With the Kingdom of Saudi Arabia introducing the new Franchise Law in 2020, expanding your brand in the jurisdiction through licensing or franchising may come with certain complexities. While the new legal regime in the KSA and the associated difficulties can seem discouraging, considering franchising on the Saudi market is definitely worth an in-depth analysis.

The Kingdom of Saudi Arabia has the largest retail market in the Gulf Cooperation Council (GCC), with all related sectors growing exponentially and attracting an increasing number of international brands, which makes it one of the most attractive franchising destinations in the Middle East and North Africa.

The demand for franchising is high, so are the legal benchmarks. Here are some high-level thoughts that are worth considering before launching a franchise in the Kingdom of Saudi Arabia.

Pre-Franchise Considerations

• Trademark registration: Trademarks must be registered in the Kingdom, before signing an agreement with potential franchise partners. They cannot be descriptive and must be translated into Arabic. The registration process is lengthy and must be considered as a preliminary step.
• Supply chain: Future franchisors must consider the availability and admissibility of their products to the Saudi Arabian market, in addition to ensuring the correct labelling of goods (in Arabic).
• Staff: In general terms, the staff of each business operated within the territory should be composed of at least 40 percent Saudi nationals.
• Foreign ownership restrictions: Franchisees can be foreign, GCC or Saudi Arabian Nationals with no impact on the relationship; however, all businesses trading in the territory must have a valid trading license, which is only granted to foreign entities with a minimum share capital of US$8 million.

Franchise Agreements

• What is and what is not a franchise? The new legislation defines “franchise” very broadly; it is difficult to avoid falling within this definition. On the other hand, trying to circumvent the applicable laws is risky. Although the process required for full compliance is lengthy and costly, trying to avoid it is not worth the fines or legal consequences.
• Disclosure and Registration: The new franchise law requires all franchisors to prepare a detailed disclosure document which must be registered with the local ministry.
• Renewal: The new franchise law sets out the manner and timing for the franchisee to provide notice of renewal and restricts the franchisor’s right to reject a request for renewal by limiting justifiable conditions to only a few.
• Restrictive covenants: Restrictive covenants (prohibitions on the franchisee to engage in a competing business) are recognized and enforceable, unless they are found contrary to mandatory local law. In broad terms, this means that such covenants should not be overly burdensome on the counterparty.
• Price recommendations: Saudi law does not per se prohibit product price recommendations unless the franchisor has a dominant position in the market.
• Withholding tax: It is deducted from royalties. There are various double-tax treaties that can be relied on, and a standard gross-up clause in franchise agreements is common.
• Currency: There are neither currency-related restrictions nor exchange controls.
• Guarantees: Guarantees are enforceable subject to certain scope limitations
• Existing agreements: Certain provisions of the new franchise law automatically apply to existing agreements predating its implementation. Additionally, if an existing franchise agreement is novated, transferred, or renewed it will have to fully comply with all the provisions of the new franchise law.

The highlights above provide a summary of the main issues. If you would like to discuss how this may affect your existing or planned franchise relationship in the jurisdiction, please reach out to our global franchise team.