This country-specific Q&A provides an overview of Franchise & Licensing laws and regulations applicable in Egypt.
Is there a legal definition of a franchise and, if so, what is it?
No, franchises are not nominate contract with specific regulations under Egyptian law and therefore there is no legal definition of a franchise under the currently applicable Egyptian Laws.
A draft law on franchise agreements was under discussion from June 2021 until the end of the parliamentary session in July 2022 but a law has not been promulgated yet, and a copy of the draft was published in the Egyptian newspapers (the “Draft Franchise Law”). The Draft Franchise Law defines franchise as “the granting, by a person called the Franchisor to another person called the Franchisee, the right to carry out the franchised business for his/her/its own account. Such right includes the right to exploit the trademark and trade name owned by or licensed to the Franchisor, receiving technical expertise and knowledge from the Franchisor; and determining the method of operating the franchised business, in return for a financial or a non-financial consideration that does not comprise the amounts paid by the Franchisee to the Franchisor in return for goods and services”.
In the absence of a specific law regulating franchising, some franchise agreements could be considered a “Transfer of Technology Contract” as regulated under the Egyptian Trade Law. In such a case, the provisions and rules related to transfer of technology contracts enumerated under the Trade Law will apply to the franchise agreement. A Transfer of Technology Contract is an agreement by virtue of which a “supplier of technology” undertakes to transfer technical information (know-how), in return for monetary compensation, to an “importer of technology” in order to use it in a technical way to
Produce or develop a specific commodity,
Install or operate machinery or equipment; or
The mere sale, purchase, lease or rental of commodities is not considered a transfer of technology, nor is the sale or license of trademarks or trade names considered as such, unless such sale or license is set out as part of or in relation to, a Transfer of Technology Contract.
Are there any requirements that must be met prior to the offer and/or sale of a franchise? If so, please describe and include any potential consequences for failing to comply.
There are currently no specific requirements under Egyptian law that must be fulfilled prior to the offer and/or sale of a franchise.
The Draft Franchise Law indicates that a franchise shall not be granted unless after the franchise business activity had commercially operated in the local or international market for a period of no less than one year through at least two different outlets, and in the event the franchisor had not directly operated in Egypt then the Egyptian franchisee may not grant a sub-franchise until after one year of operations.
Please see our response to Question 4 below in relation to disclosures.
Are there any registration requirements for franchisors and/or franchisees? If so, please describe them and include any potential consequences for failing to comply. Is there an obligation to update existing registrations? If so, please describe.
There are currently no specific registration requirements under Egyptian law for franchisors and/or franchisees (other than the standard registration in the commercial register required for any person wishing to carry out commercial activities in Egypt).
However, the Draft Franchise Law contemplates that a special register will be established at the Micro, Small and Medium Enterprises Development Agency (“MSMEDA”) for the purpose of registering the franchise agreements.
Are there any disclosure requirements (franchise specific or in general)? If so, please describe them (i.e. when and how must disclosure be made, is there a prescribed format, must it be in the local language, do they apply to sales to sub-franchisees) and include any potential consequences for failing to comply. Is there an obligation to update and/or repeat disclosure (for example in the event that the parties enter into an amendment to the franchise agreement or on renewal)?
There are currently no specific disclosure requirements under Egyptian law for franchising agreements. This said, the general rules of contracting provide that a contract should be performed in good faith and that a contract includes, in addition to its provisions, what is also necessary for its performance in accordance with the law, custom, and equity as per the nature of the obligation.
The Draft Franchise Law provides for a disclosure document to be provided by the Franchisor to the Franchisee, updated as needed with material information, before the conclusion of the franchise agreement. Such disclosure document should clearly include a disclosure of the main rights, obligations and material risks related to the franchise opportunity, otherwise it shall be deemed void. The franchisee shall not disclose confidential information therein.
For transfer of technology contracts, the supplier of the technology must disclose to the importer before concluding the contract or within the contract the hazards associated with using the technology and how to mitigate them, any lawsuits that may hinder the use of the technology, and any export control legal requirements. The importer of the technology must disclose to any local laws related to the import of the technology.
If the franchisee intends to use a special purpose vehicle (SPV) to operate each franchised outlet, is it sufficient to make disclosure to the SPVs’ parent company or must disclosure be made to each individual SPV franchisee?
There are no specific legal requirements regarding disclosures to the SPVs. It is advisable that both the use of SPVs by the franchisee and the disclosures to such SPVs be regulated and agreed upon between the parties contractually in the franchise agreement.
What actions can a franchisee take in the event of mis-selling by the franchisor? Would these still be available if there was a disclaimer in the franchise agreement, disclosure document or sales material?
If the mis-selling amounts to misrepresentation or fraud then the general rules shall apply, and the franchisee may seek to rescind the franchise agreement if it entered into the agreement in reliance on such representations and may seek compensation in case of damages.
The Draft Franchise Law provides that in the event of material breach by the Franchisor of the disclosure or registration obligations specified by the Draft Franchise Law and its executive regulations, the Franchisee shall have the right, before the lapse of one year from the date of its knowledge of the breach or before the lapse of three years from the date of the breach, whichever is earlier, to terminate the Franchise Agreement without compensating the Franchisor for early termination, or the Franchisee may claim compensation for any damage sustained without terminating the Franchise Agreement.
Would it be legal to issue a franchise agreement on a non-negotiable, “take it or leave it” basis?
Under the Egyptian Civil Law freedom of contract is a fundamental principle, as a contract is considered as the law of the contracting parties. It shall not be revoked or amended except with the agreement of the contracting parties.
How are trademarks, know-how, trade secrets and copyright protected in your country?
The main law governing the protection of intellectual property in Egypt is the law no. 82 of 2002 on the Protection of Intellectual Property Rights and its Executive Regulations (“IPR Law”), and trademarks, copyright and trade secrets (undisclosed information) are all protected by said law. Additional protection can be obtained by registering a trademark or submitting the undisclosed information with the competent authority. The Egyptian Trade Law also addresses infringement on such rights under the unfair competition provisions of the Trade Law.
Are there any franchise specific laws governing the ongoing relationship between franchisor and franchisee? If so, please describe them, including any terms that are required to be included within the franchise agreement.
There are currently no specific laws governing the ongoing relationship between franchisor and franchisee in Egypt. Instead, various generally applicable laws will apply to the franchise relationship such as the general rules of the Egyptian Civil Code, IPR Law, Protection of Competition Law and the Trade law. Accordingly, the parties to a franchise agreement shall make sure to include as much as possible all the details regulating such franchising relationship.
The Draft Franchise Law contemplates regulating the parties’ franchise relationship and provides for specific required terms to be included within the Franchise Agreement, including term, geographic area, all fees payable to the franchisor, franchisor’s business format (standards and manuals) and trademarks, training, source of goods and services,
Are there any aspects of competition law that apply to the franchise transaction (i.e. is it permissible to prohibit online sales, insist on exclusive supply or fix retail prices)? If applicable, provide an overview of the relevant competition laws.
The Egyptian competition law provides for a general prohibition in relation to vertical agreements concluded between a person and any of its suppliers or clients if such agreements result in restraining or eliminating competition in a relevant market. Therefore provisions such as exclusivity and fixing of retail prices may be scrutinized by the Egyptian Competition Authority, but whether such provisions shall be considered as anti-competitive shall be determined on a case by case basis, taking into consideration possible benefits to consumers, product quality, reputation and safety considerations, and customary practices in the relevant sector or business. It is worth noting that persons with a dominant position in a relevant market undergo more scrutiny and are generally subject to more restrictions under the Egyptian competition law.
Are in-term and post-term non-compete and non-solicitation clauses enforceable?
There is no guarantee of specific performance under Egyptian law, and therefore the main remedy in case of breach of contract is bringing a compensation claim against the breaching party.
Are there any consumer protection laws that are relevant to franchising? Are there any circumstances in which franchisees would be treated as consumers?
Generally, the Consumer Protection Law No. 181 of 2018 will apply to the franchisor and franchisee in terms of complying with product safety and product liability. Depending on the type of products or services offered to a consumer, there are other specific laws in Egypt, containing consumer protection provisions that may be relevant to franchising, such as telecommunication laws, food laws, etc.
According to said Consumer Protection law, a “consumer” is any natural or juristic person receiving products to satisfy his/its non-professional or non-commercial needs. Accordingly, Franchisees are not likely to be treated as consumers, unless they purchase products not for trading purposes.
Is there an obligation (express or implied) to deal in good faith in franchise relationships?
The obligation to deal in good faith is a fundamental principle set out in the Egyptian Civil Code, which shall apply to all types of contracts, including franchising agreements.
In addition, the Draft Franchise Law expressly stipulates that both the Franchisor and the Franchisee shall perform their obligations set out in the Franchise Agreement in good faith.
Are there any employment or labour law considerations that are relevant to the franchise relationship? Is there a risk that the staff of the franchisee could be deemed to be the employees of the franchisor? What steps can be taken to mitigate this risk?
An employment relationship under Egyptian law is mainly established by reference to the payment of wages and the exercise of control and supervision by an employer to and over an employee.
However, depending on the provisions of the franchise agreement, the way of its implementation, and the circumstance surrounding the franchising relationship, if the franchisor is exercising control over the employees of the franchisee, instructing them or paying their salaries, the franchisor may be deemed as a joint employer. Accordingly, in order to mitigate this risk, a franchisor should distance itself from the franchisee’s employees and not interfere in any aspects of their employment, such as their recruitment, dismissal, wages, scope and hours of work, etc.
Is there a risk that a franchisee could be deemed to be the commercial agent of the franchisor? What steps can be taken to mitigate this risk?
Commercial agency under Egyptian law requires the agent to be carrying out commercial transactions on behalf and for the account of the principal, while in franchising the parties are independent contractors and the franchisee in operating the franchise is doing so on its own behalf and for its own account. To mitigate such risk the contract should be clear in showing that the parties are independent contractors, are not authorized to act in each other’s name or bind the other party vis-à-vis third parties.
Are there any laws and regulations that affect the nature and payment of royalties to a foreign franchisor and/or how much interest can be charged?
The payment of royalties is subject to the contractual agreement of the parties. See also response to question 18 below in relation to the payment of royalties to foreign franchisors.
In relation to the payment of interest, and without prejudice to banking activities, the Egyptian Civil Code generally sets a ceiling of 7% on interest rates, exceptionally, the Egyptian Trade Law allows merchants to apply an interest on amounts or expenses that the merchant paid on behalf of its customers with a rate up to that applied by the Central Bank of Egypt. The Trade Law also provides that, the total cumulative interest on a commercial debt should not exceed the debt itself unless provided for by law or custom.
Is it possible to impose contractual penalties on franchisees for breaches of restrictive covenants etc.? If so, what requirements must be met in order for such penalties to be enforceable?
Yes, contractual penalties can be imposed in the form of contractually agreed compensation. There are no specific requirements for their enforceability, noting that the penalty will not be enforced if the debtor/franchisee proves that no damages were incurred by the creditor/franchisor, and that a judge can reduce such compensation if the debtor/franchisee proves that it was greatly exaggerated or that the original obligation was partially performed.
What tax considerations are relevant to franchisors and franchisees? Are franchise royalties subject to withholding tax?
The Egyptian Income Tax Law provides that royalties and interest paid to persons overseas are subject to a withholding tax of 20% without deducting any costs therefrom. Egypt is party to many bilateral Double Taxation Avoidance Treaties, and therefore international franchisors may wish to check if relevant treaties are in place and if they could benefit from them. It is also worth noting that in the case of franchise agreements that require a franchisee to import products from a franchisor that royalties paid under the franchise agreement may be deemed dutiable under the Egyptian Customs Law.
How is e-commerce regulated and does this have any specific implications on the relationship between franchisor and franchisee? For example, can franchisees be prohibited or restricted in any way from using e-commerce in their franchise businesses?
To date there isn’t a specific law regulating e-commerce, and therefore restrictions or prohibitions will be subject to the agreement of the parties.
What are the applicable data protection laws and do they have any specific implications for the franchisor/franchisee relationship? Does this have any specific implications in the franchising context?
The applicable data protection law in Egypt is the Personal Data Protection Law No. 151 of 2020. The Personal Data Protection Law provides that Personal Data may not be collected, processed, disclosed or revealed by any means except with the explicit consent of the Data Subject or where otherwise permitted by law. Failure to comply with this main requirement or the other provisions of this law, may lead to criminal offences, resulting in the application of a range of penalties, including fines, claims and imprisonment.
Accordingly, a franchisee’s or a franchisor’s customers, employees and business contacts’ data may fall under the broad definition of Personal Data, and therefore if the franchise agreement provides for the disclosure of such data then the parties to the agreement need to take heed of the requirements of the this law. It is worth mentioning that until the date of submitting this Chapter the executive regulations of the aforementioned law had not been issued, and such regulations are expected to shed further light on the application of this law.
Is the franchisor permitted to restrict the transfer of (a) the franchisee's rights and obligations under the franchise agreement or (b) the ownership interests in the franchisee?
Under the current applicable Egyptian laws, the parties to a franchise agreement may contractually agree on such restrictions.
According to the proposed Draft Franchise Law, the franchisee shall obtain the franchisor’s approval on the assignment of the franchise agreement to third parties or in case of a change of control of the franchisee, and the Franchisor shall not withhold its consent except in specific cases related to the assignee not having the financial resources or not otherwise being able to perform the franchisee’s contractual obligations or meet the franchisors criteria for granting the franchise.
Does a franchisee have a right to request a renewal on expiration of the initial term? In what circumstances can a franchisor refuse to renew a franchise agreement? If the franchise agreement is not renewed or it if it terminates or expires, is the franchisee entitled to compensation? If so, under what circumstances and how is the compensation payment calculated?
There are no specific rules governing the renewal of the franchise agreement. Therefore the general rules apply whereby the renewal of contracts is not presumed, and is either expressly agreed upon in a contract or clearly deduced from the circumstances. There are also no specific rules concerning compensation upon termination or expiry, and therefore if the franchise agreement expires or is terminated in accordance with its provisions then such expiry or termination would not give rise to compensation, otherwise the general rule on compensation applies which is for loss of profits and damages incurred as foreseeable at the time of entering into the agreement, unless agreed otherwise, noting that any agreement on limiting liability in cases of fraud or gross mistakes shall be deemed invalid.
The Draft Franchise Law provides that unless agreed otherwise in the franchise agreement, a franchisee shall have the right to request the renewal of the franchise agreement at least 60 days before its expiry date, in which case the agreement shall be renewed for a similar term unless both parties agree to renew on new terms or the franchisee was in breach of its obligations under the agreement.
Are there any mandatory termination rights which may override any contractual termination rights? Is there a minimum notice period that the parties must adhere to?
Under the Egyptian Civil Code, if one of the parties to an agreement fails to perform its obligation, the non-defaulting party, after notifying the defaulting party, can demand the specific performance of the agreement or its rescission, and a compensation in either cases, if justified. Accordingly, this mandatory rule may override any contractual termination rights.
Are there any intangible assets in the franchisee’s business which the franchisee can claim ownership of on expiry or termination, e.g. customer data, local goodwill, etc.
Since franchising is not a nominate contract under Egyptian law, this will depend on the contractual agreement of the parties, which should clearly state which party is the owner of such intangible assets. The franchise agreement should also be clear on whether compensation would be payable to the franchisee upon expiry or termination or not.
The proposed Draft Franchise Law provides as a consequence of the assignment, termination, expiration or non-renewal of the Franchise Agreement or the franchise business, any agreement for the license to use any trademark or trade name associated with the franchise business shall terminate accordingly.
What due diligence should both the franchisor and the franchisee undertake before entering into a franchise relationship?
It is always advisable for contracting parties to check evidence of due commercial and tax registration and corporate authority to enter into the franchise agreement of the other party. From a practical standpoint, the franchisee should make sure that they understand and are clear on all the different payments required under the agreement, that the franchisor provides them with all the necessary know-how and assistance to be able to operate the franchise, and that they are aware of local licensing requirements related to the franchised activity. The franchisor should get comfort that the franchisee has the financial and commercial capability necessary to meet its obligations under the agreement, and both parties should be clear on their exit strategies from the agreement. Consulting the necessary professional advisors such as tax, legal, financial and/or commercial in relation to the feasibility of the agreement is always advisable.
How widespread is franchising and what are the most active sectors? Are there any specific economic, cultural or regulatory issues that make franchising particularly attractive?
In our experience, the most active sectors are retailers and restaurants.
Is there a national franchising association? Is membership required? If not, is membership commercially advisable? What are the additional obligations of the national franchising association?
The Egypt Franchise Development Association (“EFDA”) is a non-governmental organization that is active in representing, promoting and serving the franchise industry in Egypt. Membership is not legally required.
MSMEDA, established as a fund in 2017 by the Prime Minister replacing the Social Fund for Development established in 1991, took the initiative to establish an interactive electronic platform (msme.eg) whereby it promotes the franchise business for small and medium enterprises, and providing financing to such enterprises, whether directly or through a network of franchisors partnering with MSMEDA. In addition, MSMEDA activated another electronic platform, being www.franchiseegypt.com, which is designed to cater all stakeholders of the franchising industry and take into consideration their specific needs.
Are foreign franchisors treated differently to domestic franchisors? Does national law/regulation impose any debt/equity restrictions? Are there any restrictions on the capital structure of a company incorporated in your country with a foreign parent (thin capitalisation rules)?
No, the law does not differentiate between local and foreign franchisors, and the law does not generally differentiate between Egyptian and foreign investors, but may in relation to some specific sectors/activities impose some restrictions (such as importation for trade that requires a 51% Egyptian shareholding structure, and hotel management which requires a higher capital in case of a foreign parent). The law does not impose debt/equity restrictions, and the Companies Law does not have a thin capitalization rule in relation to companies’ capital structure. However, the Egyptian tax law includes a thin capitalization rule of debt to equity that if exceeded renders the interest on such debt non-deductible for tax purposes.
Are there any requirements for payments in connection with the franchise agreement to be made in the local currency?
There are no specific requirements concerning the currency of payment in franchise agreements, and therefore it will be subject to the general legal requirements. In this regard, if both the franchisee and franchisor are in Egypt then their dealings must be in Egyptian pounds unless otherwise permissible pursuant to a treaty, another law, or cases determined by the Central Bank of Egypt (“CBE”). If the franchisor is a foreign party then the current applicable CBE regulations allows payment in foreign currency in relation to service, supply, and contracting works contracts entered into with a foreign party provided that dealings in foreign currency are conducted through the banks authorized to deal in foreign exchange
Must the franchise agreement be governed by local law?
No, the parties are free to determine the governing law of the agreement. However, in the event the franchise agreement is deemed a transfer of technology contract, then the agreement must be governed by Egyptian law.
The proposed Draft Franchise Law provides that the governing law applicable to franchise agreements in Egypt is the law agreed upon by the parties, and if the franchise agreement does not include such a provision, the Egyptian Law shall apply.
What dispute resolution procedures are available to franchisors and franchisees? Are there any advantages to out of court procedures such as arbitration, in particular if the franchise agreement is subject to a foreign governing law?
In the absence of specific laws regulating the franchise agreement, the parties to a franchise agreement may opt for local or foreign courts or arbitration. If the franchise agreement is deemed a transfer of technology contract then disputes should be settled before Egyptian courts or arbitration in Egypt. If the franchise agreement is governed by a foreign law, then foreign courts or arbitration are more advisable, noting that in such a case arbitration might be a better option in relation to enforcement of the arbitration award as Egypt has ratified the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards.
The proposed Draft Franchise Law indicates that disputes arising from franchise agreements could be settled by arbitration or mediation, and in case the franchise agreement does not include such dispute resolution method/provision, the local economic courts will have jurisdiction.
Does local law allow class actions by multiple franchisees?
Egyptian law does not recognize the concept of class action.
Must the franchise agreement and disclosure documents be in the local language?
There are no legal provisions regulating the language of franchise agreements between private law persons or disclosure documents. Hence, the language of such documents is to be determined by the parties to the franchise agreement. However, submission of such documents to Egyptian courts and competent governmental authorities would require the translation of the franchise agreement and/or the disclosure documents to Arabic if they were drawn up in any other language.
Is it possible to sign the franchise agreement using an electronic signature (rather than a wet ink signature)?
Yes, as long as the electronic signature meets the legal and technical requirements of the Egyptian Electronic Signature Law No. 15 of 2004 and its relevant regulations that ensure its authenticity and integrity of the electronic signature and document.
Can franchise agreements be stored electronically and the paper version be destroyed?
If the original franchise agreement was in paper form and not an electronically generated document or electronically signed per the requirements of the E-Signature Law referred to in response to Question 34 above, then it is advisable that the original paper version in wet ink be maintained for the term of the prescription periods in case of legal claims (e.g. commercial claims related to the franchise agreement or tax claims).
Please provide a brief overview of current legal developments in your country that are likely to have an impact on franchising in your country.
The parliamentary discussions of the Draft Franchise Law is the most relevant, and stakeholders would be keeping an eye out in the next parliamentary season if the discussions will progress. Other legislation and/or regulation to keep an eye out for are: the executive regulations of the recently issued Data Protection Law, which have not been issued yet and are expected to shed further light on the licensing requirements thereunder; and whether previous discussions on the issuance of an e-commerce law would be revived.
In your opinion, what are the key lessons to be learned by franchisors as a consequence of the COVID-19 crisis?
From a practical perspective, adapting quickly to any future unexpected natural disasters or pandemics similar to COVID-19 outbreak and embracing innovative solutions to avoid the discontinuity of their franchise, such as online sales, marketing and other IT technologies. Franchisors may wish to include in their manuals, a management plan for local or global crises.
As a result of this outbreak, now the franchisors should, before entering into any new franchising agreements, take into consideration the provisions of the franchise agreement that could not be honored by franchisees in case of crisis, such as the obligations related to payment of royalties or receiving goods from exclusive or specific suppliers, etc. Accordingly, franchisors should carefully review their contracts with their franchisees, and especially assess the force majeure clause.
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