The Participation Agreement as a Vehicle for Investment and Business Collaboration
Rodrigo Domínguez, associate at ARIAS Guatemala and expert in commercial law, presents this article on participation agreements as a flexible mechanism for structuring investments and business collaboration projects in Guatemala.
For foreign investors and participants interested in developing projects in Guatemala, participation agreements constitute a flexible and efficient legal alternative for structuring business collaboration arrangements without the need to incorporate a new commercial entity. Regulated under the Guatemalan Commercial Code, this legal structure allows parties to jointly participate in specific commercial operations, share profits and risks, and execute investment projects through a contractual framework that is less complex than a traditional corporate joint venture.
Its flexibility may be particularly useful in sectors where multiple participants require agile mechanisms to undertake joint projects or coordinate participation in procurement and bidding processes within the Guatemalan market (in the latter case, provided that the applicable bidding rules and regulations allow it).
Article 861 of the Commercial Code defines a participation agreement as an agreement pursuant to which "a merchant, referred to as the manager ("gestor” in Spanish), undertakes to share with one or more persons, referred to as participants, who contribute goods or services, the profits or losses resulting from one or more transactions of the manager’s business or from the entirety of its operations.” In this regard, it is important to note that the manager must qualify as a merchant under Guatemalan law, whether as an individual merchant or as a commercial entity duly registered in Guatemala. This requirement is particularly relevant for foreign investors, considering that the manager is the party that acts before third parties in its own name.
Unlike traditional commercial entities, a participation agreement does not create a separate legal entity. Pursuant to Article 862 of the Commercial Code, such agreements are not subject to any specific formalities or registration requirements. Likewise, under Article 863 of the same legal body, the manager assumes before third parties all rights and obligations arising from the transactions related to the project, while the relationship among the participants generally remains internal to the alliance. Nevertheless, the parties may contractually agree on the allocation of liabilities among the participants and even establish mechanisms allowing certain participants to assume specific obligations or liabilities before third parties.
Participation agreements provide broad contractual flexibility, allowing the parties to regulate how the project will be executed and managed. In practice, these agreements commonly include provisions relating to project management, decision-making mechanisms, dispute resolution procedures, the scope of the participants’ involvement in the manager’s activities, allocation of profits and losses, capital or in-kind contributions, restrictions, exclusivity, confidentiality, contingency management, and other matters relevant to the commercial relationship.
Although participation agreements are not required to be registered before the Mercantile Registry of the Republic of Guatemala and do not create a separate legal entity, for tax purposes, and pursuant to Article 22 of the Tax Code, they must be registered before the Guatemalan Tax Administration ("Superintendencia de Administración Tributaria” in Spanish). Accordingly, they are not exempt from compliance with applicable tax obligations.
The practical usefulness of this structure is particularly significant in Guatemala, considering that Guatemalan law does not expressly regulate consortiums as autonomous contractual vehicles (although consortiums are contemplated as legal entities under the Civil Code). As a result, many joint projects are typically structured through corporate joint ventures, which involve incorporating a new entity and complying with the corporate, registration, and tax obligations applicable to commercial companies. In contrast, participation agreements offer a more flexible and functional alternative for structuring commercial alliances and investment projects.
A practical example of the use of this structure may be found in the Rules for the Application of the Policy for the Procurement of Goods, Works, Services and Consulting Services Financed by the Central American Bank for Economic Integration, which recognize the joint participation of bidders through structures referred to as "APCA” (Participation Association, Consortium or Association). Through these arrangements, different participants may organize themselves to jointly participate in specific procurement or bidding processes without the need to incorporate a new commercial entity, provided that the applicable bidding terms permit it, as occurs in certain procurement procedures carried out in Guatemala involving loans granted by such bank.
For foreign investors and participants interested in developing projects in Guatemala, participation agreements constitute a flexible and efficient legal alternative for structuring business collaboration arrangements without the need to incorporate a new commercial entity. Regulated under the Guatemalan Commercial Code, this legal structure allows parties to jointly participate in specific commercial operations, share profits and risks, and execute investment projects through a contractual framework that is less complex than a traditional corporate joint venture.
Its flexibility may be particularly useful in sectors where multiple participants require agile mechanisms to undertake joint projects or coordinate participation in procurement and bidding processes within the Guatemalan market (in the latter case, provided that the applicable bidding rules and regulations allow it).
Article 861 of the Commercial Code defines a participation agreement as an agreement pursuant to which "a merchant, referred to as the manager ("gestor” in Spanish), undertakes to share with one or more persons, referred to as participants, who contribute goods or services, the profits or losses resulting from one or more transactions of the manager’s business or from the entirety of its operations.” In this regard, it is important to note that the manager must qualify as a merchant under Guatemalan law, whether as an individual merchant or as a commercial entity duly registered in Guatemala. This requirement is particularly relevant for foreign investors, considering that the manager is the party that acts before third parties in its own name.
Unlike traditional commercial entities, a participation agreement does not create a separate legal entity. Pursuant to Article 862 of the Commercial Code, such agreements are not subject to any specific formalities or registration requirements. Likewise, under Article 863 of the same legal body, the manager assumes before third parties all rights and obligations arising from the transactions related to the project, while the relationship among the participants generally remains internal to the alliance. Nevertheless, the parties may contractually agree on the allocation of liabilities among the participants and even establish mechanisms allowing certain participants to assume specific obligations or liabilities before third parties.
Participation agreements provide broad contractual flexibility, allowing the parties to regulate how the project will be executed and managed. In practice, these agreements commonly include provisions relating to project management, decision-making mechanisms, dispute resolution procedures, the scope of the participants’ involvement in the manager’s activities, allocation of profits and losses, capital or in-kind contributions, restrictions, exclusivity, confidentiality, contingency management, and other matters relevant to the commercial relationship.
Although participation agreements are not required to be registered before the Mercantile Registry of the Republic of Guatemala and do not create a separate legal entity, for tax purposes, and pursuant to Article 22 of the Tax Code, they must be registered before the Guatemalan Tax Administration ("Superintendencia de Administración Tributaria” in Spanish). Accordingly, they are not exempt from compliance with applicable tax obligations.
The practical usefulness of this structure is particularly significant in Guatemala, considering that Guatemalan law does not expressly regulate consortiums as autonomous contractual vehicles (although consortiums are contemplated as legal entities under the Civil Code). As a result, many joint projects are typically structured through corporate joint ventures, which involve incorporating a new entity and complying with the corporate, registration, and tax obligations applicable to commercial companies. In contrast, participation agreements offer a more flexible and functional alternative for structuring commercial alliances and investment projects.
A practical example of the use of this structure may be found in the Rules for the Application of the Policy for the Procurement of Goods, Works, Services and Consulting Services Financed by the Central American Bank for Economic Integration, which recognize the joint participation of bidders through structures referred to as "APCA” (Participation Association, Consortium or Association). Through these arrangements, different participants may organize themselves to jointly participate in specific procurement or bidding processes without the need to incorporate a new commercial entity, provided that the applicable bidding terms permit it, as occurs in certain procurement procedures carried out in Guatemala involving loans granted by such bank.