INTRODUCTION Contributed by: Babette Märzheuser-Wood, Dentons
chisors impose nominated suppliers for critical goods and services, or nominate an affiliate as the sole sup - plier for certain contract goods and services. In the United States of America, the authorities apply the “rule of reason”, whereby the practical impact of the restrictions on competition contained in the fran - chise agreement determines if the restrictions are per - mitted or not. In the European Union, restrictions on competition contained in vertical agreements, such as franchise agreements, are prohibited and require an exemption to subsist. Most franchise systems fall below the market size threshold of 15% where the authorities intervene. Even large franchisors, such as Burger King and Subway, have not reached that market share. This protection does not apply to so- called hardcore restrictions. Those are restrictions on competition, such as price fixing, that are deemed inherently detrimental to consumers and are therefore prohibited regardless of market share. The EU vertical restraints block exemption (VBER) sets out in detail permitted and prohibited restrictions. A common question concerns the maximum permit - ted duration of purchase ties and other exclusivity obligations in franchise agreements. Under the VBER, these are permitted for five years. However, pursuant to the case law of the European Court of Justice in its landmark decision in Pronuptia of Paris, it has been clarified that longer restrictions are permitted to the extent that they are necessary to safeguard the uni - form quality standards and appearance of those oper - ating in a franchise system. Therefore, the requirement that franchisees purchase certain distinctive goods only from approved sources can often be justified for more than five years. Duration, Minimum Term and Renewal Franchise agreements are typically long-term con - tracts. They often have a duration of between 10 and 20 years. Termination rights are therefore important from the point of view of both parties. Many fran - chisors reserve to themselves extensive rights of ter - mination for breach by the franchisee, but will deny to the franchisee the right of early termination. A number of countries, such as Germany, impose a statutory requirement that both parties must be permitted to terminate the franchise agreement for material breach.
Some jurisdictions require a minimum or maximum term for a franchise agreement – for example, France (ten years maximum) and Korea (ten years minimum). Other jurisdictions, such as Saudi Arabia, prohibit termination of the franchise agreement without good cause. This follows the tradition of the commercial agency laws, protecting local companies from termi - nation without compensation. Getting Paid It is important to verify whether the target territory has foreign exchange regulations that may prevent the franchisee from paying franchise fees in a foreign currency. Countries such as South Africa and Azer - baijan continue to regulate currency outflows, and permits may be required to pay franchise fees. Some countries impose a maximum permitted amount that can be paid by way of royalties to foreign licensors – for example, Nigeria and Pakistan. Withholding Taxes Withholding taxes can significantly impact payment flows. Most countries impose a withholding tax on royalty and technical service fee payments to foreign recipients. The tax amount can range from 5% to 25%. Franchisors will typically seek to impose on the franchisee an obligation to gross up payments, there - by increasing the amounts payable by the amount of the tax. Where withholding taxes are high, this can be onerous on the franchisee. Arguably, the franchisee should not pay a tax that is intended to be paid by the franchisor. The franchisee may not be able to receive a tax credit for this payment, and it may not be able to deduct it as an expense. The franchisor should typi - cally be able to receive a tax credit if it is a profitable business. Some countries have an excellent network of double tax treaties enabling franchisors to reduce the amount of withholding taxes that they have to pay. For compa - nies that franchise internationally on a broad basis, it is therefore important to consider where the franchisor entity should be based. Conclusion No guidebook can replace due diligence and advice from specialist local counsel with experience in fran - chising.
8 CHAMBERS.COM
Powered by FlippingBook