Franchising within the Gulf Cooperation Council countries of Bahrain, Kuwait, Qatar, Oman, Saudi Arabia and the United Arab Emirates (collectively, the GCC) is a well-known and established method for international franchisors to enter the GCC markets. The local shareholding restrictions for certain types of businesses, discussed further below, have led to franchising being one the most popular methods for international brands entering these local markets.
The United Arab Emirates is often looked at as being the first market for a franchisee to open in when franchisors grant rights to the GCC and wider Middle East and North Africa region. For this reason, this chapter will focus on the United Arab Emirates, as well as looking at various factors common to franchising in the GCC.
Although historically the franchising market has been dominated by international franchisors granting master franchises to wealthy individuals or family groups who directly open multiple locations, local brands are now beginning to emerge and franchise to multiple individuals. Although these local brands are typically looking for franchisees within the GCC market, some brands are beginning to expand outside the UAE into international markets. Just Falafel, a UAE-based falafel retail brand is one example of such a local brand that has expanded into many countries outside the GCC. The emergence of local brands franchising within the GCC has led to the introduction of various franchising consultancies, brokerages and related businesses also entering the GCC markets.
At this stage there is no national franchise association within each country, but local chamber of commerce departments within each country are taking a keen interest in franchising, along with the commercial departments of various embassies, such as the American Embassy office of the US Commercial Service of the Department of Commerce’s International Trade Administration.
Given the private nature of company and individual’s information within the GCC, there are limited market reports on franchising within each country, but various news reporting agencies and consultancies release independent estimated market intelligence at varying intervals.
II MARKET ENTRY
Generally speaking, there are no approvals or restrictions on franchisors granting master development rights to local entities.
For most businesses in which franchising has predominantly been used in the GCC, such as retail, a company incorporated with local majority shareholding is required to obtain the appropriate trade licence. For example, in the UAE (but outside the various free zone areas) only a company that has 51 per cent UAE national shareholding or 100 per cent GCC shareholding can obtain a retail trade licence for the sale of clothing. Other types of business – for example, real estate agencies – require a 100 per cent UAE national shareholding.
Notwithstanding the shareholder ownership restrictions, the company’s constitution can be drafted such that the economic benefit of the company is allocated in percentages different from the share ownership. In addition, practice has developed to overcome restrictions on foreign ownership of UAE companies whereby side agreements are entered into between the UAE national shareholder and the foreign shareholder pursuant to which the UAE national shareholder assigns its profits to the foreign shareholder.
Although it is common practice to enter into such side agreements in the UAE, their enforceability is not certain and the prudent view is that a UAE court may consider such agreements as an attempt to circumvent UAE restrictions on corporate ownership by non-UAE nationals and as a breach of UAE Federal Law No. 17 of 2004 on the Combating of Commercial Concealment, as amended (the Anti-Concealment Law).2 The Anti-Concealment Law aims to criminalise the practice of enabling a non-UAE national to conduct an economic or professional activity that is prohibited by UAE laws and regulations. The Ministry of Economy, however, has not yet provided further clarification on the implementation or further deferral of this Law, and the effective implementation of the Anti-Concealment Law may be deferred to coincide with that of either or both of the planned new Companies Law (which is anticipated to enable foreign ownership in excess of 49 per cent and up to 100 per cent in some business activities) and the Foreign Ownership Law. In reality, these practices are followed widely in the UAE and more recently have led to the emergence of specific businesses offering to be the ‘silent’ 51 per cent shareholder (for a fee). Although this is general market practice, as there is no other way around the strict interpretation of the law, the commercial risk of the UAE law courts should be taken into consideration. For these reasons most international brands enter the GCC markets through franchising rather than through incorporating a local company with potentially unenforceable side agreements.
In most areas (except specific designated ‘freehold for foreigner’ areas), foreign nationals cannot be registered as the freehold owner of real property, although again side arrangements similar to the foregoing have been used to circumvent the legislation. Further, when taking a lease on property, the owner or manager of the property will usually wish to see a valid trade licence (or residency visa for individuals), which means many clauses in standard franchise agreements, such as those that discuss the franchisor taking possession of a franchisee’s premises upon default, are not practical or easily enforced.
ii Foreign exchange and tax
All GCC states, except Kuwait, are pegged to the US dollar. Generally, no GCC state has any foreign exchange controls or restrictions on the remittance of funds, and foreign investors can freely transfer funds. Withholding tax considerations are relevant in Saudi Arabia, Oman, Qatar and Kuwait, and are discussed further below. Neither the UAE nor Bahrain imposes withholding tax.
III INTELLECTUAL PROPERTY
i Brand search
Throughout the GCC, searching for protected trademarks and other intellectual property (such as copyright, patents, design rights, etc.) is conducted through registered trademark agents and law firms, who directly approach the relevant trademarks office in each country. In addition to this, some trademark agents have developed their own internal database based on published gazettes and trademark journals, which can provide further details on potential conflicting trademarks. As it is not possible to perform GCC-wide trademark searches, trademark applications, or multi-class searches, the process for searching and registering trademarks can be comparatively very costly. Further consideration should be given to issues with English and Arabic symbols and translations, which can increase the searches and registrations required. The Supreme Council of the Gulf Cooperation Council prepared a GCC Trademarks Law many years ago; however, there are currently no implementing regulations and the law is not yet in force in any of the GCC countries. It is, however, expected that the implementing regulations of the GCC Trademarks Law will not offer a unified filing system (as is the case with the GCC Patent Law) and trademark applications will continue to be filed separately in each GCC Member State for protection.
All GCC countries follow a ‘first to file’ trademark protection system, as opposed to the US system of ‘first to use’. Historically, many franchisees have registered in their own names the franchisor’s trademarks and use the trademarks in their registered business or company names. Franchisees often quote the time it takes for trademark registration to complete (which can be up to several years in some countries) along with the costs of registration as reasons why they should be responsible for the trademark registration; however, opposing such a registration or having the registration assigned at a later date can be difficult, time-consuming and costly. Business, trade and company names pose a different challenge as each province or emirate has local municipalities or chambers of commerce responsible for business names, which are often not directly linked to trademark registries. In addition to this, independent free zones within the various GCC countries also maintain company and business name registries. Further issues with translation between Arabic and English usually mean there are many competing trade names that often cannot be challenged.
ii Brand protection
To register a trademark, a legalised and notarised power of attorney (prepared by the trademark agent) needs to be provided by the applicant, although some countries within the GCC have differing requirements as to whether the power of attorney needs to be both legalised and notarised. This power of attorney allows the trademark agent to represent the applicant in registering intellectual property rights with the relevant trademarks office in each country. The trademark agent also requires:
- a an electronic copy of the mark (usually in black and white unless specific colours are sought to be protected);
- b a list of goods and services to be protected by the mark;
- c a certified copy of any previous trademark registrations if priority is being sought; and
- d a certificate of incorporation, certificate of good standing, or extract of the commercial register or trade licence evidencing the name, address, date of incorporation and objectives of the company.
Enforcement of franchise-related intellectual property rights can present a number of challenges within the GCC markets. The courts of each of the GCC countries do not readily allow for injunctions or other discretionary remedies, meaning that it can be extremely difficult to prevent a terminated franchisee from continued use of a franchisor’s intellectual property. As arbitration is often chosen as the dispute resolution method for international franchise agreements, the arbitration clause can also be raised in any court proceeding to challenge the jurisdiction of the court in some intellectual property disputes.
Criminal offences for fraud, counterfeiting or imitating a registered trademark can be possible in certain circumstances. Also where a local court has jurisdiction to hear intellectual property disputes, a number of other remedies such as attachment orders, confiscation orders, fines, damages, destruction orders and compensation may be available depending on the nature of the dispute.
iv Data protection, cybercrime, social media and e-commerce
There is no GCC-wide data protection law, nor does any country within the GCC have specific data protection legislation. Some free zones, such as the Dubai International Finance Centre and the Qatar Financial Centre have enacted data protection legislation relating to the collection, use and transfer of data within the relevant free zone. Data protection is covered generally in various parts of the legislation such as in criminal, civil and commercial codes, electronic transactions laws, and industry-specific legislation such as covering protection of patient data in medical contexts. Shariah principles also protect an individual’s right to privacy and protection from disclosure of secrets. Sanctions associated with processing personal data outside the scope permitted by the various laws are therefore relatively severe compared with those found in Western jurisdictions. For example, in the UAE there are criminal sanctions associated with disclosing ‘secret’ information (such as personal data). Generally speaking, however, specific consent to the processing of personal data can help mitigate or avoid potential penalties.
Many GCC countries have enacted updated cybercrime laws in line with the model Cybercrime Law recently drafted by the Gulf Cooperation Council and agreed between all members of the GCC. These updated laws cover internet fraud, hacking, illegal access, system interference and distribution of viruses, and include specific provisions covering state security and political stability. These laws are drafted broadly and cover any publication of information over the internet, including blogging and use of social media. Penalties include imprisonment, fines and deportation. Furthermore, as most GCC states have enacted specific electronic transactions law (that allow for execution of contracts through electronic means and that govern the legal effect of electronic records) most of these laws contain some data protection considerations.
IV FRANCHISE LAW
There is no franchise-specific legislation in any GCC country, although commercial agency laws (as discussed further below) often cover franchise relationships with, in some cases, serious consequences for franchisors. General civil and commercial codes can also apply together with general intellectual property laws, penal codes, cybercrime laws and more specific legislation such as consumer protection laws and food safety laws.
ii Pre-contractual disclosure
As there is no specific franchise legislation in any GCC country, neither are there any specific pre-contractual disclosure requirements. Misrepresentation for pre-contractual statements are, however, covered under provisions contained in the various civil codes but in a much more narrow way than in some Western jurisdictions. For example, under Article 185 of the UAE Civil Code, misrepresentation occurs when one of the parties ‘deceives the other by fraudulent means by word or act which leads the other to consent to what he would not otherwise have consented to’. It is important to note that it does not include statements made innocently or negligently; there must be an intention, through deliberate action or inaction, to deceive by fraudulent means. Article 187 of the UAE Civil Code allows the person misled to cancel the contract if it can be shown one of the parties made a misrepresentation to the other and that the contract ‘was concluded with gross unfairness’. It is important to note that both misrepresentation and ‘gross unfairness’ must be proven and therefore a case for misrepresentation can be difficult to prove. Further, a party may be prevented from claiming for misrepresentation if the party continued to act in accordance with the contract, as Article 192 of the UAE Civil Code provides ‘the right to cancel for misrepresentation and gross unfairness shall lapse on the death of the person having the right to apply for the cancellation or upon a dealing made in the subject matter of the contract in whole or in part in such a way that implies consent’.
As there is no franchise-specific legislation, there are no registration requirements for franchise agreements (outside those to register ‘agency’ agreements discussed further below).
iv Mandatory clauses
As there is no specific franchise legislation in any GCC state, the usual elements to provide for a binding contract must be met. As an example, Article 129 of the UAE Civil Code provides that for a contract to be formed:
- a the two parties to the contract should agree upon the essential elements;
- b the subject matter of the contract must be something that is possible and defined or capable of being defined and permissible to be dealt in; and
- c there must be a lawful purpose for the obligations arising out of the contract.
Note that consideration is not a required element for a contract to be binding between the parties.
v Guarantees and protection
Guarantees are provided for under various parts of legislation in each of the GCC states. Most Western drafted forms of guarantee require tailoring for the region to be enforceable and there are provisions and practices that can make enforcement of such guarantees difficult. For example, Article 1092 of the UAE Civil Code provides that ‘if a debt is due, the creditor must claim for it within six months from the date on which it fell due, otherwise the surety shall be deemed to have been discharged’. Further, it can be especially important to undertake the usual due diligence to ensure the proposed company is authorised to provide the guarantee under its memorandum and articles of association, any board or shareholders’ meetings passing relevant resolutions are undertaken, etc., and translation into Arabic and signing in front of a notary public can also be necessary.
i Franchisor tax liabilities
The UAE and Bahrain do not impose any company or individual taxes and therefore there is no withholding tax.
Further, there is no withholding tax in Kuwait, but in respect of business entities there are a number of laws that provide for a retention-type tax, where every business operating in Kuwait should retain 5 per cent from all invoices paid to contractors or service providers. These amounts are retained until the Kuwait Tax Authority authorises release. Further, the Department of Income Tax (DIT) seeks to tax any entity ‘doing business in Kuwait’. This historically did not cover franchisors, but more recently the DIT has focused on franchise relationships that could in some situations create a tax liability for franchisors. Specific Kuwait tax and legal advice should be sought in this respect.
Saudi Arabia’s withholding tax applies at different rates depending on the services and depending on payments made to related and unrelated parties. Saudi generally imposes a 15 per cent withholding tax on royalties and a 20 per cent withholding tax on management fees.
Oman does not levy withholding tax on technical services fees, interest or dividends. As for royalties, foreign companies without a permanent establishment in Oman that derive Omani-sourced royalties are subject to a 10 per cent withholding tax on the gross royalty, withheld by the Omani payer and remitted to the tax authorities. The definition of royalties includes, among other payments, those for the use of intellectual property rights, patents and trademarks.
In Qatar, withholding tax on payments to non-residents is charged at 5 per cent on royalties and technical fees and 7 per cent on interest, commissions, brokerage fees, directors’ fees and any other payments for services conducted wholly or partly in Qatar. Withholding tax is levied on amounts paid to non-residents in relation to activities not associated with a permanent establishment in Qatar. As a consequence, withholding tax requirements apply to service providers in Qatar who are unable to produce a tax card as evidence of having a tax file in Qatar.
ii Franchisee tax liabilities
At present, there is no withholding, capital gains, personal or individual income tax imposed in the UAE (however, individuals are charged some taxes, albeit indirectly, such as municipality tax imposed on certain hotel services, as well as business and residential property rentals). Zakat, a religious wealth tax levied pursuant to shariah law in many Islamic countries, is also not presently levied in the UAE. Individual emirates in the UAE have issued tax decrees concerning corporate taxes (some decrees dating as far back as the 1960s) but have not implemented their respective decrees, except that oil and gas-producing companies and foreign banks are taxed.
All GCC states impose custom duties payable for the import and export of goods that may be applicable if any goods are supplied. In addition, there may be some form of value added tax (VAT) introduced either to the GCC as a whole or in individual countries in the future.
In Kuwait, income tax is imposed on non-Kuwaiti and non-GCC owned companies. Corporate bodies incorporated within the GCC and owned by the citizens of those countries are granted the same treatment as Kuwaiti companies and are therefore not subject to income tax at present. As discussed above, income tax is imposed on those ‘carrying on business in Kuwait’, which is currently interpreted widely by the taxation authorities and can expose some franchisors to Kuwait tax.
In Saudi Arabia, individuals can, in some circumstances, be subject to zakat and the non-Saudi’s share of companies are subject to income tax. Capital gains tax can also be applicable. In Oman, taxes are levied on income earned by a permanent establishment located in Oman. In Qatar, profits of business establishments that are wholly owned by Qatari individuals are not taxed and income tax applies only to businesses. The Qatari tax law states that taxable income arising from sources in Qatar in excess of 100,000 Qatari riyals in any taxable year is taxed at a flat rate of 10 per cent.
VAT is in the process of being implemented in all GCC countries, with an anticipated start date of 1 January 2018. It is expected that the rate of VAT will be set at 5 per cent, with a limited number of items related to food, healthcare and education being exempt.
VI IMPACT OF GENERAL LAW
i Good faith and guarantees
As the laws of the GCC are based on shariah law, which provides for fairness and good faith in contractual arrangements, the principle of ‘good faith’ is specifically recognised and is an important part of the legal system in each jurisdiction.
The UAE Civil Code3 specifically provides at Article 246 an obligation on contracting parties to perform their obligations in accordance with the agreement ‘in a manner consistent with the requirements of good faith’. Furthermore, Article 243(2) provides ‘with regard to the rights (obligations) arising out of the contract, each of the contracting parties must perform that which he is obliged to do under the contract’. Article 129 of the Bahrain Civil Code also provides that a ‘contract must be performed in accordance with its contents and in compliance with the requirements of good faith and honesty’. There are similar provisions in the Qatar, Kuwait and Oman Civil Codes.
ii Agency distributor model
Each of the GCC states has a commercial agency law that can apply to franchise relationships. Where the relevant agency law does not apply, agency considerations under general law (e.g., the civil and commercial codes in the relevant countries) can be relevant as franchising often falls within the ambit of the agency provisions in such laws. In each state, the agency provisions under the agency law and general laws encompass broadly similar principles. As a full discussion of the agency provisions are outside the scope of this chapter, obtaining specific legal advice as to the structure of the proposed arrangements, current arrangements and careful drafting of the franchise agreements can be important given the consequences when the agency laws apply. Dealing with a foreign national (or company owned in the amount of a specific percentage (100 per cent or 51 per cent) by nationals of the relevant country), registration (through providing a legalised and notarised version) and exclusivity (but not in all GCC countries) are the predominant requirements for finding a commercial agency under the specific agency laws in each country. Under both the agency laws and general commercial laws of each jurisdiction, termination of an agent can be difficult and compensation (often in substantial amounts) can be payable upon termination. Registration is therefore often avoided by the specific drafting of clauses within the franchise agreements and through taking procedural steps to mitigate the risk of registration by the agent. Also selecting arbitration and a foreign governing law can help; although most commercial agency laws (where they apply) provide that the sole jurisdiction of the local courts apply, local law applies to the dispute and any arbitration provision is void.
In July 2014, Oman amended its Law of Commercial Agencies4 to remove the requirement for a material contractual breach to take place before an agreement could be terminated or not renewed (despite what may be provided in the agreement between the parties). The UAE in 2006 made similar amendments, but, after lobbying by various agents, distributors and franchisees, changed the law back in 2010 to require ‘material justified reasons’ before an agency agreement could be amended. It will, therefore, be interesting to see how these changes will play out in practice and whether, as a consequence of this amendment, franchisors with Omani-registered agents will now look to terminate (or not renew) underperforming franchisees. In 2016, Kuwait and Qatar updated their respective Agency Laws. Of particular note, Kuwait replaced its Agency Law to clarify that franchisees and licensees are specifically covered by the Law, and has removed the requirement of exclusivity for agency agreements.
iii Employment law
To date we are not aware of any cases whereby a court has held franchisees to be employees of the franchisor. The various rules and regulations in each county regarding employment and procedural requirements such as visas and labour contracts would make such a claim difficult.
iv Consumer protection
The various consumer protection laws throughout the GCC focus on the protection of individuals in purchasing day-to-day items. For example, the UAE Consumer Protection Law5 defines ‘consumer’ as ‘an individual who purchases goods and/or services with or without consideration for personal use or the use of others’. We are not aware of any situations where a franchisee has been or could be treated as a consumer, and the relevant government authorities in each country are focused on protection of individual consumers’ rights such as safety of products, product recalls, clear pricing, protection against unreasonable price increases, refunds, product labelling, etc.
v Competition law
Historically, most GCC countries addressed anticompetitive behaviour through their civil and commercial codes or trademark laws, or both, by means of broad and general provisions that prohibit forms of anticompetitive behaviour. More recently the UAE, Saudi Arabia and Qatar have enacted specific competition law legislation. Bahrain, Kuwait and Oman to date do not have specific anti-competition regimes; however, there is discussion at the GCC level for the preparation of a unified GCC competition law.
The competition legislation for the UAE, Saudi Arabia and Qatar is drafted in broad terms focusing on anticompetitive practices (restrictive agreements and abuse of a dominant position) and economic concentrations. A wide range of common commercial practices could therefore be construed as being non-compliant with the legislation; however, there are a number of exemptions and exclusions. For example in the UAE, the telecommunications, financial and transport sectors are specifically excluded, as are exclusive distribution agreements governed by the Commercial Agencies Law. The Competition Law does not yet have the required implementing regulations, but some provisions of standard franchise agreements, such as price controls, mandatory purchasing of products from authorised suppliers, etc., may require approval of the competition regulation committee once it is formed.
vi Restrictive covenants
Non-compete and restrictive covenants are generally difficult to enforce in each of the GCC states. The courts will assess what is reasonable to protect a legitimate business interest and this is determined on a case-by-case basis. Additionally, even if considered reasonable, there can be enforcement challenges as the courts lack injunctive power in most situations. Furthermore, as generally only direct, proven and actual losses are recoverable, proving actual loss arising from breach of the relevant clauses can be difficult.
As discussed above, given the difficulties in enforcing post-term restrictive covenants, and the inability of the franchisor to take over directly the franchisee’s business (because of restrictions in local shareholding and on taking local leases), most franchise disputes are resolved through negotiation or mediation between the parties.
viii Anti-corruption and anti-terrorism regulation
Fraud, anti-corruption and anti-terrorism are covered in both general provisions of civil and commercial codes in each jurisdiction and in specific legislation such as the UAE’s Anti-Money Laundering Law,6 Fraud and Deception Law and the UAE’s updated Cybercrime Law.
As an example, the Anti-Money Laundering Law criminalises money laundering in the UAE and provides supporting mechanisms and structures to enforce the prohibition. In addition to the Anti-Money Laundering Law, the recently updated Cybercrime Law provides further penalties of imprisonment and fines for those who use any computer network, electronic information system or information technology to illegally transfer funds with the intent to conceal or disguise either the source of the funds, the origin, ownership and movement of the funds or illegally attain possession of the funds.
ix Dispute resolution
All GCC states are signatories to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) and most franchise agreements entered into between international franchisors and franchisees within the GCC provide for arbitration as the dispute resolution method. Arbitration, together with a foreign governing law provision, is often the recommended method of proceeding where the franchisor is outside the GCC to attempt to mitigate the risk of the various agency protections provided to franchisees in each jurisdiction. The exemption to this is Saudi Arabia, where the enforcement of foreign arbitral awards has traditionally been challenging and, depending on the circumstances, referral of the dispute to arbitration within one of the GCC states or to a Saudi court may be preferable. In 2012, a new arbitration law was introduced in Saudi Arabia; however, it is yet to be seen how or if this will facilitate the enforcement of foreign arbitral awards in Saudi. The UAE became a signatory to the New York Convention relatively recently, and so at this stage there are only a few instances of the local courts enforcing an arbitration award from another Convention country and to the best of our knowledge no foreign award has yet been enforced in Oman.
All GCC countries allow for contracting parties to choose a foreign law, although this is not always upheld in practice where disputes are brought to the local courts. Where the contract provides for arbitration and the arbitration clause is raised (sometimes for tactical reasons it may be preferable not to raise the arbitration clause), the courts will usually refuse jurisdiction to hear a matter. Where the relevant commercial agency law applies to a dispute, there are set procedures for the dispute contained within the relevant law, such as referral first to an agency committee prior to the courts.
Specific performance and injunctions are discretionary remedies and are not commonly granted in the GCC states; however, attachment orders are common (and often used to seize assets that are the subject of the claim). As a general note, only direct, proven and actual losses are recoverable, and consequential losses are generally not recoverable.
VII CURRENT DEVELOPMENTS
Because of the popularity of franchising in the GCC and wider Middle East region, there have been a large number of conferences and expos held by franchise consultants, brokers and chambers of commerce of relevant emirates and provinces within each of the GCC states. The success of such conferences and expos is yet to be seen, as the most successful brands have historically entered the market outwith such events. Franchising of local brands within the GCC is on the rise and we are seeing the beginning of local brands franchising internationally. Although brands franchising to one company or family, who open all stores directly (or through related entities), is still the most commonly seen method of international brands coming to the region, some brands are allowing sub-franchising of non-exclusive individual locations. In particular with local brands, there is growth in franchising to individual (non-corporate) non-exclusive franchisees.
On the legislation front, there have been calls by some interested parties for the development of a franchising law, but at this stage drafts for such a law have not progressed given the need for other laws, such as that on intellectual property (trademarks, patents, copyrights), to be updated to keep pace with the advancements in technology and e-commerce. With the increase of franchising of local brands to individuals within the GCC, the number of disputes relating to quality and assistance by franchisors is beginning to rise, which may in due course lead to increased regulation in this area.