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Taxation of a franchise business

Contributed by BridgeWest
February 15, 2018

Franchising is a business model that has several advantages both for the franchisor and for the franchisee. The taxation of a franchise business will depend on the tax system imposed in the jurisdiction where the company is incorporated. Below are some examples of the taxation principles for franchises in different countries.

Taxes paid by a franchise business

In a franchise business a franchisor, which is an already developed and established company, offers its business model, know-how and expertise to a franchisee in exchange for a fee and/or periodic payments. The relationship between the franchisor and the franchisee and the conditions for their collaboration are outlined in the franchise agreement.

However, unlike in the case of a branch of a foreign company, the incorporation of the franchise and the registration of the company for tax matters fall under the responsibility of the franchisee. The franchisor is in no manner liable for the debts and obligations of the franchise operating in another country. This means that the franchise is subject to the taxation principles applicable to the type of legal entity under which it will operate.

Taxation of franchises according to jurisdiction

The taxation of the franchise is subject to the different tax principles in the country where it will derive income from. For example, a franchise in Malaysia will pay different taxes compared to one in another Asian country. The tax system may be a reason to pick one jurisdiction over another, however, it is not the only issue to be taken into consideration by those looking for a franchising opportunity.

Singapore is a popular location to expand a business and franchising can be a good option both for a company that wishes to expand on this market and for the business investor who is looking for a safe business and wants to benefit from the lowtax for companies in Singapore. This jurisdiction also has other advantages for doing business, among which we can mention an ease of company formation and a good location in Asia. Investors who wish to start a franchise business in Singapore can talk to one of the local company formation agents.

Taxation in Malaysia differs from that in Singapore as the standard corporate income tax rate is 24% and a lower rate is applicable to small and medium-sized companies.

Investors looking to expand their businesses in Europe, particularly in one or more EU countries, should pay attention to the local tax rules and EU regulations. Special permits and licenses are required for several types of companies, including restaurants and cafes which are two lucrative business franchising options. In Germany, investors have several opportunities for franchising and the new company that will be incorporated in the country will need to pay a 15% corporate income tax, to which a solidarity surcharge is added.

We recommend that investors explore the different options for franchising in a jurisdiction and consider the corporate income tax rate and the various tax incentives that may be available for companies.


Tags: tax incentives | Germany | Europe | regulation | company formation | Invest | accounting | Malaysia | Tax | Singapore | law | business | tax



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