USA Law and Practice Contributed by: David B. Ramsey and Michelle Murray-Bertrand, Kaufmann Gildin & Robbins LLP
applicable laws, franchisors generally have substantial flexibility to establish franchise fees, royalties or ser - vice charges. The FTC Franchise Rule requires fran - chisors to disclose all fees and other payments that franchisees are required to pay, but it does not cap the amount that a franchisor may charge or impose other fee restrictions. The FTC reinforced this principle in its July 2024 Staff Guidance addressing so-called “junk fees”, which cautions that a franchisor may vio - late Section 5 of the FTC Act by imposing or collect - ing new fees that were not disclosed in the FDD and incorporated into the franchise agreement. The guid - ance states that “if a franchisor imposes or collects a new fee, through its operating manual or otherwise, that was not disclosed in the FDD and included in the franchise agreement, the franchisor may be engaging in an unfair act or practice in violation of Section 5 of the FTC Act”. Certain state franchise laws impose additional restric - tions on franchise fees and payment arrangements, including where such fees are unfair, discriminatory or inconsistent with mandatory franchise protections. For example, California and Washington have issued guidance addressing the imposition of fees through an operating manual or other means where those fees were not previously disclosed in the franchisor’s FDD. These requirements generally do not establish a maximum fee or royalty; rather, they limit a fran - chisor’s ability to impose fees that were not adequate - ly disclosed or contractually authorised. Accordingly, franchisors generally have considerable flexibility in structuring their fee arrangements, provided that the fees are properly disclosed, contractually authorised, and consistent with applicable franchise, antitrust, consumer protection and other laws. 10.2 Withholding Tax The application of withholding taxes or other taxes depends on whether the franchisor is a US or foreign entity. Payments of franchise fees, royalties and ser - vice fees to a US franchisor generally are not subject to withholding tax merely because they are made under a franchise agreement. Payments to a foreign (that is, based outside the USA) franchisor, however, may be subject to US federal withholding requirements.
The US Internal Revenue Code generally imposes 30% federal withholding tax on the gross amount of US-source fixed or determinable annual or periodi - cal income paid to a foreign person, unless an appli - cable tax treaty or statutory exemption provides for a reduced rate or exemption. US-source royalties, including payments for the use of trade marks, trade names, franchise rights and other IP, generally fall within this rule. Thus, in the absence of an applicable treaty reduction or exemption, a franchisee that owes a foreign franchisor USD100,000 in royalties generally must withhold USD30,000 and remit it to the Internal Revenue Service (IRS). Service fees are subject to different sourcing rules. Fees paid to a foreign franchisor for training, technical assistance, consulting or other services performed in the United States are generally subject to the 30% withholding rate. However, fees attributable to ser - vices performed entirely outside the United States are not subject to the 30% withholding rate, since the income for such services is not sourced in the United States. An applicable tax treaty may reduce or eliminate the withholding requirement if the treaty’s requirements are satisfied. The US franchisee, as the withholding agent, is generally responsible for deduct - ing and remitting any required tax to the IRS and com - pleting the required reporting requirements. 10.3 Foreign Currency Controls The United States does not generally impose foreign currency controls that restrict or prohibit the pay - ment of franchise fees, royalties or other amounts to a foreign franchisor; no prior authorisation from a US central bank or the franchisee’s commercial bank is required. A commercial bank may, however, conduct routine compliance and due diligence checks before processing an international payment. Having stated the above, cross-border payments to foreign-based franchisors remain subject to US eco - nomic sanctions laws administered by the Office of Foreign Assets Control (OFAC). In particular, payments involving a foreign franchisor located in, or owned or controlled by persons subject to, OFAC sanctions may be prohibited or may require OFAC authorisa - tion. If a transaction is prohibited and no applicable general licence or exemption is available, the parties
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