How to Start a Joint Venture Company in Saudi Arabia

Saudi Arabia has one of the largest and most dynamic economies in the Middle East. Currently, Vision 2030 is creating drastic shifts and landscape changes in the business environment in the country. However, for most foreign investors wishing to enter the market in Saudi Arabia, a joint venture (JV) is usually the most preferable option because it helps the businesses to pool resources, share the risks, and benefit from home-grown know-how in markets that sometimes pose challenges with respect to regulation and operations.

This blog examines major steps and considerations that are relevant to forming a joint venture company in Saudi Arabia.

What is a Joint Venture (JV)?

A joint venture is one where two or more parties come together to form a joint business entity for a certain business undertaking: in that joint venture, funds, expertise, and technology are contributed by the parties, and jointly profit and loss are distributed among the parties.

In Saudi Arabia, a JV can take various forms; however, it typically stipulates that there must be a Saudi national or a GCC partner with this kind of joint venture. The idea of this partnership is designed to make the rapidly growing market of the Kingdom accessible to foreign investors without attempting to navigate the complicated regulatory environment alone. Instead, the foreign investors will partner with a local partner who understands the unique cultural and legal aspects at play in the market.

Benefits of a Joint Venture in Saudi Arabia

There are several reasons why foreign companies prefer to enter joint ventures in Saudi Arabia:

• Access to Local Expertise:  With Saudi partners, they will have past experiences, locally in business practices, government regulations, and consumer behavior, which can be helpful to foreign investors.
• Shared Risk and Investment: In a joint venture partnership, costs, liabilities, and risks tied up in a new market are minimized, as the financial burden and risks are shared.
• Easier Market Entry: For foreign investors, entering the Kingdom via a local partner often eases some regulatory burdens. The local partner assists in navigating the laws, governmental procedures, and proper licensing processes.

Key Steps for Starting a Joint Venture in Saudi Arabia

1. Define the Business Objectives and Structure

Before dealing with any formal legal and regulatory requirements relevant to their venture, the partners must have a candid conversation about the overall business objectives of the joint venture. Both parties should have an understanding of goals, expectations, and contributions.

Some of the questions to consider may well include:

• What are each party’s precise objectives in doing business?
• What will be each party’s financial contribution?
• What role would each partner be expected to play in the daily management and operation of the venture?
• Interestingly enough, what would be the exit strategy in case of dissolution or selling of the joint venture?

These parameters in place should help decide the structure of the joint venture.

• Limited Liability Company (LLC): An LLC is one of the most commonly employed forms for joint ventures. In an LLC firm, liability for each shareholder is limited to the capital contribution made by the shareholder.
• Joint Stock Company (JSC): This is a more appropriate structure for large-scale ventures where huge capital is needed, since the structure allows for issuing shares that could be sold to further investors.
• Partnerships: Although rare in Saudi Arabia, partnerships are models of liability shared between two or more co-owners.

2. Choose the Right Local Partner

Foreign investors in Saudi Arabia must incorporate a Saudi partner to engage in certain activities, such as retail activities, real estate, and commercial distribution. According to the law, the local partner must either be a Saudi national or a company owned by Saudi nationals. 

Usually, the Saudi partner will take most shares of the joint venture, although the foreign investors can hold discussions with the Saudi partner for a considerable share in the equity, particularly in sectors that currently promote such foreign investments within the framework of Vision 2030.

3. Draft the Joint Venture Agreement

The joint venture agreement represents the fundamental document that outlines the terms and conditions of the partnership, including equity ownership, roles and responsibilities, cash and/or property contributions to the JVs, profit-sharing, management of profits or losses, and dispute resolution provisions.

• Capital Contributions: Set forth the well-defined condition on which each party will contribute capital, such as the amounts of cash and/or contributed assets or intellectual property.
• Management and Control:  Define how the joint venture will be managed and who will make key business decisions.
• Profit and Loss Sharing: Setting out in express terms how profit and loss will be shared.
• Exit Strategy: A mechanism should be developed to wind up the joint venture or for the withdrawal of a partner from the agreement.
• Dispute Resolution: This describes the mechanism employed to resolve disputes, whether through arbitration or litigation.

4. Register the Joint Venture

After entering into the partnership agreement, the registration of the joint venture should take place through SAGIA (Saudi Arabian General Investment Authority). SAGIA is the authority that oversees foreign investments and licensing investments for joint ventures in Saudi Arabia.

The following set of documents is needed for registration:

• The joint venture agreement.
• Personal and legal documents for the registration of each partner.
• Business plan specifying the venture’s nature, aims, market analysis, and financial outlook.
• Provisional company name (not yet registered).
• Contract of lease of the company office/business place.

5. Comply with Regulatory and Licensing Requirements

Regulatory requirements are stringent in Saudi Arabia when it comes to businesses, more so for foreign ones. An application for SAGIA may, depending on the sector, require your project to obtain additional operational licenses from other government agencies, such as:

• Municipal licenses are required for any business, depending on the site.
• Specific licenses based on the sector, e.g., healthcare, manufacturing, or energy.
• Tax registration with the Saudi tax authority (ZATCA) according to VAT and other tax legislations.

6. Open a Bank Account and Set Up Financial Operations

After the joint venture receives approval, opening a business bank account in Saudi Arabia is the next step. Usually, such kinds of activities will require the commercial registration documents of the company, an investment license, a joint venture agreement, and identification of the directors of the company.

Aside from that, remember that you will also need to develop financial accounting and reporting systems according to local tax regulations, including Value Added Tax (VAT), applying to most goods and services in Saudi Arabia. With this in mind, a local accounting firm that is well-informed on regulations in Saudi Arabia will assist you in complying.

7. Manage Ongoing Operations

Transaction typically runs for the joint venture legally, and the focus is on managing daily operations, which include executing the business plan, overseeing production/customer service, managing finances, and ensuring statutory obligations are being met.

The successful joint venture shall operate based on periodical meetings with the Saudi partner as well as transparent communication. Changes in business operations, regulations, or ownership percentages may also call for amendments in the joint venture agreement as the business develops.

Conclusion

A joint venture in Saudi Arabia promises to be a lucrative one, especially considering the economy’s growth and provision of incentives to foreign investors. However, that entire process requires careful planning, selection of the right local partner, and walking through all the inevitable legal and regulatory hurdles in Saudi Arabia. 

These commendable steps, coupled with mentoring by professionals, will support foreign investors in nurturing a joint venture that gives them a strong foothold in the Saudi market while alleviating most of the risk associated and sharing resources.

It is always advisable to reach out to local legal and business experts, like Arnifi, when considering a potential joint venture in Saudi Arabia to facilitate hassle-free entry and continued compliance.