Setting up a Joint Venture Company in Saudi Arabia: Any investor, local or foreigner, before going to set up a joint venture business in KSA must know first what is joint venture, reasons to choose JV Co, its features, advantages and disadvantages, importance of JV Co, Saudi authorities involved in its formation, and how to incorporate a joint venture company in Saudi Arabia, etc. All these things are discussed in detail in this article.
What is a Joint Venture Company?
A joint venture is a strategic alliance between two or more business parties to form a partnership to share the markets, intellectual property, assets, knowledge, and, the overall profits, and losses too. A joint venture company in Saudi Arabia differs from a merger as there remains no transfer of ownership in such a deal.
Reasons to Set Up Joint Venture Company in Saudi Arabia
All companies try to maintain their edge, progress, and expand in the present competitive business scenario throughout the world. For this they have to be visionary and select options such as diversification of business sectors, products and services, revenue streams and producing something innovative to the consumers or even entering a new market.
When the companies think of diversification and expansion they may face constraints in finances, technologies and difficulties in making headway in the new business and entering a new market. To overcome these difficulties often two or more business partners or companies join hands through a temporary agreement that allows them to combine their resources like competitive skills, technology, etc. for the competitive edge in the market. Such types of temporary business agreements are called Joint Ventures and the business entity formed is Joint Venture Company in Saudi Arabia. This business arrangement involves several aspects called the features of Joint Venture.
Features of Joint Venture Company in Saudi Arabia
Foreign partners in a joint venture company of KSA may own 100% equity share but having a Saudi local partner who owns 50% or more of the equity share has advantages in many ways. For example, this company is eligible for an interest free loan up to 50% of the project’s cost that can be repaid over 10 years. Some of the most important features of joint venture company in Saudi Arabia are:
- Two or more companies when they join hands through a temporary agreement to overcome some issues in their businesses are called Joint Venture.
- Those parties or business entities involved in the joint venture company setup are called co-venturer.
- The companies create synergies with their abilities that enable them to use each other’s abilities to enhance efficiencies in the joint venture company.
- Joint ventures are of short duration to overcome certain issues.
- The terms of the joint venture company in Saudi Arabia are executed on a written agreement signed by all parties involved like durations, model of association, liabilities, etc.
- Each party involved for the registration of Joint Venture will have shared control over the venture’s activities.
- The co-venturers will share their physical and human resources for moving the project ahead to achieve the goal for which the joint venture is formed.
- A newly formed joint venture company in KSA leads to innovations in products and services by sharing their knowledge, technologies and manpower together for a common purpose.
- The associated parties in a joint venture are well aware of the risk and since they mutually share the financial burden as well as the risk if arise. On the other hand, if their joint venture becomes profitable, the profits are shared according to pre-agreed terms.
Advantages and Disadvantages of Joint Venture Company KSA
One of the most important advantages of a joint venture company in Saudi Arabia is that it can help business firms to grow faster, increase productivity and generate greater profits. However, a joint venture company can pose major problems relating to bearing liabilities, potential for conflicts and disputes between partners. Other benefits or advantages and disadvantages to setup Joint Venture Company in Saudi Arabia are given in the table below.
Advantage and Disadvantage of Joint Venture Business in KSA
|Advantages of JVC
|Disadvantages of JVC
|The Saudi laws allow foreign investors to opt businesses in the form of joint ventures in KSA. It offers flexible business opportunities.
|Foreign investors are not permitted to invest in some sectors like defence, finance, etc.
|When a joint venture is shaped as a joint-stock company it doesn’t need to report beneficial ownership of a joint venture company.
|A 100% foreign ownership of the company needs extra conditions like higher share capital, etc.
|Joint venture company in Saudi increases capacity bearing requirements.
|The objectives of the joint venture are not often clear.
|Joint ventures make it easy to share risks and costs (liability) with co-partners.
|The communication between co-partners of a joint venture company is not always helpful.
|This firm provides access to greater resources like knowledge, expertise, technology, and finance.
|The co-partners of a joint venture often expect different things from the company.
|Joint ventures make growth without borrowing funds or look for outside investors.
|The level of expertise and investment in a joint venture is not always equally matched.
|Joint venture companies use co-partner’s customer databases to market their products easily.
|The work and resources in a joint venture are not distributed equally.
|Joint venture firms in KSA join hands in purchasing, research and development.
|The co-partners’ different cultures and management styles often pose barriers to co-operation.
|And the most important benefit of a joint venture company is its flexibility like limited lifespan and commitment for both parties and the business’ exposure.
|The joint venture’s contractual limitations pose a risk to a partner’s core business operations.
Importance of Joint Venture Businesses in KSA Industry Trends
The current business world faces a number of risks and uncertainties, in the meantime the Joint Ventures have proved to be of great importance and value to overcome the problems. The current industry trends all over the world so look for expert international joint venture services to guide in launching their joint venture process, especially in KSA.
The joint venture company in Saudi Arabia provide important services in producing innovative consumer products presently along with the different opportunities that comes like:
- It provides opportunities to share resources and responsibilities to run new businesses.
- There is flexibility for the participating companies in joint ventures in KSA.
- It is very important for sharing business risks collectively.
- It gives them an opportunity to test their skills with the trading challenges.
Why Legal Advice to Setup Joint Venture Company in KSA?
There is no doctrine of precedent (legal principle established by superior court) in the Kingdom of Saudi Arabia (KSA) and presently it may appear as laws and regulations are potentially inconsistent with each other. It means the Saudi legal framework is complex and evolving constantly. So the legal business consultants often feel to be in a state of action compared with some western legal systems. Therefore, to be updated with latest and new changes in company formation laws, foreign investors should seek legal advice from local business consultants and professional advisors in KSA with regard to legal as well as corporate, financial, immigration, tax and zakat matters, etc.
Finding Right Partner for Joint Ventures in Saudi Arabia
Searching out the right co-partners to set up joint venture company in Saudi Arabia is the most important work for a successful investment in the Kingdom. Because the Saudi co-partner in your joint venture should be active with adequate experience in the field of activity. Your joint venture partners should be cooperative and help with practical issues on the ground. We, at F. Al Tamimi Law Firm, have financial advisors, accountants and investigative professionals who can assist in finding the right type of co-partners for the successful operation of joint ventures in KSA.
The joint venture in Saudi Arabia having the right partners can help the investors with required important insights and the ground knowledge to launch and operate the business smoothly and profitably. That’s why most of the international investors consider preferring a local partner for their first investment in the form of joint venture in Saudi Arabia whether the partners are required or not.
Saudi Legal Issues for Joint Venture with Foreign Investors
There are certain legal issues specific to Saudi business entities of which foreign investors should have knowledge before setting up a corporate joint venture. These legal issues are:
- Any Saudi company forming a joint venture with a foreign (non-GCC) shareholder must obtain a foreign investment licence from the Ministry of Investment of Saudi Arabia (MISA).
- All Saudi business firms regardless of having a foreign shareholder or not must comply with ‘Saudization’ on the basis of the Nitaqat system of the Ministry of Labour. It recommends the employment of a minimum number of Saudi citizens as per business sector and number of employees of the company concerned.
- In a joint venture company in KSA at least 10% of net profits must be transferred each year to a statutory reserve till the reserve becomes at least 30% of its share capital.
- If losses in a joint venture company reach 50% of its share capital there is a mandatory recapitalisation or liquidation for the company and a compulsory decision to continue the company or liquidate it for a limited liability company (LLC).
Setup Joint Venture Company in Saudi Arabia
The partners of a joint venture in Saudi Arabia need to set up some kind of legal entity having licence duly to conduct the business. The legal entity needs a standardized form of constitutional documents to setup joint venture company in Saudi Arabia like Articles of Association (AOA) or By-laws, Certificate of Registration (CR), MISA Foreign Business Investment Licence (FBIL), Registration Certificate at Chamber of Commerce, etc. The AOA is generally referred to as the agreement between two parties (foreign investors and local individuals or company) in the form of a joint venture in KSA.
Authority for Joint Venture Company Registration in KSA
- For the establishment of a joint venture company in Saudi Arabia either with local or foreign investors will need to obtain a business investment licence from the Ministry of Investment of Saudi Arabia (MISA).
- The Article of Association (AOA) is submitted to the Ministry of Commerce and Industry (MOCI) to get accepted and provide the certificate of registration (CR).
- The company’s name registration for joint venture company setup in Saudi Arabia is reserved with the Unified Centre.
- A joint venture company is required to register with a local municipality along with the office address under MERAS.
- To follow Saudization policy the company has to register with the Ministry of Labor and Social Development (MLSD).
- The joint venture businesses have to register with the General Organization for Social Insurance (GOSI) to compulsorily follow the insurance policy towards the security of their employees.
- The joint venture company in KSA is required to submit an application to the Chamber of Commerce and Industries (CCI) for a certificate of membership within 30 days of having the company’s certificate of registration (CR).
- Any company in Saudi Arabia is required to register with the General Authority of Zakat & Tax (GAZT).
- When establishing a Joint Venture Company in Saudi Arabia, it must be clear whether the business entity will result in the creation of an economic concentration under KSA Competition Law that must be notified in advance to and approved by the Saudi General Authority for Competition (GAC).