Joint Ventures in Turkish Law - ONGUR&PARTNERS

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Joint Ventures in Turkish Law


JOINT VENTURES IN TURKISH LAW

 

Nowadays, in the wake of progress in international commerce, international projects have also become widespread. These projects are common especially in States, where they are used to carry out public services. The reason behind is the requirement of know-how and advanced technology, but these cannot be provided by local enterprises all the time. On the other hand, fore-mentioned public services require big capital investments, a financial burden which is hard to overcome by enterprises, on their own. Thus, two or more enterprise usually comes together under the roof of Joint Venture and this way they share both the financial risk and profit from each other’s know-how and technology.

 

Joint Ventures can be defined as an association of more than one legal or real entities which are legally and economically independent, to carry out a certain or a continuous work and make profit, by setting up a trading partnership. Not being regulated in Turkish Law, in the doctrine and practice, it is accepted that Joint Venture is in the scope of “business partnership” which is regulated under the Corporate Tax Law numbered 5520. On the other hand, even though the legal character of Joint Venture is contentious, the general acceptance is the Joint Venture is regulated through “ordinary partnership” provisions. This opinion is based on the Art.620/2 of new Code of Obligations numbered 6098. According to the article, if a partnership does not bear the characteristics of the partnerships designated in the Turkish Commercial Code then the partnership will be deemed ordinary partnership and it will be subject to the “ordinary partnership” provisions of Code of Obligations. In scope of these provisions, it should be accepted that Joint Ventures has the characteristics of an “ordinary partnership”.

 

A.  JOINT VENTURES IN SCOPE OF “ORDINARY PARTNERSHIP” PROVISIONS

1. Internal Relationships:

Turkish law of Obligations is based on freedom of contract principle as it is stipulated in the article 26 of Code of Obligations. Therefore, partners are free to regulate their internal relations. However, the regulation shouldn’t be contrary to the mandatory provisions of the Law. In case of a contradiction, provisions on “ordinary partnership” should be applied to Joint Venture.

 

a) Capital: Capital to be committed to the partnership is defined as contribution share in the Code. In accordance with the Art. 621, partners can commit their shares as cash money, credit, labor or as another “good”. According to the Art. 621/3 they can even commit the usage of a “property” as capital. In other words, the contribution of parties can be various starting from cash money, personal reputation, personal labor, experience, information to activities. Also the same article regulates the necessity for commitment shares of all partners to be equal and of same importance regarding the realization of the partnership’s purpose, unless otherwise agreed.

 

b)Advances and expenses: In scope of Code of Obligations numbered 6098, partner’s liability towards advances, expenses and expenditures are regulated as follows:  “The expenses endured or debts covered personally by one of the partners in the name of the partnership, remaining partners are liable to the partner; damages endured by the partner stemming directly from the administration of the partnership and  are to be covered by the remaining partners. Partner can demand interest for the loan to the partnership starting from the loan date.” As can it be inherent in the regulations a distinction from partners personal property and the partnerships property are is made and partners are compensated personally by remaining partners for the expenses endured in the name of the partnership, as the partnership does not possess a legal personality. 

 

c) Prohibition of Competition:  Directly or indirectly, none of the partners are can work for his/her own account, contrary to the aim of partnership or damaging the partnership. (The Law numbered 6098, Art. 626). The limits of noncompetition are set according to the requirements of life and the rules of bone fide. Other partners can demand the restitution of damage deriving from actions contrary to the noncompetition and revocation of Joint Venture or abolition of managerial authority of manager partner on probable cause.

 

d) Decisions: In accordance with Code of Obligations (Article 624), decisions shall be taken unanimously by all partners. If there is a contrary regulation in contract allowing the decisions to be taken by majority of votes, accordingly the majority will be determined to the number of partners. Additionally, the majority of partners not the majority of shares but will be considered during the determination.

 

e) Administration: Partnership can be administrated by single partner or partners tasked with administration, or by all partners. Additionally, a third person can be tasked by partners for administration of partnership. If these arrangements are not present in establishing contract, in accordance with Code of Obligations (Article 625) partnership should be administrated by all partners. Authority of administration includes routine work and acts towards realization of the purpose. The execution of unusual work depends on all partners consent. Donation, disposition of real estate and appointment of advocate general can be given as examples for unusual works. Because of partnership affairs, partners have joint liability. On the other hand, each partner has a duty of loyalty to partnership. As a result, each partner must be careful during execution of partnership affairs. In case of contrary actions to duty of care, partner in charge shall be held liable for damages to aggrieved partners.

 

f) Distribution of Profit: Manager is tasked with to rendering accounts (at least once each year) and distribution profits. Conditions envisaged in deed of partnership about extension of business year period is not valid. If the procedure of computing profit or loss (just one of them) is regulated under the deed of partnership and other is not, that rule will be applied for both of distribution of profits and losses. Distribution profit and loss shall be specified in contract. If there isn’t any guideline regarding sharing in the deed of partnership, regardless of the share, equal distribution of profit or loss will be implemented for each partner, as  envisaged under the Art.623 of Code of Obligations.

 

g) Supervision:  Supervision is one of the key rights of the partners. Within this scope, demand of information about general situation of works, examining commercial books and documents, summarizing the financial situation, are the rights which cannot be agreed otherwise under the deed of partnership. (Code of Obligations numbered 6098 Art. 631)

 

2. External Relations:

 

a) Legal representation: Joint Venture is an unincorporated partnership. For this reason, partners must act all together when becoming a party to a case. Representation of partnership requires special representation, as a consequence of becoming a party to legal proceedings does not deem as a routine affair. In case of capacitating a partner for administration, existence of representation authority can be acceptable. So, managing partner can litigate on his/her on the behalf of Joint Venture or he /she also can be sued.

 

b) Joint Venture-Bank Relations: In accordance with Banking Law, credit allocation and usage of credits is not possible for Joint Ventures as they don’t possess a legal personality. It will only be possible to open the credit on behalf of one or a few partners directly. It won’t be possible to establish a credit relation between the unincorporated “ordinary partnerships” and their partners. However, accreditation of partners (real or legal entities) will be considered as an indirect credit relationship, regardless of Joint Venture, under the principals stated in regarding Article. On the other hand, even if the Joint Venture’s name in guarantee letter’s text is present, it should be clear that the letter has been arranged for bank customer on credit. If the Joint Venture is accrediting more than one of their partners, only one guarantee letter can be arranged by implying the amount and beneficiary of the credit.

 

c) The Change in Partners:In accordance with Code of Obligation (Article 632/1) accession of a new partner to the partnership depends on the consent of all partners. Accession of a new partner to the partnership can be possible in the following ways:

 - Joining a partnership by pledging capital,

 - Joining a partnership as an inheritor,

 - Joining a partnership in place of outgoing partner,

 

Providing that the provisions, concerning involvement of inheritors to the partnership is possible in establishing contract, inheritors shall join the partnership instead of deceased partner even without consent of partners. In other conditions of acceptance, all partners consent on a new partner is needed.

 

Exclusion of a partner is regulated under the Art. 633 of Code of Obligations and it is possible in the following cases:

 - Notice of termination of a partner,

 - Disability of a partner,

 - Bankruptcy of a partner,

 - Encashment of liquidation share by means of compulsory execution or death of the partner,

 - If there is a provision in the deed of partnership that the JV will continue, in case of one of these situation’s presence, that partner or agent, or inheritor can leave the partnership or can be extracted with a written notice given by other partners.

 

d) Expiration of Partnership: (Code of Obligation Article 639-640) Partnership expires in the following cases:

1. Realization of the aim of partnership or its impossibility,

2. If there is no provision about partnership’s continuity, after a partner’s death,

3. If there is no provision about partnership’s continuity, disability, bankruptcy and encashment of liquidation share by means of compulsory execution or death of the partner,

4. With the consent of all partners,

5. Expiry of the period determined by the partners,

6. In the deed of partnership if the right of notice of termination is reserved or if the partnership is for indefinite period or limited with the life of a partner, with a partner’s notice of termination,

7. In the presence of probable cause, without fulling other conditions, with the court’s decision on a demand of termination.

If the partnership is for indefinite period or limited to the life of a partner, each partner can notice the termination before 6 months. (Code of obligations Art. 640)

 

e) Liquidation: Liquidation is regulated under the Art. 642 and following articles of Code of Obligations. According to the Art. 644 all partners are tasked as a liquidator and are obliged to join the liquidation transactions. For liquidation assets and liabilities of the partnership should be calculated. The goods are sold and liquidated.  The payments for third people are recompensed. The advances given, and the expenses made by partners are paid back. If the JV makes a loss during liquidation, the loss will be shared between the partners. (Code of Obligations Art.643). The sharing of the profit will be made under the same principals. The expiry of Joint Venture doesn’t cause a difference in commitments given to third people. The joint liability of partners continues exactly for JV’s commitments.

 

B. JOINT VENTURES IN SCOPE OF TAX LAWS

 

As indicated above, the Art.1 of the Corporate Tax Law numbered 5520, subjects the income of business partnerships to corporate tax. In the last paragraph of the Art.2 “business partnerships” is defined. Accordingly, “business partnerships: Partnerships set up by corporations indicated in the above paragraphs in between them or with real people, to carry out a work jointly or to share the profit and demanding tax liability in this way are business partnerships. The issue that they are not a legal entity doesn’t affect their tax liability”. As it is understood from the Article 2, Joint Ventures are in scope of “business partnerships” and even they are not legal entities, as a result of being dependent on “ordinary partnership” provisions they are accepted as tax payer for Corporate Tax. In other words if the partnership is registered as tax payer at tax office, it will pay 22[1]% of corporate tax from is total income. To become a tax payer in scope the Corporate Tax Law, the partnership should fulfill following criteria:

 

  -  Minimum one of the partners should be corporate tax payer.

  -  The partnership should be set up with a written agreement to carry out a certain work.

  -  The subject of the partnership should be a certain work.

  -  It should be envisaged that the work will be completed in a certain time period.

  -  There should be a commitment contract between the partnership and the employer.

  -  The parties should be responsible to the employer from not a certain part of the work but whole of it.

  -  The profit and the loss should be shared at the end of the work.

  -  The work committed jointly by the parties should be completed and the obligations regulated under the Tax Procedural Law should be fulfilled.

 

2. JOINT VENTURES IN SCOPE OF PUBLIC TENDER LAW NUMBERED 4734

Article 4 of Public Tender Law numbered 4734 defines joint ventures as, business partnerships or consortiums formed by a mutual agreement between more than one natural or legal persons in order to participate in procurements. 

 

Detailed provisions on the subject are found in the Art. 14 of the same law. In the article: “Joint ventures can be established by more than one natural or legal persons either in the form of business partnerships or consortiums. Members of business partnerships undertake the whole work with equal rights and responsibilities while, members of consortiums undertake the work distributed according to their own expertise field with separate rights and responsibilities.  Joint ventures have the right to participate in all kinds of tenders. In case the work requires different expertise, contracting authority will indicate in the tender document’s consortiums cannot participate in the tender. At the tender stage, joint ventures are expected to submit an agreement regarding the establishment of business partnership or consortium among members. In business partnership agreements a pilot member shall be specified whereas a coordinator partner shall be specified in consortium agreements. In case the tender is awarded to the business partnership or consortium, a notary-certified agreement regarding business partnership or consortium is required to be submitted prior to the signing of the contract. In business partnership agreements, it must be stated that all natural and legal person members are jointly and severally liable for the fulfillment of the commitment whereas in consortium agreements, for each natural and legal person constituting the consortium which part of the work committed and the intention of fulfillment of the commitment through coordination among themselves by coordinator must be stated.

 

As can be seen, the provision is detailed on the subject of joint ventures participating in public tenders.

 

 

 

[1] 22 percent tax rate is applied for earnings of 2018 2019, 2020