Franchising Law in Pakistan for Foreign Brands: Agreements, Royalties, IP and Compliance

Pakistan offers a significant consumer market for international food, retail, education, hospitality, technology and service brands seeking expansion through local partners. However, franchising law in Pakistan does not operate through a single dedicated franchise statute. Instead, an international franchise arrangement sits at the intersection of contract law, intellectual property law, competition regulation, foreign-exchange controls, taxation and corporate law. Foreign franchisors therefore need a carefully structured Pakistan-specific agreement rather than simply using their global franchise template without local legal review.

As of September 2026, the legal and regulatory environment also includes important State Bank of Pakistan rules governing payments of royalty, franchise and technical-service fees to foreign parties. For international brands, legal planning should begin before the local franchise agreement is signed because the contractual payment structure, intellectual-property licence, market restrictions and operating model can directly affect regulatory compliance and the ability to remit fees abroad.

Understanding Franchising Law in Pakistan

Pakistan does not presently have a standalone franchise law comparable to franchise-specific regimes found in certain other jurisdictions. The legal relationship between franchisor and franchisee is primarily contractual, with the Contract Act, 1872 providing the general framework for contractual rights and obligations. Additional statutes and regulatory regimes apply depending on the contents of the franchise arrangement.

This means that the franchise agreement becomes especially important. Matters that might be prescribed by franchise legislation elsewhere—such as territorial rights, disclosure, renewal, operating standards, intellectual-property use, termination and post-termination restrictions—must be addressed carefully through contractual drafting and the applicable general laws of Pakistan.

Foreign franchisors should also understand that Pakistan does not generally operate a franchise-specific pre-sale disclosure system equivalent to the formal franchise disclosure document regimes used in some jurisdictions. Nevertheless, commercial disclosures, representations, financial projections and statements made during negotiations should be accurate. Misrepresentation, contractual warranties, deceptive marketing and other legal principles can still create liability.

Which Pakistani Laws Can Apply to a Franchise?

A cross-border franchise may involve several areas of Pakistani law simultaneously. The precise regulatory framework depends on the industry, business structure, products, payment model and contractual restrictions involved.

• Contract Act, 1872: governs the core contractual relationship between the franchisor and franchisee.
• Trade Marks Ordinance, 2001: protects trademarks and brand rights licensed to the Pakistani franchisee.
• Competition Act, 2010: may affect exclusivity, resale pricing, territorial restrictions, non-compete provisions, tying and other restrictive arrangements.
• Foreign Exchange Regulation framework: governs qualifying outward remittances of franchise, royalty and technical-service fees.
• Income Tax Ordinance, 2001: can apply to royalties, technical-service payments and other Pakistan-source income received by non-residents.
• Companies Act, 2017: becomes relevant where the foreign company itself establishes a place of business or operates through a registered corporate presence in Pakistan.
• Consumer, sector-specific and provincial laws: may apply depending on the franchise industry and location of operations.

Choosing the Right Franchise Structure in Pakistan

An international brand can enter Pakistan through several commercial structures. A foreign franchisor may grant a franchise directly to an independent Pakistani company, appoint a master franchisee with development rights, establish a local subsidiary, enter into a joint venture, or—where legally and commercially appropriate—maintain another form of corporate presence.

Direct Franchise

Under a direct model, the foreign brand contracts with a Pakistani franchisee that operates one or more outlets or business units. This can reduce the foreign franchisor's direct operational footprint, but the agreement must clearly allocate responsibilities relating to licences, employees, premises, taxation, imports, product approvals and local compliance.

Master Franchise

A master franchise arrangement gives the Pakistani master franchisee wider development rights and may permit sub-franchising within an agreed territory. Because this structure can involve territorial exclusivity, minimum development commitments, restrictions on competing businesses and control over downstream franchisees, both contractual and competition-law analysis becomes particularly important.

Local Subsidiary or Foreign Company Presence

A foreign brand may instead establish its own Pakistani corporate structure. Under the Companies Act, 2017 framework, a foreign company establishing a place of business in Pakistan may be required to complete foreign-company registration requirements with the Securities and Exchange Commission of Pakistan. The existence of a separately incorporated Pakistani subsidiary does not, by itself, necessarily mean that the foreign parent has established a place of business in Pakistan, so the actual operating model should be reviewed rather than relying only on ownership structure.

Essential Clauses in a Pakistan Franchise Agreement

A well-drafted franchise agreement should do more than identify the brand and royalty percentage. For international transactions, the agreement should be drafted so that commercial obligations align with Pakistani contract, competition, tax, foreign-exchange and intellectual-property requirements.

1. Grant of Franchise Rights

The agreement should specify exactly what the franchisee receives: the right to use trademarks, operating systems, recipes, software, designs, confidential manuals, copyrighted material, proprietary processes or other intellectual property. Rights that are not expressly granted should remain reserved to the franchisor.

2. Territory and Exclusivity

The agreement should define whether the franchisee receives exclusive, non-exclusive or protected territorial rights. It should also address online sales, delivery platforms, institutional sales, e-commerce and customers located outside the physical territory. Territorial restrictions should be reviewed from a competition-law perspective rather than automatically copied from an overseas agreement.

3. Franchise Fees, Royalties and Other Payments

The commercial schedule should separately identify any initial fee, continuing royalty, technical-service fee, marketing contribution, software fee, training fee and reimbursement. For a foreign franchisor, defining the payment categories correctly is particularly important because Pakistani foreign-exchange and tax treatment can depend on the legal character of the payment.

4. Operating Standards and Quality Control

International brands generally need strong contractual powers to protect consistency. The agreement should address approved products, suppliers, store design, branding, service standards, inspections, audits, training, health and safety requirements, customer complaints and corrective measures.

5. Reporting and Audit Rights

Where royalties are calculated as a percentage of sales, the franchisor should have clear rights relating to sales reporting, accounting records, point-of-sale systems, tax records and audits. The definition of gross sales or net sales should be precise because differences in deductions, taxes, discounts or imported inputs can create substantial disputes and may also affect remittance calculations.

6. Term, Renewal and Development Obligations

A master franchise agreement should contain measurable development milestones, including the number of outlets, geographic rollout, opening deadlines and consequences of missed targets. Renewal conditions should be objective and should address refurbishment, outstanding payments, compliance history and execution of updated documentation.

7. Termination and Post-Termination Obligations

Termination provisions should distinguish between remediable and serious defaults. After termination, the franchisee should normally be required to stop using the brand, return confidential materials, transfer or discontinue authorised digital assets where appropriate, remove signage and settle outstanding amounts. Non-compete and restrictive provisions require careful drafting because their enforceability and competition-law implications cannot be assumed.

Trademark and Intellectual Property Protection

A franchise business derives much of its value from intellectual property. A foreign brand should therefore consider protecting its trademarks in Pakistan before granting extensive commercial rights to a franchisee. The Trade Marks Ordinance, 2001 provides the principal statutory framework for trademark protection.

The franchise agreement should make clear that ownership of the marks remains with the franchisor or relevant intellectual-property owner. It should regulate permitted formats, brand guidelines, domain names, social-media accounts, advertising material and use of translated or modified versions of the brand.

Foreign franchisors should also plan for enforcement. The agreement should require the franchisee to promptly report suspected counterfeiting, passing off, unauthorised online stores, confusing domain names and other infringement. Responsibility for enforcement costs and control of legal proceedings should be expressly allocated.

Competition Law Risks in Franchise Agreements

The Competition Act, 2010 can be highly relevant to franchising because a franchise is normally a vertical commercial relationship between parties operating at different levels of the supply or distribution chain. The Competition Commission of Pakistan identifies resale price maintenance, exclusive distribution, exclusive dealing, tying arrangements and certain quantity restrictions as examples of vertical arrangements that can raise competition concerns.

This does not mean that every exclusivity or distribution clause is automatically unlawful. The legal question depends on the object, effect and market context of the restriction. Where an arrangement restricts competition, the Competition Act provides an exemption framework where statutory criteria are satisfied.

Foreign franchisors should therefore obtain competition review before imposing mandatory resale prices, broad territorial restrictions, extensive non-compete obligations or compulsory purchasing arrangements. This area should not be treated as boilerplate: the Competition Commission has actively warned businesses about restrictive vertical arrangements, and its published exemption records include master franchise agreements.

Royalty and Franchise Fee Remittance from Pakistan

Foreign franchisors usually expect initial franchise fees and recurring royalties to be paid outside Pakistan. These payments are subject to Pakistan's foreign-exchange regulatory framework administered by the State Bank of Pakistan (SBP) and processed through authorised dealer banks.

SBP materially revised the rules for royalty, franchise and technical-service fee remittances for relevant agriculture, social, infrastructure and service-sector projects, including international food chains, on 19 December 2025. Accordingly, foreign franchisors should not rely on older agreements or legal summaries quoting previous remittance limits.

Under the revised framework reported for qualifying new non-financial-sector operations, the permitted upfront payment can be up to USD 250,000, while recurring royalty, franchise and technical-service fees may be permitted up to 8% of qualifying net local sales, subject to the applicable calculation methodology, documentation and banking requirements. Agreements may run for up to 10 years with further renewal under the revised framework. For existing operations, the treatment of upfront fees differs, and the initial fee for new operations is taken into account within the applicable recurring cap once commercial operations begin.

The applicable category, allowable deductions, agreement structure and documentary requirements should be confirmed with the designated authorised dealer bank before execution or remittance. A commercially agreed royalty does not, by itself, guarantee that the full amount can be remitted abroad under foreign-exchange regulations.

Taxation of Franchise and Royalty Payments

Cross-border franchise payments also require a separate tax analysis. Under Pakistan's Income Tax Ordinance, 2001, Pakistan-source royalties and certain fees received by non-residents may be subject to tax, and section 152 imposes withholding obligations on relevant payments to non-residents.

The correct tax treatment depends on the nature of the payment, the recipient's tax residence, whether the foreign franchisor has a permanent establishment in Pakistan, and whether an applicable double taxation agreement provides relief or modifies the domestic treatment. Franchise agreements should therefore avoid treating every payment as a single undifferentiated “franchise fee” when the commercial arrangement actually contains separate intellectual-property, technical, training or service components.

Tax obligations should be modelled before commercial pricing is finalised because withholding tax, indirect taxes and treaty provisions may affect the net amount ultimately received by the foreign franchisor.

Dispute Resolution for International Franchise Agreements

International franchise contracts should contain a detailed governing-law and dispute-resolution clause. The parties should determine whether disputes will be resolved through Pakistani courts, arbitration or another contractually agreed process.

The clause should address the seat of arbitration where arbitration is chosen, institutional or ad hoc rules, appointment of arbitrators, language, interim remedies, confidentiality and allocation of costs. The parties should also consider where the franchisee's assets are located and how any final judgment or arbitral award would ultimately be enforced.

Regardless of the primary dispute forum, the franchisor may need rapid relief in Pakistan when dealing with continued trademark use, misuse of confidential information, unauthorised operation after termination or other conduct requiring urgent local legal action. Dispute clauses should therefore be drafted together with the intellectual-property and termination provisions rather than in isolation.

Due Diligence Before Appointing a Pakistani Franchisee

A strong contract cannot compensate for selecting an unsuitable franchise partner. Foreign franchisors should conduct legal and commercial due diligence before granting territorial or master franchise rights.

• Verify corporate registration, ownership, directors and authorised signatories.
• Identify the ultimate beneficial ownership and source of investment where relevant.
• Review financial capacity and ability to meet development obligations.
• Investigate litigation, regulatory issues and significant commercial disputes.
• Confirm experience operating comparable retail, hospitality or service businesses.
• Review proposed premises, leases and development arrangements.
• Assess licences and sector-specific approvals required for the business.
• Review supply chains, import requirements and product registrations where applicable.
• Confirm that the franchisee can satisfy foreign-exchange, tax and reporting requirements.
• Investigate conflicts with competing brands and related-party businesses.

Common Mistakes Foreign Franchisors Should Avoid

One common mistake is signing a global franchise template without adapting it for Pakistan. Clauses concerning royalties, resale pricing, territorial exclusivity, governing law, termination or restrictive covenants can have consequences under Pakistani law even when those clauses are standard elsewhere.

Another risk is launching the business before securing appropriate trademark protection. Once a local operator has built websites, social-media accounts, signage and customer recognition around the brand, an intellectual-property dispute becomes more commercially disruptive.

Foreign brands should also avoid assuming that because a franchise fee is contractually payable it can automatically be remitted abroad. Foreign-exchange documentation and the relevant SBP framework should be reviewed during transaction structuring, not only when the first payment falls due.

Finally, appointing a master franchisee without measurable development targets can effectively lock an entire market to an underperforming partner. Territory, rollout schedules, minimum performance standards and loss of exclusivity should therefore be tied together carefully.

How Zawar Law Chambers Can Assist Foreign Franchisors

Zawar Law Chambers advises international businesses and foreign clients on commercial transactions and regulatory matters in Pakistan. For franchise projects, legal support can cover the entire entry process rather than only preparing a franchise agreement.

• Pakistan market-entry and franchise structure review
• Master franchise and unit franchise agreements
• Franchise agreement review and negotiation
• Trademark registration and intellectual-property protection
• Competition-law assessment of restrictive clauses
• Royalty and franchise-fee regulatory structuring
• Corporate incorporation and foreign-company compliance
• Legal due diligence on prospective franchise partners
• Tax and regulatory coordination
• Contract termination and franchise disputes
• Arbitration, litigation and intellectual-property enforcement
• Ongoing corporate legal retainer services in Pakistan

Conclusion: Franchising Law in Pakistan Requires Integrated Legal Planning

Franchising law in Pakistan should be approached as a combination of contract, intellectual-property, competition, corporate, tax and foreign-exchange law rather than as a single regulatory subject. For foreign brands, the strongest strategy is to structure the commercial relationship, intellectual-property licence and payment mechanism together before granting rights to a Pakistani franchisee.

The December 2025 changes to Pakistan's franchise and royalty remittance framework have made current regulatory review particularly important for international brands considering Pakistan. At the same time, Competition Commission scrutiny of restrictive vertical arrangements means that exclusivity, pricing and non-compete clauses require substantive legal analysis rather than standard-form drafting.

Foreign franchisors planning to appoint a Pakistani franchisee, negotiate a master franchise, remit royalties, protect trademarks or resolve an existing franchise dispute should obtain Pakistan-specific legal advice based on the proposed business model and sector. A properly structured franchise can protect the international brand while giving the Pakistani operator clear commercial rights, compliance responsibilities and a workable framework for long-term expansion.