Franchise Agreements in the UAE: Structuring, Registration, and Termination Risks

The UAE is one of the fastest-growing franchise markets in the Middle East. International food and beverage brands, retail chains, fitness concepts, education providers, and service businesses enter the market through franchise arrangements every year. The appeal is clear: a large, affluent consumer base, a strategic location between Europe and Asia, and a business environment that generally welcomes foreign investment.

The legal risk is less obvious. The UAE has no standalone franchise law. Franchise agreements are governed by a combination of general contract law, the Commercial Agencies Law, trademark legislation, competition law, and emirate-level licensing requirements. The single most important structuring decision a franchisor makes is whether the arrangement will be registered as a commercial agency with the Ministry of Economy. That decision determines who controls the relationship, how difficult it is to terminate, and what compensation the franchisee can claim when it ends.

This article covers the legal issues that matter most for franchisors entering the UAE and franchisees evaluating a franchise opportunity. Franchisees should conduct thorough due diligence on the franchisor, the brand's UAE market potential, and the legal structure before signing. It is written for business owners, in-house counsel, and commercial teams structuring or renegotiating franchise arrangements.

The legal framework: no franchise law, but franchise rules

The UAE does not have a dedicated franchise statute at the federal level. The word "franchise" does not appear as a defined legal concept in mainland UAE legislation. Instead, franchise relationships are regulated through:

Federal Law No. 3 of 2022 on the Regulation of Commercial Agencies (the "Commercial Agencies Law"), effective 15 June 2023, which replaced Federal Law No. 18 of 1981. This law defines a "commercial agency" broadly to include agency, distribution, sale, offer, franchise, or the provision of a commodity or service within the UAE. If a franchise arrangement meets this definition and is registered with the Ministry of Economy, the Commercial Agencies Law applies, and its termination and compensation provisions override the parties' contractual terms in several material respects.

The UAE Civil Code (Federal Law No. 5 of 1985, as amended), which governs contractual relationships generally, including obligations of good faith, performance, breach, and termination.

The Commercial Transactions Law (Federal Decree-Law No. 50 of 2022), which applies to commercial contracts and addresses matters including limitation periods and commercial obligations.

Federal Decree-Law No. 36 of 2021 on Trademarks, which governs trademark registration, licensing, and enforcement. Trademark protection is the backbone of any franchise.

Federal Decree-Law No. 36 of 2023 (the Competition Law), which applies to franchise agreements containing exclusivity clauses, territorial restrictions, or resale price maintenance provisions.

DIFC Law No. 10 of 2020 (the DIFC Franchise Law), which is the only jurisdiction-specific franchise law in the UAE. It applies to franchises operating within the DIFC and requires written agreements with minimum content standards, but does not mandate registration.

The absence of a single regulatory framework means that the legal position depends heavily on how the franchise is structured and whether it is registered as a commercial agency.

Registered vs unregistered: the critical structuring decision

Every franchisor entering the UAE faces a binary choice that shapes the entire legal relationship.

Registered franchise (commercial agency)

If the franchise arrangement is registered with the Ministry of Economy as a commercial agency, the Commercial Agencies Law applies in full. Registration is available where the franchisee is a UAE national, a company wholly owned by UAE nationals, or a UAE public joint stock company with at least 51% UAE national ownership.

Registration gives the franchisee:

• Territorial exclusivity. The registered agent is presumed to have exclusive rights within the agreed territory (the entire UAE, or specific emirates).
• Import protection. Customs authorities can block parallel imports of the franchisor's products that bypass the registered agent.
• Termination protection. The Commercial Agencies Law prescribes specific termination grounds and notice periods. The franchisor cannot simply decide not to renew.
• Compensation rights. On termination or non-renewal, the franchisee may claim compensation for investments, lost profits, and the value of agency-related assets.
• Access to the Commercial Agencies Committee. Disputes between registered parties go first to a dedicated committee before escalation to court or arbitration.

Unregistered franchise

If the franchise is not registered as a commercial agency, the arrangement is governed by the UAE Civil Code and the Commercial Transactions Law as a standard commercial contract. The parties have significantly more freedom to define their own terms, including termination rights, exclusivity, territory, and compensation.

Most international franchisors structure their UAE arrangements as unregistered franchises to avoid the termination and compensation protections that the Commercial Agencies Law grants to registered agents. This is a deliberate strategic choice, not an oversight.

Why the distinction matters

The practical difference is stark. Under an unregistered franchise, the franchisor can terminate for the reasons specified in the agreement, with the notice period agreed between the parties, and with compensation limited to what the contract provides. Under a registered franchise, the franchisor faces statutory constraints that may prevent termination even where the franchisee is underperforming, and compensation obligations that go beyond the contract.

The risk for franchisors is that an unregistered arrangement can be reclassified. If the substance of the relationship meets the Commercial Agencies Law definition (representation, exclusivity, sale or distribution of goods or services in the UAE, in return for commission or profit), a UAE court may treat it as a commercial agency regardless of what the parties called it in the contract. Careful drafting of the franchise agreement, avoiding language that implies agency or exclusive distribution rights, reduces but does not eliminate this risk.

Key terms in a UAE franchise agreement

Whether registered or unregistered, a UAE franchise agreement must address the following:

Territory and exclusivity

The agreement should define the franchisee's territory precisely. An exclusive territory means the franchisor will not appoint another franchisee or operate directly within that area. A non-exclusive territory gives the franchisor flexibility to expand through additional franchisees or company-owned outlets.

For unregistered franchises, granting exclusivity increases the risk of the arrangement being classified as a commercial agency. Many franchisors grant non-exclusive rights and manage territory allocation through separate side letters or schedules that can be adjusted over time.

Fees and royalties

Franchise fees in the UAE are typically structured as an initial franchise fee (a lump sum paid on signing, commonly ranging from AED 100,000 to AED 1 million depending on the brand and sector) plus ongoing royalties calculated as a percentage of the franchisee's gross revenue (typically 5% to 10%). Marketing fund contributions (2% to 5% of revenue) are standard for brands with national or regional advertising programmes. Some franchisors also require the franchisee to provide a bank guarantee securing the franchisee's payment obligations under the agreement.

The agreement should specify how royalties are calculated, when they are payable, what records the franchisee must maintain, and the franchisor's right to audit the franchisee's books. Under the UAE Corporate Tax Law, royalty payments and franchise fees are deductible business expenses for the franchisee, and taxable income for the franchisor if it has a taxable presence in the UAE. Transfer pricing rules under Ministerial Decision No. 97 of 2023 apply if the franchisor and franchisee are related parties, requiring that fees reflect arm's length pricing.

Intellectual property

IP protection is the foundation of every franchise. The franchisor licenses its trademarks, trade dress, know-how, operating manuals, proprietary systems, and (in many cases) copyrighted training materials to the franchisee for the duration of the agreement.

Trademark registration is essential. The UAE operates a first-to-file system under the Trademark Law (Federal Decree-Law No. 36 of 2021). If the franchisor has not registered its trademarks in the UAE before entering the market, a third party (including a prospective franchisee) could file first and block the franchisor's use of its own brand. We advise franchisors to register trademarks across all relevant classes before signing any franchise agreement.

Trademark licence agreements should be recorded with the Trademark Office at the Ministry of Economy. Recording is not legally required for the licence to be valid, but it establishes a public record of the licensed use, which helps prove trademark use (relevant for defending against cancellation actions based on non-use after five years) and strengthens the franchisor's enforcement position.

Know-how and trade secrets must be protected contractually. The franchise agreement should include confidentiality obligations that survive termination, restrict the franchisee's use of proprietary information after the relationship ends, and require the return or destruction of all confidential materials.

Operations manual and quality control

The franchisor's right to control the franchisee's operations is what distinguishes a franchise from a simple licence. The agreement should reference the operations manual and give the franchisor the right to update it, require the franchisee to comply with current standards, and specify the consequences of non-compliance (including the right to terminate for persistent quality failures).

Quality control provisions must be enforceable without creating an employment relationship. If the franchisor exercises too much day-to-day control over the franchisee's staff, hours, and operations, the franchisee's employees may argue that the franchisor is their actual employer. This risk is manageable with careful drafting.

Term, renewal, and termination

Term. Most UAE franchise agreements run for 5 to 10 years, with options to renew. The initial term should be long enough for the franchisee to recover its setup investment and generate a return.

Renewal. The agreement should specify renewal conditions: whether renewal is automatic or requires mutual agreement, what performance criteria the franchisee must meet, and whether the franchisor can impose updated terms (including revised fee structures) on renewal.

Termination. This is where the registered/unregistered distinction bites hardest.

For unregistered franchises, the agreement governs. The franchisor can terminate for breach (with a cure period), insolvency, change of control, abandonment, or other specified events. The agreement should also address termination without cause (with a longer notice period) if the franchisor wants maximum flexibility.

Under the UAE Civil Code, courts may grant the breaching party a "grace period" to remedy the breach before termination takes effect. This means a termination for breach may not be immediate, even if the contract says it is. Drafting the termination clause to require a written cure notice with a specific deadline helps manage this risk.

For registered franchises, the Commercial Agencies Law applies. Under Article 9 of the law, a registered commercial agency can be terminated where:

• The agreement expires and a party does not wish to renew (with notice of at least one year or half the contract term, whichever is less)
• Either party terminates in accordance with the agreement's terms (same notice requirement)
• The parties agree to terminate
• A court orders dissolution
• One party ceases to exist or the agent loses the requisite nationality

Post-termination obligations

On termination, the franchise agreement should address:

• De-branding. The franchisee must remove all franchisor branding from premises, signage, vehicles, websites, and social media within a specified period.
• Return of materials. All confidential materials, operating manuals, software access, and proprietary systems must be returned or destroyed.
• Stock and inventory. The franchisor may have the right (or obligation, under a registered agency) to purchase remaining inventory at fair value.
• Non-compete. Post-termination non-compete clauses are enforceable in the UAE if reasonable in duration, geographic scope, and activity. Courts will assess reasonableness on a case-by-case basis. A 12 to 24 month non-compete within the franchise territory is generally defensible.
• Customer data. Ownership and transfer of customer data should be addressed, particularly given the UAE's developing data protection framework under Federal Decree-Law No. 45 of 2021 (the Personal Data Protection Law).

Compensation on termination: what the franchisee can claim

Termination compensation is the issue that generates the most disputes in UAE franchise relationships. The position differs fundamentally between registered and unregistered arrangements.

Registered franchise (commercial agency)

Under Article 11 of the Commercial Agencies Law:

• If a fixed-term agreement expires without renewal, the agent can claim compensation for damage suffered as a result of non-renewal, unless the contract expressly excludes this right. This is a significant change from the old law, which did not permit contractual exclusion.
• If either party terminates in accordance with the agreement's terms, the affected party can claim compensation for damage suffered.
• The agent can also claim compensation on termination (other than expiry) if it can prove that its efforts contributed to the principal's success in the UAE and that termination will cause loss of expected profits.
• On termination, agency-related assets (inventory, equipment, showroom fitout) must be transferred to the principal or a new agent at fair market value.

Unregistered franchise

Compensation is governed by the contract terms and general civil law principles. The franchisor can contractually limit compensation to specified amounts or formulas, exclude consequential damages, and cap liability. However, UAE courts retain the power under the Civil Code to award damages for breach of good faith, and a termination that a court considers arbitrary or abusive may trigger compensation beyond what the contract provides.

Transitional provisions to watch

The Commercial Agencies Law introduced transitional protections for legacy agencies:

• Two-year transition (ended 15 June 2025). Agencies registered before the new law came into force were not subject to the new termination rights for two years.
• Ten-year protection. Agencies registered for more than 10 years with the same agent, or where the agent has invested more than AED 100 million, are not subject to the new termination rights for 10 years from 15 June 2023 (i.e., until 15 June 2033). For these legacy agencies, the old law's restrictive "material reason" standard for termination still applies.

Franchisors with long-standing registered franchise arrangements need to understand which termination regime applies to their specific relationship.

Competition law issues

Franchise agreements routinely contain provisions that can trigger scrutiny under the Competition Law (Federal Decree-Law No. 36 of 2023):

Exclusive territories. Territorial exclusivity may be challenged if it restricts competition in a relevant market. However, exclusivity within a franchise system is generally defensible where it is necessary for the franchisee's investment recovery and brand consistency.

Resale price maintenance. The Competition Law prohibits agreements that fix or set minimum resale prices. A franchisor can recommend prices but cannot mandate them. Limited exceptions may apply for short-term promotional campaigns supporting the entry of a new product.

Non-compete clauses. During the franchise term, a non-compete is generally enforceable. Post-termination non-competes must be reasonable and proportionate.

Tying arrangements. Requiring franchisees to purchase supplies exclusively from the franchisor or approved suppliers is common in franchise systems. If the franchisor has a dominant market position, tying may be challenged under the Competition Law. In practice, supply control requirements tied to quality standards are defensible.

Dispute resolution

Franchise disputes in the UAE can be resolved through UAE courts, arbitration, or (for registered agencies) the Commercial Agencies Committee.

Commercial Agencies Committee

For registered franchise arrangements, disputes must first be referred to the Commercial Agencies Committee established under the Commercial Agencies Law. The Committee attempts to resolve the dispute before it proceeds to court or arbitration. This is a mandatory first step for registered agencies.

Arbitration

The Commercial Agencies Law now expressly permits arbitration clauses in agency contracts, with proceedings seated either in the UAE or abroad. This was not clearly available under the old law.

For unregistered franchises, arbitration is available without restriction. Most international franchisors prefer arbitration under recognised institutions such as the DIAC, ICC, or DIFC-LCIA, as it provides English-language proceedings, confidentiality, and international enforceability under the New York Convention.

UAE courts

If the dispute goes to the UAE courts, proceedings will be in Arabic. All documents must be translated by a certified legal translator. Court proceedings are document-driven, with limited oral testimony. For guidance on the UAE court process, enforcement mechanisms, and precautionary measures, see our guide on litigation and dispute resolution in the UAE.

DIFC and ADGM courts

If the franchise entity is incorporated in the DIFC or ADGM, disputes can be resolved through their respective courts, which operate under English common law. The DIFC Franchise Law (Law No. 10 of 2020) applies to franchises operating within the DIFC and imposes minimum content requirements for franchise agreements.

Structuring the franchise: mainland, free zone, or financial free zone

The franchisee's corporate structure determines licensing requirements, operational scope, and the applicable legal framework.

Mainland LLC. The most common structure for franchisees operating in the domestic UAE market (retail, F&B, services). The franchisee sets up an LLC, obtains the relevant trade licence from the DED, and operates under the franchise agreement. Since 2021, 100% foreign ownership is permitted for most activities, but commercial agency activities remain restricted to UAE nationals or UAE-owned entities. If the franchise involves multiple investors setting up the franchisee entity together, the shareholder agreement governing the LLC must be aligned with the franchise agreement's transfer and change of control provisions.

Free zone entity. Franchise operations based in a free zone (DMCC, JAFZA, Dubai South, IFZA) benefit from 100% foreign ownership and simplified setup. However, free zone entities may face restrictions on trading directly with the UAE domestic market unless they obtain a dual licence or operate through a mainland distributor.

DIFC or ADGM. Suitable for franchise holding structures, master franchise arrangements, or franchise operations targeting the financial services sector. The DIFC Franchise Law provides a structured regime, and both jurisdictions offer common law governance and independent courts. Where a master franchise involves multiple investors structuring a joint venture to operate the franchise, the JV governance framework must be coordinated with the franchise agreement's operational and approval requirements.

For guidance on choosing between these structures, see our article on DIFC business setup.

Common franchise structuring mistakes

Failing to register trademarks before entry. The UAE's first-to-file system means an unregistered brand is unprotected. Franchisors who enter the market without UAE trademark registrations risk losing control of their own brand name.

Granting exclusivity without understanding the consequences. Exclusive territorial rights in an unregistered franchise increase the risk of reclassification as a commercial agency. If exclusivity is commercially necessary, the agreement must be drafted to minimise agency characteristics.

Ignoring the Commercial Agencies Law transition periods. Franchisors with legacy registered agencies (registered before June 2023) must check whether the two-year or ten-year transitional protection applies before attempting to terminate or restructure the relationship. This is one of several key regulatory changes affecting UAE companies in 2026 that businesses should be tracking.

Weak termination provisions. A termination clause that says "either party may terminate on 30 days' notice" without specifying grounds, cure periods, or post-termination obligations is inadequate for a franchise. Termination provisions should address every foreseeable exit scenario and be consistent with UAE Civil Code requirements on good faith and proportionality.

No Arabic translation. Franchise agreements enforced in UAE courts must be translated into Arabic by a certified translator. If the Arabic version is ambiguous or inconsistent with the English original, the Arabic version prevails in onshore proceedings. Both versions should be prepared and reviewed simultaneously.

Overlooking corporate tax. Since the introduction of UAE corporate tax at 9% in June 2023, franchise royalties, management fees, and intercompany charges between franchisor and franchisee must comply with transfer pricing rules. Structures that were tax-neutral before 2023 may now create taxable events.

Registered vs unregistered franchise: comparison

When to get advice

Franchise structuring in the UAE requires careful coordination between corporate law, IP law, competition law, and tax planning. The decision to register or not register, the drafting of the franchise agreement, and the protection of the franchisor's intellectual property are interdependent. Getting one wrong can undermine the others.

At Kayrouz & Associates, our corporate and commercial team advises both franchisors and franchisees on franchise agreement structuring, trademark protection, Commercial Agencies Law compliance, and franchise dispute resolution. We work with international brands entering the UAE and with UAE-based businesses evaluating franchise opportunities. For advice specific to your franchise arrangement, contact our team.

FAQ

Does the UAE have a franchise law? There is no standalone franchise statute at the federal level. Franchise relationships are governed by the Commercial Agencies Law (Federal Law No. 3 of 2022) if registered with the Ministry of Economy, or by the UAE Civil Code and Commercial Transactions Law if unregistered. The DIFC has its own Franchise Law (Law No. 10 of 2020) that applies to franchises operating within the DIFC.

Should a franchise agreement in the UAE be registered as a commercial agency? It depends on the parties' objectives. Registration gives the franchisee statutory termination protection, exclusivity, and parallel import blocking rights, but restricts the franchisor's ability to terminate or change the relationship. Most international franchisors choose not to register, retaining greater contractual freedom. However, certain industries (oil, defence, pharmaceuticals) require registration.

Can a franchisor terminate a registered franchise in the UAE? Yes, but subject to statutory constraints. Under the Commercial Agencies Law, a registered agency can be terminated on expiry, by mutual agreement, in accordance with the contract's terms, by court order, or where a party ceases to exist. Notice of at least one year or half the contract term (whichever is less) is required. The agent may claim compensation even where termination is lawful.

What happens to the franchisee's investment on termination? Under a registered agency, the outgoing agent's agency-related assets (inventory, equipment, fitout) must be transferred to the principal or new agent at fair market value. Under an unregistered franchise, the position is governed by the contract. Well-drafted agreements specify how inventory, equipment, and leasehold improvements are handled on exit.

Are franchise royalties subject to UAE corporate tax? Yes. Since 1 June 2023, franchise royalties paid to a franchisor with a taxable presence in the UAE are subject to corporate tax at 9% on taxable income above AED 375,000. Royalties paid by the franchisee are deductible business expenses, but transfer pricing rules apply to related-party transactions, requiring arm's length pricing.

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