A Legal Overview considering Recent Legislation
Introduction
The franchise sector in the United Arab Emirates is experiencing rapid growth, driven by economic openness and legislative developments aimed at enhancing the investment environment and ensuring a balance between the interests of local and foreign investors. Although there is no standalone federal law regulating franchise contracts specifically, the UAE legal framework provides a comprehensive structure governing such contracts through various relevant legislations.
Legal Concept of Franchising in UAE Law
UAE legislation does not provide an independent definition of “franchise”. However, Federal Law No. 3 of 2022 concerning the regulation of commercial agencies includes “franchise” as one of the forms covered under the concept of commercial agency, provided there exists a representative relationship within the country whereby the franchisee distributes or sells products or services on behalf of the franchisor in exchange for profit or commission. Under specific conditions—such as exclusivity and local ownership—the franchise contract may fall under the scope of the Commercial Agencies Law.
Legal Framework Governing Franchise Contracts
Franchising in the UAE is governed by multiple interrelated laws, notably:
- Federal Law No. 3 of 2022 (Commercial Agencies Law): The principal reference if the franchise is registered as an exclusive agency.
- Civil Transactions Law No. 5 of 1985: Governs general contractual aspects, especially the principle of good faith in contract performance.
- Commercial Transactions Law No. 50 of 2022: Governs commercial relationships and applies to purely commercial franchise activities.
- Trademark Law No. 36 of 2021: Provides protection for the trademark used in the franchise.
- Personal Data Protection Law No. 45 of 2021: Imposes strict compliance obligations on customer data collection and use.
- Competition Law No. 4 of 2012: Restricts anti-competitive practices, with exceptions granted to registered commercial agencies.
- Corporate Tax Law No. 47 of 2022: Subjects franchise income to corporate tax when profits exceed the exemption threshold.
Registering a Franchise as a Commercial Agency: When and Why?
If the franchise agreement contains an exclusivity clause and is granted to a qualified national entity, it may be registered with the Ministry of Economy as a commercial agency. Registration offers legal protections including a ban on parallel imports, entitlement to compensation upon unlawful termination, and exclusive jurisdiction of the Commercial Agencies Committee in resolving disputes.
If the contract is not registered, it remains a civil or commercial contract governed by general contract principles, allowing greater flexibility in negotiation and termination, but without the special protections afforded to registered agencies.
Franchising in Free Zones: DIFC and ADGM
The Dubai International Financial Centre (DIFC) has a dedicated Franchise Law enacted in 2020. It requires written agreements and the inclusion of material disclosures such as fees, training provisions, and business model structure. Registration is not mandatory under this regime, and parties are free to choose the applicable law and dispute resolution forum.
In contrast, the Abu Dhabi Global Market (ADGM) has no specific franchise law; it applies English common law principles. The contract terms and mutual obligations of the parties serve as the primary source of governance.
Intellectual Property and Trademark Protection
The trademark is the cornerstone of any franchise relationship. The franchisor must register their trademark in the UAE pursuant to the Trademark Law and document license agreements to secure protection against third parties. The agreement should also outline conditions of use and brand reputation safeguards to ensure consistent operation.
Mutual Obligations of Franchisor and Franchisee
The franchisor is obliged to provide technical support, training, marketing, and operational materials. The franchisee, in turn, must adhere to the franchisor’s standards and operational guidelines and refrain from any actions that may damage the trademark or deviate from the approved business model.
The principle of “good faith” governs the relationship at all stages—from negotiation to executions codified in Article 246 of the Civil Transactions Law.
Competitive Restrictions and Exclusivity Clauses
Restrictions such as exclusivity and non-competition clauses are generally valid in franchise agreements, provided they do not breach the principles of fair competition or violate the Competition Law—unless the franchise is a registered commercial agency, which enjoys a statutory exemption.
Tax Implications on Franchise Agreements
Royalty fees are subject to 5% VAT and 9% corporate tax if annual profits exceed AED 375,000. Both parties must consider tax implications when structuring the agreement and determining which entity will collect and declare the fees.
Termination and Dispute Resolution
Termination rules depend on the contract type. If registered as a commercial agency, the franchise cannot be terminated except with one year’s notice or half the contract duration (whichever is shorter), or for a legitimate cause. The Commercial Agencies Committee has initial jurisdiction before the matter proceeds to arbitration or court.
If the contract is unregistered, its termination is governed by the agreement terms, with the courts or arbitration tribunals serving as the dispute resolution forum.
In DIFC, disputes are governed by the Centre’s law and may be referred to the financial courts or resolved through arbitration if agreed by the parties.
Key Reforms in the New Commercial Agencies Law (2022)
Recent legislative amendments introduced major changes to the franchise landscape, including:
- Allowing foreign companies to obtain direct agency rights where no national agent exists.
- Facilitating termination through clear notice periods and limiting compensation to actual damages.
- Granting existing registered agencies (as of June 2023) a transition period of up to two or ten years, depending on the investment nature.
