Many entrepreneurs in the agricultural sector operate in their own interests, aiming to achieve the most favorable results for themselves. However, sometimes their own resources are insufficient, and acquiring additional ones may not be cost-effective for various reasons. This is when the need arises to combine assets with another business entity and achieve a common goal in an optimal relationship for both parties. The ideal tool for legally regulating such relationships is a joint activity agreement without creating a legal entity. This type of agreement is quite commonly used in the agricultural sector, particularly when one party has property rights to a land plot, and the other has the resources to cultivate agricultural crops, such as planting materials, equipment, and labor. Joint activities can be carried out either by combining the contributions of the participants (simple partnership) or without combining contributions.
It should be noted that establishing joint activities can carry significant legal risks. For example, one party may put the other party at a disadvantage, leading to the second party incurring significant losses and legal problems instead of profits from the joint activities. Therefore, when formalizing joint activities, it is important to seek the assistance of a lawyer with experience in this field.
Legal services related to joint activities include, in particular:
- Consultation on the formalization of legal relationships in joint activities;
- Verification of the legal status and reliability of the parties to the joint activity agreement;
- Assistance with the drafting, amending, and termination of joint activity agreements;
- Expert review of signed joint activity agreements;
- Support in resolving disputes arising from joint activity agreements;
- Resolution of tax issues arising in connection with joint activities.
Practice experience: 19 years
Specialization: litigation support, tax, customs and antitrust practices, agricultural law, IT and M&A
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Practice experience: 6 years
Specialisation: business and civil law, tax and customs practice, corporate law, registration and reorganisation of business
Practice experience: 11 years Specialization: support of economic, civil, labor and administrative disputes, inspections
To minimize possible negative consequences when concluding a joint activity agreement, the following actions are desirable:
- Clearly define the rights and obligations of the parties, the procedure for making joint decisions and actions, managing joint affairs, the legal status of the property allocated for joint activities, the procedure for distributing profits, covering expenses, and losses of the participants.
- Pay special attention to the duration of the agreement and the terms for its termination. It will not be to your advantage if the agreement includes a provision allowing the other party to unilaterally terminate it.
- Notarizing the joint activity agreement. The law allows for the agreement to be concluded without notarization, but involving a notary adds reliability to the deal, as the notary is obligated to verify the authority of the parties to conclude the agreement, the presence of legal documents for the land, and the compliance of the agreement’s terms with the requirements of the legislation.
The products produced as a result of the joint activity, as well as the fruits and income derived from such activities, are the joint partial property of the participants, unless otherwise provided by the simple partnership agreement or the law.
The profit obtained by the participants of the simple partnership agreement from their joint activities is distributed proportionally to the value of the contributions made by each participant to the common property, unless otherwise provided by the simple partnership agreement or other agreements of the participants.
The accounting of joint property can be entrusted to one of the participants, as defined in the joint activity agreement. This participant must follow the Methodical Recommendations for Accounting of Joint Activity without Creating a Legal Entity, approved by the Ministry of Finance of Ukraine’s Order No. 1873 from 30.12.2011, as well as PSBO 12.
Regarding tax accounting of joint activities, it should be noted that according to the Tax Code of Ukraine, for tax purposes, two or more individuals conducting joint activities without forming a legal entity are considered a separate entity within such activities. The accounting of the results of the joint activity is carried out by the tax payer, authorized by the other parties according to the terms of the agreement, separately from the accounting of the business results of the taxpayer. For tax purposes, business relations between the participants in the joint activity are equated to relationships based on separate civil law contracts. Additionally, the tax authorities do not keep records of joint activity agreements that are not subject to the tax accounting and taxation specifics outlined in the Tax Code. Each participant in such agreements is individually registered with the tax authorities and independently fulfills their tax obligations.
A joint activity agreement must be concluded in writing. Notarization of such agreements is not required by law, but it is not unnecessary.
Joint activity agreements (for joint cultivation of agricultural crops) are not subject to state registration. In practice, this type of agreement is sometimes confused with another agreement of a similar name but with a completely different legal nature and content—the joint investment activity agreement, which is subject to state registration.
A joint activity agreement, like any other agreement, is a legal act aimed at acquiring corresponding rights and obligations. Therefore, the general requirements established by the Civil Code of Ukraine apply to a joint activity agreement, and adherence to these requirements is necessary for the validity of any legal act. Thus, if for some reason the content of the joint activity agreement contradicts the Civil Code of Ukraine, other civil legislation acts, or the interests of the state and society, its moral principles, or if a party to the agreement lacks the necessary capacity, the agreement may be declared invalid. A joint activity agreement, like any other legal act, must be aimed at achieving real legal consequences stipulated by the agreement. Therefore, if the joint activity agreement is a disguised land lease agreement, its content will contradict the legal requirements, which is grounds for declaring the agreement invalid and obligating the land user to vacate the land plot, given that its use in such a case is without sufficient legal grounds.
