Internal Revenue Code of 1986, as amended. This is not unique to Page 248

250 Connecticut, however, so a complete discussion of the rules and regulations pertaining to S corporations is beyond the scope of this survey. General Partnerships Connecticut has adopted the Uniform Partnership Act, which generally governs the creation, operation and winding up of a partnership organized and existing under Connecticut law. Unlike a corporation and most other limited liability entities, a general partnership may be created without filing any organizational document or other certificate with the state, although a partnership may file a statement of partnership with the Office of the Secretary of the State setting forth: (i) the name of the partnership, (ii) the street address of its chief executive office and of one office in this state, if there is one, (iii) the names and mailing addresses of all of the partners or of an agent appointed and maintained by the partnership for the purpose of maintaining such information, and (iv) the names of the partners authorized to execute an instrument transferring real property held in the name of the partnership. Any such statement also may state the authority, or limitations on the authority, of some or all of the partners to enter into other transactions on behalf of the partnership and any other matter. Also unlike a corporation, a partnership s profits are not taxed directly, but rather, flow through to the partners of the partnership. Partners in a general partnership have significant leeway in defining the relations among the partners and between the partners and the partnership. The primary disadvantage of a general partnership is that the partners generally are jointly and severally liable for all obligations of the partnership. Limited Liability Partnerships Connecticut also provides statutory authority for the formation of registered limited liability partnerships, which generally combine the limited liability characteristics of corporations with the flowthrough income tax treatment of partnerships. To become a registered limited liability partnership, a partnership must file a certificate of limited liability partnership with the Office of the Secretary of the State. The certificate of limited liability partnership must set forth: (i) the name of the partnership, (ii) the address of its principal office, (iii) if the partnership's principal office is not located in this state, the address of a registered office and the name and address of a registered agent for service of process in this state, (iv) a brief statement of the business in which the partnership engages, and (v) any other matters the partnership may determine to include, together with a statement that that the partnership thereby applies for status as a registered limited liability partnership. The primary advantage of a registered limited liability partnership is that, by statute, a partner in a registered limited liability partnership generally is not liable directly or indirectly, including by way of indemnification, contribution or otherwise, for any debts, obligations and liabilities of, or chargeable to, the partnership or another partner or partners, whether arising in contract, tort or otherwise, arising in the course of the partnership business while the partnership is a registered limited liability partnership. However, there is one important exception. The registered limited liability partnership provides no protection to a partner of a registered limited liability partnership for his own negligence, wrongful acts or misconduct, or that of any person under his direct supervision and control. As a result, the use of registered limited liability partnerships generally is limited to professional service organizations where such liability cannot be disclaimed. A registered limited liability partnership that consists of partners who render professional services must continuously maintain professional liability insurance in an amount not less than two hundred fifty thousand dollars. Limited Partnerships Connecticut has adopted the Revised Uniform Limited Partnership Act, which generally governs the creation, operation and winding up of a limited partnership organized and existing under Connecticut law. A limited partnership may be formed by preparing and filing a certificate of limited partnership Page 249

251 with the Office of the Secretary of the State. The certificate of limited partnership must set forth: (i) the name of the limited partnership and the address of the office required to be maintained in this state, (ii) the name and address of the agent for service of process required to be maintained by the limited partnership, (iii) the name and business address of each general partner; (iv) the latest date upon which the limited partnership is to dissolve, and (v) any other matters the partners determine to include therein. Limited partnerships provide a vehicle to raise equity from a large number of investors because limited partners may invest without subjecting themselves to personal liability. Moreover, a limited partnership can include a large number of limited partners without hindering decision making because limited partners may not participate in the control or management of the business if they wish to maintain limited liability. Because of the passive nature of limited partnership investments, however, the offer and sale of limited partnership interests are subject to the requirements of state and federal securities laws. Limited Liability Companies Connecticut has adopted the Connecticut Limited Liability Company Act, which generally governs the creation, operation and dissolution of a limited liability company organized and existing under Connecticut law. One or more organizers may form a limited liability company by signing and filing articles of organization with the Office of the Secretary of the State. The articles of organization must set forth: (i) the name of the limited liability company, (ii) if management of the limited liability company is vested in a manager or managers, a statement to that effect, (iii) the nature of the business to be transacted or the purposes to be promoted or carried out, except that it shall be sufficient to state, either alone or with other business or purposes, that the purpose of the limited liability company is to engage in any lawful act or activity for which limited liability companies may be formed under the Connecticut Limited Liability Company Act, (iv) the principal office address of the limited liability company, (v) an appointment of a statutory agent for service of process, and (vi) any other matter the organizer or organizers determine to include. The primary advantage of a limited liability company is that it combines the limited liability characteristics of a corporation with the flow-through income tax treatment of a general partnership. Furthermore, a limited liability company generally provides greater flexibility in its operation than that provided by a corporation. A Connecticut limited liability company cannot conduct business as a state bank and trust company, a savings bank, an industrial bank, a building and loan association, a telegraph company, a gas, an electric, or an electric distribution or water company, or cemetery corporation, or an affiliate of an insurance company. Cooperative Associations Connecticut provides statutory authority for the creation and formation of cooperative associations. Under Connecticut law, seven or more persons of lawful age, who are inhabitants of this state, may, by written articles of agreement, associate themselves together for the purposes of trade or for carrying on any lawful mercantile, mechanical, manufacturing or agricultural business within this state, and, when such articles of association have been executed and filed in the office of the Secretary of the State, the franchise tax specified by statute has been paid to, and such articles of association approved by, the Secretary of the State, such persons shall become a corporation and enjoy all the powers and privileges and be subject to all the duties, restrictions and liabilities of other Connecticut corporations, except so far as the same may be limited or enlarged by statute. A cooperative association provides few, if any, advantages over a regular corporation, so this form of organization is rarely utilized. The distribution of profits from a cooperative association is subject to the additional requirement that no distribution shall be declared or paid until a sum equal to ten percent of the net profits is appropriated for a contingent or sinking fund and until there has been Page 250

252 thereby accumulated a sum equal to twenty percent of the capital stock of the cooperative association. Statutory Trusts Finally, Connecticut provides statutory authority for the creation and formation of statutory trusts, commonly known as business trusts. A statutory trust may be organized to carry on any lawful business or activity, whether or not conducted for profit. A statutory trust is created by: (i) a trust instrument under which property is or will be held, managed, administered, controlled, invested, reinvested or operated, or business or professional activities are or will be carried on, by a trustee or trustees for the benefit of such person or persons as are or may become entitled to a beneficial interest in the trust property and (ii) the filing of a certificate of trust with the office of the Secretary of the State. The certificate of trust must set forth: (i) the name of the statutory trust, (ii) the future effective date, which shall be a date certain, of effectiveness of the certificate if it is not to be effective upon the filing of the certificate, (iii) the principal office address of the statutory trust, (iv) the appointment of a statutory agent for service of process, and (v) any other information the trustees determine to include therein. Except to the extent otherwise provided in the governing instrument of the statutory trust, the beneficial owners of a statutory trust shall be entitled to the same limitation of personal liability extended to shareholders of a Connecticut corporation. Similarly, except to the extent otherwise provided in the governing instrument of a statutory trust, a trustee, when acting in such capacity, shall not be personally liable to any person other than the statutory trust or a beneficial owner for any act, omission or obligation of the statutory trust or any trustee thereof. 2. Are there attributes of the form that you consider unique to your jurisdiction? No. Generally speaking, the Connecticut laws governing the formation and operation of business entities are derived from model and uniform acts. For example, the Connecticut statutes governing the formation and operation of corporations are derived from the Model Business Corporation Act, the Connecticut statutes governing the formation and operation of general partnerships are derived from the Uniform Partnership Act, and the Connecticut statutes governing the formation and operation of limited partnerships are derived from the Revised Uniform Limited Partnership Act. 3. Describe the management and governance structure for each organizational form. Corporations All corporate powers are exercised by or under the authority of, and the business and affairs of a corporation are managed by or under the authority of, the board of directors of the corporation. Directors are responsible for appointing officers, adopting bylaws, and managing the corporation. Directors generally delegate day-to-day operating responsibilities to officers. Officers perform the functions set forth in the bylaws of the corporation and, to the extent consistent with the bylaws, the functions prescribed by the board of directors. Shareholders elect directors, have the right to receive dividends and vote on significant corporate transactions, such as a merger and the sale of all or substantially all of the assets of the corporation. General Partnerships A general partnership is defined as the association of two or more persons to carry on as co-owners of a business for profit. As such, each partner is an agent of the partnership. This means that an act of a partner in the ordinary course of the business binds the partnership, unless the partner had no authority to act for the partnership in that matter and the person with whom the partner dealt knew that the partner lacked authority. Page 251

253 Under a general partnership, co-owners have considerable freedom to determine among themselves the terms which will govern their partnership. Generally, relations among the partners and between the partners and the partnership are governed by the partnership agreement. The partnership agreement may grant to all or certain identified partners the right to vote on any matter. In lieu of a provision in the partnership agreement defining the rights and duties of the partners, the partners rights and duties are governed by statute. Limited Partnerships A limited partnership must have at least one general partner and one limited partner. General partners manage and control the limited partnership, and may be subject to personal liability. If a limited partner participates in the management or control of the partnerships, he is no longer a limited partner (i.e., may be subject to personal liability). However, Connecticut law enumerates various powers that a limited partner may exercise which do not constitute participation in the management or control of the business. These powers include serving as an agent or employee of the limited partnership, consulting with or advising the general partner on the business of the partnership, acting as surety for the limited partnership, attending meeting of partners, or voting on matters such as the dissolution and winding up of the limited partnership, the sale, exchange, lease, mortgage, pledge, or other transfer of all or substantially all of the assets of the limited partnership, or change in the nature of the business. Limited Liability Partnerships A registered limited liability partnership is managed in the same manner as a general partnership. The partners have considerable freedom to determine the terms that govern their partnership. In lieu of a provision in the partnership agreement defining the rights and duties of the partners, the partners rights and duties are governed by statute. Limited Liability Companies Unless otherwise provided in the articles of organization, every member of a limited liability company is an agent of the limited liability company for purposes of its business or affairs, and the act of any member binds the limited liability company, unless the member so acting has, in fact, no authority to act for the limited liability company in the particular matter and the person with whom he is dealing has knowledge of the fact that the member has no such authority. If the articles of organization vests management of the limited liability company in non-member managers, then the members are not agents of the company and do not have the authority to act on behalf of the company, and every manager is an agent of the limited liability company for purposes of its business or affairs, and the act of any manager binds the limited liability company, unless the manager so acting has, in fact, no authority to act for the limited liability company in the particular matter and the person with whom he is dealing has knowledge of the fact that the manager has no such authority. Cooperative Associations The business and affairs of a cooperative association are managed by no fewer than seven members, who are styled a board of managers and are chosen annually by the stockholders. Such persons hold their offices until others are chosen and have qualified in their stead. The bylaws of a cooperative association may divide the board of managers into not more than three classes, each class of which shall hold office for not more than three years. In such event, one of the classes is elected each year. The association has such other officers as may be designated and appointed in accordance with its bylaws. Statutory Trusts Except to the extent provided in the governing instrument of the statutory trust, the business and affairs of a statutory trust are managed by or under the direction of the trustees. To the extent Page 252

254 provided in the governing instrument of a statutory trust, any person, including a beneficial owner, is entitled to direct the trustees or other persons in the management of a statutory trust and, except to the extent otherwise provided in the governing instrument of a statutory trust, neither the power to give direction to a trustee or other persons nor the exercise thereof by any person, including a beneficial owner, causes such person to be a trustee. 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? Except for cooperative associations, no form of Connecticut business organization imposes any general residency requirement for management or owners of the organization and there is no restriction or prohibition on foreign investors to perform, or have interests in, specific activities. Generally speaking, however, each form of Connecticut business organization must maintain an office in the state and appoint a registered agent for service of process. There is a residency requirement for cooperative associations. The members of a cooperative association must be inhabitants of the State of Connecticut. 5. Describe the extent to which management and owners are exposed to liability. Corporations A shareholder of a Connecticut corporation is not liable to the corporation or its creditors, except to pay the agreed upon consideration for its shares. Unless otherwise provided in the certificate of incorporation, a shareholder of a Connecticut corporation is not personally liable for the acts or debts of the corporation except that he may become personally liable by reason of his own acts or conduct. Similarly, an officer or director is not liable for any action taken as an officer or director if he acts in good faith, with the care an ordinarily prudent person in that position would exercise under similar circumstances and in a manner he reasonably believes to be in the best interests of the corporation. Under the doctrine of piercing the corporate veil, however, a corporation s shield of limited liability may be disregarded, and personal liability imposed, when the corporation is inadequately capitalized, used to perpetrate a fraud, or corporate formalities are not followed. General Partnerships Under Connecticut law, all partners of a general partnership are jointly and severally liable for all obligations of the partnership, unless otherwise agreed by the claimant or provided by law. Limited Partnerships In a limited partnership, general partners are personally liable for the debts of the partnership and the acts of other partners. Limited partners, however, are afforded limited liability in much the same manner as shareholders of a corporation. A limited partner is not liable for the obligations of the partnership beyond the amount of his or her capital contribution so long as the limited partner does not participate in the management or control of the partnership. Limited Liability Partnership A partner in a registered limited liability partnership is not liable directly or indirectly, including by way of indemnification, contribution or otherwise, for any debts, obligations and liabilities of, or chargeable to, the partnership or another partner or partners, whether arising in contract, tort or otherwise, arising in the course of the partnership business while the partnership is a registered limited liability partnership, except that the statutory limitation of liability does not affect the liability of a partner in a registered limited liability partnership for his own negligence, wrongful acts or misconduct, or that of any person under his direct supervision and control. Page 253

255 Limited Liability Companies A person who is a member or manager of a Connecticut limited liability company is not liable, solely by reason of being a member or manager, under a judgment, decree or order of a court, or in any other manner, for a debt, obligation or liability of the limited liability company, whether arising in contract, tort or otherwise or for the acts or omissions of any other member, manager, agent or employee of the limited liability company. However, any member, manager, agent or employee of a limited liability company rendering professional services is personally liable and accountable for the negligent or wrongful acts or misconduct committed by him, or by any person under his direct supervision and control, while rendering professional services on behalf of the limited liability company to the person for whom such professional services were being rendered. Moreover, under the piercing of the veil doctrine described above, a member of a limited liability company may be subject to personal liability under certain circumstances. Cooperative Associations Managers of a cooperative association are subject to the same limited liability as directors and officers of a corporation. Similarly, shareholders of a cooperative association are subject to the same limited liability as shareholders of a corporation. Statutory Trusts The beneficiaries of a statutory trust are entitled to the same limitation of personal liability extended to shareholders of a corporation. Trustees of a statutory trust, when acting in such capacity, are not personally liable to any person other than the statutory trust or a beneficiary for any act, omission, or obligation of the statutory trust. Officers, employees, and managers of a statutory trust, when acting in such capacity, have the same limited liability as the trustees. 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? Corporations The ownership interest in a corporation is represented by its outstanding shares. Individual shares are transferrable and there is no minimum number of owners. General Partnerships The only transferable interest of a partner in a Connecticut general partnership is the partner's share of the profits and losses of the partnership and the partner's right to receive distributions. The interest is personal property. A general partnership must consist of at least co-owners, or partners. Limited Partnership Except as provided in the partnership agreement, a partnership interest is assignable in whole or in part. An assignment of a partnership interest does not dissolve the limited partnership or entitle the assignee to become or to exercise any rights of a partner. An assignment entitles the assignee to receive, to the extent assigned, only the distribution to which the assignor would have been entitled. Except as provided in the partnership agreement, a partner ceases to be a partner upon assignment of all his partnership interest. The partnership agreement may provide that a partner's interest in a limited partnership may be evidenced by a certificate of partnership interest issued by the limited partnership and may also Page 254

256 provide for the assignment or transfer of any partnership interest represented by such a certificate and make other provisions with respect to such certificates. A limited partnership must have at least one general partner and one limited partner. Limited Liability Partnerships See General Partnerships above. Limited Liability Companies Except as provided in writing in an operating agreement: (i) A limited liability company membership interest is assignable in whole or in part; (ii) an assignment entitles the assignee to receive, to the extent assigned, only the distributions to which the assignor would be entitled; (iii) an assignment of a limited liability company membership interest does not dissolve the limited liability company or entitle the assignee to participate in the management and affairs of the limited liability company or to become or exercise any rights of a member; (iv) until the assignee of a limited liability company interest becomes a member, the assignor continues to be a member and to have the power to exercise any rights of a member, subject to the members' right to remove the assignor; (v) until an assignee of a limited liability company membership interest becomes a member, the assignee has no liability as a member solely as a result of the assignment; and (vi) the assignor of a limited liability company membership interest is not released from liability as a member solely as a result of the assignment. An operating agreement may provide that a member's limited liability company interest may be evidenced by a certificate of membership interest issued by the limited liability company and may also provide for the assignment or transfer of any membership interest represented by such a certificate and make other provisions with respect to such certificates. There is no minimum number of owners in a limited liability company; a limited liability company may be formed by a single member. Cooperative Associations A cooperative association consists of seven or more persons of lawful age agreeing, for the purpose of trade, to join together and form a corporation. The shareholders in a cooperative association are considered the owners. No person may become a shareholder without the consent of the association s managers. Statutory Trusts Except to the extent otherwise provided in the governing instrument of the statutory trust, a beneficial owner has an undivided beneficial interest in the property of the statutory trust and shares in the profits and losses of the trust. A beneficial owner s interest in a statutory trust is considered personal property. This interest is freely transferable except to the extent otherwise provided in the governing instrument. There is no minimum number of beneficial owners in a statutory trust. 7. Is there a minimum capitalization? Generally speaking, the Connecticut statutes do not impose any minimum capitalization requirements on any of the forms of business organization discussed in this survey, although the licensing and other requirements applicable to particular types of businesses (e.g., banks and insurance companies) may impose minimum capital requirements and inadequate capitalization may lead to the loss of the limitation of personal liability. Page 255

257 8. Is there a security that can be issued to the public? Corporations, limited partnerships, limited liability companies and statutory trusts all may issue securities to the public. 9. Can the form incur debt, or grant security for debt? Yes. Each form of business organization discussed in this survey can incur debt and grant security for its debts. 10. What is the duration of the form? Can it be renewed? Corporations A Connecticut corporation has a perpetual duration unless its certificate of incorporation provides otherwise. General Partnerships A Connecticut general partnership may be organized for a definite term or the completion of a particular undertaking, or may be a partnership at will. Generally speaking, a partnership that is organized for a definite term or the completion of a particular undertaking is dissolved, and its business must be wound up, upon the expiration of the term or the completion of the undertaking. A partnership at will generally continue in existence until it is dissolved upon the receipt of notice of a partner s express will to withdraw as a partner, or on a later date specified by the partner. Conn. Gen. Stat provides for a number of events that cause the dissolution of a general partnership. Limited Partnerships A Connecticut limited partnership is dissolved and its affairs must be wound up (i) at the time specified in the partnership agreement; (ii) upon the happening of events specified in the partnership agreement; (iii) with the written consent of all partners; (iv) upon an event of withdrawal of a general partner unless at the time there is at least one other general partner and the partnership agreement permits the business of the limited partnership to be carried on by the remaining general partner and that partner does so, but the limited partnership is not dissolved and is not required to be wound up by reason of any event of withdrawal, if, within ninety days after the withdrawal, all partners agree in writing to continue the business of the limited partnership and to the appointment of one or more additional general partners, if necessary or desired and (v) by judicial decree. Limited Liability Partnership See General Partnerships above. Limited Liability Companies A Connecticut limited liability company will exist perpetually unless otherwise specified in the articles of organization or its dissolution is voted upon and approved by at least a majority of the members or ordered by judicial decree of dissolution. Cooperative Associations A cooperative association may exist perpetually. Page 256

258 Statutory Trusts Except to the extent otherwise provided in the governing instrument, a Connecticut statutory trust has perpetual existence. A statutory trust may not be terminated or revoked by a beneficial owner or other person except in accordance with the terms of its governing instrument. 11. Describe the process, customary time period and approximate cost of establishing the form. Corporations A Connecticut corporation is formed when an incorporator executes and delivers a certificate of incorporation to the Office of the Secretary of the State. The submission of the certificate of incorporation must be accompanied by a filing fee of $100. At the time of formation, a corporation must also pay a franchise tax, the amount of which is determined by the number of shares it issues. The minimum franchise tax currently is fixed at $150. The corporate existence begins when the certificate of incorporation is filed with the Office of the Secretary of the State. After incorporation, if the initial directors are named in the certificate of incorporation, the initial directors shall hold an organizational meeting, at the call of a majority of the directors, to complete the organization of the corporation by appointing officers, adopting bylaws and carrying on any other business brought before the meeting. If the initial directors are not named in the certificate of incorporation, the incorporator or incorporators shall hold an organizational meeting at the call of a majority of the incorporators to elect directors and complete the organization of the corporation or to elect a board of directors who shall complete the organization of the corporation. An organization and first annual report must be filed with the Office of the Secretary of the State within thirty days after the date of the organizational meeting. The fee for the filing of the organization and first annual report currently is fixed at $150. General Partnerships A Connecticut general partnership is formed whenever two or more persons carry on as co-owners of a business for profit. A general partnership does not need to file a certificate with the Office of the Secretary of the State. Limited Partnerships To form a Connecticut limited partnership, all of the general partners must execute and file a certificate of limited partnership with the Office of the Secretary of the State. The certificate of limited partnership must set forth: (i) the name of the limited partnership and the address of the office in Connecticut where it maintains records; (ii) the name and address of the agent for service of process; (iii) the name and business address of each general partner; (iv) the latest date upon which the limited partnership is to dissolve; and (v) any other matters the partners desire to include. Each limited partnership must appoint and maintain a statutory agent for service of process in the State of Connecticut. The initial written appointment of the statutory agent for service of process must be included in the initial certificate of limited partnership. The filing fee for the initial certificate of limited partnership and appointment of statutory agent currently is fixed at $120. Limited Liability Partnerships To form a registered limited liability partnership in Connecticut, a partnership must file a certificate of limited liability partnership with the Office of the Secretary of the State. The certificate must state the name of the partnership, the address of its principal office, or if not located in Connecticut, the address of a registered office, and the name and address of a registered agent for service of process in Connecticut. The filing fee for the initial certificate of limited liability partnership currently is fixed at $ Page 257

259 Limited Liability Companies A limited liability company is formed by one or more organizers executing and filing articles of organization with the Office of the Secretary of the State. The filing fee for the articles of organization and initial appointment of a statutory agent for service of process currently is fixed at $120. Cooperative Associations A cooperative association is formed when seven or more persons associate together for the purposes of trade or business within Connecticut, and execute and file articles of association with the Office of the Secretary of the State. A cooperative association is subject to the same filing fee and franchise tax as corporations. Statutory Trusts Each statutory trust must file a certificate of trust with the Office of the Secretary of the State. In addition to filing a certificate of trust with the Secretary of the State, a statutory trust must appoint a statutory agent for service of process. The filing fee for the initial certificate of trust currently is fixed at $ Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? No. 13. For what taxes is the form liable? Except for insurance companies, the base tax for corporations other than real estate investment trusts, regulated investment companies, and financial institutions is the greater of the regular tax measured by Connecticut net income, the additional capital stock based tax, or the minimum tax of $250. The Connecticut corporation business tax is a franchise tax computed on the basis of net income as reported for federal tax purposes with certain adjustments and as apportioned to Connecticut under a statutory apportionment formula. Net income apportioned to Connecticut is taxed at the rate of 7.5%. Modifications to determine Connecticut net income include increasing federal corporate taxable income by state and local income tax paid or accrued in the income year and decreasing income for dividends received or accrued (as defined by the Internal Revenue Code); except that 30% of dividends received from a domestic corporation in which a taxpayer owns less than 20% of the shares, as measured by total voting power and value, are included in Connecticut net income. Applicable to income years beginning on or after January 1, 2009, a surtax of 10% of the tax on net income applies for income years beginning on or after January 1, 2009, and prior to January 1, The surtax does not apply to any company whose tax is equal to $250. Any company whose gross income is less than $100 million is exempt from this surtax unless it files as part of a Connecticut combined corporation business tax return or as part of a Connecticut unitary return. The surtax is calculated without regard to any credit that may be applied against the corporation business tax. An additional capital stock based tax calculated on the average value of capital stock, surplus and undivided profits at 3.1 mills per dollar of capital holdings can apply if, and to the extent that, the amount calculated exceeds the regular tax computed on the basis of Connecticut net income. Corporations subject to Connecticut tax pay a minimum tax of $250 per year. Applicable to income years beginning on or after January 1, 2009, a surtax of 10% of the tax on capital applies for income years beginning on or after January 1, 2009, and prior to January 1, The surtax does not apply to any company whose tax is equal to $250. A company whose gross Page 258

260 income is less than $100 million is exempt from this surtax unless it files as part of a Connecticut combined corporation business tax return or as part of a Connecticut unitary return. The surtax is calculated without regard to any credit that may be applied against the corporation business tax. For taxpayers engaged in business both within and without Connecticut, the capital stock base is apportioned under a two-factor formula consisting of tangible property and intangible assets to determine the portion attributable to Connecticut. For taxpayers engaged in business both within and without Connecticut, net income is generally apportioned based on gross receipts in Connecticut as a percentage of total gross receipts. However, a three factor formula is applied to businesses engaged in the manufacture, sale, or use of tangible personal or real property, the three factors being property, payroll and receipts, with receipts double weighted. Generally, for income years commencing after 2000, manufacturers are allowed to use the single gross receipts factor formula. Specific statutory apportionment provisions apply to motor bus companies, air carriers, and domestic life insurance companies. Estimated corporate income tax payments are due on the 15th day of the third, sixth, ninth and twelfth months and must in the aggregate equal the lesser of (a) 90% of the tax determined to be due for the income year, or (b) if the preceding year was an income year of 12 months and the corporation filed a return with a liability for tax for such year, 100% of the tax shown on the return for the preceding income year without regard to any credits. For tax years beginning in 2001, Subchapter S corporations are not taxable in Connecticut under the Connecticut corporation business tax. Furthermore there is no provision of Connecticut law that specifically indicates that a state entity-level tax is imposed if an S corporation has a federal entitylevel tax (due to net recognized built-in gains, excessive net passive investment income, or LIFO recapture). Prior to 2001, the percentage of net income subject to tax was reduced over a four-year period beginning in However, beginning on January 1, 2004, Subchapter S corporations are required to file a composite tax return and make a composite Connecticut income tax payment on behalf of each nonresident shareholder where the shareholder s pro rata share of the income derived from or connected with Connecticut sources is $1,000 or more. An S corporation shareholder is liable for the Connecticut personal income tax, in his or her individual capacity, on the shareholder s respective share of S corporation income, whether or not such share is actually distributed to the shareholder. Similar to Subchapter S corporations, beginning on January 1, 2004, partnerships, limited liability companies that have multi-members and are characterized as partnerships for federal income tax purposes, and other pass-through entities (hereinafter collectively referred to as pass-through entities ) are generally required to file a composite tax return and make a composite Connecticut tax payment on behalf of each nonresident, non-corporate partner or member where the partner or member s pro rata share of the entity s income connected with Connecticut sources is $1,000 or more. Similar to Subchapter S corporations, a partner or member of a pass-through entity is liable for the Connecticut personal income tax or Connecticut corporation business tax, as applicable, in his or her or its individual or corporate capacity, on the partner or member s respective share of the passthrough entity s income, whether or not such share is actually distributed to the partner or member. A limited liability company that is disregarded as an entity separate from its owner for federal income tax purposes is similarly disregarded as an entity for Connecticut income tax purposes. For taxable years beginning on or after January 2, 2002, there is an annual tax of $250 on each S corporation, limited liability partnership, limited partnership, and limited liability company that is, for federal income tax purposes, either treated as a partnership if it has two or more members, or disregarded as an entity separate from its owner if it has a single member. For tax year 2003, such entities were required to pay an additional surcharge equal to 20% of the business entity tax for a total 2003 business entity tax of $300. This surcharge was removed for taxable years beginning on or after January 1, 2004 and the annual tax is $ Page 259

261 All of these entities also pay various other taxes, such as on employee wages, property tax and sales and use taxes. 14. What is the tax treatment of payments to foreign owners? Foreign owners of a C corporation are liable for the Connecticut personal income tax or Connecticut corporation business tax, as applicable, on dividends received from a C corporation where such dividends are derived from Connecticut sources and are includible in income for federal income tax purposes. However, if the dividend recipient is a C corporation, Connecticut allows the dividends received deduction claimed on the federal tax return, but only 70% of the dividends received is allowed as a subtraction from federal income to determine Connecticut income when the recipient corporation owns less than 20% of the total voting power and value of the stock of the dividend payer. The payer of the dividend is not required to withhold the Connecticut tax on the dividends. Foreign owners of an S corporation, limited liability partnership, limited partnership, and limited liability company that is, for federal income tax purposes, either treated as a partnership if it has two or more members, or disregarded as an entity separate from its owner if it has a single member, are liable for the Connecticut personal income tax or Connecticut corporation business tax, as applicable, in his or her or its individual or corporate capacity, on their respective shares of the entity s Connecticut income, whether or not such shares are actually distributed to the owners. 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? S corporations, partnerships, limited liability companies that have multiple members and are characterized as partnerships for federal income tax purposes, and other pass-through entities are generally required to file a composite tax return and make a composite Connecticut tax payment on behalf of each nonresident, non-corporate shareholder, partner or member where the shareholder, partner or member s pro rata share of the entity s income connected with Connecticut sources is $1,000 or more. Contact Information Richard S. Smith Jr. RSmith@murthalaw.com Edward B. Whittemore EWhittemore@murthalaw.com Kenneth L. Levine KLevine@murthalaw.com Murtha Cullina LLP CityPlace I, 29th Floor 185 Asylum Street Hartford, Connecticut Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 260

262 Issues Relating to Organizational Forms and Taxation USA, Georgia Prepared by Lex Mundi member firm Alston & Bird LLP 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. For-profit Corporation (FP Corp). Advantages. Shareholders (owners) can avoid personal liability for the debts and liabilities of the corporation, and the entity may have perpetual existence. Disadvantage. Profits are taxable to the corporation and may also be taxable to the shareholders when distributed (so-called double taxation ). Non-For-Profit Corporation (NFP Corp). Advantages. Directors and officers are rarely personally responsible for the NFP Corp s debts and liabilities. Disadvantage. Available only for non-profit ventures. Limited Liability Company (LLC). Advantages. Members (owners) can avoid personal liability for the debts and liabilities of the LLC, and the entity may have perpetual existence. Also, the LLC does not pay tax on its profits. Tax obligations are passed through to the members. General Partnership (GP). Advantages. A partnership is simple to form and it avoids double taxation. Disadvantage. Partners may be held personally liable for the debts and obligations of the partnership. Limited Partnership (LP). Advantages. Avoids double taxation, like a partnership. However, it also has two classes of partners, general and limited. The general partners may be held liable for the debts and liabilities of the partnership, while the limited partners may not. A limited partnership may elect to be a limited liability partnership, which would provide limited liability for the general partners. Disadvantages. General partners have unlimited liability. Note. There are also professional corporations and professional associations available for persons who practice certain specified professions. In such entities, the shareholders and/or controlling persons are all licensed to practice the same profession, and the entity provides services only in such specified profession. These professions may include accounting, architecture, chiropractic, dentistry, professional engineering, land surveying, law, pharmacy, psychology, medicine and surgery, optometry, osteopathy, podiatry, veterinary medicine, registered professional nursing or harbor piloting. It is also possible to form a cooperative. These are formed for the purpose of providing some kind of benefit to the members, rather than a return on investment. This form is often used by a collective of producers, such as farmers. The entities most likely of interest to foreign investors are FP Corps and LLCs. 2. Are there attributes of the form that you consider unique to your jurisdiction? No, there are no attributes of an FP Corp, NFP Corp, LLC, GP or LP that are unique to Georgia. Page 261

263 3. Describe the management and governance structure for each organizational form. FP Corp. Owned by shareholders. Managed by a board of directors that is elected by the shareholders, and by officers who are appointed by the board. A corporation must have articles of incorporation (filed with the Georgia Secretary of State s office) and bylaws, both of which documents must contain certain provisions required by Georgia law. These governing documents provide for governance matters such as how and when directors will be elected, which officers the corporation will be required or permitted to have, and when and how meetings of shareholders and directors will be held. NFP Corp. Has no shareholders. May have members, but is not required to do so. Managed by a board of directors that is elected either by the members or by the existing board, and by officers appointed by the board. LLC. Owned by members. Managed either by its members or by managers who are appointed by the members. An LLC must have articles of organization that are filed with the Georgia Secretary of State s office. Typically, the members will also execute an operating agreement that defines the rights, duties and liabilities of the members, and managers if applicable. Georgia law does not require an operating agreement. In the absence of such an agreement, or if an agreement is silent about a particular matter, the Georgia LLC code will apply. GP. No formal organizational document, filing or agreement is required. Each partner has a right to participate in management, as well as a right to share in the profits of the partnership. LP. Must file a certificate of limited partnership with the Georgia Secretary of State s office, which will identify the general partners. Governance is generally pursuant to a limited partnership agreement, which identifies the limited partners and specifies respective rights and duties. 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? There are no residency requirements, however there are requirements regarding engagement in certain professions, as outlined in question Describe the extent to which management and owners are exposed to liability. FP Corp. No personal liability for the debts and liabilities of the corporation. NFP Corp. No personal liability for the debts and liabilities of the corporation. LLC. No personal liability for the debts and liabilities of the LLC. GP. Partners may have personal liability for the debts and obligations of the partnership. LP. General partners may be personally liable for the debts and liabilities of the partnership, while the limited partners may not. 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? FP Corp. (i) Ownership represented by shares of stock; (ii) stock is transferable, subject to any agreement to the contrary among the shareholders; (iii) no minimum number of shares or shareholders. Page 262

264 NFP Corp. There is no ownership; control is vested in members or board of directors. LLC. (i) Ownership represented by membership interests; (ii) membership interests are transferable, subject to any agreement to the contrary among the members; (iii) no minimum number of members. GP. (i) Ownership represented by partnership interests; (ii) partnership interests are not transferable without consent of other partners; (iii) there must be at least two partners. LP. (i) Limited partners have limited partnership interests; (ii) limited partnership interests are transferable if the limited partnership agreement permits it or the other partners consent; (iii) there must be at least one general partner and one limited partner. 7. Is there a minimum capitalization? There is no minimum capital required to form a FP Corp, NFP Corp, LLC, GP or LP. 8. Is there a security that can be issued to the public? FP Corp. Securities can be issued. NFP Corp. Securities generally cannot be issued. LLC. Securities can be issued. GP. Securities generally cannot be issued. LP. Securities can be issued. 9. Can the form incur debt, or grant security for debt? Yes, under Georgia corporate law, a FP Corp, NFP Corp, LLC, GP and LP may lawfully incur debt and grant security for debt. 10. What is the duration of the form? Can it be renewed? FP Corp. As stated in articles of incorporation; may be perpetual. NFP Corp. As stated in articles of incorporation; may be perpetual. LLC. The members may specify a term in the articles of organization or an operating agreement, and that term may be perpetual. Absent a statement to the contrary, the LLC will dissolve 90 days after an event of dissociation with respect to the last remaining member. GP. Death or withdrawal of any partner dissolves the general partnership. LP. Upon the occurrence of events specified in the limited partnership agreement. 11. Describe the process, customary time period and approximate cost of establishing the form. FP Corp. Articles of incorporation must be filed with the Georgia Secretary of State, which can be done on a same-day basis. The filing fee is set by statute and is currently $100. In addition, the corporation must publish a notice of the filing of articles in a newspaper that is the official organ of the county where the initial registered office of the corporation is to be located or that is a newspaper of general circulation within such county meeting certain statutory criteria. The cost of such publication is set by statute and is currently $40. The corporation must have an initial board of directors, adopt Page 263

265 bylaws, appoint a registered agent within the state of Georgia, and appoint the officers required by the bylaws. NFP Corp. Articles of incorporation must be filed with the Georgia Secretary of State, which can be done on a same-day basis. The filing fee is set by statute and is currently $100. In addition, the corporation must publish a notice of the filing of articles in a newspaper that is the official organ of the county where the initial registered office of the corporation is to be located or that is a newspaper of general circulation within such county meeting certain statutory criteria. The cost of such publication is set by statute and is currently $40. The corporation must have an initial board of directors, adopt bylaws, appoint a registered agent within the state of Georgia, and appoint the officers required by the bylaws. LLC. Articles of organization must be filed with the Georgia Secretary of State, which can be done on a same-day basis. The filing fee is set by statute and is currently $100. Also, the LLC must appoint a registered agent within the state of Georgia. GP. No state filing or organizational meeting of the partners is required to form a general partnership in Georgia. LP. A certificate of limited partnership must be filed with the Georgia Secretary of State, which can be done on a same-day basis. The filing fee is set by statute and is currently $100. Also, the limited partnership must appoint a registered agent within the state of Georgia. 12. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? No. 13. For what taxes is the form liable? NOTE RESPONSE WILL BE SENT BY SEPARATE . THERE IS A PROBLEM WITH THIS BOX ON THE FORM. 14. What is the tax treatment of payments to foreign owners? FP Corp. Federal Income Tax All foreign persons are subject to tax at 30% on dividends paid by a US corporation to foreign shareholders unless tax treaties reduce or eliminate US tax on foreign income. Dividends paid to US shareholders are also subject to further US tax. An S- corporation is not available for foreign owners. GA Taxation: Dividends, interest, or royalties received by a foreign corporate shareholder may be taxed by Georgia if the foreign corporate shareholder is subject to Georgia corporate income tax (see answer to question 13). The foreign corporate shareholder may be entitled to a deduction for dividends received on its Georgia corporate income tax return. LLC, GP, LP. Federal Income Tax Generally, no tax on distribution to foreign partners ( pass-through taxation ). Advance withholding taxes apply on income earned by foreign partners. If an LLC is taxed as a corporation, FP Corp. rules apply. GA Taxation: Georgia also requires withholding by entities treated as a pass-through entity (e.g., S-corporations, partnerships, and LLCs classified as partnerships for federal income tax purposes) on distributions to non-resident members and/or partners, as well as on payments to non-resident owners in connection with the sale by the non-resident of real property located in Georgia. Page 264

266 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? Generally, there is no difference between the tax treatment of foreign and domestic owners, as the Commerce Clause and Equal Protection Clause of the U.S. Constitution prohibit states from discriminating against out-of-state taxpayers. Contact Information Jeffrey C. Glickman jeff.glickman@alston.com Edward Tanenbaum edward.tanenbaum@alston.com Susan J. Wilson susan.wilson@alston.com Alston & Bird LLP One Atlantic Center 1201 West Peachtree Street Atlanta, Georgia Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 265

267 Issues Relating to Organizational Forms and Taxation USA, Idaho Prepared by Lex Mundi member firm Hawley Troxell 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. Business Corporation Advantages: perpetuity; limited liability; transferable shares; separation of ownership and management; and well-established law governing its operation. Disadvantage: potentially subject to double taxation. Note: this category may also include professional service corporations, which operate largely as business corporations, but owners and managers must be licensed members of a specified list of regulated professions, such as architecture, medicine, or law. Limited Liability Company ( LLC ) Advantages: flexibility that allows them to combine nearly all the advantages of corporations and partnerships, without the disadvantages. Disadvantages: flexibility entails greater time and cost in formation; form is relatively new, so there is uncertainty about how it will be treated by courts. General Partnership Advantages: income is passed through to partners and taxed at partner level; easily formed without any state filing. Disadvantages: all partners are liable personally for partnership liabilities; without a well-drafted partnership agreement, partnerships may be susceptible to internal disputes, and a single partner may cause dissolution. Limited Partnership Advantages: income is passed through to partners and taxed at partner level; limited partner(s) have complete limited liability, but often do not participate in decision-making and management. Disadvantages: the general partner(s), who generally manages the entity, is personally liable for partnership obligations. Note on Partnerships: By filing a certificate with the Secretary of State, either a general or limited partnership may elect limited liability status, whereby partners are free from liability for acts and obligations of the partnership. Nonprofit Corporation Advantage: exempt from most income taxation. Page 266

268 Disadvantages: limited to statutorily-defined purposes such as charitable, educational or religious activities; do not issue capital stock and private individuals cannot benefit financially from their activities, with the exception of reasonable salary for employees. Cooperative Marketing Association Advantages: functions as a hybrid of a nonprofit and business corporation and are generally exempt from income taxation. Profits of the cooperative are generally returned to the members. Disadvantages: ownership/membership is limited to those who consume the organization s goods or services, i.e. agricultural producers; must follow statutory governance structure. Business corporations and LLCs are by far the most commonly used forms. Partnerships may also be of interest to foreign investors in particular circumstances. Because cooperative marketing associations and nonprofit corporations are likely of little use to foreign investors, they will mostly be ignored in the remaining answers. For more information on Idaho nonprofit corporations, see Idaho Code et seq.; for cooperative marketing associations, see Idaho Code et seq., B(2). 2. Are there attributes of the form that you consider unique to your jurisdiction? For the most part, there are no notable attributes of these forms unique to Idaho. The statutes creating and/or regulating these forms are based almost entirely on uniform legislation which has been adopted in many states. Business corporations are based on the Revised Model Business Corporation Act, LLCs on the Revised Uniform Limited Liability Company Act, and partnerships on the Revised Uniform Partnership Act and the Uniform Limited Partnership Act. 3. Describe the management and governance structure for each organizational form. Business Corporation The corporation s shareholders elect a board of directors. All corporate powers are exercised by or under the authority of the board, which manages and directs the business and affairs of the corporation. Idaho Code The articles of incorporation and the bylaws govern internal management of the corporation, and the bylaws may provide for the election or appointment of officers to which the board may delegate certain responsibilities. Idaho Code The board of directors must be elected by the shareholders, who may by agreement eliminate the board or restrict its powers. Idaho Code The articles of incorporation must set forth the number and classes of shares, and the voting rights of those shares. Idaho Code Once the corporation is formed, the articles of incorporation may generally only be amended with shareholder approval. Idaho Code LLC In general, an LLC is governed by an operating agreement, which the members have great flexibility in drafting, subject to some mandatory statutory provisions and limitations. In the absence of an operating agreement, statutory provisions will apply. An LLC is member-managed unless the operating agreement provides that it will be manager-managed. Idaho Code (1). If member-managed, each member has equal rights in the management of the LLC. Idaho Code (2). Unless the operating agreement states otherwise, matters in the ordinary course of business may be decided by a majority of members, but acts outside the ordinary course, such as amendments to the operating agreement, require the consent of all members. Idaho Code (2). In a manager-managed LLC, any matter relating to the activities of the company is decided exclusively by the managers. Idaho Code (3). Unless the operating agreement states otherwise, a manager is chosen by a majority of the members, and need not be a member. Matters in Page 267

269 the ordinary course of business may be decided by a majority of the managers. Idaho Code (3). Matters outside the ordinary course must be approved by all members. Idaho Code (3). General Partnership Management of a partnership may be governed by a partnership agreement, but is otherwise subject to the Idaho Uniform Partnership Act. Idaho Code et. seq. Matters in the ordinary course may be decided by a majority of partners, and all partners must consent to actions outside the ordinary course. Idaho Code Limited Partnership A limited partner cannot act for or bind the limited partnership. Idaho Code Any matter concerning the partnership s activities may be decided exclusively by the general partner, or by a majority of the general partners if there is more than one. Idaho Code However, all partners must consent to certain acts outside the ordinary course of business, such as amendments to the partnership agreement. Idaho Code Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? Business Corporation No. The articles of incorporation or bylaws may prescribe qualifications for directors. A director need not be a resident of this state or a shareholder of the corporation unless the articles of incorporation or bylaws so prescribe. Idaho Code However, in a professional service corporation, generally only a person licensed by the state to perform the particular profession may be a shareholder, director, or officer. Idaho Code LLC No. Partnership No. Note: In Cooperative Marketing Associations, only agricultural producers whose products will be handled by the association may be owners/members. Idaho Code Describe the extent to which management and owners are exposed to liability. Business Corporation Shareholders are not personally liable for the acts or debts of the corporation. Idaho Code The articles of incorporation may limit or eliminate liability of directors for money damages, except for improper receipt of financial benefit, intentional infliction of harm or violation of criminal law, and authorizing unlawful distributions. Idaho Code The articles may also permit or mandate indemnification of directors and officers for actions taken as a director or officer, with the same exceptions as listed above. Idaho Code LLC LLCs provide complete limited liability. The LLC may indemnify members and managers for any debt, obligation, or liability incurred in the course of activities on behalf of the company, as long as the member or manager has not violated their fiduciary duties, or made a distribution leaving the company insolvent. Idaho Code (1). Page 268

270 Transactions in which a member or manager has a conflict of interest do not violate the duty of loyalty if the transaction is fair to the company, or if all members or managers approve or ratify the transaction after full disclosure. Idaho Code To fulfill the duty of care, the members and managers merely need to act in good faith and be reasonably informed. Idaho Code As long as it is not manifestly unreasonable, the operating agreement may substantially narrow the fiduciary duties of managers or members set forth in the statute, including limiting violations of the duty of care to intentional misconduct or knowing violations of law. Idaho Code General Partnership Generally, all partners are liable jointly and severally for all obligations of the partnership. Idaho Code Partners are not liable for partnership obligations if the partnership has filed for limited liability status. Idaho Code However, limited liability does not affect the liability of a partner in a limited liability partnership for his own omissions, negligence, wrongful acts, misconduct or malpractice or that of any person under his direct supervision and control. Idaho Code Partners also owe fiduciary duties to one another, which duties can be limited in the partnership agreement. Idaho Code Limited Partnership A limited partner is not liable for partnership obligations even if the limited partner participates in management and control. Idaho Code A limited partner does not have any fiduciary duty to the partnership or any partner solely by reason of being a limited partner. Idaho Code Generally, general partners are liable jointly and severally for all obligations of the limited partnership. Idaho Code However, if the limited partnership has filed for limited liability status, then any partnership obligation is solely the obligation of the limited partnership. A general partner is not personally liable. Idaho Code Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? Business Corporation Ownership is represented by shares of stock. The articles of incorporation must set forth the classes of shares, e.g. common, preferred, convertible, etc., and series of shares within a class. Idaho Code At least one class or series must have unlimited voting rights, and at least one class, which may be the same class, must be entitled to receive the corporation s net assets upon dissolution. Idaho Code The basic rule is that shares are fully transferable, unless the articles, bylaws, or a shareholder agreement restrict transferability. Idaho Code The minimum number of owners is one. Idaho Code LLC Ownership is represented by a membership interest in the LLC. The consent of all the members is required to admit a new member, although the operating agreement can alter this requirement. Idaho Code The basic rule is that membership interest are not transferable, but a transferable interest may be transferred. A transferable interest gives the transferee the right to receive the distributions to which the transferor would otherwise be entitled, but does not permit the transferee to participate in the Page 269

271 management or conduct of the company s activities. Idaho Code Thus, the economic rights to receive distributions are separated from governance rights. However, the statute does not prohibit transferring governance rights from one existing member to another. See Official Comment to Idaho Code Further, the operating agreement may be drafted to allow for a member to transfer governance rights without the consent of the other members. Official Comment to Idaho Code The minimum number of owners is one. Idaho Code General Partnership Ownership is represented by partnership interests. A new partner may be admitted only with the consent of all the partners. Idaho Code The only transferable interest of a partner in the partnership is the partner's share of the profits and losses of the partnership and the partner's right to receive distributions. Idaho Code A partnership must have a minimum of two partners. Idaho Code Limited Partnership A limited partnership is the same as a general partnership for purposes of ownership, transferability, and minimum number of owners. However, the partnership agreement may be drafted such that limited partners may transfer their full partnership interest and not merely the right to receive distributions and profits. Idaho Code Is there a minimum capitalization? Business Corporation There is no minimum capitalization required to form a business corporation. However, once formed, the corporation may not make distributions to shareholders that would leave the corporation insolvent, meaning the corporation would be unable to pay its debts or that its assets would be less than its liabilities. Idaho Code (3). Liabilities include liquidation preferences unless the articles of incorporation provide otherwise. Idaho Code (3). In addition, the common law provides that if a business corporation does not have sufficient resources to pay reasonable liability claims, a court may ignore the corporate form and impose personal liabilities on the shareholders. LLC There is no minimum capitalization required to form an LLC. However, once formed, the LLC may not make distributions that would leave the company insolvent, meaning the LLC would be unable to pay its debts or that its assets would be less than its liabilities. Idaho Code (1). Liabilities include liquidation preferences. Idaho Code (1). General Partnership No. Limited Partnership There is no minimum capitalization required to form a limited partnership. However, once formed, the limited partnership may not make distributions that would leave it insolvent, meaning the limited partnership would be unable to pay its debts or that its assets would be less than its liabilities. Idaho Code Liabilities include preferential rights upon dissolution. Idaho Code Is there a security that can be issued to the public? Business Corporation Yes. Subject to applicable state and federal securities laws, the board of directors may authorize the corporation to issue shares of stock to the public. Idaho Code LLC Page 270

272 Yes. Subject to applicable state and federal securities laws, the LLC may issue interests to the public. The rights and nature of such interests will be determined by the operating agreement. General Partnership Yes. Although generally an interest in a general partnership is not considered a security, such an interest may be a security if the holder has little or no power to manage the partnership. The Idaho Uniform Partnership Act allows sufficient flexibility to draft the partnership agreement such that securities may be issued. Idaho Code However, it would be unwise to invest in a general partnership security as this could entail personal liability for the security holder. Limited Partnership Yes. Subject to applicable state and federal securities laws, the limited partnership may issue limited partnership interests to the public as securities. 9. Can the form incur debt, or grant security for debt? Business Corporation Yes. A business corporation has the power to make contracts and guarantees, incur liabilities, borrow money, issue its notes, bonds, and other obligations, which may be convertible into or include the option to purchase other securities of the corporation, and secure any of its obligations by mortgage or pledge of any of its property, franchises or income. Idaho Code (7). LLC Yes. An LLC has broad authority to do all things necessary or convenient to carry on its activities. Idaho Code General Partnership Yes. As partners are personally liable for partnership liabilities, they may borrow and grant security just as an individual would. Limited Partnership Yes. A limited partnership has the powers to do all things necessary or convenient to carry on its activities Idaho Code What is the duration of the form? Can it be renewed? Business Corporation Unless its articles of incorporation provide otherwise, every corporation has perpetual duration and succession in its corporate name. Idaho Code LLC A limited liability company has perpetual duration. Idaho Code (3). General Partnership The duration of a general partnership is unlimited, although without a well-drafted partnership agreement the form can be unstable and subject to dissolution with the death or other exit of a partner. Limited Partnership A limited partnership has a perpetual duration. Idaho Code (3). 11. Describe the process, customary time period and approximate cost of establishing the form. Business Corporation The incorporator files articles of incorporation with the secretary of state. Idaho Code There is a $100 filing fee. The articles must set forth the corporation s name, the number of shares it Page 271

273 is authorized to issue, its registered agent, and the name(s) and address(es) of the incorporator(s). Idaho Code After incorporation, the incorporator(s) must elect a board of directors, unless the initial board was named in the articles. Idaho Code The board then appoints officers and adopts bylaws. Idaho Code The cost in 2010 of basic incorporation documents is approximately $600, plus the $100 filing fee. LLC The organizer files a certificate of organization with the secretary of state. Idaho Code There is a $100 filing fee. The certificate must state the LLC s name, designated office, registered agent, and the name and address of at least one member or manager. Idaho Code An operating agreement should be drafted and signed, especially if there are multiple members. Given the flexibility of the LLC form, drafting the operating agreement may involve significant time and expense. In addition to the $100 filing fee, the approximate cost of forming an LLC in 2010 is $2,000, due to the need to draft an operating agreement. General Partnership [T]he association of two (2) or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership. Idaho Code Formation is thus fast and easy, but it is advisable to draft a partnership agreement, which will involve varying amounts of time and expense. The partnership may become a limited liability partnership if such action is approved by the number of partners necessary to amend the partnership agreement. Idaho Code The partnership then files a statement of qualification with the secretary of state. Idaho Code There is a $100 filing fee. Idaho Code In addition to the $100 filing fee, the approximate cost of forming a general partnership in 2010 is $2,000, due to the need to draft an operating agreement. Limited Partnership A certificate of limited partnership must be filed with the secretary of state. Idaho Code There is a $100 filing fee. The certificate must state the name of the limited partnership, its registered agent, the name and address of each general partner, and whether the limited partnership is a limited liability limited partnership. Idaho Code The certificate may also be amended subsequently to make the partnership a limited liability limited partnership. Idaho Code A partnership agreement should also be drafted and signed. In addition to the $100 filing fee, the approximate cost of forming a limited partnership in 2010 is $2,000, due to the need to draft an operating agreement. 12. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? Business Corporation - No. LLC - No. Page 272

274 General Partnership - No. Limited Partnership - No. 13. For what taxes is the form liable? Preliminary Notes: Besides income taxes outlined below, all entities in Idaho are subject to: (i) a 6% retail sales tax; and (ii) property tax at a rate varying from year to year and county to county. Any entity with employees is also liable for federal and state payroll taxes. Tax rates provided are for Idaho matches its income tax code as closely as possible to the Internal Revenue Code of 1986 as amended ( IRC ), so that Idaho defines and measures income, capital gains and losses, and most other concepts in the same manner as the federal government. Idaho Code Gain or loss from sale of ownership interests in an entity will generally result in a capital gain or loss. 26 U.S.C If the interest is held for more than one year, the capital gain is considered longterm under the IRC, and is subject to a preferential tax rate for federal income taxes. 26 U.S.C However, in Idaho, the gain will be taxed as ordinary income. Idaho allows significant deductions for capital gains from sales of qualifying property, but ownership interests in an entity are not qualifying property. Idaho Code H. Business Corporation Entity Federal corporate income tax: In 2010, taxable income is taxed at increasing marginal rates, from 15-35%. Idaho corporate income tax: In 2010, taxable income is taxed at a 7.6% flat rate, but all corporations must pay a minimum of $20. Idaho Code Individual Owners Federal income tax: Dividends paid to shareholders are taxed as income, although the corporation has already paid corporate income tax on the profits distributed as dividends. In 2010, qualified dividends meeting IRS guidelines are taxed as capital gains (0-15%) and ordinary dividends as ordinary income (10-35%). Idaho income tax: In 2010, dividends are taxed as ordinary income from %. Idaho Code , Note: The above information applies to a C Corporation. In an S Corporation, all income passes through to the owners and is taxed as individual income, but the corporation is subject to certain IRS restrictions. The S Corporation/C Corporation distinction is a federal income tax concept and not unique to Idaho. LLC Entity If an LLC elects to be taxed as a partnership, then no income is taxed to the LLC. Page 273

275 Individual Owners If an LLC elects to be taxed as a partnership, all LLC income thus passes through and is taxed to members at their individual income tax rates, which in 2010 are state ( %) and federal (10-35%). General Partnership Entity No income taxed to partnership. Individual Owners All partnership income passes through and is taxed to the partners at their individual income tax rates, which in 2010 are state ( %) and federal (10-35%). Limited Partnership Entity No income taxed to partnership. Individual Owners All partnership income passes through and is taxed to the members at their individual income tax rates, which in 2010 are state ( %) and federal (10-35%). 14. What is the tax treatment of payments to foreign owners? Federal tax treatment of payments to foreign owners is governed by federal law, and is not unique to Idaho. Foreign owners are liable for income derived from or related to sources within Idaho. Idaho Code A. This includes income attributable to or resulting from [a]ny business, trade, profession or occupation conducted or carried on in this state, including the distributive share of partnership income and deductions, and the pro rata share of S corporation income and deductions. Idaho Code A. As noted, an LLC may, and usually does, elect to be treated as a partnership for taxation purposes. Idaho Code A. 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? See answer to question 14. Foreign owners are only taxed in Idaho on income derived from or related to sources within Idaho. Idaho Code A. However, [t]his is to be computed without the deductions for either the standard deduction or itemized deductions or personal exemptions except as provided in subsection (4) of this section. Idaho Code A. Page 274

276 Subsection (4) provides that a portion of the standard deduction and personal exemptions may be deducted, based on the proportion of the foreign owner s income which is Idaho income. Idaho Code A(4). Contact Information Thomas Chandler tchandler@hawleytroxell.com Hawley Troxell 877 Main Street Suite 1000 Boise, Idaho Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 275

277 Issues Relating to Organizational Forms and Taxation USA, Indiana Prepared by Lex Mundi member firm Faegre Baker Daniels LLP 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. Corporations. Advantage is that it is the most understand form of entity as it has been around the longest. Biggest disadvantage is that there is double taxation if you don't qualify as an "S" corporation and make that election. S corporations are generally limited to being owned only by individuals. Limited liability companies (LLCs). These give you pass through tax treatment, but also limited liability. They have only been around since the 1990's. They are probably the most widely used entity now, other than for companies looking to go public or receive venture capital or private equity funding. Limited partnerships are not used nearly as much anymore, except with mutual funds and similar investment vehicles. They have one or more general partners who have unlimited liability (including personal liability if an individual), and limited partners who do not have any liability beyond their investment. Limited liability partnerships (LLPs) are similar to LLCs. Often general partnerships convert to this form to receive the limited liability protection. There are also a few other specialty-type entities (such as professional corporations and non-profit corporations). 2. Are there attributes of the form that you consider unique to your jurisdiction? No 3. Describe the management and governance structure for each organizational form. Corporations are governed by the board of directors, who appoints the officers. The board is elected by the shareholders. LLCs can be governed by either the members (the owners) or one or more managers. Often more sophisticated LLCs have a board of managers. Limited partnerships are governed by the general partner. LLPs typically have a managing partner. Page 276

278 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? No 5. Describe the extent to which management and owners are exposed to liability. Per above, general partners who are individuals can have personal liability in limited partnerships. But typically individuals form LLCs or other entities to be the general partner, which takes away this possibility of personal liability. With the other types of entities, as long as you follow the company or corporate formalities (such as not commingling personal and company assets, keeping books and records in order, etc), there is no personal liability. So the exposure of the owners is limited to the amount of their investment. 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? Corporations have shareholders who own stock. The stock is transferable, although often there is a shareholders agreement that restrict transfers. LLCs have members who own either units or membership interests. The statutes in Indiana are not clear on that. Most people in Indiana typically call them units. Like corporations, units are transferable, but transfers are often restricted in the Operating Agreement (the agreement among members). LLPs have similar structures. Limited partnerships have general partner units and limited partner units. Like corporations, these units are transferable, but transfers are often restricted in the partnership agreement among the partners. None of these types of entities has a minimum number of owners. 7. Is there a minimum capitalization? No, although being undercapitalized is one thing that could lead to a claim that the entity has not followed its corporate or company formalities, which then could lead to personal liability of the owners. 8. Is there a security that can be issued to the public? Yes, with corporations. They can issue their stock to the public markets. 9. Can the form incur debt, or grant security for debt? Yes, all of these forms can. 10. What is the duration of the form? Can it be renewed? When LLCs were first created, people often had them last only 30 years. They can be renewed. Now most people have them last perpetually, the same as the other forms. 11. Describe the process, customary time period and approximate cost of establishing the form. Counsel conducts interviews with the client or potential client to determine the various things they want to accomplish and then counsel (often times working with accountants) helps the client choose Page 277

279 the appropriate form. You often then make determinations about how and whether ownership interests can be transferred, what happens if an owner dies or becomes disabled, what happens if one of the owners wants to sell, etc. The timeline and the cost depend a lot on how complicated the entity will be. For example, a single owner LLC can be created within a few hours for a cost as little as $500-$750. Most entities are much more complicated. I would guess that the average entity takes 2-3 weeks to set up at a cost of $2,000 to $5,000. Many entities are much more complicated and take much longer. 12. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? No. The only requirement is to file a document with the Indiana Secretary of State stating that you are forming an entity and paying the filing fee (currently $90). 13. For what taxes is the form liable? Corporations pay corporate taxes. The other entities described above are "pass through" entities where the taxes are paid by the individual owners. All of these entities also pay various other taxes, such as on employee wages. 14. What is the tax treatment of payments to foreign owners? There are no special taxes for this in Indiana. There may be federal taxes for this. This would be no different than any other states in the USA. 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? Not from an Indiana perspective. Again, there may be issues at the federal level, but these are not unique to Indiana. Contact Information David Barrett david.barrett@bakerd.com Faegre Baker Daniels LLP 300 North Meridian Street, Suite 2700 Indianapolis, Indiana Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 278

280 Issues Relating to Organizational Forms and Taxation USA, Michigan Prepared by Lex Mundi member firm Butzel Long 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. Corporation - most beneficial for an entity that has a complex capital structure or the need to accumulate earnings at the entity level for expansion or other corporate purposes or is planning to go public. Also benefit from limited liability larger body of case law interpreting various rights and liabilities of corporations. Disadvantages are that there is tax at the entity level, ofetn more complexity in organizing and a greater need for regular upkeep (resolutions, meetings, etc. than with an LLC.This is the form of entity we have seen most often used by foreign entities who are establishing a local company. Limited Liability Company - very easy to organize. no entity level taxation. limited liability. No regular upkeep typically required. Disdavnate.g.s are that if there is more than one member, the operating agreement can becoame complex and there is less law to interpret rights and liabilities. This is the form of entity we have seen most often used by foreign entities making acquisitions in the US. and is especially popular for ownership of real estate. Limited Liability Partnership - this is similar to an LLC but is designed essentailly for use by professional service firms. Not used by foreign entities from experience so will not comment further on this form of entity. Partnership - very easy to establish.no entity level taxation. Disadvantages are no limited liability and gretare liabiity for acts of co-partners. Limited Partnership - similar to a partnership so ther si no entity level tax but with limited liability on the part of limited partners. Only general partner has liability. Disadvantage is tax qualification and documentaion is complex. 2. Are there attributes of the form that you consider unique to your jurisdiction? No. 3. Describe the management and governance structure for each organizational form. Corporation - must have a board of directors and officers. The board is elected by the shareholders and the officers are elected by the directors. Rights are governed by the articles of incorporation, bylaws and any shareholder agreements. LLC - may be member-managed or may have managers. in the latter case, the members elect the managers. Rights are governed by the articles of organiation and by the operating agreement, if there is one. Partnership - run by the partners. There may or may not be a partnership agreement that will define the rights. Page 279

281 Limited Partnership - Run by the GP. Limited Partnership Agreement defines the rights. 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? No. 5. Describe the extent to which management and owners are exposed to liability. Corporations and LLCs - very little exposure. only in case of "piercing the veil" for failure to maintain the entity, for failure to pay taxes (on the part of signers) and for personal wrongful conduct. Partnerships - full liability. Limited Partnerships - liability on part of the GP. Limited Partners have no liability except if they become deemed to be GPs by involving themselves too much in the business or for personal wrongful conduct. 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? Corporations - evidenced by shares of stock. Transferable subject to securities law restrictions and any agreements not to transfer. need only 1 owner. LLCs - No evidence of ownership required other than articles of organization or operatng agreement althoug certificates are occasionally used. Transferable subject to securities law restrictions and any agreements not to transfer. need only 1 owner. Partnerships - no evidence of ownership generally other tha partnership agreement if there is a written one. Transferable subject to and any agreements not to transfer. Limited Partnership - need at least one GP and one LP. Ownership usually evidenced by LP Agreement. Transferable subject to securities law restrictions and any agreements not to transfer. need only 1 owner. 7. Is there a minimum capitalization? No. 8. Is there a security that can be issued to the public? in all cases, yes, although in practice very few LLCs and partnerships are offered to the public. 9. Can the form incur debt, or grant security for debt? Yes in all cases. 10. What is the duration of the form? Can it be renewed? Stated in organizing documents. Allowed to be perpetual except in the case of partnerships and limited partnerships which dissolve upon the occurrence of stated events but may be renewed. Page 280

282 11. Describe the process, customary time period and approximate cost of establishing the form. Corporation - lawyer typically forms for a cost of $2,000 for simplest version with a few shareholders. LLC- may be formed for $200 or so if a single member LLC with no operating agreement. If the latter, more often $2,500-4,000. Partnership - may be formed for no cost (by operation of law) or filign of very low cost (perhaps $ for simple). Limited Partnership - foemd by filing LP certificate. This is very inezxpensive (perhaps $ ). Prepartion of an LP agreement is more ($3, ,000 ). 12. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? No. 13. For what taxes is the form liable? Corprations - income and employment taxes. LLC, Partnership and LP - no entity level tax. Must pay employment taxes on employees. 14. What is the tax treatment of payments to foreign owners? Subject to withholding of 30% subject to tax treaty. 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? Yes, the witholding on payments to foreign owners is unique. Contact Information Robert A. Hudson hudson@butzel.com Butzel Long 150 West Jefferson, Suite 100 Detroit, Michigan Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 281

283 Issues Relating to Organizational Forms and Taxation USA, New Jersey Prepared by Lex Mundi member firm Day Pitney LLP 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. Sole Proprietorship: One person provides all of the capital and assumes all the responsibilities for the business venture. Some advantages of forming a sole proprietorship are: (i) low start-up costs, (ii) minimal governmental oversight, (iii) maximum vested control in the owner, (iv) minimal working capital requirements, and (v) tax advantages to the owner because all of the profits flow directly to the owner. Some disadvantages are: (i) unlimited personal liability, (ii) lack of continuity, (iii) difficult to raise capital. General Partnership: There is unlimited liability for the partners and the partners are ordinarily responsible for partnership debts. Some advantages of forming a general partnership are: (i) ease of formation process with the state, (ii) low start-up costs, (iii) more sources of venture capital, (iv) flexibility of partnership agreement to customize allocations of profits and losses and management/governance provisions, (v) minimal government oversight, and (vi) no entity-level taxation. Some disadvantages are: (i) unlimited personal liability to the partners, (ii) lack of continuity, (iii) difficulty in securing follow-on capital and (iv) reliance on partners. Limited Partnership: Only the general partner has unlimited liability. The main advantage of the limited partnership is that the limited partners are not liable for partnership debts beyond the extent of their capital contributions. Limited Liability Company: The owners of an LLC are known as members all of whom have limited liability for the LLC s debts. Multi-member LLCs are taxed as partnerships unless otherwise elected to be taxed as a corporation. Single-member LLCs are disregarded unless the LLC elects corporate status. LLCs feature similar advantages to partnerships in that the operating agreement provides for flexibility in terms of items such as allocations of profits and losses, management and transferability of interests. Corporation: The liability of the shareholders is limited to the amount they pay for shares of stock. The continuity of a corporation is unaffected by death of shareholders and transfers of shares of stock. A C-Corporation is a separate taxable entity with its own taxable year and accounting methods and it computes its taxable income separate from its owners. This results in two layers of tax because tax is levied upon corporate profits and upon dividends after they are paid to shareholders. S-Corporation profits are passed through to the individual stockholders with no federal income tax to the corporation. S-Corporation shareholders have limited liability. Some advantages of forming a corporation are: (i) limited liability, (ii) centralized management, (iii) ease of transfer of ownership, and (iv) ease of raising capital. Some disadvantages are: (i) more government oversight, (ii) higher expenses for organization, (iii) charter restrictions and (iv) double taxation (other than S- Corporations). 2. Are there attributes of the form that you consider unique to your jurisdiction? No. Page 282

284 3. Describe the management and governance structure for each organizational form. Partnership In a partnership, management and governance structure are flexible and are typically agreed upon by the partners and set forth in the partnership agreement. In the event the partnership agreement is silent on a particular issue, there are statutory defaults for certain actions. In a limited partnership, management is usually vested in the general partner, with certain approval rights reserved to the limited partners. Limited Liability Company Similar to Partnerships, management and governance structures are flexible. Management is usually vested in one or more managers with certain approval rights reserved to the members in the operating agreement. The operating agreement may provide for different management structures, including formation of a Board of Directors. Corporation Management of a corporation is vested in the Board of Directors, except as otherwise provided in the shareholders agreement. 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? No, unless otherwise required by the Certificate of Incorporation or Bylaws of a corporation or the governing agreements of the entity. 5. Describe the extent to which management and owners are exposed to liability. As noted above, limited liability protection is afforded to shareholders of a corporation, members of a limited liability company and limited partners in a limited partnership. Personal liability extends to sole proprietors and partners in a general partnership (and the general partner in a limited partnership). Each director of a corporation is jointly and severally liable to the corporation to the extent of any injury suffered by the corporation's creditors or shareholders as a result of certain actions voted for, or concurred in, by the director. However, a director may not be held liable if the director properly discharged his or her statutory fiduciary duty. Subject to certain statutory limitations, the certificate of incorporation may contain a provision limiting directors' or officers' personal liability to the corporation or its shareholders for damages caused by breaches of duties owed to the corporation or its shareholders. 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? Partnership The interest of a partner in the partnership is the partner's share of the profits and losses of the partnership and the partner's right to receive distributions. Partnership interests are transferable subject to limitations of partnership agreement. The minimum number of owners is two. Limited Liability Company Similar to a partnership, limited liability company interests consist of a member s share of the profits and losses of the LLC and the member s right to receive distributions. LLC interests may also be denominated as units as specified in the operating agreement. Membership interests or units may be transferable subject to limitations of the operating agreement. There is no minimum number of owners. Corporation Interests in a corporation are corporate shares that are transferable subject to the provisions of the Shareholders Agreement. There is no minimum number of shareholders. Page 283

285 7. Is there a minimum capitalization? No. 8. Is there a security that can be issued to the public? Yes. The most common form of equity ownership that is offered in a public offering is shares of stock in a corporation. 9. Can the form incur debt, or grant security for debt? Yes. 10. What is the duration of the form? Can it be renewed? Sole Proprietorship The sole proprietorship remains in existence for as long as the owner is willing or able to stay in business. When the owner dies, the sole proprietorship no longer exists. Partnership A partnership is formed and continues to exist by the implied or express agreement of the partners. Dissolution is caused by the occurrence of certain events defined by statute, including the expiration of the partnership term as provided in the partnership agreement, the completion of the undertaking for which the partnership was formed, and judicial action. Other events such as the death or withdrawal of a partner also cause dissolution but only if the majority of the remaining partners do not agree to continue the partnership. Limited Liability Company Similar to partnerships, dissolution of an LLC is caused by the occurrence of certain events defined by statute, including the expiration of the LLC term as provided in the operating agreement, the completion of the undertaking for which the LLC was formed, judicial action and the death or withdrawal of the last remaining member unless a new member is admitted within 90 days. Corporation Dissolution of a corporation also occurs pursuant to the events set forth in the statute which include: (i) upon the expiration of any period of duration stated in the corporation's certificate of incorporation, (ii) by unanimous consent of the shareholders, (iii) pursuant to a board recommendation followed by shareholder approval, (iv) by action by one or more shareholders, if there is a special provision in the certificate of incorporation, and s(v) upon demand by one or more shareholders if the period of duration of the corporation specified in its charter has expired. 11. Describe the process, customary time period and approximate cost of establishing the form. Most businesses formed in New Jersey must file organizational documents with the State of New Jersey. This requirement applies to profit and non-profit corporations, limited partnerships, limited liability partnerships and limited liability companies. Sole proprietorships and general partnerships are not subject to this requirement but will still need to register the business name with the clerk of the county where the business is located. Routine service for the processing of organizational documents varies anywhere from one to more than three weeks. For an extra fee, filers may have service expedited (2-4 day turnaround) or processed same-day. The fees associated with the filing of organizational documents for these entities are as follows: -Limited Partnerships - $150 (plus additional fees for expedited services) -Limited Liability Companies - $125 (plus additional fees for expedited services) -Corporations - $125 (plus additional fees for expedited services) Page 284

286 All entities must also complete and file a NJ-REG with the Division of Revenue to become registered for applicable taxes and related liabilities that are administered by the Department of Labor and Division of Taxation. 12. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? No. 13. For what taxes is the form liable? Corporation Business Tax New Jersey imposes a corporation business tax on every New Jersey corporation that acquires a taxable status beginning either on the date of its incorporation, or on the first day of the month following its incorporation if so stated in its Certificate of Incorporation. Note that a corporation that has elected to be treated as an S-Corporation for federal tax purposes may make an election to be treated as a New Jersey S-Corporation. Note that this is an affirmative election that must be made with the state a corporation that has made the election at the federal level is not automatically treated as an S-Corporation at the state level. Sales and Use Tax New Jersey imposes sales and use taxes on certain items and services sold at retail. Partnerships and Limited Liability Companies For New Jersey Gross Income Tax purposes, every partnership or limited liability company that has income from sources in the State of New Jersey, or has a New Jersey resident partner, must file the New Jersey Partnership return. Note that the partnership or LLC is not taxable itself; income and losses flow through to the individual partners proportionately (or as set forth in the partnership agreement or operating agreement) and are reflected in their own income tax returns. Partnerships also have a withholding requirement for its foreign owners based on taxable income whether the income is distributed or undistributed. The foreign owners of a New Jersey partner are those partners that live outside the state of New Jersey, including in foreign countries. In addition, each entity classified as a partnership for Federal income tax purposes that has any income or losses derived from New Jersey sources and that has more than two owners is required to pay a $150 filing fee for each owner of an interest in the entity, up to a maximum of $250, What is the tax treatment of payments to foreign owners? Partnerships are also required to remit a tax on behalf of its nonresident partners (including foreign partners in foreign countries) based on taxable income regardless of whether the income is distributed or undistributed. These partnership payments made on behalf of out-of-state corporate and noncorporate partners are based on taxable income whether the income is distributed or undistributed and are designated as a tax at a rate of 9% for nonresident corporate partners and 6.37% for noncorporate partners. Qualified investment partnerships and partnerships listed on a U.S. national stock exchange are not subject to the tax. Page 285

287 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? Yes, as noted above, New Jersey partners are subject to withholding requirements with respect to its foreign owners. Contact Information Lori J. Braender, Esq. lbraender@daypitney.com Day Pitney LLP One Jefferson Road Parsippany, New Jersey Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 286

288 Issues Relating to Organizational Forms and Taxation USA, New York Prepared by Lex Mundi member firm Alston & Bird LLP 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. *Management and tax issues often inform the advantages and disadvantages of each entity. These relevant issues are addressed in Answers to Questions 3 and 13, respectively, and thus do not appear in the responses to Question 1. For-profit Corporation (FP Corp). Advantages. Ownership interests are freely transferable. No limitation on the number or types of shareholders. Flexibility of financing available through the sale of securities to investors. Shareholders have limited liability for debts or judgments against Corp. Disadvantages. Formalities are required to operate. Qualification is required for doing business in other states. Regular government reporting is required. Stock transfers are subject to securities regulation. New York (NY) FP Corps can file with the IRS and state as an S-Corporation for tax purposes. Non-for-Profit Corporation. (NFP Corp). Advantages. Directors and officers are rarely personally responsible for the NFP Corp s debts and liabilities. Some nonprofits are eligible to receive public and private grants, making it easier to get operating capital. With 501(c)(3) NFPs, donations made by individuals to the NFP Corp are tax-deductible. Disadvantages. Available only for non-profit ventures. NFP Corps must keep records and report meeting minutes. NFPs formed for charitable purposes may be required to register with the NY State Attorney General. Limited Liability Company (LLC). Advantages. All members are subject to limited liability. Disadvantages. Qualification is required for doing business in other states. Reporting to the government is required. Interests are not freely transferable and may be subject to securities law regulation. Publication of formation required. Registered Limited Liability Partnership (LLP). Advantages. LLP partner is only personally liable for his own or his employee s negligence. Form is also available to NY registered foreign LLPs. Disadvantages. Consent of partners needed for formal business conduct. A contributor to an LLP is not entitled to return of his contribution except as stated in the partnership agreement. Only available for professional services in NY (e.g. lawyers, doctors, architects). No limited partners. Limited Partnership (LP). Advantages. All limited partners have limited liability. No limit exists on the number or types of partners. Disadvantages. General partners have unlimited liability. Transfer of interests may be subject to securities law regulation. General Partnership (GP). Advantages. GPs are informal; that is, meetings are informal and government reporting is not required. Disadvantages. Partners have unlimited liability for the business. Interest is not transferable. The entities most likely of interest to foreign investors are FP Corps and LLCs. Page 287

289 2. Are there attributes of the form that you consider unique to your jurisdiction? FP Corp. No attributes of this form are unique to NY. NFP Corp. No attributes of this form are unique to NY. LLC. NY imposes a publication requirement upon formation of the LLC which requires that the members of the LLC publish a notice in newspapers in the geographic region of formation. LLP. LLPs can only be formed for professional services in NY. LP. No attributes of this form are unique to NY. GP. No attributes of this form are unique to NY. 3. Describe the management and governance structure for each organizational form. FP Corp. Owned by shareholders. Managed by a board of directors that is elected by the shareholders, and by officers who are appointed by the board. A corporation must have certificate of incorporation (filed with the NY Department of State) and bylaws, both of which documents must contain certain provisions required by NY law. These governing documents provide for governance matters such as how and when directors will be elected, which officers the corporation will be required or permitted to have, and when and how meetings of shareholders and directors will be held. There is no residency restriction. Directors must be at least 18 years old. New York does not require listing of directors in the certificate of incorporation. NFP Corp. Has no shareholders. May have members, but is not required to do so. Managed by a board of directors that is elected either by the members or by the existing board, and by officers appointed by the board. LLC. No limit exists on the number or types of members. LLC is owned by its members. Managed either by its members or by managers who are appointed by the members. An LLC must have articles of organization that are filed with the NY Department of State. The members will also execute an operating agreement that defines the rights, duties and liabilities of the members, and managers if applicable. LLP. Each general partner has an equal right to manage and control the LLP. All general partners have authority to bind the LLP. LP. All general partners have the right to manage. The contributions of a limited partner may be cash, other property or services. Must file a certificate of limited partnership with the NY Department of State, which will identify the general partners. Governance is pursuant to a limited partnership agreement, which identifies the limited partners and specifies respective rights and duties. GP. All partners have the right to manage and act on behalf of GP. 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? New York does not have a provision specifying where directors or owners must reside for an LLC, LP, GP, or FP Corp or NFP Corp. However, if a FP Corp elects S-Corporation status for tax purposes, it cannot have any foreign investors. Page 288

290 5. Describe the extent to which management and owners are exposed to liability. FP Corp. Shareholders of a FP Corp have limited liability for the FP Corp's debts and obligations. As a result, their losses cannot exceed the amount which they contributed to the corporation as dues or payment for shares. Officers and directors may be personally liable for financial harm caused to the corporation due to their breach of various duties. FP Corps may indemnify their officers and directors. NFP Corp. Officers or directors who vote for certain corporate actions may be liable. NFP Corps may indemnify their officers and directors. LLC. All members have limited liability. LLC may indemnify its officers and directors, if any. LLP. General partners are personally liable only if they or person they supervise commits wrongful act. LP. All general partners have personal liability, limited partners personally liable only if they participate in control of business, which can occur under rare circumstances. GP. All general partners have personal liability. 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? FP Corp. (i) Ownership represented by shares of stock; (ii) stock is transferable, subject to any agreement to the contrary among the shareholders; (iii) no minimum number of shares or shareholders. NFP Corp. There is no ownership; control is vested in members or board of directors. LLC. (i) Ownership is represented as membership interest. (ii) A member s interest in profits from the LLC is transferable, but a member s ownership interest is not transferable unless authorized by the LLC Operating Agreement or by the consent of at least a majority of the members. (iii) No minimum number of members. LLP. (i) Ownership is represented as partnership interests; (ii) limited liability partnership interests are transferable, (iii) No minimum number of partners. LP. (i) Limited partners have limited partnership interests; (ii) limited partnership interests are transferable if the limited partnership agreement permits it or the other partners consent; (iii) there must be at least one general partner and one limited partner. GP. (i) Ownership represented by partnership interests; (ii) partnership interests are not transferable without consent of other partners; (iii) there must be at least two partners. 7. Is there a minimum capitalization? No, there is no minimum capital required for a FP Corp, NFP Corp, LLC, LLP, LP or GP. 8. Is there a security that can be issued to the public? FP Corp. Securities can be issued. NFP Corp. Stock and shares are prohibited. LLC. Generally, securities can be issued. Page 289

291 LLP. Securities can be issued. LP. Securities can be issued. GP. Securities generally cannot be issued. 9. Can the form incur debt, or grant security for debt? Yes, under New York corporate law, a FP Corp, NFP Corp, LLC, LLP, LP, and GP may lawfully incur debt and grant security for debt. 10. What is the duration of the form? Can it be renewed? FP Corp. The life-span of the business is perpetual; or for a designated period stipulated in the Certificate of Incorporation. NFP Corp. The life-span of the business is perpetual; or for a designated period stipulated in the Certificate of Incorporation. LLC. The life-span of the business may be for a designated period stipulated in the Articles of Organization; or until a dissolution event occurs and the company takes no action to continue. LLP. Upon the occurrence of events specified in the LLP agreement. LP. The life-span of the business is for a designated period stipulated in the Certificate of Limited Partnership; or until a dissolution event occurs, subject to any right to continue that may be stated in the partnership agreement. GP. The life-span of the business is for a designated period stipulated in the partnership agreement; or until a dissolution event occurs. 11. Describe the process, customary time period and approximate cost of establishing the form. FP Corp. A Certificate of Incorporation must be filed (signed by at least one incorporator) with the Department of State. Cost is approximately $ Standard filing time is about 3 to 4 weeks. Expedited filing time takes 24 hours; however additional fees apply. NFP Corp. One or more persons, called "incorporators," may form a not-for-profit corporation. Incorporators are natural persons who are 18 or older. A Certificate of Incorporation must be filed (signed by at least one incorporator) with the Department of State. Registration with the Attorney General s Charities Bureau is required for some NFP Corps. LLC. Articles of Organization (signed by one or more organizers) and a Certificate of Publication must be filed with the Department of State. The State filing fee is $225, plus an additional $50 to file two affidavits of publication. It usually takes one to two days from the time of order for the Secretary of State to file the document and issue a filing receipt. LLC must also publish notice of formation in local newspapers, which can cost upwards of $1000. LLP. Registration costs $ A registered limited liability partnership (RLLP) must file an LLP Statement within 60 days prior to the 5th anniversary of the effective date of its registration or notice of registration, and every 5 years thereafter as required by the Partnership Law. The fee for filing the LLP Statement for a RLLP is $20. Registering can be done on a same-day basis. Page 290

292 LP. Filing by the general partner by executing a partnership agreement and filing a Certificate of Limited Partnership pursuant to Section of the Revised Limited Partnership Act. Filing can be done on a same-day basis. GP. No state filing or organizational meeting of the partners is required to form a general partnership in NY. A Certificate of Assumed Name (following an agreement of the partners) with the clerk of the county/ies in which the business is conducted must be filed. 12. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? No. 13. For what taxes is the form liable? FP Corp. a) Federal Income Tax - Income subject to double taxation, once at the FP Corp level and once at the shareholder level. Income is taxable at corporate rates, which, at the highest Federal marginal rate level, are currently about the same as the individual highest marginal rate level. Note - S-Corporations are not exempt from corporate income taxation in NY. NY does not recognize S-Corporation status. Consequently, a NY S-Corporation having income from NY City sources will be taxed as a corporation for NY City tax purposes and has to pay NY City's General Corporation Tax. b) Corporation Franchise Tax Based on the greater of: (1) allocated entire net income, 7.1% (6.5% for qualified NY manufacturers); or (2) allocated capital, 0.15% (maximum tax, $350,000 for NY manufacturers/$10 million for all others); or (3) 1.5% of minimum taxable income; or (4) minimum flat rate (varies from $25 to $5,000 depending on NY receipts). c) Sales and Use Tax Imposed on the sale of tangible personal property and certain enumerated services. State rate equals 4% plus an additional 3/8% imposed in the Metropolitan Commuter Transportation District (MCTD). Local rates imposed in addition to state vary by county from.5% to 4.5%. The combined state and NY City rate equals 8 7/8% (4% state + 3/8% MCTD + 4.5% city). d) Property Tax Imposed by local government on real property only. Personal property is not subject to tax at the state or local level. Rates are determined annually depending upon budgetary needs. e) Unemployment Insurance Tax Imposed on employers that pay remuneration of $300 or more in any calendar quarter. The standard rate is 5.4% but the rate can vary from.9% to 8.9% depending upon the employer's experience rating. f) Real Estate Transfer Tax Imposed by the state on each conveyance of an interest in real property where the consideration exceeds $500. The rate of tax is $2 for each $500 of consideration or value. Additional 1% tax imposed on conveyances of interests in residential real property when the consideration for the entire conveyance is $1 million or more. g) Real Property Transfer Tax Imposed by the City on conveyances of real property situated in whole or in part within NY City when the consideration for the property exceeds $25,000. The tax rate varies from 1% to 2.625% depending on the type of property and amount of consideration. h) Numerous other taxes may be imposed depending on the type of business and transactions conducted, including, but not limited to, motor fuels tax, alcoholic beverage tax, environmental tax, stock transfer tax, mortgage recording tax, hotel occupancy tax and commercial rent tax. NFP Corp. Nonprofits can apply for both federal and state tax-exempt status. A NFP Corp is generally exempt from federal income taxes except for any NFP Corp engaging in certain political or legislative activities or if the NFP Corp has unrelated income. With some exceptions, NFP Corps must pay sales/ use tax on their purchases and collect sales tax on their sales. Page 291

293 LLC. a) Federal Income Tax Under the check-the-box election procedure, LLC with 2 or more members can elect to be an association (corporation) or a partnership for federal income tax purposes; LLC with 1 member can elect to be an association (corporation) or elect to be disregarded as an entity separate from its owners (in effect, to be treated as a sole proprietorship or a branch for federal tax purposes). Tax filings and inheritance tax at individual member level (unless taxed as a corporation) are required. If treated as a corporation, the same tax results exist as with a FP Corp. If treated as a partnership, then the partnership pays no tax; rather, each of its partners pays its pro rata share of tax on their pro rate share of income and further distributions to the partners are generally tax free. b) Corporation Franchise Tax The election made for U.S. federal income tax purposes applies for NY franchise tax. An LLC electing treatment as a corporation is subject to the tax. An LLC electing treatment as a partnership is not subject to tax, but is a "flow-through entity"; its members must report the income, losses and tax attributes of the LLC on their individual or corporate returns and pay any tax due. c) LLCs are liable for all other state and local taxes listed above that apply to a FP Corp. GP, LP and LLP. a) Federal Income Tax Taxed as a partnership as described above in the case of an LLC which is treated as a partnership. b) Corporation Franchise Tax Partnerships are not subject to the Corporation Franchise Tax. Partnerships are "flow-through entities" for tax purposes; individual partners must report the income, losses and tax attributes of the partnership on their NY individual income tax returns and pay tax. Corporate partners are subject to the franchise tax and must report partnership income, losses and tax attributes on their returns and pay tax. c) Partnerships are liable for all other state and local taxes listed above that apply to a FP Corp. 14. What is the tax treatment of payments to foreign owners? FP Corp. a) Federal Income Tax All foreign persons are subject to tax at 30% on dividends paid by a US corporation to foreign shareholders unless tax treaties reduce or eliminate US tax on foreign income. Dividends paid to US shareholders are also subject to further US tax. An S- Corporation is not available for foreign owners. b) State Taxes Payments from a FP Corp to foreign owners are generally treated as an expense to the paying corporation and will therefore reduce the amount of net income subject to tax for the paying corporation. The foreign owners are not subject to tax on payments assuming they have no nexus with NY (i.e. the foreign owners have no property or employees of their own located in NY.) Mere ownership of stock alone does not subject foreign owners to NY tax. NFP Corp. Members are not taxed. LLC. a) Federal Income Tax If taxed as a corporation, FP Corp rules apply. b) State Taxes Payments to foreign owners from LLCs electing partnership treatment are subject to NY tax. Due to the flow-through nature of these entities, NY deems that the NY members themselves are doing business in NY through the partnership entity. Therefore, the members have nexus and are taxable in NY. Individual members must file an individual income tax return, report the payments from the LLC, along with any expenses, and pay any tax due. Corporate members must file a return and pay the Corporation Franchise Tax. c) Payments to foreign owners from LLCs electing treatment as a corporation are treated as described above under the FP Corp. Page 292

294 LLP, LP, GP. a) Federal Income Tax Generally, no tax on distribution to foreign partners ( pass-through taxation ). Advance withholding taxes apply on income earned by foreign partners. b) State Taxes Partnerships are liable for taxes as described under LLC, State Taxes section above. 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? Federal Income Tax See above answer to Question 14. State Taxes Yes, foreign owners of a corporation doing business in NY avoid the second level of taxation that is imposed on resident owners with regard to payments made to owners/shareholders (assuming the foreign owners have no nexus with New York). Contact Information Stephanie Denkowicz stephanie.denkowicz@alston.com William Ruehl bill.ruehl@alston.com Edward Tanenbaum edward.tanenbaum@alston.com Alston & Bird LLP 90 Park Avenue New York, New York Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 293

295 Issues Relating to Organizational Forms and Taxation USA, Ohio Calfee, Halter & Griswold LLP 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. Ohio law provides for several different forms of business organizations. The most popular forms of organizations include the following: Partnerships o (General Partnerships and Limited Liability Partnerships) Limited Partnerships Limited Liability Companies Corporations; and Professional Associations. Less utilized form of entities in Ohio include cooperatives (governed by Chapter 1729), business trusts (governed by Chapter 1746) and limited partnership associations (governed by Chapter 1783). Because cooperatives, business trusts and limited partnership associations are not the most commonly used entities in Ohio, they are beyond the scope of this guide. There are no readily available statistics regarding what type of Ohio entity is most commonly utilized by foreign investors. However, it appears that corporations and limited liability companies are the preferred business entities used by foreign investors as investment vehicles in the United States generally. 2. Are there attributes of the form that you consider unique to your jurisdiction? No. 3. Describe the management and governance structure for each organizational form. Except for some nonwaivable provisions of law, the partnership agreement governs relations among the partners and between the partners and the partnership Unless otherwise agreed upon by the partners in the partnership agreement, (i) each partner has equal rights in the management and conduct of the partnership business ( (F)); (ii) a person may become a partner only with the consent of all of the partners ( (I)); and (iii) a decision arising as to a matter in the ordinary course of business of a partnership may be decided by a majority of the partners, and an act outside the ordinary course of business of a partnership and an amendment to the partnership agreement may be undertaken only with the consent of all of the partners ( (J)). A partner owes the duty of loyalty and the duty of care to the partnership and to the other partners The partnership agreement cannot eliminate the duty of loyalty, although it can identify specific types or categories of activities that do not violate the duty of loyalty, if not manifestly unreasonable (B)(3). The partnership agreement also cannot unreasonably reduce the duty of care (B)(4). Page 294

296 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? No. 5. Describe the extent to which management and owners are exposed to liability. General partnerships: A partnership is liable for loss or injury caused to a person by the wrongful act or omission of a partner acting in the ordinary course of business of the partnership (A). All partners are jointly and severally liable for all obligations of the partnership unless otherwise agreed by the claimant or provided by law, except that a person admitted as a partner into an existing partnership is not personally liable for any partnership obligation incurred before the person s admission as a partner (A)-(B). Limited liability partnerships: An obligation of a limited liability partnership, whether arising in contract, tort or otherwise, is solely the obligation of the partnership (C). A partner in a limited liability partnership is not personally liable, directly or indirectly, by way of contribution or otherwise, for an obligation of the limited liability partnership solely by reason of being or acting as a partner (C). This is true regardless of anything inconsistent in the partnership agreement that existed before any vote required to establish a limited liability partnership (C). 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? (i) A partner s ownership interest in a partnership is a partnership interest. It includes all of a partner s rights in the partnership, including the partner s economic interest and all management and other rights (P). A partner s economic interest means a partner s share of the profits and losses of a partnership and the partner s right to receive distributions (F). (ii) A partner s economic interest is the only transferable interest of a partner in the partnership A transfer, in whole or in part, of a partner s economic interest in the partnership does not entitle the transferee to participate in the management or conduct of the partnership business, to require access to information regarding partnership transactions, or to inspect or copy the partnership books or records (A). A transferee of a partner s economic interest in a partnership only has a right to receive, in accordance with the transfer, distributions to which the transferor otherwise would be entitled, to receive upon the dissolution and winding up of the partnership business, in accordance with the transfer, the net amount otherwise distributable to the transferor, and to seek a determination by a tribunal that it is equitable to wind up the partnership business (B). Upon transfer, the transferor retains the rights and duties of a partner other than the interest in the distributions transferred (D). A transfer of a partner s economic interest in the partnership in violation of a restriction on transfer contained in the partnership agreement is ineffective as to a person having notice of the restriction at the time of transfer (F). (iii) A partnership is an association of two or more persons [which] carry on as co-owners of a business for profit (M); (A). As a result, a partnership requires at least two owners. A person can be an individual or a business entity such as a corporation (Q). 7. Is there a minimum capitalization? There is no minimum capital requirement. 8. Is there a security that can be issued to the public? A partnership can issue a security to the public. Partnership interests in partnerships are securities Page 295

297 and the sales of securities representing an interest in a partnership are governed by the federal and Ohio securities laws (A). 9. Can the form incur debt, or grant security for debt? A partnership can incur debt and grant security for debt. 10. What is the duration of the form? Can it be renewed? The partners agree to the duration of the partnership. That said, many events can cause the dissolution of a partnership. For example, a partnership for a definite term or particular undertaking is dissolved if the term has expired or the undertaking is complete, if all of the partners wish to wind up the partnership business, or if within 90 days of a partner s dissociation at least half of the remaining partners desire to wind up the partnership business If a partnership for a definite term or particular undertaking is continued, without an express agreement, after the expiration of the term or completion of the undertaking, the rights and duties of the partners remain the same as they were at the expiration or completion, so far as is consistent with a partnership at will (A). If the partners continue the business without any settlement or liquidation of the partnership, the partners are presumed to have agreed that the partnership will continue (B). A partnership may continue in existence after dissolution only for the purpose of winding up its business (A). However, at any time after the dissolution of a partnership and before the winding up of its business is completed, all of the partners may waive the right to have the partnership s business wound up and the partnership terminated, in which event the partnership shall resume carrying on its business as if dissolution had never occurred (B). 11. Describe the process, customary time period and approximate cost of establishing the form. A general partnership is formed whenever two or more persons carry on a business for profit as coowners, whether or not they intend to form a partnership (A). No filing is necessary. Further, it is not necessary that the contract establishing the partnership be in writing, and a partnership can be found to exist even though a written agreement purports to establish a different relationship. A general partnership may become a limited liability partnership if the partnership agrees to such and files a statement of qualification with the Ohio Secretary of State The fee for filing a Statement of Domestic Qualification is $125. It takes 3-5 business days for the Office of the Ohio Secretary of State to process the filing. For an additional fee of $100, processing can be expedited and completed in 1-2 business days. 12. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? No. 13. For what taxes is the form liable? All businesses, regardless of the form of organization, will pay: i. Commercial Activity Tax. This is a tax on most types of business gross receipts from Ohio sources, without deduction for cost of goods. The tax is levied at $150 on gross receipts between $150,000 and $1 million, and at 0.26% on receipts in excess of $1 million. ii. Property Tax. Nearly all taxes on tangible personal property have been repealed, and have been replaced by the Commercial Activity Tax. Real property within the State remains taxable based on the fair market value thereof at rates established at the county level where the real property is located. Page 296

298 iii. Sales and Use Tax. 1. On purchases. These taxes are payable upon purchase of tangible personal property, as well as on a limited range of services. The statewide rate is 5.5%, while counties and other local subdivisions may add on rates of up to 2.25%. A multitude of exemptions apply, such as sale for resale, use in manufacturing, etc., and are claimed by providing an exemption certificate to the seller. 2. On sales. Businesses having certain levels of contact with Ohio must collect sales and use tax on sales to Ohio residents, or must obtain exemption certificates from customers. All pass-through entities (including general partnerships, limited liability partnerships, limited partnerships, as well as limited liability companies and S-corporations) report their Ohio-sourced net income to their owners. Individual owners then report such net income as a part of their individual income tax obligation. Pass-through entities which invest in lower tier pass-through entities report the Ohio-sourced income to their ultimate owners. Ohio does require that pass-through entities withhold Ohio income taxes on behalf of out-of-state investors. Alternatively, Ohio allows pass-through entities to file a composite income tax return on behalf of out-of-state investors. Finally, many cities and villages levy an income tax on business entities (including pass-through entities as well as C-corporations) doing business within their jurisdictions. Pass-through entities, as a practical matter, usually report and pay the tax on a composite basis for their owners. 14. What is the tax treatment of payments to foreign owners? Foreign owners are treated no differently, for tax purposes, than out-of-state investors who are U.S. residents. Ohio requires that pass-through entities withhold Ohio income taxes on behalf of out-ofstate as well as foreign investors. Alternatively, Ohio allows pass-through entities to file a composite income tax return on behalf of out-of-state and foreign investors. 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? Ohio requires that pass-through entities withhold Ohio income taxes on behalf of foreign investors. Alternatively, Ohio allows pass-through entities to file a composite income tax return on behalf of foreign investors. Contact Information Jennifer Vergilii jvergilii@calfee.com Peter Comodeca pcomodeca@calfee.com Calfee, Halter & Griswold LLP The Calfee Building 1403 East Sixth Street Cleveland, Ohio Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 297

299 Issues Relating to Organizational Forms and Taxation USA, Oklahoma Prepared by Lex Mundi member firm Crowe & Dunlevy 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. Corporations. The principal advantages are the general understanding of the entity and the limited liability of equityholders and the principal disadvantage is double taxation, unless it is an S corporation, a form not generally available to foreign investors. Limited Liability Companies. An LLC is the most flexible entity, permitting wide variation in the contractual terms and generally providing pass-through treatment for income tax purposes, as well as limited liability for the equityholders. An LLC is the mostly widely used form of entity, other than for entities that intend to go public or are seeking private equity or venture capital. General and Limited Partnerships. Partnerships generally provide pass-through treatment for income tax purposes, as well as limited liability for the limited partners, but are not generally used any more. They have one or more general partners that are liable for the obligations of the partnership. Limited Liability Partnerships. An LLP is not generally used by foreign investors, except to provide limited liability to general partners of a pre-existing general partnership. There are also a few other specialty-type entities (such as cooperatives and professional corporations) that are not generally used by foreign investors. 2. Are there attributes of the form that you consider unique to your jurisdiction? No. 3. Describe the management and governance structure for each organizational form. A corporation is governed by a board of directors, which appoints the officers. The board of directors is elected by the shareholders. An LLC can be either manager-managed or member-managed. Limited and general partnerships are governed by one of more general partners. An LLP generally has one or more managing partners. 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? No. 5. Describe the extent to which management and owners are exposed to liability. Other than the general partner of a general or limited partnership, who is liable for the obligations of the partnership, the equityholders and the management are not generally liable for the obligations of the entity. An entity may, however, be pierced in certain limited circumstances, exposing the equityholders to personal liability, and there are certain taxes typically employment taxes and sales and use taxes for which the responsible officers of a corporation may be personally liable. Page 298

300 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? A corporation has shareholders who own stock that is transferable, subject to the applicable securities laws and any stockholders agreement. An LLC has members who own either membership interests or units that are transferable, subject to the applicable securities laws and any restrictions in the operating agreement. Partnerships have partnership interests that are transferable, subject to the applicable securities laws and any restrictions in the partnership agreement. A corporation or an LLC does not need to have a minimum number of equityholders. A partnership by definition must have at least two equityholders. 7. Is there a minimum capitalization? No. Undercapitalization is, however, one factor in determining whether to pierce an entity, resulting in personal liability of the equity holders for obligations of the entity. 8. Is there a security that can be issued to the public? Yes. While all of the entities could conceivably issue securities to the public, corporations and, to a lesser extent, limited partnerships are the most common vehicles. 9. Can the form incur debt, or grant security for debt? Yes. All of the entities can incur debt and grant security for the debt. 10. What is the duration of the form? Can it be renewed? All of the entities can be created for a stated duration or can be perpetual. The term of an entity with a stated duration could be extended. 11. Describe the process, customary time period and approximate cost of establishing the form. The process generally consists of a consultation with counsel, who assists the client in determining the appropriate form of entity and the structure of the entity. The counsel then prepares drafts of the organizational documents for client review and, following client review, the documents are finalized with any necessary filings made. The cost and the time period vary widely depend upon the complexity of the entity. For example, a single owner corporation or LLC can be created within an hour for a cost as little as $500. Most entities are more complicated and would require one or two weeks with a cost of $2,000 to $5, Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? No. The only requirement is to file the appropriate organizational document with the Secretary of State of Oklahoma and to pay the relatively nominal filing fee. 13. For what taxes is the form liable? Corporations other than S corporations - pay corporate income taxes. The other entities are "pass through" entities where the income taxes are paid at the equityholder level. Corporations mat also be subject to a new business activity tax, as may the other entities depending on the results of a threeyear review. All of these entities also pay various other taxes, such as on employee wages. Page 299

301 14. What is the tax treatment of payments to foreign owners? There are no special taxes at a state level in Oklahoma. 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? There is no special treatment at a state level in Oklahoma. Contact Information Roger A. Stong roger.stong@crowedunlevy.com Crowe & Dunlevy 20 North Broadway, Suite 1800 Oklahoma City, OK Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 300

302 Issues Relating to Organizational Forms and Taxation USA, South Carolina Prepared by Lex Mundi member firm Wyche, P.A. 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. In South Carolina, the available organizational forms typically used for business purposes are: corporation, close corporation, general partnership, limited liability partnership, limited partnership, sole proprietorship, and limited liability company. For a corporation, Articles of Incorporation must be filed with the South Carolina Secretary of State. The owners of a corporation are generally not liable for the entity s obligations, but (unless it is an S corporation) the corporation s income is subject to double income taxation, once at the corporate level and in addition at the shareholder level on corporate distributions such as dividends. A close corporation is a statutory creation that has more flexible governance requirements than regular corporations; but, the characteristics of a statutory corporation are otherwise substantially the same as those of a regular corporation. A general partnership generally has no registration requirements, is flexible, and has flow-through income taxation. However, all partners of a general partnership are personally and jointly and severally liable for the obligations of the partnership. A limited liability partnership limits the personal liability of the partners and has formal registration requirements, but functions in all other ways essentially as a general partnership. A limited partnership may be created when at least one partner has unlimited liability (a general partner) and at least one partner has limited liability and less responsibility for the management of the partnership (a limited partner). Unlike general partnerships, limited partnerships are subject to various registration and other formal requirements. Limited partnerships generally have flow-through income taxation. A sole proprietorship is the most flexible form of organization, but the owner of a sole proprietorship is liable for the obligations of the business, and the sole proprietorship s income is treated as the income of its owner for income tax purposes. A limited liability company has features of both a corporation and a partnership. Its members generally have limited liability, it may be taxed for income tax purposes as a partnership or sole proprietorship (depending on the number of owners), and it has flexible management requirements. A limited liability company must have Articles of Organization filed with the South Carolina Secretary of State. Corporations and limited liability companies are likely the most commonly used form in South Carolina for foreign investors. 2. Are there attributes of the form that you consider unique to your jurisdiction? In most material respects, the attributes of the entities described above are similar for entities organized under South Carolina law as for similar entities organized under the laws of most other States in the United States. South Carolina for-profit corporations may have as few as one director. South Carolina corporations must file annual reports and pay an annual license fee. 3. Describe the management and governance structure for each organizational form. In a corporation, shareholders elect a board of directors, which elects officers. Officers manage the day-to-day operations of the corporation. Shareholders must vote on certain extraordinary items, like mergers, sales of substantially all assets, and substantive amendments to Articles of Incorporation. A corporation s governance provisions are set forth in the corporate law and the corporation s bylaws Page 301

303 and, in some cases, its Articles of Incorporation. A close corporation may choose not to have a board of directors, is not required to have bylaws, and is not required to have annual shareholder meetings. Limited liability partnerships and limited partnerships are typically governed by a partnership agreement. In a limited partnership, only general partners may participate actively in management and control of the business. If a limited partner participates in the management of the limited partnership, the limited partner may become exposed to the broader scope of liability generally applicable only to general partners. A limited liability company s governance is typically set forth in its operating agreement; to the extent the operating agreement does not address a governance issue, the limited liability company statute may contain a default rule. A limited liability company may be managed either by managers or by the members, but if manager-managed, that governance feature must be specified in its Articles of Organization filed with the South Carolina Secretary of State. Generally, there are no statutory management requirements for a general partnership, limited liability partnership, or sole proprietorship. 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? As a general rule, there are no residency requirements for management or owners of a South Carolina entity or restrictions or prohibitions on foreign investors. 5. Describe the extent to which management and owners are exposed to liability. In a corporation, close corporation, or limited liability company, owners and management generally are not liable for the debts, obligations, and liabilities of the company. However, they may be liable for their own intentional or wrongful conduct. In a general partnership, all partners are jointly and severally liable for the debts and obligations of the partnership. In a limited liability partnership, partners are not liable for debts, obligations, and liabilities chargeable to the partnership arising from the negligence, wrongful acts, or misconduct committed in the course of the partnership business by another partner or employee/agent of the partnership. Partners are still liable for their own acts and for those of people directly under their control. In a limited partnership, general partners are liable for all obligations chargeable to the partnership, and limited partners are liable for obligations of the partnership only to the extent of the limited partner s interest in the partnership unless the limited partner participates substantially in the control of the business. If a limited partner takes part in the control of the business, the partner is liable only to persons who transact business with the limited partnership with actual knowledge of the partner s participation in control. Sole proprietors have unlimited liability for the obligations and actions of the business. 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? A corporation s ownership interest is represented by shares of the company. Unless restricted by the corporation and subject to compliance with applicable securities laws, shares are transferable. The minimum number of owners is one. The same ownership interest elements apply to a close corporation, except there is a statutory default restriction on transfer unless the close corporation s Articles of Incorporation provide otherwise. There must be at least two owners to form a general partnership or a limited liability partnership, and there must be at least one general partner and at least one limited partner to form a limited partnership. Partnership interests consist of each partner s share of profits and surplus. A partnership interest is considered personal property and is freely assignable unless otherwise agreed upon by the partners in a partnership agreement. The economic attributes of a limited partnership interest are generally transferable (subject to compliance with applicable securities laws) but the transferee does not automatically have the right to acquire the other attributes of a limited partnership interest. Most limited partnership agreements contain restrictions on the transferability of partnership interests. A sole proprietorship is not an entity separate from its owner, and therefore there is no ownership interest in a sole proprietorship as such. A limited liability company must have at least one owner. An ownership interest in a limited liability Page 302

304 company is transferable to the extent allowed by the company in its operating agreement and subject to compliance with applicable securities laws. 7. Is there a minimum capitalization? There is no minimum capitalization requirement for any organizational form. However, adequate capitalization must be in place in order to preserve the limited liability shield available under some of the entity formats. 8. Is there a security that can be issued to the public? Each of the entities, other than a close corporation, a general partnership or a sole proprietorship, may have an ownership interest represented by a security that can be issued to the public provided that such security is issued in accordance with applicable securities laws. 9. Can the form incur debt, or grant security for debt? All entity forms can incur debt and grant security for debt. 10. What is the duration of the form? Can it be renewed? A corporation, close corporation, general partnership and limited partnership may last until dissolved, unless otherwise provided for in the Articles of Incorporation/Organization. A limited liability partnership s registration lasts one year and may be renewed each year. A limited liability company lasts until dissolved or for a certain term of years (which must be specified in the Articles of Organization if the entity is to exist only for a specific term). A sole proprietorship is not an entity separate from its owner. 11. Describe the process, customary time period and approximate cost of establishing the form. To form a corporation, one or more incorporators must sign and file Articles of Incorporation with the Secretary of State. The state filing fee and initial tax is currently approximately $135. This filing must include an initial Annual Report for the South Carolina Department of Revenue, and an attorney licensed in South Carolina must sign a certificate certifying that all requirements have been met. Completion of organization of a corporation includes adoption of bylaws and election of directors and officers. To be designated a close corporation, the incorporator must follow the same procedure as for a corporation and designate the corporation as a statutory close corporation in its Articles of Incorporation. There are no formal requirements to form a general partnership, but the partnership may need to register in each county in which it owns property. A limited partnership and a limited liability partnership must register with the South Carolina Secretary of State. The limited partnership fee is currently approximately $10 and the limited liability partnership fee is currently approximately $100. A written partnership agreement should be agreed upon as part of the organization of a limited partnership or a limited liability partnership. There are no formal requirements to form a sole proprietorship. To form a limited liability company, Articles of Organization must be filed with the South Carolina Secretary of State. The state filing fee and initial tax is currently approximately $110. An Operating Agreement may be used, but it is not required and is not a matter of public record. For any form requiring registration with the South Carolina Secretary of State, generally two business days are needed for the filing to be complete. The costs listed above do not include attorneys fees, which will vary depending on the circumstances. 12. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? No. Page 303

305 13. For what taxes is the form liable? Each entity is responsible for applicable income taxes, license/excise taxes, sales taxes, real property taxes, personal property taxes and other relevant taxes. Generally, for income tax purposes, a general partnership, a limited liability partnership, a limited partnership, a sole proprietorship or a limited liability company is not subject to direct income taxation, and the entity s income flows through to its owners and must be reported by those owners as their income. 14. What is the tax treatment of payments to foreign owners? If a foreign business chooses to operate in the United States through a corporation formed here, that corporation will be subject to United States income taxation on its worldwide income. Dividends from that corporation to foreign shareholders will be subject to United States income tax that will be withheld by the United States payor. The amount of that tax may be significantly reduced by treaty. United States branches of foreign businesses are taxed similarly to United States corporations owned by foreign shareholders. United States partnerships and limited liability companies withhold and pay the income tax applicable to foreign partners and members at United States rates. 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? If a foreign business chooses to operate in the United States through a corporation formed here, that corporation will be subject to United States income taxation on its worldwide income. Dividends from that corporation to foreign shareholders will be subject to United States income tax that will be withheld by the United States payor. The amount of that tax may be significantly reduced by treaty. United States branches of foreign businesses are taxed similarly to United States corporations owned by foreign shareholders. United States partnerships and limited liability companies withhold and pay the income tax applicable to foreign partners and members at United States rates. The foregoing responses to questions 1-15 provides only a summary of applicable legal provision and omits numerous exceptions, qualifications and limitations set forth in the law. In addition, the foregoing addresses only provisions of South Carolina law and does not address the law of any other jurisdiction, including without limitation United States federal law. For more complete information, reference should be made to applicable statutes, rules, regulations and judicial or administrative decisions. Contact Information Meliah Bowers Jefferson mjefferson@wyche.com Eric Amstutz eamstutz@wyche.com Wyche, P.A. 44 East Camperdown Way Greenville, South Carolina Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 304

306 Issues Relating to Organizational Forms and Taxation USA, South Dakota Lynn, Jackson, Shultz & Lebrun, P.C. 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. a) Non-Profit Corporations. A non-profit corporation is a corporation which does not distribute any part of its income or profit to its members, directors, or officers. Neither the members, nor the officers or directors are personally liable for the corporation s obligations. Non-profits are typically used by individuals to pursue social objectives as the entity can apply for federal tax exempt status and may apply for exemption from certain state and local taxes, such as property taxes. As a non-profit corporation, shareholders and members can not share in profits. b) Corporations. A corporation is a for-profit business which has legal authority to act as a separate entity, apart from its shareholders. The main advantage of a corporation is the liability protection afforded shareholders, directors and officers. The corporation must follow typical corporate formalities to insure this protection. Profits and losses and voting rights are allocated according to ownership c) Limited Liability Companies. The advantages of LLCs are that members and manages are not liable for the company s debts or obligations, members have broad discretion in allocating profits and losses and voting rights. An LLC also provides creditor protection to members interest in an LLC that are not available to shareholders of corporations. d) Partnerships. Partnerships offer unlimited flexibility in governance and management and they are simple and easy to establish. The main disadvantage is the unlimited personal liability of the partners for the debts of the partnership. e) Limited Partnerships. Some advantages of LPs are that they offer flexibility in allocation of profits and losses among the general and limited partner while also protecting the personal assets of limited partners from the LP s obligations. General partners, however, still have unlimited liability. f) Limited Liability Partnership. LLPs are nearly identical in all respect to Partnerships, but they provide liability protection to the partners for the obligations of the partnership. g) Co-operatives. A co-operative is a business which is owned by those using its services. Some advantages to co-operatives are that the ownership structure maximizes internal motivation among employees, directors, and officers, and services to the members are provided at cost. A disadvantage of co-operatives is that outside investors may be wary of providing capital due to the tight ownership structure. 2. Are there attributes of the form that you consider unique to your jurisdiction? To protect family farms, South Dakota bans the use of a foreign or domestic corporation or LLC for agricultural purposes, except in limited circumstances. Also, South Dakota has no state income tax, which affects all forms of business. For LLCs and LPs, a charging order is the sole remedy available to a creditor against a member s or limited partner s interest in the form. Page 305

307 3. Describe the management and governance structure for each organizational form. a) Non-Profit Corporations. Non-profits are managed by a Board of Directors, which must have at least three (3) directors the original Board of Directors must be named in the Articles of Incorporation. These directors do not have to be members of the non-profit, and are elected either by the Board or the membership. A non-profit is operated by its officers and employees. b) Corporations. Corporations are managed by a Board of Directors and its officers, which are appointed by the Board. Shareholder approval is required for designated outside the ordinary course of business issues. c) Limited Liability Companies. LLCs can be managed my members (like a partnership) or managers (like a corporation). The relationship of the members or managers to the LLC are governed by an operating agreement. d) Partnerships. Partnerships have significant flexibility in management and governance. Unless otherwise designated in a partnership agreement, each partner has an equal right to control and profits of the partnership. e) Limited Partnerships. Generally, except as provided in the partnership agreement, a general partner of a LP manages the LP. Limited partners typically are not involved in the operation of the LP. f) Limited Liability Partnerships. Generally, an LLP is managed the same way as a Partnership. g) Co-operatives. Co-operatives are managed by a Board of Directors, which must have at least five (5) directors, and by their officers are appointed by the Board. The Board of Directors may have only three (3) directors if it has less than 50 members. 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? None. 5. Describe the extent to which management and owners are exposed to liability. a) Non-Profit Corporations. Neither directors, officers, or members are personally liable for a nonprofit s obligations or liabilities. b) Corporations. Neither directors, officers, or members are personally liable for a corporation s obligations or liabilities. Directors may be personally liable for improper distributions to the shareholders. c) Limited Liability Companies. Members and managers are not personally liable for debts, obligations or liabilities of the LLC. d) Partnerships. Partners are personally liable for the partnership s debts, obligations, and liabilities, and each partner s personal assets are at risk. e) Limited Partnerships. Limited partners are not liable for a LP s obligations unless he, she or it is involved in the management or control the LP General partners are liable for the LP s obligations. f) Limited Liability Partnerships. Partners in an LLP are not personally liable for the LLP s debts, obligations or liabilities. Page 306

308 g) Co-operatives. Directors are liable for any improper distribution of assets, if done negligently or in bad faith. Officers, directors, employees, and agents are not liable for any actions taken on behalf of the best interests of the co-operative. Additionally, no patron or member is liable for any debt which the co-operative incurs. 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? a) Non-Profit Corporations. There is no ownership interest in a non-profit. There must be 3 organizers. b) Corporations. A corporation s ownership interest is represented by shares. Shares are freely transferable, but a restriction can be placed on their transfer. There must be at least one shareholder. c) Limited Liability Companies. A member of an LLC has a membership interest or membership units, which may or may not be represented by a certificate. The transfer of a membership interest does not grant membership status to the transferee unless approved by the LLC. A transfer instead only allows the transferee to receive distributions. There must be at least one member. d) Partnerships. A partnership must have two or more partners. The only transferable interest of a partner in the partnership is the partner's share of the profits and losses of the partnership and the partner's right to receive distributions. e) Limited Partnerships. A partnership interest is assignable in whole or in part, subject to the provisions of the partnership agreement. A limited partnership needs at least one general partner and at least one limited partner. f) Limited Liability Partnerships. An LLP must have at least 2 partners. A partner can only assign his or her right to receive distributions. g) Co-operatives. A co-operative s ownership interest is represented by capital and membership stock. A co-operative may recall or exchange stock. There is no statutory minimum number of owners. 7. Is there a minimum capitalization? While there is no formal statutory amount necessary as minimum capitalization, a business formed in South Dakota must be adequately capitalized to protect its shareholders or members against a claim for piercing of the corporate veil. 8. Is there a security that can be issued to the public? a) Non-Profit Corporations. Non-profit corporations do not issue securities. b) Corporations. Subject to registration and disclosure requirements on the state and federal level, securities in a corporation can be issued to members of the public. c) Limited Liability Companies. Subject to registration and disclosure requirements on the state and federal level, securities in an LLC can be issued to members of the public. d) Partnerships. Subject to registration and disclosure requirements on the state and federal level, securities in a partnership can be issued to members of the public, although it is unusual to do so. Page 307

309 e) Limited Partnerships. Subject to registration and disclosure requirements on the state and federal level, securities in an LP can be issued to members of the public. f) Limited Liability Partnerships. Subject to registration and disclosure requirements on the state and federal level, securities in an LLP can be issued to members of the public. g) Co-operatives. Subject to registration and disclosure requirements on the state and federal level, securities in a co-op can be issued to members of the public. 9. Can the form incur debt, or grant security for debt? Each referenced form can incur debt and grant security in its assets. 10. What is the duration of the form? Can it be renewed? Each form can exist for perpetuity unless another term is referenced in its formation documents. 11. Describe the process, customary time period and approximate cost of establishing the form. a) Non-Profit Corporations. A non-profit must file an original and conformed copy of its Articles of Incorporation with the South Dakota Secretary of State. The Articles of Incorporation must be filed by three (3) incorporators over the age of 18, and must state: the name, duration, and purpose of the non-profit, the name and address of its registered agent, and also whether the non-profit is to have members or any membership requirements. The filing fee is $30. b) Corporations. A corporation must file an original and conformed copy of its Articles of Incorporation with the South Dakota Secretary of State. The Articles of Incorporation must be filed by an incorporator and must state: the name of the corporation, the number of shares to be issued, the street address of its principal office, and the name and address of each incorporator. The filing fee is $150. c) Limited Liability Companies. An LLC must file an original and conformed copy of the Articles of Organization to the South Dakota Secretary of State. The Articles of Organization should be filed by an organizer and must state: the name of the company, the address of its initial designated office, the name and address of the organizer(s), the duration, and how the company is to be managed. The Articles should also include whether any members are liable for its debts or liabilities. Filing will cost $150. d) Partnerships. The association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership. No filing with the Secretary of State is required. e) Limited Partnerships. A limited partnership is formed at the time of the filing of the certificate of limited partnership with the filing fee of one $125 in the Office of the Secretary of State. The certificate should include: the name of the limited partnership, the name and business address of each general partner, the latest date for limited partnership dissolution. f) Limited Liability Partnerships. A partnership is formed as referenced above. That partnership receives LLP status by filing a statement of qualification with the South Dakota Secretary of State. The statement should include: the name of the partnership, street address of its office or registered agent, a statement that the partnership elects to be a limited liability partnership, and a deferred effective date, if any. g) Co-operatives. A co-operative must file an original and conformed copy of its Articles of Incorporation with the South Dakota Secretary of State. The Articles of Incorporation must be filed by 3 incorporators at or over the age of 18, one of them being a resident of South Dakota. Page 308

310 The Articles should state the name, duration, and purpose of the co-operative, and membership class information. The filing fee is $150. The Secretary of State typically files articles within 2-3 business days of receipt. 12. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? There are no requirements for government to be part of a project or investment vehicle or receive part of the profits arising therefrom. 13. For what taxes is the form liable? South Dakota has no state income tax, no corporate income tax, no personal income tax, and no business inventory tax. South Dakota applies a sales and use tax to most goods and services sold or used in the state. Real Property taxes are also assessed. 14. What is the tax treatment of payments to foreign owners? South Dakota has no state income tax, and therefore foreign owners are treated no differently than domestic ones under South Dakota law. 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? South Dakota has no state income tax, and therefore foreign owners are not impacted differently than resident ones under South Dakota law. Contact Information Heath R. Oberloh hoberloh@lynnjackson.com Lynn, Jackson, Shultz & Lebrun, P.C. 909 Saint Joseph Street, Suite 800 Rapid City, South Dakota Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 309

311 Issues Relating to Organizational Forms and Taxation USA, Utah Prepared by Lex Mundi member firm Van Cott, Bagley, Cornwall & McCarthy, P.C. 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. Corporation, professional corporation (PC), nonprofit corporation, corporation sole, limited liability company (LLC), professional limited liability company (PLLC), low-profit limited liability company (L3C), limited partnership (LP), limited liability partnership (LLP), sole proprietorship, general partnership. There is also a unique entity known as an industrial bank. LLCs and corporations are the most common investment vehicles. PCs, PLLCs and LLPs are commonly used by practicing professionals. Nonprofit corporations are commonly used to qualify for tax exempt status. 2. Are there attributes of the form that you consider unique to your jurisdiction? Many organizations, especially large and multinational corporations, have formed industrial banks in Utah. The corporation sole form is sometimes used by religious and charitable organizations. Like many (but not all) states, Utah allows the formation of single-member LLCs. 3. Describe the management and governance structure for each organizational form. Typical of other jurisdictions. 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? No residency requirement. 5. Describe the extent to which management and owners are exposed to liability. Generally, liability is limited to capital investment as long as entity formalities are observed. 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? Typical documentation requirements apply. Corporations use share certificates, LLC membership and partnership interests are documented in an operating or partnership agreement. 7. Is there a minimum capitalization? No, but at least nominal capitalization is recommended. Page 310

312 8. Is there a security that can be issued to the public? Both corporations and LLCs may issue securities to the public in accordance with state and federal laws. 9. Can the form incur debt, or grant security for debt? Yes. 10. What is the duration of the form? Can it be renewed? Corporations and partnerships are perpetual until dissolved. LLCs are limited to 99 years but can be renewed. 11. Describe the process, customary time period and approximate cost of establishing the form. Formation of registered entities (i.e., other than general partnership or sole proprietorship) is accomplished by filing with the Division of Corporations and Commercial Code (Utah Department of Commerce). Filing fees are typically under $100. Time required to prepare articles, bylaws, operating agreements, etc. is typical of what would be required in any other jurisdiction. 12. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? No government participation is required. Typical provisions regarding business registration, business licensing, etc. apply. 13. For what taxes is the form liable? Utah imposes corporate and personal income tax (based on federal income tax), sales/use tax, property tax, typical withholding taxes (again based on federal withholding requirements), and various excise taxes. 14. What is the tax treatment of payments to foreign owners? Income derived through a Utah entity is generally treated as Utah-sourced income, regardless of the residency of the owners. Page 311

313 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? Depending on the state, a foreign owner whose state of residence also imposes income tax may incur some double taxation in the event the state of residency does not provide a credit for foreign taxes paid sufficient to fully offset taxes paid in Utah. Contact Information Tacy Hartman thartman@vancott.com Van Cott, Bagley, Cornwall & McCarthy, P.C. 36 South State Street, Suite 1900 Salt Lake City, Utah Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 312

314 Issues Relating to Organizational Forms and Taxation Uruguay Prepared by Lex Mundi member firm Guyer & Regules 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. The most common forms of organization available in our jurisdiction are the following: a.) Stock corporations ( Sociedades Anónimas ), b.) Limited Liability Partnerships ( Sociedades de Responsabilidad Limitada ) and c.) Branches of Foreign Entity. a) Stock corporations. This type of legal entity is the mostly used by investors, including foreign ones. There are two kinds of corporations: i) publicly traded corporations and ii) closed corporations. Corporations may represent their paid in capital with bearer or registered shares. However, for special purposes or certain activities, the corporations shall have only registered shares (e.g. to own land or perform agriculture activities, banks, insurance companies). Advantages: The stock companies are the most commonly used forms of organization in our country to the following reasons: i) the limited liability of its shareholders as they do not carry any liability for the company s debts beyond the amount of capital each shareholder pays or has agreed to pay in; (ii) there is no minimum number of shareholders once the company has been incorporated; (iii) the capital can be represented in bearer shares (depending on the type of activity). b) Limited Liability Partnership ( LLP ). This legal form is usually chosen by medium- and small-size business entities. Under this kind of partnership the liability of the partners is limited to the capital they subscribe, being however liable for the labor debts (only for non paid wages). There must be a minimum of two partners and a maximum of 50. c) Branch of Foreign Entity. Companies established abroad are recognized in Uruguay and may perform isolated acts or contracts without any other prior administrative procedure or act. However, when they perform activities within Uruguay on a regular basis they must set up a branch in the country. Branches are regulated by provisions similar to those for local companies as regards organization, tax treatment, etc. Under Uruguayan law, the branch is not a separate legal entity, being therefore the head office, together with the branch regarded as a unique legal entity (except for taxes, which are liquidated separately, considering the activities of the branch in Uruguay as a permanent establishment). Page 313

315 2. Are there attributes of the form that you consider unique to your jurisdiction? No. 3. Describe the management and governance structure for each organizational form. a) Corporations. The Shareholders Meeting is the highest corporate authority and shall meet at least once a year to approve the annual balance sheet and the distribution of earnings, as well as to appoint the Board of Directors or administrator. Administration may be entrusted to a single administrator or a Board of Directors consisting of one or more persons appointed by the Shareholders meeting. In the case of publicly traded corporations the Board of Directors must meet at least once a month, whereas in closed corporations it must meet mandatory once a year to call the Shareholders Meeting (to submit the annual balance sheet, etc.). The Board may meet in Uruguay or abroad, at its discretion. The Board of Directors may govern the corporation subject to the control and approval of the Shareholders Meeting. b) Limited Liability Companies. The management of these companies is normally conducted by an administrator or board appointed by the Meeting of Partners. c) Branch of a Foreign Entity. Under local Law of Commercial Companies the foreign entity shall appoint one or more legal representatives, who will manage the branch. The branch must also appoint a fiscal representative, who can be the same person as the legal representative (please see answer to question 4 below). In this case, the Head Office of the foreign entity is liable for all obligations assumed by the branch. In addition, the foreign entity can be validly summoned in Uruguay by suing the branch. 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? No, there is no residency requirement neither for management nor owners. However, the fiscal representative of a branch must be a Uruguayan fiscal resident. Said fiscal representative will be jointly liable with the branch for its tax obligations. There are no prohibitions for foreign investors to perform commercial or industrial activities in Uruguay, except for: (i) radio or television broadcast services waves in which the provider shall be a company with national shareholders; (ii) in case airline companies with national flag the owner of 51% of the airline company respectively, must be domiciled in Uruguay; (iii) in case of vesels, if the owners or operators are physical persons they must be Uruguayan citizens and be domiciled in Uruguay; if the owners or operators are legal entities, they must evidence that: if the legal entity is a personal company (such as a unlimited liability company) then more than half of its partners must be of Uruguayan citizenship and domiciled in Uruguay; if the legal entity is a stock corporation, in such a case then 51% of the issued shares must issued on a registered basis and be held by Uruguayan Page 314

316 citizens; the management and control of the company must be run by Uruguayan citizens; the company must be incorporated in Uruguay. 5. Describe the extent to which management and owners are exposed to liability. According to Uruguayan Company Law that legal representatives of limited liability partnership and corporations are personally and jointly liable for any damages caused to the company arising for their misconduct as legal representatives. Legal representatives are liable for: acting against the law; acting against the by-laws and articles of incorporation of the company; not complying with their duty of loyalty to the company; or not complying with their duty of care vis-à-vis the company. Regarding fiscal liabilities, legal representatives as well as the attorneys in fact are jointly liable with the company for its fiscal duties. This implies that the Tax Authority may claim against either the company or the mentioned representatives the sums owed. Nonetheless, there is a double limitation to this responsibility (except for the Corporate Income Tax as explained below): 1) it does not reach those legal representatives who can prove that they have acted with due care, and 2) it is limited to the aggregate value of the corporate net worth, except in case of fraud. However, the liability of Directors of stock companies or partners of limited liability companies for the payment of Corporate Income Tax, is established as objective. Therefore, the above mentioned limitations do not apply in case of this tax. The Directors and legal representatives of stock corporations and the partners of limited liability partnerships are held jointly liable for: contracting the mandatory insurance covering work accidents and the compliance with safety and accident prevention regulations. In case of limited liability partnership, its partners are personally and jointly liable for the labor debts of the company (only for non paid wages). Regarding criminal conduct, and as a consequence of the application of general principles, the liability of the legal representatives arise from their personal and individual involvement in the criminal act. Such liability would cease when legal representatives sufficiently prove that they: had no intervention in such acts; or, had no knowledge of the same; or had expressed their opposition to it. 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? (i) The ownership interest in the Corporations may be represented by bearer or registered shares. In addition, Corporations may issue ordinary and preferred shares. The preferred shares allow their holders to exercise certain rights that are not available to the ordinary shareholders, i.e. the right to appoint certain number of members of the Board of Directors, the right to receive a predetermined amount of profits.. (ii) Yes. There is no restriction in the transfer of shares. However, depending on the type of activity rendered by the company, certain transfers shall be previously authorized by the competent authority (i.e. transfer of shares from financial institutions). Page 315

317 (iii) Stock companies have no minimum number of owners (only when incorporating the company two founders are needed, but this number can be later reduced to one). Limited Liability Partnerships need at least two partners. 7. Is there a minimum capitalization? The Corporations shall have their capital represented in Uruguayan Pesos, except when their main purpose is to invest in assets located abroad. At least 25% of the Corporation s authorized capital must be paid-in by the shareholders. 8. Is there a security that can be issued to the public? Yes. Stock companies can issue the following securities to be publicly offered: shares and corporate bonds. In case of trusts, they can issue certificates of indebtedness. Securities that are publicly offered in Uruguay as well as the issuer of such securities need to be registered before the Central Bank of Uruguay ( CBU ). Further, certain specific regulations apply to such cases. 9. Can the form incur debt, or grant security for debt? Yes. 10. What is the duration of the form? Can it be renewed? The term of the Limited Liability Partnerships may be of a maximum of 30 years. For stock companies, there is no maximum term. In both cases, the term may be renewed and modified by the partners or shareholders respectively, by means of an amendment of the articles of incorporation of the company. 11. Describe the process, customary time period and approximate cost of establishing the form. In the case of closed stock companies, at least two founder shareholders must sign the foundation minutes and approve the by-laws before a notary public. By-laws are subject to authorization of a governmental agency called Auditoria Interna de la Nacion and have to be registered once the approval has been granted at the National registryof Commerce and published in the Official Gazette and other newspaper. The by-laws shall contain the basic characteristics of the corporation (corporate purpose, duration, management, etc), as well as any other regulations not violating legal provisions (e.g. procedure for Shareholders Meetings, legal representation of the company, etc). There are, however, certain legal provisions of the public order that prevail over the stipulations of bylaws. The customary time period for the constitution of a stock company is of approximately 120 days. However, if the articles of incorporation of the stock company are customarily standard and do not have any special clause, the time period reduces to 2 days. On the other hand, in order to incorporate a limited liability partnership at least two partners shall sign the by-laws of the company before a notary public. Afterwards, the by-laws have to be registered before the National registryof Commerce and published in the official gazette and in another newspaper. Once the publications are made the limited liability partnership is legally formed The customary time period for the constitution of a limited liability partnership is of approximately 30 days. However, if the articles of incorporation of the stock company are customarily standard and do not have any special clause, the time period reduces to 2 days. Finally, please note that it is possible to acquire shelf corporations, already constituted companies which have not started operations and provide an immediate use. Regarding the costs of establishing the form, they vary depending on the content of the articles of incorporation. For standard companies, the cost is of approximately USD Page 316

318 12. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? No. However, there are special activities which shall be necessarily carried out by governmental bodies, since the State has the monopoly of the same: water and electric supply, local fixed line telecommunication services, insurance over labor risks and the import and refining of crude oil and import and export of liquid, semi liquid and gaseous fuel. 13. For what taxes is the form liable? In general, Corporations pay the following taxes (other specific taxes may apply depending on the activity). a) Corporate Income Tax ( Impuesto a las Rentas de las Actividades Económicas IRAE ) The IRAE is levied annually on fiscally adjusted net income from a Uruguayan source, derived from profit-making activities carried out by companies at a rate of 25% (for fiscal exercises started after July 1, 2007). In order to obtain the net income, accrued expenses incurred during the fiscal year may be deducted exclusively if they are needed to obtain and maintain taxed income and if such expenses are duly documented. As a general rule, the only expenses that may be deducted are those which constitute taxable income for the counterparty, either under the IRAE, Personal Income Tax on residents (hereinafter IRPF ), Income Tax on Non-Residents (hereinafter IRNR ) or under any form of tax imposed on income in the foreign country. When expenses incurred qualify as counterparty s IRPF or IRNR taxable income, the deduction will be limited by applying the ratio between the tax rate for those earnings and the IRAE tax rate corresponding to the expense (except in the case of labor gains which can be deducted in a 100%). When the expense is incurred abroad, a 100% deduction may be made provided that the tax rate on these expenses is 25% or higher. If the tax rate is lower than 25%, a proportional percentage to be applied shall be calculated. b) Capital Tax (Impuesto al Patrimonio - IP) The capital tax is an annual tax paid on properties, assets and rights economically located, placed or used within the country. The taxable amount is determined by the difference between the taxed assets and the deductible liabilities (only commercial debts, tax debts except net worth tax, average debts with Financial Institutions). The tax rate is of 1,50%, which is calculated considering the net worth which is used to obtain incomes subject to IRAE. In case the company holds assets abroad or exempted assets, liabilities are only computed in the amount exceeding the value of said assets. A decrease of the 50% paid annually by this tax may be applicable depending the IRAE to be paid. Companies with bearer participations and companies with registered shares, when the shareholders are not individuals, will not be able to make such deduction. IP is paid annually, but monthly payments in advance are required at a rate of 11% regarding the previous year tax. Page 317

319 Additionally, legal entities included in the IRAE that are debtors of individuals domiciled abroad or legal entities organized abroad that do no perform business in Uruguay through an agency, branch or establishment, are appointed as withholding agents of this tax at a rate of 1.5%. However, loans, investments, guarantees and import prices balances are exempted. c) Control of corporations tax (ICOSA) The ICOSA is levied on stock co 14. What is the tax treatment of payments to foreign owners? The Income Tax on Non-Residents ( IRNR ) applies to incomes of Uruguayan source obtained by non-resident individuals or legal entities not operating in Uruguay by means of a permanent establishment. The general rate of the IRNR shall be 12%. In the case of dividends or profits paid by Uruguayan companies (IRAE taxpayers) to foreign shareholders, the rate shall be of 7%. Consequently, dividends distributed by an Uruguayan company (taxed by IRAE) to its Head Office or to its foreign owners will be taxed by the IRNR at the rate of 7% on the distributed amount. It must be stressed that this tax will apply only to the amount of the IRAE net taxable base. To these effects the losses from previous years will not be considered as part of the net taxable base. 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? No. Even though residents and non-residents pay different taxes ( Non-residents pay IRNR while individual residents pay Income Tax on Residents), both taxes have the same rate (7%) regarding dividends and profits. Nevertheless, foreign owners may have a different tax treatment in case Uruguay has executed a double taxation treaty with the foreign owners jurisdiction. Contact Information Valentina Larrobla vlarrobla@guyer.com.uy Guyer & Regules Plaza Independencia Montevideo, Uruguay Tel Fax This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: Page 318

320 Issues Relating to Organizational Forms and Taxation Venezuela Prepared by Lex Mundi member firm Hoet Pelaez Castillo & Duque 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (e.g., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. The Venezuelan Commercial Code provides for four different types of business organizations: the stock corporation, the limited liability company; the partnership; and, the limited partnership. The stock corporation, indistinctly referred to either as a CA (compañía anónima) or SA (sociedad anónima), is the most common type of legal entity used. The basic characteristic of this type of entity is that the partners will be isolated from the liability of the company, since their liability will be limited to the amount of capital they have contributed. The capital of any CA will be represented by shares. Unless otherwise provided for in the by-laws, the CA s shares are freely transferable by endorsement of the shares and the signing of the shareholders book. Venezuelan laws allow great flexibility regarding the management structure of CA. The Venezuelan Commercial Code does not contemplate any floor or ceiling on the capital of a CA. Therefore, the amount to be allocated as capital of a CA is the decision of the partners, with no restrictions under local law. The capital can be paid in kind or in cash, as so decided by the partners, and at the time of incorporation at least 20 per cent of the total amount allocated as capital must be paid in. The limited liability company (Sociedad de Responsabilidad Limitada) is a hybrid of partnerships and share corporations. The Commercial Code establishes a minimum capital of 20 bolivars and a maximum capital of 2,000 bolivars for a SRL. The capital of a SRL will be divided into participation quotas which must be transferred pursuant to a notarised deed. If the capital contribution is in cash, the partners may initially pay 50 per cent of the amount subscribed, but if the capital contribution is in kind, it must be paid in full. The legal limit on the maximum capital has made this entity unattractive for project companies; however, based on a provision of the Code of Commerce that allows for partner funding of the SRL, known as additional compensation and complementary payments, this type of entity has, in some cases, been used as a project company. The Partnership is a business organization formed by two or more members who do not enjoy limited liability. These members are jointly and severally liable for the partnerships obligations. The Limited Liability Partnership is a type of business organization that has two types of partners (i) one type of joint and liable partner (joint partner) and (ii) one type of limited partner (silent partner). The social obligations are guaranteed by the unlimited and joint liability of the joint partners and by the limited liability of the silent partners based on its specific amount of subscribed capital. In addition, Branches are treated by the Venezuelan Commercial law as local corporations, therefore, branches are authorized to carry out business without other limitations than the legal dispositions applicable to companies organized in Venezuela. 2. Are there attributes of the form that you consider unique to your jurisdiction? Limited Liability Partnerships and Limited Liability Companies might have positive tax consequences for investors from the United States of America because might allow the elimination of a tax level in Page 319