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Cross-border Joint Ventures & Tax


It is common, when two or more persons or entities wish to join forces to collaborate on a specific project, that the parties will form a joint venture in connection with the project. A joint venture in South Africa is undertaken either via an incorporated joint venture or via an unincorporated joint venture. It is important that prior to entering into a joint venture, that the parties consider the relevant tax consequences beforehand.

Incorporated joint venture

An incorporated joint venture is typically where a company or similar entity is incorporated (the “company”), and two or more shareholders (the “joint venturers”) contribute funding, skills and/or knowledge to the company, and are issued shares by the company which has been newly incorporated. The shareholders and directors are typically not held liable for the liabilities of the company, as the company has a separate juristic personality. The only way to hold the directors and/or shareholders personally liable would be to pierce the corporate veil, which in most instances is not always possible (except where prescribed by law). The company is typically regarded as a person for tax purposes, and is not transparent for tax purposes (except where prescribed by law).

Unincorporated joint venture

An unincorporated joint venture in South Africa is typically regarded as a partnership. In terms of South African law, a partnership is not regarded as a legal person and each partner is jointly and severally liable for the debts incurred by the partnership, or partners acting in the course of the partnership. A partnership is not a juristic entity with a separate personality from its members/ partners. For tax purposes, a partnership is also not regarded as a person, and each partner is taxed on the profits of the partnership. For this reason, a partnership is regarded as “transparent” in that the partnership is not taxed, but the partners are.

Cross-border issues

A difficult situation may arise in cross-border situations where a partnership is regarded as a juristic as well as taxable person in one country, but regarded as transparent and not as a "person" in another entity. This is because where partners reside in different countries, different countries may in terms of their domestic laws have taxing rights to the partnership profits (by residency or by source). The issue of where the source of the partnership profits arise may be questioned, as well as whether a country has taxing rights to the profits of the partnership, by reason of the partnership being deemed to be incorporated and/or established in that country by virtue of the domestic laws of that country.

Whether a partnership is recognised as a person for tax purposes in a country, when dealing with cross border transactions, is an important question to consider as the answer will result in how the partnership will be treated for tax purposes. In the event of a conflict, if a double taxation agreement exists between the countries who claim the right to tax, then the double taxation agreement should assist in determining which country has the right to tax the partnership profits. In the absence of a double taxation agreement, it is possible that double taxation on the partnership profits would occur (by reason of the partnership being taxed, as well as the partners in another country).

Partnership option

If a joint venture is regarded as a partnership (either as an unincorporated partnership or as a limited liability partnership) in terms of foreign laws in which the partnership is conducting business, then the partnership may in some instances be regarded as a foreign partnership in terms of the Income Tax Act 58 of 1962 (the “Act”). Partnerships in some jurisdictions are regarded as transparent for tax purposes, and it is important to consider this aspect.

As a partnership is not taxable as a "person" in itself in South Africa, then from a South African income tax perspective, the profits of the partners, whether local or foreign, are taxed in accordance with section 24(H)(5) of the Act, and are accordingly taxable in South Africa with the effect that each partner is required to submit a return. This may lead to double taxation of partnership profits where the partnership also conducts business in another jurisdiction, therefore a Double Tax Treaty (if in existence between South Africa and the foreign jurisdiction) and domestic law must be considered to determine whether South Africa derives taxing rights to the partnership profits which are derived from a source in South Africa.

Source of profits in the cross-border context

In CIR v Epstein the Court held that where partners of the partnership carry on business activities in two countries, then the source of the profits will accordingly be from two sources. However, if a partner carries on business in South Africa, then such income will be sourced within in South Africa and be taxable in South Africa. It follows that South African sourced-income would be taxable in South Africa. However, this still may result in a situation where the partnership profits are subject to double taxation as the profits may be taxable in the foreign jurisdiction as well. If a double taxation agreement between the foreign jurisdiction and South Africa exists, we then need to consider what article of the Double Tax Treaty would provide some relief from double taxation on the same profits.

Section 24(H)(2) of the Income Tax Act provides as follows:

Where any trade or business is carried on in partnership, each member of such partnership shall, notwithstanding the fact that he may be a limited partner, be deemed for the purposes of this Act to be carrying on such trade or business.”

Whilst our law does not recognise a partnership to be a legal entity, it was held in Grundlingh v CSARS that the partnership in the said case, where it carried on business in another jurisdiction (in this case Lesotho), it would be carrying on business in Lesotho and be a permanent establishment, with the result that profits that are attributable to such permanent establishment will be taxable in the country where that permanent establishment is found to exist. We will, in a further article, address the meaning and definition of permanent establishments in a follow up article.


Given that joint ventures can be taxed differently to that of South Africa in a foreign jurisdiction, it is essential to obtain tax and legal advice before forming a joint venture and before engaging in business as a joint venture in a foreign jurisdiction. There may be other legalities which need to be followed in a foreign jurisdiction (for example, obtaining a business permit). The tax consequences of intended ways of doing business should just be one of the aspects of risk assessments which should be carried out prior to entering into transactions, as opposed to after. Speak to your legal advisor prior to entering into such transactions to fully understand the nature and risk of each option.

Disclaimer: This article is written for information purposes only and should not be regarded as legal advice or tax advice, and it may contain errors and/or omissions. Always seek legal or tax advice from your professional advisor. Spence Attorneys will not be held liable for any act and/or omission arising from any person acting on this article.

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