Franchise Arrangements under KSA Law

relationship between franchisors and franchisees. The primary objective of the KSA franchise arrangements is to foster transparency in these business arrangements. Saudi Arabian franchise law not only safeguards the interests of franchisors and franchisees but also contributes to the overall business environment, fostering a level playing field and instilling confidence in the franchise sector.

Pre-Franchise Considerations

• Trademark Registration: Ensure trademarks are registered in the Kingdom, adhering to specific criteria, including translation into Arabic.
• Supply Chain: Assess product availability and compliance with Saudi Arabian market standards, emphasizing accurate Arabic labelling.
• Staff Requirements: Aim for a workforce comprising at least 40% Saudi nationals for each business operating within the territory.
• Foreign Ownership Restrictions: While franchisees can be foreign, GCC, or Saudi Arabian nationals, all businesses in the territory must hold a valid trading license, requiring foreign entities to have a minimum share capital of US$8 million.

Franchise Agreements

• Definition of Franchise: The legislation broadly defines "franchise," making it challenging to avoid falling within this scope.
• Disclosure and Registration: Franchisors must prepare a detailed disclosure document, mandatory for registration with the local ministry.
• Renewal Procedures: The law outlines the franchisee's notice of renewal and restricts the franchisor's right to reject renewal requests under limited justifiable conditions.
• Restrictive Covenants: Enforceable unless found contrary to mandatory local law, restrictive covenants should not unduly burden the counterparty.
• Price Recommendations: Product price recommendations are generally permissible unless the franchisor holds a dominant market position.
• Withholding Tax: Deducted from royalties, relying on applicable double-tax treaties, with standard gross-up clauses in common use.
• Currency and Guarantees: No currency-related restrictions or exchange controls; guarantees are enforceable within certain scope limitations.
• Existing Agreements: Certain provisions of the new franchise law automatically apply to existing agreements, with novated, transferred, or renewed agreements requiring full compliance.

Navigating the nuances of franchise arrangements under KSA Law requires careful consideration of these legal aspects. Understanding the implications and ensuring compliance with KSA franchise arrangements can pave the way for successful and legally sound franchise operations in the Kingdom.

Amendments

Saudi Arabia's Trade Ministry has recently made significant amendments to the Commercial Franchise Law, as outlined in Royal Decree No. M22/1441. These modifications aim to address challenges faced by investors and promote the growth of franchising. A key amendment involves the cancellation of three requirements specified in Article 13. Notably, the mandatory submission of financial status confirmation by parties granting franchises has been eliminated.

Previously, KSA franchise law required franchisors to provide financial statements, including their financial status at the end of the last fiscal year and statements indicating their ability to meet debts, along with financial statements for the last two fiscal years. With the recent changes, the submission of financial statements for the last two years is now optional, providing parties with flexibility in confirming their ability to meet financial obligations. This move enhances the ease of doing business and encourages franchising activities in the Kingdom.

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