Types of joint venture

What are the key types of joint venture in your jurisdiction? Is the ‘joint venture’ recognised as a distinct legal concept?

Saudi Arabian law distinguishes between two types of joint venture: unincorporated joint ventures and equity joint ventures. Unincorporated joint ventures are cooperations between two or more participants without legal personality. They cannot hold rights or obligations or otherwise engage with third parties. Any legal relationship pertaining to unincorporated joint ventures is entered into by their partners directly. The structure of unincorporated joint ventures is defined only by the joint venture agreement concluded between their parties, as well as general contract law, which in Saudi Arabia derives largely from Islamic law principles.

Alternatively, equity joint ventures are more formalised cooperations where two or more parties execute joint projects through joint corporate entities. Under Saudi Arabian law, equity joint ventures can be established in the form of any company or partnership available under Saudi Arabian law. The most common legal forms chosen for Saudi Arabian equity joint ventures are limited liability companies and closed joint stock companies. As such, equity joint ventures have legal personality and can hold rights and obligations. Furthermore, as corporate entities, equity joint ventures are subject to Royal Decree M/3 of 28/1/1437H governing commercial companies.

Common sectors

In what sectors are joint ventures most commonly used in your jurisdiction?

Joint ventures are used in all sectors in Saudi Arabia. Unincorporated joint ventures, however, tend to be more common in the construction and infrastructure sectors, where unincorporated joint ventures are often formed to bundle capacities to satisfy requirements for participation in public tenders. Equity joint ventures are established in various sectors for different purposes. They may be utilised as a means to pool competences in the technology or manufacturing sectors or, more generally, as instruments to pool resources for large-scale projects. Equity joint ventures involving Saudi Arabian parties are also used by foreign businesses to acquire local expertise and connections.


Rules for foreign parties

Are there rules that relate specifically to foreign joint venture parties?

Unlike many of its neighbours, Saudi Arabia does not generally restrict foreign shareholdings. Thus, foreign natural or legal persons may hold up to 100 per cent of the shares in a Saudi Arabian company. However, foreign investment remains restricted in some individual sectors, such as oil and gas, real-estate brokerage and security services. Restricted activities and sectors are included on the negative list maintained by the Saudi Arabian General Investment Authority (SAGIA). Furthermore, companies with wholly foreign shareholdings may be subject to specific standards, such as higher share capital requirements or additional approval. For unincorporated joint ventures, the only relevant restriction relating to foreign participation is the exclusion of foreign investors from the sectors included on the negative list.

Ultimate beneficial ownership

What requirements are there to disclose the ultimate beneficial ownership of a joint venture entity?

There is no general requirement to disclose beneficial ownership of a joint venture entity unless for joint ventures incorporated as a joint stock company. Joint stock companies are subject to the Saudi Arabian Capital Market Authority (CMA) and its regulations. As such, joint stock companies have to disclose to the CMA the identity of all persons holding an ultimate beneficial ownership stake of at least 5 per cent.

It should be noted that, while there is no general requirement to disclose ultimate beneficial ownership, structures seeking to circumvent foreign investment restrictions for sectors included on the SAGIA negative list (see question 3) may be sanctioned by severe penalties.

Setting up and operating a joint venture


Are there any particular drivers in your jurisdiction that will determine how a joint venture is structured?

As in other jurisdictions, the duration and complexity of the projects or operations for which joint ventures are created will have a significant impact on their structure. Unincorporated joint ventures are typically used for short-term engagements owing to the fact that unincorporated joint ventures can be dissolved rather easily. For long-term engagements, the closer relationship between the parties and independent management and operational structure established by an equity joint venture may be more appropriate.

In addition, certain particularities specific to Saudi Arabian law require consideration when structuring a joint venture. For instance, because of the primacy of Islamic law, Saudi Arabian entities may not procure conventional interest-bearing loans, unless specific authorisation to do so has been given by their shareholders. Such authorisation could be included in the company’s constitutive agreements. Furthermore, owing to the poor protection of intellectual property under Saudi Arabian law, this aspect should be addressed when structuring a joint venture. Intellectual property rights should not be transferred to a local Saudi Arabian entity. Necessary intellectual property should be made available to the local entity through licensing agreements. In addition, since enforcement of claims is still rather time-consuming and costly in Saudi Arabia, it may be advisable to manage the profits generated by the joint venture entity to secure shareholder interests in the commercial venture.

Tax considerations

When establishing a joint venture, what tax considerations arise for the joint venture parties and the joint venture entity? How can tax charges be lawfully mitigated?

Under Saudi Arabian law, Saudi Arabian nationals (and citizens of other Gulf Cooperation Council (GCC) countries, who are considered Saudi Arabian nationals within the meaning of Saudi Arabian tax law) are not subject to income tax. Consequently, profits generated by a corporate entity will be subject to income tax only where and as far as such profits are apportioned to shares held by, or the beneficial owners of which, are foreigners. Asymmetric distributions of profits and losses will be considered when assessing the corporate income tax load. Thus, where in a joint venture entity Saudi Arabian nationals hold 50 per cent of the shares and the profits are distributed 80/20 to the benefit of the foreign shareholders, 80 per cent of the profits will be subject to corporate income tax. Corporate income tax is charged at a flat rate of 20 per cent of the annual net profits of the entity. An additional 5 per cent withholding tax is levied where funds are transferred abroad.

Foreign interests in unincorporated joint ventures may also be subject to Saudi Arabian corporate income tax where a permanent establishment of the foreign partner is generated in Saudi Arabia through the unincorporated joint venture. In this case, profits generated through this permanent establishment will be taxable in the Kingdom. Where a foreign business without a permanent establishment in Saudi Arabia receives income from a Saudi Arabian tax resident for work executed in Saudi Arabia, the Saudi Arabian customer is required to withhold 15 per cent of all payments as withholding tax.

While not subject to corporate income tax, interests of Saudi Arabian nationals in a corporate entity are not tax-free, and are subject to the zakat. While traditionally a mandatory charitable contribution, zakat in present-day Saudi Arabia is collected as a tax at a flat rate of 2.5 per cent. Unlike corporate income tax, which is calculated based on the net profits of an entity, the tax basis for zakat is the net worth of the company and thus more comparable to a wealth tax than an income tax. Withholding tax is not charged if profits allocated to Saudi Arabian shareholders are transferred abroad. Finally, the tax year for zakat is the Islamic calendar year, while Saudi Arabian income tax is assessed based on the Gregorian calendar. Hence, the application of corporate income tax and zakat in mixed Saudi Arabian- and foreign-held equity joint ventures requires somewhat more dedicated tax planning and management.

Effective from 1 January 2018, Saudi Arabia introduced value added tax (VAT) at a standard rate of 5 per cent. Specific products and services, as well as certain transactions, are zero-rated or VAT exempted. The new VAT needs to be considered when assessing the viability of a venture in the Saudi Arabian market.

Asset contribution restriction

Are there any restrictions on the contribution of assets to a joint venture entity?

While capital contributions to corporate entities are much more common, there are, in principle, no restrictions on the contribution of assets to a joint venture entity. Still, some restrictions apply due to foreign ownership restrictions. For instance, foreigners may only own real estate in Saudi Arabia if the value of their real estate investment exceeds 30 million riyal or such real estate is acquired for use in their professional endeavors, ie, business premises, workers’ accommodation or warehouses.

Interaction between constitution and agreement

What is the interaction between the constitution of the joint venture entity and the agreement between the joint venture parties?

The constitutive agreement of a corporate entity established in Saudi Arabia - typically referred to as the articles or memorandum of association - have to be legalised by a notary public in the Kingdom and filed with the competent authorities. From a legal point of view, the parties are free to define the terms of these articles or memoranda as they see fit, provided that they meet the requirements of Saudi Arabian law, first and foremost those of Royal Decree M/3 of 28/1/1437H governing commercial companies. The Saudi Arabian authorities tend to reject articles that deviate substantially from the standard articles typically utilised without legal grounds. Furthermore, the official articles cannot be made subject to foreign law or include an arbitration clause. Therefore, a separate joint venture agreement is typically concluded that governs the internal relationship among the joint venture parties.

Which agreement will take precedence is not explicitly governed by Saudi Arabian law. However, Saudi Arabian authorities have frequently taken the position that the provisions of a company’s articles will take precedence over those of a joint venture agreement if the provisions of the two agreements conflict. Therefore, the joint venture agreement should be carefully drafted to expend on rudimentary provisions of the articles or govern matters not contemplated in the articles.

Party interaction

How may the joint venture parties interact with the joint venture entity? Are there any restrictions?

The joint venture parties typically assert control of the joint venture entity through an ordinary or extraordinary general assembly. At least one ordinary general assembly must be held each year. An extraordinary general assembly will have to be held in certain instances; for example, if the company is over-indebted. Under Saudi Arabian law, a company is deemed to be over-indebted where its liabilities and obligations exceed its assets plus half of its share capital. The Saudi Arabian authorities will not consider positive future developments of the entity’s business when determining whether it is over-indebted. If a company is over-indebted, an extraordinary general assembly has to be convened, during which the shareholders shall resolve either to liquidate the company or inject additional capital into the company.

Restrictions for sharing information between the shareholders and a joint venture entity only apply in specific constellations. While such restrictions are very rare for limited liability companies, certain information-sharing restrictions apply where a joint venture entity is incorporated as a joint stock company. Furthermore, restrictions may be imposed on the joint venture by agreement between its shareholders - for example, to shield certain interactions between one of the shareholders and the joint venture entity from the other shareholders - or with third parties, for example, in transactions where a customer of the joint venture entity seeks to limit the disclosure of confidential information.

Exercising control

How may the joint venture parties exercise control over the joint venture entity’s decision-making?

The primary mechanism for shareholders to exercise control over a joint venture entity is asserting control over the entity’s management. Under Saudi Arabian law, the management of limited liability companies is vested in individual general managers, while joint stock companies are managed by a board of directors. To expend its control over a joint venture entity, a shareholder can procure the right to appoint the general managers of a limited liability company or the majority of the directors of a joint stock company. Similarly, to secure its position, minority shareholders can demand the right to determine at least one director or manager. Furthermore, shareholders may wish to establish a supervisory board to oversee local management.

Regulations pertaining to management can also be utilised to limit the independence of the joint venture entity by including restrictions on management authorities. These restrictions will not be binding in respect to third parties, unless the restrictions are explicitly communicated to such third parties, for example, by disclosing managers’ powers of attorney to third parties. Hence, restrictions on management authorities will typically only have legally binding effect internally between the management and the company or its shareholders. Typical restrictions imposed on local management are limiting their authority to conclude transactions that exceed a specific value or have significant implications for the joint venture. Local management can be compelled either to act jointly to conclude such transactions or to procure the consent of the shareholders or a supervisory board to do so.

An important tool for minority shareholders to secure their interest in a joint venture is voting in the general assembly. For instance, minority shareholders can increase their impact on a joint venture or prevent marginalisation by procuring veto rights for decisions with a substantial impact on the joint venture, such as the incorporation of subsidiaries, amendments to the entity’s business objectives and its liquidation. Where parties to a joint venture cannot agree to include veto rights, majority requirements for decisions on fundamental aspects of the joint venture may be raised to allow a group of minority shareholders to successfully oppose such decisions.

Governance issues

What are the most common governance issues that arise in connection with joint ventures? How are these dealt with?

Governance and compliance standards in Saudi Arabia are comparatively rudimentary. Aside from entities subject to the supervision of the CMA, which are subject to the corporate governance regulations issued by the CMA, corporate entities are subject only to a basic set of corporate governance rules arising out of statutory Saudi Arabian law. Foreign and group governance regulations of joint venture partners may be imposed on a joint venture by agreement.

While compliance standards are still lacking in Saudi Arabia, the government has taken steps to increase compliance throughout all economic sectors. These include stricter measures against bribery, increased worker protection - such as explicitly outlawing placement fees - and the introduction of fair market practices. Furthermore, foreign investors will typically be bound by domestic compliance standards imposed in their home jurisdiction. Because of inexperience with compliance standards, local staff will require increased training on applicable compliance standards and procedures, and additional supervision may be necessary.

Nominee directors

With an incorporated joint venture, what controls exist in your jurisdiction in relation to nominee directors? How should a nominee director balance the potentially conflicting interests of the joint venture company and the appointing shareholder?

All directors and managers are under a fiduciary duty to act in the best interests of their company. While the company is solvent, the best interests of the company equate to the interests of the company’s shareholders as a whole. Should the company become insolvent, these interests will rank behind the interests of creditors. A director finding him or herself in a position of conflict of interest does not automatically breach this duty. However, the director must resolve the conflict by exercising his or her discretion in the best interests of the company. Thus, a nominated director may to a certain degree work to favour the interests of a specific shareholder. Ultimately, however, every director is bound to work in favour of the joint venture entity. Violations of a director’s fiduciary duties may be sanctioned with substantial penalties and may expose the director to liability claims from the company and its shareholders.

Competition law

What competition law considerations are engaged by the formation and operation of the joint venture? Is approval needed?

Joint venture formation - regardless of whether an unincorporated or an equity joint venture is formed - is caught by the Saudi Arabian competition regime. Where the envisaged joint venture’s turnover would exceed the thresholds determined by the Saudi Arabian competition regulations, the proposed joint venture must be notified to the competition authorities, which will determine whether to grant approval for the transaction. The Saudi Arabian competition authorities to date have dealt with few merger control procedures and are thus comparatively inexperienced. Notification of a transaction that may require merger control approval, therefore, should be accompanied with substantial documentation on the relevant transaction and its possible impact and benefits for the Saudi Arabian market. Close cooperation with the competent authorities is essential to ensure the swift and professional resolution of a request for notification.

Provision of services

What are the key considerations in your jurisdiction in structuring the provision of services to the joint venture entity by joint venture parties?

The joint venture parties are free to conclude agreements for services or licence agreements with the joint venture. No specific restrictions apply under Saudi Arabian law. However, such agreements shall be priced at arm’s length and must comply with the provisions of the transfer pricing bylaws issued by the General Authority of Zakat and Tax in January 2019. Furthermore, intergroup contracts may also be restricted by agreement between the joint venture parties in the joint venture agreement.

Employment rights

What impact do statutory employment rights have in joint ventures?

Saudi Arabian residency regulations impose some restrictions on employment of expatriates. While employers are generally free to recruit expatriates, the Saudi Arabian government has in recent years taken measures to reduce the Kingdom’s reliance on a foreign workforce and made it more difficult for expatriates to obtain residency and work permits. Furthermore, since unincorporated joint ventures do not have a legal personality under Saudi Arabian law, they cannot sponsor foreign employees. Thus, where expatriates are to be employed for work executed through an unincorporated joint venture, these persons will have to be employed by one of the joint venture partners or a third-party manpower supplier.

In addition, Saudi Arabia has been running a programme to increase employment of Saudi Arabian nationals in the private sector (the Saudisation programme). Under this programme, private-sector businesses are ranked according to the percentage of Saudi Arabian nationals employed by them. A low ranking may result in discrimination of the business in respect to government services and in public tenders, while a high ranking may provide benefits. The thresholds applied in the ranking process depend on the size of the relevant enterprise as well as the industry in which it is engaged.

Aside from these regulations seeking to manage domestic and foreign employment, Saudi Arabian labour regulations are comparatively balanced. Royal Decree M/51 of 23/8/1426H on employment in the private sector was molded after the model labour law of the International Labour Organization. Collective labour rights, however, are comparatively little developed in Saudi Arabia. Thus, collective bargaining and collective action such as strikes have less of an impact in Saudi Arabia.

Intellectual property rights

How are intellectual property rights generally dealt with on the creation, operation and termination of a joint venture in your jurisdiction?

Protection of intellectual property under Saudi Arabian law is lacking. With the exception of universally known brands such as Coca-Cola and Apple, infringements of intellectual property rights including brands or trade secrets are extremely difficult to prevent or sanction in Saudi Arabia, if the relevant intellectual property rights are not registered domestically in Saudi Arabia. Moreover, the Saudi Arabian authorities have in the past found that joint venture parties have the right to continue to use intellectual property rights registered by a joint venture entity in Saudi Arabia after the joint venture has been terminated. Therefore, to protect their intellectual property rights adequately, joint venture partners should refrain from transferring intellectual property rights to joint venture entities or registering them in Saudi Arabia through joint ventures. They should rather register intellectual property through an entity they control and allow the joint venture to use the intellectual property through licensing agreements.

Additionally, parties may choose to include provisions in joint venture agreements or a separate agreement that would assign the right to intellectual property generated by the joint venture to a specific joint venture party. To be valid and enforceable under Saudi Arabian law, the party acquiring intellectual property would, however, have to be compelled to compensate the joint venture or the joint venture partners for the transfer of ownership of intellectual property. Such consideration may be a payment or a contribution in kind, for example, secondment of R&D staff or the provision of research facilities to the joint venture.

Finally, joint venture parties should at the time of incorporation take steps to regulate the treatment of intellectual property as of the joint venture being dissolved or a party exiting the joint venture. They should include in the joint venture agreement provisions that determine which parties have the right to use intellectual property after the joint venture is dissolved, whether the joint venture shall refrain from using certain intellectual property or trade names upon one party leaving the joint venture and how violations shall be treated. These provisions will typically be found in the joint venture agreement.

Funding the joint venture

Typical funding

How are joint ventures generally funded in your jurisdiction? Are there any particular requirements relating to funding and security packages?

Joint ventures are typically funded by their shareholders leveraged with third-party lending. Because of the significant influence of Islamic law, conventional lending employing interest-bearing loans is not available for all entities. An entity may only procure funds through conventional financing if authorisation to do so is included in the entity’s constitutional documents. Where no such authorisation exists, a joint venture is limited to procuring funding through Sharia-compliant financing. Islamic financing is available in the Saudi Arabian market. Furthermore, international banks have grown more open to accommodating Islamic finance requirements in recent years.

To promote the diversification of the Saudi Arabian economy and stimulate the industrial and manufacturing sectors, the Kingdom has introduced incentives for investment in these sectors. Most notably, the government set up the Saudi Industrial Development Fund (SIDF), which may provide up to 50 per cent financing for approved industrial projects at favourable conditions. The SIDF may grant loans for terms of up to 15 years.

Capital injection restrictions

Are there any legal or regulatory restrictions on the injection of capital into, or the distribution of profits or the extraction of cash by other means from, the joint venture entity?

Shareholders may inject capital into joint venture entities by capital increase or injecting funds into the entity’s capital reserve. Capital increase will require a shareholder resolution to be passed with a 75 per cent majority or any higher majority agreed upon between the parties. The shareholders’ liability will be increased according to the increase share capital they subscribe to. Injections into the capital reserve generally require only a declaration of the shareholder making the payment.

Profits may only be distributed to the shareholders in the amount that they are available for distribution and approved by shareholder resolution. The profits available for distribution are the turnover minus the company’s liabilities. Furthermore, 10 per cent of the company’s profits must be paid into the company’s capital reserve until the reserve reaches 50 per cent of the company’s share capital. The share capital may not be distributed to the shareholders.

Tax considerations

What tax considerations should be taken into account in the operation of the joint venture?

In the operation of a joint venture, the duality of the Saudi tax regime with respect to the taxation of corporate entities must be observed. While profits accrued by foreign shareholders are subject to corporate income tax, the interest of Saudi shareholders in corporate entities is subject to zakat. This duality has implications both for the calculation of the tax load of a joint venture entity and for tax filings (see question 6). Furthermore, Saudi Arabian withholding tax and existing double taxation treaties have to be considered when structuring the tax exposure of shareholdings in joint ventures. Finally, Saudi Arabian VAT will have implications for operations of joint ventures in Saudi Arabia.

Accounting and reporting issues

Are there any noteworthy accounting or reporting issues for the joint venture parties regarding their investment in the joint venture?

Joint ventures operating in Saudi Arabia are subject to the domestic accounting standards issued by the Saudi Organization for Certified Public Accountants (SOCPA). SOCPA accounting standards are fully compliant with the International Financial Reporting Standards (IFRS) issued by the IFRS Foundation and the International Accounting Standards Board. For unincorporated joint ventures, appointed tax representatives will be charged with fulfilling certain accounting aspects such as filing VAT statements.

Deadlock, exit and termination

Deadlock provisions

What deadlock provisions are commonly included in joint venture agreements in your jurisdiction?

The first step in resolving deadlock situations in Saudi Arabian joint ventures will typically be good faith negotiations. However, where a deadlock cannot be resolved through negotiations, few mechanisms are available.

A common provision in many shareholders’ agreements that deals with deadlock in decision making, or serious disputes between shareholders, is to provide for a buy-sell mechanism, whereby one party names a price at which the joint venture interest can be bought or sold. The other party may either buy out or sell to the first party at the named price. Another common provision is the concept of dilution, where if one partner refuses to contribute equity capital as needed, the other partner can contribute and dilute the interests of the first, possibly shifting voting rights or board representation in the process. While we have seen both concepts included in joint venture agreements pertaining to Saudi Arabia, neither of these mechanisms will be enforced by the Saudi Arabian courts. Since Saudi Arabian courts reserve the right to comprehensively review arbitral awards when requested to recognise these for enforcement in Saudi Arabia, this aspect needs to be considered when drafting joint venture agreements even if the agreements are subject to foreign law.

Thus, in Saudi Arabian joint ventures, the parties will largely be limited to negotiations and dispute-resolution mechanisms to resolve deadlock situations. Because of the low quality of decisions and lengthy procedures in Saudi Arabian courts, joint venture parties typically opt for arbitration as a means of dispute resolution.

Exit provisions

What exit provisions are commonly included? Does the law restrict any forms of mandatory transfer provision or any basis of calculation?

Typically, joint venture agreements will include detailed provisions concerning the transfer of shares, including rights of first refusal as well as drag-along and tag-along clauses. Other, more aggressive, arrangements concerning the mandatory transfer of shares such as shoot-out or Russian roulette clauses are less common. Furthermore, there is some concern that such aggressive share transfer mechanisms may not be enforceable under Saudi Arabian law, as these mechanisms conflict with the principles of Islamic law. Clauses requiring the transfer of shares upon certain events such as insolvency or the joint venture reaching certain milestones are generally permissible under Saudi Arabian law.

The parties are generally free to determine the basis of calculation of the value to be assigned to shares for the purpose of a transfer of shares required under the joint venture agreement. However, Saudi Arabian authorities typically assign greater value to equity considerations than courts in western jurisdictions. Thus, where they deem that one party is unduly disadvantaged by the way the share value is calculated, Saudi Arabian authorities will often amend the share value calculated based on the agreement to even out unjust treatment of individual parties.

Tax considerations following termination

What are the tax considerations on termination of the joint venture?

Few tax implications will have to be observed upon termination of an unincorporated joint venture. However, in government contracts, certain amounts may be withheld until confirmation has been provided by the Ministry of Finance that all tax obligations, including withholding tax, have been settled. Such confirmation must be procured prior to terminating the joint venture. In equity joint ventures, profits realised by dissolving the joint venture entity are taxed under the Saudi Arabian tax regime. Such taxes will be included in the final tax statement of the joint venture entity.


Choice of law and resolution methods

In your jurisdiction, are there constraints on the choice of law or the method of dispute resolution provided for in joint venture agreements?

Pursuant to Royal Decree M/34 of 24/5/1433H governing commercial arbitration disputes pertaining to criminal or administrative law and personal status matters are subject to the exclusive jurisdiction of the competent courts. While the decree does not explicitly exclude shareholder disputes from arbitration, Saudi Arabian courts have in the past assumed jurisdiction in shareholder disputes despite the parties to the dispute having opted for arbitration. However, the recognition of arbitration clauses by Saudi Arabian courts and authorities has in recent years improved significantly. Accordingly, parties can expect the courts to respect arbitration clauses in most cases. To be valid and enforceable, an arbitration agreement must be concluded in writing by an individual or a legal entity with the necessary legal capacity. Otherwise, the agreement will be null and void. Furthermore, where a joint venture party is a public authority or government-owned business, an arbitration agreement requires prime ministerial approval, unless authorisation to conclude arbitration agreements is provided through law.

A choice of law clauses is also generally permissible under Saudi Arabian law. A company’s articles or memorandum of association, however, may not be made subject to foreign law. Thus, the choice of law is an option only in the joint venture agreement.

Mandatorily applicable local law

What mandatory provisions of local law will apply irrespective of the choice of governing law?

In principle, joint venture parties are free in their choice of law. However, Islamic law, which is considered in large parts ordre public by Saudi Arabian authorities, may have some implications for the legal relationship between the parties. For instance, where a joint venture entity is not authorised to conclude conventional financing agreements, a shareholder loan may not be interest bearing.

Remedy restrictions

Are there any restrictions on the remedies a tribunal can grant that would have a bearing on the arbitration of joint venture disputes? Are there any restrictions on the arbitration of shareholder claims?

Generally, there are no restrictions on the arbitration of shareholder claims under Saudi Arabian law. The nature and scope of remedies available under Saudi Arabian law are more limited than in most other jurisdictions. In general, only remedies recognised under Sharia law are available under Saudi Arabian law. These include the right to rescind a contract, indemnification and damages for actual and direct losses, with little or no means of recovering compensation for the loss of future profits or the loss of business reputation. These restrictions also apply to arbitration proceedings subject to Saudi Arabian substantial law. Furthermore, while Saudi Arabia is a member state of the New York Convention, Saudi Arabian courts will typically conduct a révision au fond under Saudi Arabian law when requested to recognise an arbitration award issued in an arbitration subject to a substantive law other than that of Saudi Arabia. Thus, matters of Saudi Arabian law need to be considered when an award may have to be enforced in the Kingdom.

Minority investor protection

Are there any statutory protections for minority investors that would apply to joint ventures?

Minority investor protection under Saudi Arabian law is still somewhat rudimentary. Existing minority shareholder protection under Saudi Arabian law is mainly provided by statutory qualified majority requirements for shareholders’ resolutions on certain issues. For instance, by requiring a qualified majority for decisions to increase share capital, the Saudi Arabian corporate regime provides rudimentary protection against dilution. However, since minority investor protection is lacking under Saudi Arabian law, minority shareholders will have to take steps to procure additional protection, for example, through regulations in the joint venture agreement. In unincorporated joint ventures, minority investor interests are generally governed by the joint venture agreement.


How can joint venture parties have liabilities to each other beyond what is expressly agreed in the joint venture agreement?

An unincorporated joint venture does not have legal personality under Saudi Arabian law. Therefore, such a joint venture cannot acquire rights or obligations. Consequently, any liabilities of an unincorporated joint venture are liabilities of its parties. Towards third parties, the liabilities of the joint venture parties is joint and several. Internally among the joint venture parties, the distribution of liabilities may be regulated through agreement.

Parties to an equity joint venture are generally shielded from liability towards third parties contracting with the joint venture entity. However, in certain cases, third parties may have recourse against the joint venture parties directly, for instance, if the joint venture entity is over-indebted and the shareholders fail to remedy the situation. Internally, the joint venture partners are liable towards each other according to their shareholding in the company. They may amend the internal distribution of liabilities through agreement.

Disclosure of evidence

Are there any particular issues that can arise in joint venture disputes in your jurisdiction concerning disclosure of evidence?

Saudi Arabian procedural law is routed in the continental European legal tradition. This applies to rules of evidence as well. Common law principles such as discovery are not applied in Saudi Arabian proceedings. Evidence may be presented at any stage of a dispute. However, the parties to an arbitration may agree to apply common law procedural principles such as discovery.

Market overview

Jurisdictional advantages

What advantages does your jurisdiction offer for parties wishing to set up and operate joint ventures?

Since Saudi Arabia became a member state of the World Trade Organization in 2005, the Kingdom’s foreign investment climate substantially improved. Recently, Saudi Arabia has initiated a large-scale reform programme to further entice foreign investment: the Saudi Arabian Vision 2030. The Saudi Arabian foreign investment regime is comparatively liberal in the region. Unlike other GCC countries, where foreign ownership in corporate entities is limited to a minority share, foreign investors can hold up to 100 per cent of shares in Saudi Arabian companies. Furthermore, Saudi Arabia has significantly reduced the sectors that are reserved for investment from Saudi Arabian citizens. Finally, joint ventures engaged in industrial and manufacturing projects may receive financing at favourable conditions from the SIDF.

Requirements and restrictions

Are there any particular requirements or restrictions relating to joint ventures in your jurisdiction that could deter international investors?

Because of remaining restrictions for foreign investment in certain sectors such as security services and real-estate brokerage, joint ventures with foreign participation will not be able to do business in these sectors in Saudi Arabia. In addition, particulars of Saudi Arabian law stemming from the Islamic law tradition will require specific structuring of joint ventures; in particular, where joint ventures are to procure funding through conventional financing. Finally, litigation in Saudi Arabia is slow and costly. These issues, however, can be mitigated by the professional structuring and operation of joint ventures.

Updates & Trends

Key developments of the past year

What are the current trends affecting joint ventures in your jurisdiction? What recent developments in legislation and case law have had an impact on joint ventures?

Key developments of the past year32 What are the current trends affecting joint ventures in your jurisdiction? What recent developments in legislation and case law have had an impact on joint ventures?

Since the comprehensive reform of the Saudi Arabian corporate regime in 2015, we have seen few legislative amendments that may affect joint ventures. However, the ongoing liberalisation of the Saudi Arabian market for foreign investment and increasing acceptance of arbitration have significantly strengthened the position of foreign investors. Growing adherence to compliance standards and international best practices further increase transparency and regulation of the Saudi Arabian market. These factors have made Saudi Arabia increasingly attractive for foreign investment. Nonetheless, considerable hinderances for both domestic and foreign investment in the private sector remain; namely, slow and intransparent administrative procedures and the inconsistency of administrative decisions continue to be an issue for the private sector.