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South Africa Provides Franchising Tax Guide

by Lorys Charalambous,, Cyprus

25 July 2016

The South African Revenue Service (SARS) has issued a guide on the income tax implications of income received and expenditure incurred by franchisors and franchisees.

SARS notes that the growing franchise industry in South Africa is a major contributor to the South African economy. As a result, it considers that the rapid rate at which new franchises are entering the market has now given rise to a need for clarity concerning the tax implications that arise in relation to the income of franchisors and franchisees.

SARS points out that a wide range of payments and receipts can be stipulated in a franchise agreement. Franchisors, for instance, receive payments such as initial fees, renewal fees, and royalties from the franchisee. In exchange, the franchisor has to provide the necessary intellectual property and business processes to enable the franchisee to operate the franchise.

On the other hand, the franchisee incurs initial expenditure in setting up the franchise outlet, as well as expenditure relating to the day-to-day running of the franchise which can either be in the form of once-off or recurring payments.

Different tax consequences may, it is said, attach to amounts received by a franchisor and a franchisee. Generally, a receipt of an amount by a franchisee or franchisor may constitute gross income, but excluding receipts and accruals of a capital nature. Expenditure must be laid out for the purposes of trade.

While the guide proceeds to explain the probable tax treatment of certain specific types of income and expenses relevant to franchisors and franchisees, each case has to be considered on its own merits when determining the taxability of a franchisor and a franchisee, SARS's guidance says. The terms and conditions of the franchise agreement will be important in determining the tax implications of the different types of amounts received, or expenses incurred, by them, the guidance says.

TAGS: South Africa | compliance | tax | business | tax compliance | royalties | revenue guidance | commerce | intellectual property | fees | tax authority | Africa

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