Packing a local franchise to enter foreign markets

If your franchise model is successfully operating in Russia, one of the next stages of development may be entering foreign markets. The choice of the country depends not only on economic factors. This may also be affected by taxation and internal regulation in that jurisdiction. In any case, Russian currency regulation must also be taken into account. About that, on what aspects to look for when selling franchises abroad, you can read in our article.

Content: 

• How to conclude a franchise agreement with a foreign franchisee
• Currency regulation when concluding a franchise agreement with a non-resident 
• Taxation of royalties and flat fee from a non-resident when concluding a franchise agreement

How to conclude a franchise agreement with a foreign franchisee

Having determined the market that the Russian franchisor plans to enter, it is necessary to familiarize oneself with the regulation of franchising in this country. First of all, this concerns the conclusion of an agreement. First, some conditions are universal. For example, royalties or lump-sum fees are independent of national laws, but there may be specialties everywhere. The more complex the terms of your contract, the more it is worth delving deeper into the regulation. The amount of remuneration may vary depending on the target audience in different countries. Secondly, in most non-CIS countries, the obligation for the franchisor to disclose information is widespread. For example, the franchisor will be required to report the prosecution of his managers. It may also be mandatory to report the number of franchisees, reasons for closing, etc. Third, it is necessary to check whether there are additional obligations in other countries, for example, on liability insurance, etc.

Currency regulation when concluding a franchise agreement with a non-resident

When concluding agreements with a non-resident and receiving lump-sum contributions and royalties from them, one will have to face Russian currency regulation. The main obligation in this area is the repatriation of currency (Article 19 of the Law "On Currency Regulation and Currency Control". The Russian organization is obliged to ensure that the non-resident receives payment to its bank account for the transferred results of intellectual activity, including exclusive rights to them. This account must be opened with an authorized bank, which will be required to provide detailed information on currency transactions. Particular attention should be paid to this, as there are cases brought to administrative responsibility for violation of currency legislation. in this case, the fine will be measured in a fraction of the cost of currency operation. Therefore, if you plan to sell the franchise to foreign partners, it is necessary to estimate the currency risk.

Taxation of royalties and flat fee from a non-resident when concluding a franchise agreement

By selling a franchise to a foreign organization, you enter into an agreement with a non-resident. The taxation of your income depends on it.

Firstly, you do not need to pay VAT, since the place of sale of services is not Russia. VAT will be paid by the franchisee.

Secondly, if a relationship with a non-resident arises, it is necessary to take into account the norms of agreements on the avoidance of double taxation. They are concluded by Russia with a large number of states and allow you not to pay taxes in two countries at the same time. Under these agreements, the following rates apply:

• EAEU
  • 10% - Kazakhstan (Article 12 of the Convention)
  • 10% - Kyrgyzstan (Art.12 of the Agreement)
  • 10% - Belarus (Art.12 of the Agreement)
  • 0% - Armenia
• 10% - Ukraine (Art.12 of the Agreement)
• 0% - USA
• 0% - Cyprus
• 6% - China

Thus, a franchise agreement with a foreign company is impossible without the involvement of lawyers. This process includes many aspects at once: special taxation, requirements of currency legislation, compliance with national conditions. Although the business model remains the same, the legal framework may change. Probably, the Russian franchisor will need to disclose a large amount of information about its activities. In addition, the calculation of profit also depends on the agreements with the state in which the franchise will be distributed, as they establish rules to prevent double taxation. If you have any questions or need help preparing a franchise for a foreign market, please contact the lawyers of A4 Law Firm.