Article 1.5 of the Franchise Law defines Franchise as: “A right granted by a franchisor to a franchisee to run a franchise business on his own account under the trademark or under the brand name of the franchisor or the person licensed to use the same; this shall include transferring technical expertise and specifying the manner of operation. Such right may be granted for a financial or non-financial consideration, excluding the amounts the franchisee pays to the franchisor in return for goods or services”.

Article 1.8 of the Franchise Law defines a Franchise Agreement as: “an agreement between a franchisor and a franchisee, under which a franchise is granted”.

To put it simply, in KSA, a franchise is generally understood as a license that entitles a franchisee to use the franchisor’s business model, processes, trademarks, other intellectual property rights, technical expertise, knowhow, and the manner of operating the franchise business, which is usually recorded in what is known as the operation manuals in order to provide services or sell products under the franchisor’s brand.

From the above definitions, the Franchise Law clearly distinguishes franchise agreements from commercial agencies, distribution and license agreements by expressly requiring that the franchisor must entitle the franchisee the right to use, inter alia, his trademarks, other IP rights, technical expertise, knowhow, and the franchise business model.

The Franchise Law in KSA sets out specific conditions and requirements that must be met before a franchise can be offered or sold. These requirements aim to ensure transparency and disclosure of vital information of the franchisor and mainly protect the rights and interests of the franchisees, develop the franchise industry in KSA and regulate the franchise relationship in a balanced manner.

A key pre-condition for offering or granting a franchise is that the franchised business may not be offered or granted unless it has been actively operated for a minimum of one year at no fewer than two points of sale, or by at least two individuals, one of whom may be the franchisor or one of their affiliates. These mandatory requirements are stated under Article 5.1 of the Franchise Law, establish a fundamental eligibility threshold that franchisors must satisfy prior to granting a franchise in KSA.

Other related provisions are mentioned in our response to question 25 below.

Unfortunately, in practice, many franchise agreements are signed and executed without complying with the imperative mandatory provisions of Article 5 mentioned above. In the latter case the franchisee is entitled to terminate the franchise agreement and claim for compensation as the franchisor violates the provisions of the Franchise Law. Based on our practical experience numerous lawsuits have been filed before the Commercial Court in KSA for the said reasons.

Another core requirement under the SFL is the imperative mandatory pre-contractual disclosure obligation set out in Article 7 of the Franchise Law and Article 3of the Implementing Rules, which are mentioned in our response to question number 4 below.

In case a franchisor materially breaches the pre-contractual disclosure obligation mentioned above, the franchisee is entitled to exercise multiple rights as detailed hereunder, in particular, in our response to questions 3 and 4.

As per Article 6 of the Franchise Law, it is mandatory that the franchisor registers the franchise agreements and the FDD with the Ministry.

The franchisor is required to register each signed franchise agreement along with the relevant FDD with the Ministry within a maximum period of 90 days from the date of signing the franchise agreement. The registration is done by submitting and depositing copies of both the signed franchise agreement along with the relevant FDD to the competent authority at the Ministry (Article 3.1 of the Implementing Rules).

In practice the registration process, application and relevant documents are currently submitted to the online portal of Monsha’at. In practice, several documents must be submitted with the application to register the franchise agreement and the FDD, including, inter alia, the following:

1. A signed franchise agreement; and
2. The FDD relevant to the franchise agreement, satisfying the requirements stated in the SFL, which will be mentioned in our response to question 4 below; and
3. Additional documents are also required, particularly in cases where the franchisor is a foreign entity, which include without limitation a copy of the commercial registration certificate (CR) or the certificate of incorporation of the company of the franchisor and the entity of the franchisee, a copy of the articles of association (or equivalent constitutional documents) of the company of the franchisor and a power of attorney authorizing the lawyer, if a local Saudi lawyer has been engaged, to take the steps on behalf of the applicant

Following the submission of the registration application together with the required documents and information online, the competent authority shall undertake a review of the submitted application, information and documents, and either accepts them or asks for further information or documents. After the competent authority accepts the application a final registration franchise certificate is issued, and the franchisee will be permitted to conduct the franchise business in KSA.

Pursuant to Articles 7.2 and 11.1 of the Franchise Law, the franchise agreement and the relevant FDD must be in Arabic, and if drafted in another language, it must be translated into Arabic by a certified translator licensed in KSA.

If the franchisor materially breaches the disclosure or registration obligations stipulated in the SFL, the franchisee has the right to:

1. Claim damages from the franchisor without terminating the agreement as provided under Article 19 of The Franchise Law;
2. Terminate the franchise agreement by giving written notice to the franchisor, without any obligation to compensate the franchisor, provided that such notice is given within one year from the date the franchisee becomes aware of the breach, or within three years from the date the breach occurred whichever is earlier according to Article 17 of the Franchise Law. In the latter case, the franchisee is entitled to claim for compensation as well as the other rights stated under Article 20 of the Franchise Law.

As per the provisions of Article 20 of the Franchise Law the franchisor or any of its affiliates is required to repurchase any material assets used exclusively in the franchised business. This applies to assets purchased by the franchisee either from the franchisor or from a third party acting on the franchisor’s instructions. The repurchase must take place within 60 days of the franchisee’s request, and the price must be at least equal to the original purchase price paid by the franchisee, minus depreciation calculated according to standard accounting principles. Furthermore, the franchisor must compensate the franchisee for any losses incurred in establishing, acquiring, or operating the franchised business, unless the refusal to renew or extend the agreement was legally justified.

The franchisee’s right to compensation stated under Articles 19 and 20 of the Franchise Law is only limited to the loss or damage which are directly caused by the franchisor’s material violation of its obligations pursuant to the provisions of Article 12.1 of the Implementation Rules.

Article 21.2 of the Franchise Law imposes time limits on when claims for compensation can be brought, where it states that any claim for compensation filed as a result of the franchisor’s or franchisee’s violation of their obligations as stipulated under the Franchise Law or the franchise agreement shall not be heard upon the lapse of one year from the date the non-defaulting party becomes aware of the violation or upon the lapse of three years from the date of the occurrence of the violation, whichever occurs earlier.

Further, failure of the franchisors to comply with the FDD or registration obligations may also result in monetary administrative fine of up to Saudi Riyals (500,000).

Article 2.3 of the Franchise Law states that one of the main purposes of this Law is to “ensure disclosure of rights, obligations, and risks so any prospective franchisee can make an informed investment decision”.

Article 1.12 of the Franchise Law defines the Franchise Disclosure Document as: “A document disclosing the key rights and duties of the franchise and the substantial risks relating thereto”. Therefore, the SFA requires clear disclosure of rights, obligations and risks to enable the franchisees to make well-informed investment decisions and evaluation of the franchise opportunity.

As per the SFL the franchisor is obliged to prepare, submit and register an FDD related to the signed franchise agreement.

The FDD must be provided to the prospective franchisee at least 14 days before concluding the franchise agreement or accepting any payment in connection with the franchise, whichever occurs earlier (Article 7.1 of the Franchise Law).

The FDD should be in Arabic, and if drafted in another language, it must be translated into Arabic by a certified translator licensed in KSA. Moreover, the FDD must be clear, accurate, and complete (Article 7.2 of the Franchise Law).

As per the express provisions of Article 6.1 of the Implementing Rules, the FDD must contain specific mandatory items and information stated in the disclosure document requirements attached to the Implementing Rules, including without limitation, the following main points:

1. Business and working experience of the franchisor; and
2. Litigation history of the franchisor; and
3. Fees and amounts payable to the franchisor; and
4. Estimated initial investment expected to be invested by the franchisee; and
5. Information on existing franchisees of the franchisor.

It is worth noting that previously the Implementing Rules required the FDD to include 17 key disclosure items, one of which related to the franchisor’s financial capability specifically, the provision of their balance sheets for the previous one or two fiscal years. Notably, the disclosure form issued by the Ministry was amended by Ministerial Resolution No. (339) dated 14-08-1444 Hijra corresponding to 6-3-2023, which has now removed the obligation on the franchisor to disclose its financial position and to provide audited financial statements for the preceding two years. Accordingly, the number of mandatory disclosure headings and main items has been reduced to 16, which constitute the minimum disclosure requirements under Saudi law and if an international FDD does not address all of these prescribed points, even if it is otherwise comprehensive, it will not be deemed sufficient and compliant with the SFL.

In addition to the main 16 headings and items, the FDD as per the Implantation Rules must also include several sub-headings and items, such as: (i) a list of the members of the board of directors and the current senior executives of the franchisor responsible for the franchise business; (ii) details regarding the locations where the franchise business is conducted; and (iii) information about any ongoing lawsuits or arbitration cases involving the franchisor or its group, related to their participation in the franchise business model.

Additionally, according to Article 5 of the Implementing Rules, the registration of the franchise agreement and the related FDD shall remain valid throughout the entire term and duration of the relevant franchise agreement. However, the franchisor may revoke the registration by submitting a request to the Ministry within (90) days if the agreement is terminated, expires; or is nullified or terminated by a court’s order.

Moreover, it is obligatory under the Implementing Rules for certain disclosures to be made if the franchisor includes details in the FDD regarding any historical or projected financial performance of the franchises (Article 7 of the Implementing Rules).

Potential consequences and penalties if the franchisor do not comply with the disclosure requirements may result in significant penalties, these consequences and penalties have been detailed in our response to questions 3 above. For clarity purposes, the SFL has stated similar consequences and penalties in case the franchisor materially breaches either the disclosure or registration obligations.

In practice, each franchise agreement must be accompanied by its own FDD as concluded from Article 3.1of the Implementing Rules mentioned above. Needless to say, that certain information within the FDD, may remain the same across agreements and the content of the FDD will ultimately differ depending on certain factors, including, inter alia, the estimated initial investment, the type of franchise agreement and the specific geographic location. For instance, the investment required for an outlet in Riyadh will be most likely be higher than that in a smaller city in KSA. Therefore, each agreement must be supported by a separate FDD reflecting the relevant particulars.

Article 10 of the Franchise law clearly states that “the franchisor and franchisee shall, in good faith, fulfil their obligations under the franchise agreement.” Both the franchisor and the franchisee are required to fulfil their obligations under the franchise agreement in good faith. This duty of good faith is further reinforced by Saudi courts according to the general principles of Islamic Shari’ah which represents the public order in KSA, that imposes an overarching obligation on parties to act in good faith in the performance of their contracts.

As such, any disclaimer or clause that is found by Saudi courts or arbitration panel to have been made in bad faith will not be legally recognized or enforceable in KSA.

Further, if a franchisor fails to disclose material information as required under the SFL this may be considered to be mis-selling and if such a failure constitutes a material breach, then the franchisee will have the right to exercise the rights stated under Articles 17, 19 and 20 of the Franchise Law detailed in our response to Question 3.

In addition to any mutually agreed terms by a franchisor and a franchisee, Article 11.2 of the Franchise Law and Article 8 of the Implementing Rules prescribe specific mandatory terms and conditions that must be incorporated into each franchise agreement which cannot be overridden or waived contractually by the parties. These terms and conditions include, among others:

1. A description of the franchised business, the duration of the agreement, and the geographic area it covers; and
2. Details of all payments the franchisee must make to the franchisor, including the initial franchise fee, any training costs, technical support fees; and
3. The franchisor’s duty to provide technical, marketing, and other necessary expertise, and its role in supplying goods or services; and
4. The franchisee’s right to use trademarks or other IP rights, and how both parties handle any issues or damages related to IP infringement; and
5. How disputes between the parties will be resolved; and
6. The rights and obligations of both franchisor and franchisee regarding termination of the agreement, and responsibilities of both parties upon termination or expiration of the agreement; and
7. Any restrictions on either party from engaging in competing businesses during or after the agreement, subject to the Competition Law; and
8. The responsibilities of the parties regarding the protection of confidential information and data.

Needless to say, the franchisor and the franchisee have the freedom to regulate the provisions of the above terms and conditions as they deem appropriate, in a manner that protects their rights and interests in the franchise agreement. The SFL has prescribed several conditions to be mandatorily inserted in a franchise agreement, while keeping the way they could be regulated and drafted to the discretion of the franchisor and the franchisee.

In addition to the above mandatory conditions that must be included in a franchise agreement intended for application in KSA, the franchise agreement must not contain a provision(s) that conflicts with the imperative mandatory provisions of the SFL, the commercial law or the general principles of Islamic Shari’ah, for instance; a clause requiring the payment of interest on late payments, would be illegal under law of KSA. For further details regarding this point, please refer to our response provided under question 15 below.

As long as the required disclosures and terms are properly addressed in the franchise agreement and the franchisor complies with all of the procedural requirements (including filing and disclosure obligations), and the above requirements are fulfilled, then, it is ultimately for the parties to decide whether to enter into the agreement or not, and there is no legal prohibition against offering the agreement on a non-negotiable, “take-it-or-leave-it” basis.

Intellectual property rights in KSA are governed by various laws (regulations) that provide protection for copyrights, trademarks, and trade secrets. As mentioned in our response to Question 7 above, the SFL outlines certain mandatory conditions that must be included in a franchise agreement, one of which is the franchisee’s right to use any trademark or other intellectual property rights related to the franchised business, as well as the respective liabilities of the parties in the event of an infringement of such rights and any resulting damages.

Trademarks: Trademarks in KSA are mainly protected under the Trademark Law issued by Royal Decree No. (M/21) dated 7-8-2002 Gregorian calendar (hereafter referred as the “Trademark Law”). The registrable marks include names, words, symbols, numbers, images, packaging, shapes, colours, and even sounds and scents. The Saudi Authority for Intellectual Property (hereafter referred as “SAIP”) uses and recognize the Nice Classification system for organizing trademark registrations, which are to be filed with the SAIP and once registered, the owner holds exclusive rights to use the trademark for 10 years, with the option of renewal and use by any other party requires the owner’s permission. With respect to infringement of trademarks counterfeiting or imitating a registered mark in a way that causes confusion or using someone else’s trademark in bad faith is considered infringement and offenders may face fines, imprisonment from 1 to 3 years, or both. Moreover, repeat offenses can lead to doubled penalties and additional measures in cases of infringement may include closing the business for 15 days to six months and publishing the decision at the violator’s expense.

Unlike the laws of other countries, in KSA a trademark license nor a trademark user agreement is not required under the SFL.

Trade Secrets: Trade secrets are mainly protected under the Regulations for the Protection of Confidential Commercial Information issued by Ministry Decision No. (3218), as amended, passed in 2005 (hereafter referred as the “Trade Secrets Regulations”). A trade secret is defined as commercially valuable information that is not publicly known or easily accessible, and whose owner takes reasonable steps to keep it confidential. However, protection does not extend to secrets that violate Shari’ah, public order, or public morals. Unlawful acts include unauthorized access, use, or disclosure of trade secrets, particularly in ways that violate fair commercial practices. Such conduct is considered an abuse and can lead to legal consequences under the regulations. As long as reasonable efforts are taken by the owner of the information to maintain the information as a trade secret, the Trade Secrets Regulations do not expressly provide for a limit on the duration of the right, although a minimum protection period of 5 years is specified (subject to limited exceptions) in the context of secret information submitted to an official competent authority for the purpose of approval of the marketing of drugs or chemical agricultural products in which new chemical substances are used.

Copyright: Copyright in KSA is mainly regulated by the Copyright Law issued by Royal Decree No. (M/41) dated 2-7-1424 Hijri corresponding to 30-8-2003 Gregorian calendar, as amended by Council of Ministers Decision No. (536) dated 19-10-1439 Hijri (hereafter referred as the “Copyright Law”). The Copyright Law protects original works in the fields of literature, art, and science, regardless of the medium, format, or purpose. This law protects works by Saudi and non-Saudi authors first published, performed, or displayed in the KSA; works by Saudi authors first released abroad; as well as works by broadcasters, performers, and producers of sound recordings, and those covered by international treaties to which KSA is a party. Under the Copyright Law, copyright owners are granted exclusive rights to reproduce, distribute, prepare derivative works, and publicly perform or display them. The provisions of the laws give moral rights to authors that cannot be waived or transferred, except to heirs or to the Ministry of Culture and Information if there are no heirs. Under the Copyright Law the duration of protection varies depending on the nature of the work, such as for individual authors, it lasts for their lifetime plus 50 years after death; for joint works, from the death of the last surviving author; and for corporate authors, 50 years from the date of first publication. For audio and audio-visual works, films, collective works, and software the protection lasts for 50 years from their first public release, for applied arts and photographs protection is granted for 25 years from publication, broadcasts for 20 years from transmission, and for sound recordings and performances for 50 years from their recording or performance date. The Copyright Law also provides that “infringement” includes unauthorized publishing, modifying or copying a work, removing copyright information or protective codes, using pirated software or broadcasts, manufacturing tools to bypass protections, and distributing counterfeit materials. The penalties for any violations of the Copyright Law are set out under Article 22 and include warnings, fines up to Saudi Riyals (250,000), temporary closure of the offending business for up to two months, confiscation of infringing materials, and imprisonment for up to six months.

One of the key objectives of the Franchise Law is to regulate and govern the relationship between franchisor and franchisee, emphasizing the principles of freedom to contract and transparency, as expressly prescribed under Article 2.1 of the Franchise Law.

However, due to the complexity and diversity of the legal relationships regulated under a franchise agreement, such as granting the license to use Franchisor’s trademark, other intellectual property rights, trade secrets, selling goods and products, non-competition obligations, other legislation will also apply depending on the text of the franchise agreement, including, inter alia, the Trademarks Law, Arbitration laws (if settling disputes are through arbitration), Law of Commercial Courts (if settling disputes are through Saudi courts), Trade Secrets Law, Labor Law for the employees of a franchisee working in the operation of the franchise business, , the Competition Law, the general principles of Shari’ah.

It should be underlined that Article 3 of the Franchise Law provides that “this Law shall apply to any franchise agreement executed in KSA“. Therefore, according to the said Article, as long as a franchise agreement will be implemented in KSA, the said franchise agreement and the related FDD will be subject to the SFL, at least in connection with the imperative mandatory provisions stated in the SFL that cannot be contractually waived.

For more details, please see our responses to Questions 4 and 7above, which explain the key provisions that must be included in franchise agreements and FDDs in KSA.

At the outset, according to Article 11.2.g of the Franchise Law, if a franchise agreement or an FDD in KSA is found to conflict with the Saudi Competition Law, the provisions of the Saudi Competition Law shall prevail. Further, pursuant to Article 3 of the Saudi Competition Law, it applies to all franchise business conducted in KSA and therefore, franchisors and franchisees alike must ensure that their agreements, business structures, and commercial practices are carefully aligned with the Competition Law and its requirements.

The updated version of the Saudi Competition Law was introduced by Royal Decree No. (M/75) dated 29-6-1440 Hijri corresponding to 07-3-2019 Gregorian calendar (hereafter referred as “Competition Law) The Competition Law has been issued to protect fair market practices, prevent anti-competitive behaviour, and restrict entities with dominant positions from engaging in practices that could distort the market or harm consumers. The oversight and enforcement of the law fall under the General Authority for Competition (herein referred to as “GAC”), which has been particularly highly active and rigorous in monitoring the conduct of manufacturers and distributors in their dealings with retailers and consumers and entities in KSA to prevent unfair competitive behaviour and monopoly to sustain fair market and enhance a healthy business environment in KSA.

One of the most important provisions of the Competition Law to be considered in franchise agreements is Article 4 that states: “The prices of goods and services shall be in accordance with market rules and free competition principles…”.

Similarly, Article 6 prohibits entities that hold a dominant position in the market from abusing that position in ways that may harm or restrict competition.

It should be underlined that as per the Implementing Rules one of the items to be included in the FDD is the territory and exclusivity of the franchise. As such it may be inferred that the SFL permits the franchise rights to be exclusive, and thus the franchisee shall be entitled to reserve exclusive rights in the territory mentioned in the franchise agreement and be protected from competing businesses being established by the franchisor directly or indirectly by third parties, within the said territory.

Based on the above, it is permissible and acceptable in KSA to insert a clause in a franchise agreement that prohibits online sales by the franchise and insists on exclusive supply or fix retail prices. However, as mentioned above, in the event of any apparent conflict between a franchise agreement and the Competition Laws it will be left to the discretion of the competent authorities, including GAC, to determine whether a violation of the Competition Law has occurred or not.

The Implementing Rules expressly affirms the right of the franchisor and/or the franchisee to regulate the conduct of any competing business during the term of the franchise agreement, or after its termination or expiry, without prejudice to the provisions of the Competition Law.

The courts in KSA recognize and uphold non-compete and non-solicitation clauses, provided they comply with the relevant Saudi laws, do not contradict with the general principles of Shari’ah, do not violate the provisions of the Competition Law and established business practices in KSA. However, courts are unlikely to enforce non-competition covenants that are considered excessive or overly restrictive. They may also amend or partially accept such provisions, for instance by shortening their duration if they exceed two years in labour contractual relationship. The courts in KSA have issued many precedents confirming that a non-competition clause is valid and enforceable if it meets certain criteria. In practice, the competent Saudi court has the discretionary authority on a case-by-case basis depending on the particular facts and circumstances of each case and dispute to decide if the non-competition clause is valid and enforceable.

Saudi courts may enforce foreign court injunctions after ensuring that certain requirements are fulfilled, including the existence of a reciprocity agreement between KSA and the issuing jurisdiction to enforce such injunctions.

Under the Saudi Labour Law, specifically Article 83, employers are allowed to include non-compete clause in employment contracts to protect their legitimate commercial interests and safeguard their business secrets. This clause is particularly relevant when an employee’s role involves access to confidential business information or direct dealings with the employer’s clients.

According to the provisions of Article 83 of the Saudi Labour Law, to enforce the non-competition clause or agreement, it must be in writing; and clearly specify in terms of duration (with the restriction not exceeding two years from the end of the employment relationship), and geographic area of the restriction, and type of activity and work covered, and to the extent needed to protect the legitimate interests of the employers. This legal provision aims to prevent employees from immediately competing against their former employers by using sensitive information or client relationships gained during their employment.

It is legitimate and permitted under the prevailing Saudi Labour Law to include non-solicitation clause in employment contracts signed and implemented in KSA.

In practice, and subject to the above reservations, many standard employment agreements signed and implemented in KSA contain a non-competition clause. However, non-solicitation clauses are incorporated in some employment contracts, depending on the nature of the work of the employee.

In practice non-solicitation clause is included in franchise agreements applied in KSA and is stated in the model forms for the franchise agreements currently used by Monsha’at. However, in case of a dispute in connection with breaching a non-solicitation obligation, it is often difficult to prove such a breach before Saudi courts, and thus in practice, the implementation of such clauses may be challenging in KSA.

Further, recent amendments to the Saudi Labour Law grant employees the right to resign and terminate their employment contracts within a period of 90 days as from their resignation notices, and employers cannot prevent them or refuse such resignations after the lapse of the aforementioned 90 days.

Additionally, significant changes have been introduced in labour relationships between Saudi employers and non-Saudi workers. Specifically, the process of transferring sponsorship and work visas for non-Saudi employees has become more streamlined and flexible, subject to the fulfilment of certain conditions. As a result, many Saudi companies are experiencing difficulties in enforcing non-solicitation clauses. Franchisors and franchisees face similar challenges in enforcing non-solicitation obligations.

Franchisors and the franchisees are obliged under Article 10 of the Franchise Law, and according to the general principles of Shari’ah to perform their contractual obligations under the franchise agreement in good faith. For further details, please refer to our response to Question 6 above.

The franchisee’s employees (workers as per a signed labour contract) working in the franchise business in KSA will be subject to the then applicable Saudi Labour law and any amendments thereto. This includes, but is not limited to the provisions relating to basic and actual wages, working hours, rest periods, weekly rest days, Official holidays, annual vacations, insurance, duration of labour contracts, non-Saudi employees, termination and expiration of labour contracts, end of service awards, women employment, the percentage of Saudi Employees vs Non-Saudi Employees commonly referred to as Saudization etc.

It is worth mentioning that the current Saudi Labour law establishes the basic rule for regulating working hours in KSA and limits the working hours to not more than 8 hours per day (if measured daily) or 48 hours per week (if measured weekly). During Ramadan, Muslim employees’ working hours must be reduced to a maximum of 6 hours per day.

As a general rule, the risk of the franchisee’s employees being deemed employees of the franchisor is very low, particularly given that Article 1 of the Franchise Law clearly defines a Franchise “as a right granted by a franchisor to a franchisee to conduct a franchise business subject of the franchise agreement on its own account”, therefore it can be inferred that a franchisee’s employees remain under the franchisee’s sponsorship, liability and control and shall be considered his workers, in particular, if a labour contract is signed between the franchise and the employee.

Consequently, the franchisor is generally not considered a joint employer, and the franchisee remains liable for the actions of their employees. To further mitigate any potential risk, this can also be explicitly stated in the franchise agreement. Bearing in mind that most franchise agreements (and the model forms for the franchise agreements currently used by Monsha’at) contain a specific clause, commonly referred to as “Independent Contractor”, which states expressly that the franchisee is conducting the franchise business on its own account, risk and by using its own employees and workers, who, under no circumstances, shall be considered the employees of the franchisor.

There is no such risk under the Franchise Law, as it expressly distinguishes franchise agreements from commercial agency arrangements.

Article 4 of the Franchise law clearly provides that “For the purpose of applying this Law, the following agreements and arrangements shall not be deemed a franchise agreement: 2. An agreement or contract subject to the Law of Commercial Agencies applicable in the KSA. 3. An agreement or contract limited to the sale of goods or provision of services carrying certain trademarks, or to the use of a trademark or any copyrighted material of any good or service”.

According to the SFL the franchise agreement and the FDD must contain in detail the provisions regulating the percentage of royalties, franchise fees and other payments to be made by the franchisee to the franchisor, in order to avoid any uncertainty or ambiguity in the franchise agreement or the FDD.

In KSA any provision with respect to charging interest on late payments is deemed inapplicable and unlawful, as it is considered Riba which is prohibited under Saudi law based on Islamic Shari’ah principles. As a result, Saudi Commercial and Civil courts in their judicial precedents have consistently refused to recognize or accept interest on late payments and consider such stipulation null and void as it is prohibited under Islamic Shari’ah principles.

In practice, and based on our experience, the Ministry has on several occasions refused to register franchise agreements that include provisions for interest on late payments.

With respect to royalties, while franchise agreements in KSA usually stipulate payment in Saudi Riyals, there is no legal requirement mandating this. Parties are free to agree on payments in other major currencies, such as US Dollars, Euros or Sterling Pounds, as Saudi law does not prohibit such arrangements.

In general, there is nothing in the SFL that prohibits inserting penalties in franchise agreements in KSA. In practice, franchise agreements applied in KSA may contain contractual penalties that shall be imposed on franchisees if they breach restrictive covenants or contractual obligations. For example, if a franchisee, after the termination of a franchise agreement does not change the appearance of the franchised unit or store or does not remove any signage that identifies the business with the franchise system, or continues to use the franchisor’s trademarks beyond the agreed time frame, contractual penalties may be stipulated and enforced on a per-day basis until compliance is achieved. These penalties must meet certain conditions to be enforceable before Saudi courts, including being reasonable in scope to protect the franchisor’s rights and free from any form of unlawful interest (Riba), as explained in our response to Question 15 above.

In case of master franchise or area developer agreements, breaching restrictive covenants or other contractual obligations by the franchisee may also be placed to result in the loss of the rights to develop further franchises, particularly where the breach undermines the franchisor’s existing rights or the integrity of the agreement.

In practice, many franchise agreements applied in KSA as well as the model forms for the franchise agreements currently used by the Ministry and Monsha’at, include a guarantee clause in favour of the franchisor, where its rights are protected by guarantees. For example, promissory notes and/or personal guarantee(s). If the franchisee breaches its restrictive covenants or similar obligations, the franchisor is entitled to enforce the guarantee clause. It is strongly recommended that any guarantee clause included in a franchise agreement be carefully drafted and thoroughly reviewed by a specialised Saudi lawyer to ensure full compliance with the applicable laws of KSA.

Withholding tax in KSA is applicable at the rate of 15% on royalties and certain other services. Under Saudi Arabia’s Income Tax Law issued by Royal Decree No. (M/1) dated 6-3-2004 Gregorian calendar (hereafter referred as ‘Income Tax Law’) “Royalties” are defined broadly to include payments for the use of or right to use IP such as copyrights, patents, designs, industrial secrets, trademarks, trade names, know‑how, goodwill, or any payments tied to scientific, industrial or commercial expertise.

Withholding tax may apply to technical and management service fees, franchise and licensing fees store opening fees, and other similar IP-related payments. It is generally understood that payments to non-residents for the use of intellectual property rights are subject to withholding tax. However, withholding tax does not apply to profits made from merely buying and selling goods.

Under the Saudi Income Tax Law, every resident, regardless of whether they are considered a taxpayer and any permanent establishment of a non-resident in KSA that makes a payment to a non-resident from a source within KSA is required to withhold tax from that payment. The applicable withholding tax rates are outlined in Article 68 of the Income Tax Law, which provides as follows:

1. Rent: 5%.
2. Royalty or proceeds: 15%.
3. Management fees: 20%.
4. Payments for airline tickets, air or sea freight: 5%.
5. Payments for international telecommunication services: 5%.
6. Any other payments specified in the Regulations, provided that the tax rate does not exceed 15%.
7. In case of amounts paid by a natural person, the conditions for withholding stipulated under this Article shall apply to the payments pertaining to his activity”.

While it may be possible to restructure payments in alternative ways which may attract a lower withholding tax such structuring must be carefully assessed to ensure it does not contravene the Saudi Anti-Concealment Law. In practice, the Zakat, Tax and Customs Authority (ZATCA) have in certain instances reclassified management or training fees as royalties, thereby applying the 15% withholding tax rate. There have been cases where licensing and service-related fees were viewed as falling within the scope of royalties and taxed accordingly.

Under the prevailing SFL, there is no specific provision regulating e-commerce activities.

In practice, franchisors often reserve the right to conduct e-commerce operations themselves or permit franchisees to do so, subject to the franchisor’s policies and approval. The allocation of these rights typically depends on the nature of the franchise. For example, for service-oriented franchise agreements, such as real estate consultancy, e-commerce is generally not included due to the practical difficulties of online delivery, whereas, in most cases, product-oriented franchise agreements frequently include provisions of franchisors retaining exclusive control over e-commerce channels due to their strategic importance.

Therefore, the franchisor may lawfully restrict or prohibit franchisees from using e-commerce in accordance with the terms of the franchise agreement, making the allocation of e-commerce rights primarily a matter of contractual agreement rather than a statutory regulation/obligation.

The Personal Data Protection Law by Royal Decree No. (M/147) dated 05-09-1444 Hijri corresponding to 27-3-2023 Gregorian calendar (herein referred to as the “PDPL”), regulates the protection of personal data of individuals and applies broadly to the collection, processing, storage, and transfer of personal data within KSA.

Although there is no express provision in the PDPL addressing franchise, it is our understanding that in the franchising context, both franchisors and franchisees are required to ensure compliance with the PDPL when handling customer data, employee information, or any other personal data processed in the course of operating the franchise. Moreover, cross-border data transfers (e.g., from the Saudi franchisee to a foreign franchisor) may be subject to the relevant provisions under the PDPL.

In addition to the statutory framework, Shari’ah principles also safeguard an individual’s right to privacy. As such, the disclosure of personal or confidential information generally requires the consent of the data subject, unless disclosure is mandated by overriding public interest.

It should be noted that the Franchise Law requires that the franchisor shall maintain the confidentiality of the accounting and financial information and any data relating to the franchisee’s business, unless otherwise agreed in writing with the franchisee (Article 8). Moreover, it is mandatory that the franchise agreement must include and regulate the franchisor and franchisee’s obligations in relation to confidential information and data protection under the Implementing Rules.

The Implementing Rules have also stated the FDD shall cover and include any rights the franchisor may have relating to confidential information or trade secrets, a general description thereof must be provided to the franchisee along with the mechanism and method on how to use and employ them.

It is also worth noting that the PDPL is undergoing a major refinement process, with several proposed amendments expected in 2025 focused primarily on enhancing accountability for data controllers, including requirements for documenting data processing activities. In parallel, the Saudi Data and Artificial Intelligence Authority (SDAIA) has also introduced the National AI Index, marking a key step toward the development of future AI regulations and ethical frameworks. Collectively, these developments reflect a broader move towards more rigorous compliance expectations for digital platforms operating in KSA.

In practice, most of the franchise agreements applied in KSA (and the model forms for the franchise agreements currently used by the Ministry and Monsha’at) contain a detailed clause (or a whole separate agreement attached to the franchise agreement) to regulate the protection of data and confidential information and secrets of the franchisor and the franchisee.

The franchisor is, subject to the provisions of SFL, entitled to impose restrictions within the franchise agreement to restrict the transfer of the franchisee’s rights and obligations under the franchise agreement; and/or the ownership interests in the franchisee.

The SFL provides that unless otherwise stated in the franchise agreement, the franchisee must obtain the franchisor’s prior written approval before assigning the franchise agreement or undergoing a change in control. This is regulated under Article 13 of the Franchise Law, which provides that once the franchisor has granted such approval, it shall be considered irrevocable and the franchisor may not later object to the assignment or change in control, except in certain circumstances, including, but not limited to, situations where the proposed assignee lacks sufficient financial resources, fails to meet the franchisor’s reasonable conditions or selection criteria etc.

Complementing this, Article 10 of the Implementing Rules similarly reinforces that the franchisor may not object to an assignment or change in control, nor revoke its prior approval, except in specific situations, such as if the person expected to assume control of the franchisee has filed for bankruptcy, or where the franchisee is in material breach of the agreement and fails to remedy the breach within 14 days of receiving written notice.

Building on the above, Article 14 of the Franchise Law further states that, subject to Article 13 and the Implementing Rules, if a franchisor does not respond in writing to a franchisee’s request to assign the franchise agreement or transfer control of the franchisee, the franchisor is deemed to have approved the request by default. In line with this, Article 11 of the Implementing Rules clarifies that if the franchisor intends to reject such a request, it must do so in writing within thirty (30) days, clearly stating the reasons for the refusal.

The Franchise Law sets out certain rules for renewing or extending the franchise agreement by the franchisee.

The Franchise Law provides that unless the franchise agreement states otherwise, the franchisee must notify the franchisor in writing at least 180 days before the agreement expires if the franchisee wishes to renew or extend it. The renewal or extension of the franchise agreement shall be for the same duration and under the same terms and conditions as the original agreement, unless one or more of the various exceptions outlined under Article 15 of the Franchise Law applies.

Further, the Franchise Law provides that a franchisor is not permitted to terminate the franchise agreement before its agreed expiry date without the franchisee’s written consent, unless the termination is for a legitimate valid reason. The legitimate reasons as outlined in Article 18 of the Franchise Law include the franchisee’s failure to meet a material obligation and does not cure it within fourteen (14) days of receiving written notice; liquidation or dissolution of the franchisee; abandonment or suspension of business operations for more than ninety (90) consecutive days without valid justification; the franchisee engaged in fraudulent conduct in the operation of the franchised business; or infringes the franchisor’s intellectual property rights during the validity of the franchise agreement.

It should be noted that pursuant to the above mentioned Articles 15 and 18 respectively, if the franchisor unlawfully terminates the franchise agreement or if the franchisor refuses to renew or extend the agreement without a valid reason, the franchisee may seek remedies rely on the protections provided under Article 20 of the Franchise Law, which has been explained under our response to question 3 above.

The Franchise Law also imposes time limits and states that if a franchisor terminates the franchise agreement in violation of Article 18 of the Franchise Law, any claim for compensation must be filed within three years from the date of termination ,after which the claim will no longer be heard (Article 21 paragraph 1).

Conversely, if a franchisee terminates the agreement in violation of the Franchise Law and the franchisor suffers damage as a result, the franchisor may claim compensation, unless the franchise agreement states otherwise (Article 20 of the Franchise Law).

Further to the provisions of Articles 17 and 18 of the Franchise Law stated in our response to questions number 21 and 3 above.

Termination conditions for a franchise agreement in KSA are governed by the Franchise Law. Article 16 addresses the expiry and termination of a franchise agreement, providing that it generally terminates upon the death, legal incapacity, or liquidation of a natural person franchisee, or upon the initiation of liquidation or dissolution of a corporate franchisee. Notably, the franchise agreement itself may stipulate alternative terms for termination or provide for the transfer of rights to heirs or third parties.

The Franchise Law does not expressly address e-commerce, and the use of such rights depends on the terms of the franchise agreement. In practice, franchisors may seek to retain control over e-commerce channels, sometimes even in circumstances where practical implementation may be challenging, so as to centralize online sales and to maintain brand consistency. There is no statutory right granted to the franchisee in this regard, and our response to Question 18 above contains further details. On the contrary, most of the franchise agreements applied in KSA and the model forms for the franchise agreements currently used by Monsha’at prescribe the franchisors right to reserve ownership of customer goodwill, client data, telephone numbers, in particular, upon the termination or expiration of a franchise agreement. It should be noted that applying those rights in practice may not be easy, especially if the franchisor is a foreign company that does not have a legal entity established in KSA.

Since the early 2000s, multiple franchise committees have been formed in Jeddah, Riyadh, Makkah, and other cities of KSA. Additionally, the National Franchise Association was established a few years ago to regulate and support the development of the franchise industry in KSA, in particular, before the issuance of the SFL. However, from our practical experience, as a former member of most of these committees and the National Franchise Association, they were not as active as they have been, and their role in supporting the franchise industry in the Saudi market has not been very prominent.

Joining franchise committees or the National Franchise Association in KSA is not mandatory under the SFL or required to conduct franchise business in KSA.

As mentioned in paragraph 3 of our Introductory Chapter above, Monsha’at, in cooperation with the Ministry, has established the Franchise Center, which has been active and effective in organizing various activities, events, and policies aimed to develop the franchise industry in KSA.

It is also worth mentioning that the Franchise Center has recently mandated that anyone wishing to provide franchise consultancy services in KSA must first obtain permission and a license from the Franchise Center. This requires meeting several conditions, including an exam, covering legal aspects of the SFL and franchising in general. We are honoured that our firm is handling the legal component of the syllabus for these examinations.

In general, the restrictions applicable to all foreign companies and investors in KSA extend equally to franchising activities. Any company that is wholly or partially owned by a foreign investor in KSA is subject to the Saudi Foreign Investment Law (Regulations) issued pursuant to Royal Decree No. (M/1) dated 5-1-1421 Hijri corresponding to 10-4-2000 Gregorian calendar and its amendments (hereafter referred as “Saudi Foreign Investment Law”). The competent regulatory authority in this regard is primarily the Ministry of Investment of KSA (MISA). Generally, the most stringent conditions on foreign ownership and control apply to trading and wholesale activities, while service-related activities tend to have fewer regulatory burdens and requirements.

In general, after a careful review of the SFL, it does not set out a specific chapter or conditions for international or non-local franchises that differs from Saudi or local franchises.

A particularly debated issue concerns whether foreign entities are permitted to act as franchisees. In practice, this remains a complex and unsettled area, with differing interpretations on the permissibility of foreign companies operating as franchisees in the KSA. Notwithstanding this uncertainty, all other regulatory requirements applicable to foreign franchisors, including those relating to foreign investment, taxation (including Income tax, withholding tax and value added tax), and commercial activity apply equally within the franchising context. It is also worth noting that this area of law continues to evolve.

While the Franchise Law does not impose a requirement for the franchisor to be fully Saudi-owned, it does set certain conditions for franchising activities within KSA. If the franchisor does not practice the franchised business in KSA on its own account, the master franchisee appointed by the franchisor, who has the right to sub-franchise may not sub-franchise or offer the same until it (master franchise) or any other franchisee has practiced the franchised business in KSA for a period not less than one year.

It is important to highlight that under the SFL and the Saudi Foreign Investment Law, it is not a requirement for the franchisor to obtain an investment license from MISA in order to conduct franchise business within KSA.

Furthermore, if the franchisor is non-Saudi, the Ministry requires the franchise agreement to be signed before a Notary Public, legalized and attested together with the FDD by the competent authorities ending with the Saudi Embassy (or apostilled) in the franchisor’s home country, for it to be duly registered in KSA.

There is no provision in the SFL that prohibits a franchise agreement to be governed by a foreign law.

Please review our detailed response to Question 9 above, which indicates that any franchise agreement implemented in KSA falls within the scope of the SFL, and accordingly, key mandatory provisions such as the registration of the franchise agreement, preparation and registration of the FDD, will apply, even if the agreement is governed by foreign law.

According to Article 25 of the Franchise Law, disputes arising from the franchise agreement or the application of the Franchise Law may be settled by alternative means, such as arbitration, mediation, or conciliation, and there is no prohibition on the franchisor and franchisee from agreeing to refer disputes to Saudi courts, foreign courts, or arbitration panel seated inside or outside KSA. Accordingly, disputes arising from franchise relationships may be resolved either before the competent courts in KSA or through alternative means, such as arbitration, mediation or conciliation, whether conducted domestically or internationally, depending on the agreement between the parties.

It is common practice in international franchise agreements for franchisors to choose settling disputes related to a franchise agreement through courts or arbitration panels in their country, however, the practical enforcement of such provisions in KSA may present challenges and should be considered. Accordingly, the dispute resolution mechanism in a franchise agreement must be thoroughly reviewed by a specialised Saudi lawyer to ensure the enforceability of any relevant court judgement or arbitral award.

Further, it is important to highlight that now as per Article 19 of the Commercial Courts Law, a claimant is required to serve a pre-action notice to the defendant outlining the subject matter of the dispute. Failure to do so may affect the claimant’s ability to initiate proceedings before the Commercial Court. It is important to note that, in adjudicating such disputes, the court will apply the SFL, the relevant provisions of the franchise agreement, and, where the agreement or SFL is silent, the principles of Shari’ah and Saudi commercial law will apply.

As mentioned in the Introductory Chapter, the enactment of the new SFL reflects a clear legislative intent to support and protect the franchise sector in KSA overall. To further fulfil this aim, dedicated circuits within the Commercial Court have also been recently formed to handle franchise disputes exclusively. This ensures that such matters are adjudicated by judges with specialized expertise in franchise law, reinforcing KSA’s commitment to fostering and safeguarding the franchise industry.

As mentioned in our response to Questions 3 and 4 above, a signed franchise agreement and the related FDD must be submitted in Arabic or, if originally drafted in another language, accompanied by a certified Arabic translation prepared by a translator licensed in KSA.

There is no specific requirement set out under the Franchise Law regarding electronic signature or a wet ink signature of a franchise agreement, and it is merely stated in the Franchise Law that a franchise agreement must in writing and signed by the parties.

Electronic signatures are generally acceptable in KSA and are governed under the Saudi Electronic Transactions Law, which regulates the use of electronic transactions and signatures, and provides the necessary legal recognition and enforceability for electronically signed documents. Article 14 of the Electronic Transactions Law sets out specific conditions under which an electronic signature may be considered valid and acceptable, says that the electronic signature must be attributable to the person identified in the relevant digital certificate and the signature must have been provided by that person for the specific purpose outlined in the certificate. Additionally, the electronic transaction must remain unaltered after the signature has been applied. Therefore, subject to the above, electronically signed documents are legally enforceable when these conditions are met and if a contract duly executed with a compliant electronic signature, it is generally treated as an original and does not, in most cases, require a corresponding wet-ink version.

In the case of foreign franchisors who, as outlined in our response to Question 25 above, are subject to various requirements by the Ministry, it is assumed that the franchise agreement shall be executed in wet ink.

In line with the objectives of Saudi Vision 2030, we anticipate that regulatory and commercial developments over the next few years are likely to make the franchise environment more favourable for foreign investors and in general more organized and regulated in KSA to encourage potential franchisors to franchise their businesses and potential franchisees to invest in franchise projects, and ultimately improve and support the franchise sector and industry overall.