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Expert analysis from the HayyaTax team
Published: April 5, 2025
Introduction to Saudi Arabian Franchise Law
The Kingdom of Saudi Arabia has established comprehensive legal frameworks governing franchise arrangements with a primary focus on transparency. The franchise legislation in KSA serves multiple purposes: protecting franchisors and franchisees, creating an equitable business environment, and building confidence within the franchise sector.
Key Considerations Before Entering a Franchise Agreement
Trademark Requirements
- All trademarks must be properly registered within the Kingdom
- Specific criteria must be met, including Arabic translation of all marks
- Registration must be completed before franchise operations begin
Supply Chain Compliance
- All products must meet Saudi Arabian market standards
- Arabic labeling requirements must be strictly followed
- Assessment of product availability and distribution channels is essential
Workforce Nationalization
- Businesses operating within Saudi Arabia must maintain a workforce of at least 40% Saudi nationals
- This Saudization requirement applies to all franchise operations in the territory
- Compliance is monitored by regulatory authorities
Foreign Investment Considerations
- Franchisees can be Saudi nationals, GCC citizens, or foreign entities
- All businesses must possess valid trading licenses
- Foreign entities face additional requirements, including a minimum share capital of US$8 million
Essential Elements of KSA Franchise Agreements
Broad Definition of “Franchise”
The Saudi Arabian legislation provides an expansive definition of what constitutes a “franchise,” making it difficult for business arrangements to avoid falling under this regulatory framework.
Disclosure and Registration Requirements
- Franchisors must prepare comprehensive disclosure documentation
- Registration with the Ministry of Commerce is mandatory
- Detailed financial and operational information must be disclosed
Renewal Protocols
- Clear procedures exist for franchisees to provide notice of renewal
- Franchisors face restrictions on rejecting renewal requests
- Rejections must be based on limited justifiable conditions defined by law
Legal Considerations for Franchises
- Restrictive Covenants: Generally enforceable unless they conflict with mandatory local laws or place undue burden on the counterparty
- Pricing Guidelines: Franchisors may recommend product prices, but restrictions apply if the franchisor holds a dominant market position
- Tax Implications: Withholding tax applies to royalty payments, with potential relief through double-taxation treaties
- Financial Transactions: No currency restrictions or exchange controls apply to franchise operations
- Guarantees: Legally enforceable within certain scope limitations
Impact on Existing Agreements
- Certain provisions of the updated franchise law automatically apply to existing agreements
- Agreements that are novated, transferred, or renewed must achieve full compliance with current regulations
Recent Amendments to Saudi Arabian Franchise Law
The Trade Ministry has implemented significant changes to the Commercial Franchise Law (Royal Decree No. M22/1441) to address investor challenges and stimulate franchise growth:
Key Changes
- Elimination of three requirements previously specified in Article 13
- Removal of mandatory submission of financial status confirmation by franchisors
- Financial statements for the previous two fiscal years now optional rather than required
- Enhanced flexibility for parties to demonstrate financial capability
These amendments represent a substantial step toward creating a more business-friendly environment for franchising in Saudi Arabia.
How HayyaTax Can Help
At HayyaTax, our specialized team provides comprehensive guidance on navigating franchise arrangements under Saudi Arabian law. Our services include:
- Detailed compliance assessments for franchise agreements
- Strategic tax planning specific to franchise operations
- Expert guidance on regulatory requirements
- Financial structuring to optimize franchise arrangements
Contact our team at www.hayyatax.com to learn how we can support your franchise business in Saudi Arabia.