The U.S. Department of State Directorate of Defense Trade Controls is the regulatory organization charged with administering the body of export laws known as the International Traffic in Arms Regulations (ITAR). The ITAR sets out the rules and regulations that must be followed when transferring or exporting items from the U.S. that are considered important to national security, and therefore, require a greater level of control to protect the items or information from illicit use.
The Directorate of Defense Trade Controls, usually referred to as "DDTC," is somewhat notorious for- as the saying goes- holding their cards close to the vest when it comes to offering guidance on specific topics related to the ITAR and how it applies to exporting goods and services to foreign persons or countries. So, for any U.S. exporter whose products or services are captured under the ITAR, it is important to take notice when DDTC speaks by publishing guidance.
On March 25, 2024, DDTC published a short series of Frequently Asked Questions regarding joint ventures1 and how those contractual arrangements affect an exporter's DDTC registration. Following are a few of the key points from the FAQs.
- DDTC views joint ventures as separate legal entities, rather than as a subsidiary or affiliate of the parties to the joint venture agreement. If the entity formed from a joint venture will be engaging in military or defense related activities that are subject to the ITAR, the joint venture entity must separately incorporate and register with DDTC.2
- If a DDTC registered entity enters into a joint venture that results in 50% or more ownership of the new entity, the joint venture must be added to the registrant's existing DDTC registration as a subsidiary. The same rule applies even if it is a foreign incorporated joint venture. Alternatively, if the DDTC registered entity owns less than 50% of the joint venture but is responsible for managing the day-to-day operations of the joint venture, then the joint venture entity would still be added to the existing DDTC registration and listed as a controlled affiliate.
- If a joint venture entity is equally owned (50/50) by two DDTC registered companies and control of business operations is also equally shared, then DDTC will consider other factors in deciding under which entity the joint venture will be registered, such as which of the registered entities is engaging in more ITAR specific activities or projects. If the joint venture is independently managed, then the joint venture entity must register with DDTC independently.
- If a U.S. incorporated joint venture is managed by foreign persons but will be engaging in ITAR-controlled activities, a U.S. person must be appointed as a senior officer for the U.S. joint venture and the joint venture can then apply for independent DDTC registration. If no U.S. person is acting as a senior officer of the joint venture, then it cannot register with DDTC and cannot conduct ITAR-controlled activities.
- It is important to remember when participating in a joint venture with foreign persons, whether the foreign persons are in the ownership structure or as foreign person employees, transfers of ITAR-controlled technical data is only permitted with appropriate authorization or licenses from DDTC.
Footnotes
1. There is no single legal definition of the term "joint venture." Generally, joint venture is used to describe a commercial arrangement between two or more parties to undertake a specific business project or opportunity. The parties share both the risks and rewards of the undertaking.
2. See ITAR § 120.13 Registration. Any person or business that engages in the manufacturing, exporting, temporarily importing or ITAR-controlled items, or provides services controlled under the ITAR, is required to be registered with DDTC.
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