Cambodia will hold 51 percent of Cambodia Angkor Air and Vietnam Airlines the rest.
The airline will operate domestic flights from Cambodia's capital, Phnom Penh, to Siem Reap, site of the Angkor temples, the country's biggest tourist destination, and to the coastal tourist town of Sihanoukville.
"The government is investing to facilitate the company's flight operations to carry tourists for competitive fares, to attract more visitors," Prime Minister Hun Sen told a crowd at Phnom Penh International airport.
The new airline will initially operate with two ATR 72 planes and is scheduled to get an Airbus A321 in September.
It was looking to expand commercial flights to Vietnam and another neighbouring country, Laos, and hoped to increase its fleet to 10 by 2015, said Vietnam Airlines Executive Director Pham Ngoc Minh.
Vietnam and Cambodia are traditional rivals, and Vietnam's deputy prime minister, Truong Vinh Trong, said at a signing ceremony on Sunday evening that the airline was not just a rare joint investment, but a way to "improve the two Asian neighbours' bilateral relations".
Cambodia has had no national carrier since Royal Air Cambodge went bankrupt in 2001 with estimated losses of $25 million.
In 2007, Indonesia's Rajawali Group signed a deal with Cambodia to establish a flag carrier and planned to begin flights in mid-2008, but the deal was cancelled because of the global economic downturn.
Cambodia welcomed 2.2 million tourists last year.