SHARING IN FRANCHISES.
The franchiser has a duty to ensure that the profit earned by
the franchisee can benefit him/her and that the royalties received ensure
continuity of the franchise.
The franchisers may at times keep a certain percentage of net
sales and royalties to themselves.
In other cases the franchiser pays an amount to protect the
franchisee against any risks pending.1
TAX IMPLICATIONS ON FRANCHISES IN
According to the Kenya Revenue
Authority (KRA), franchises are taxed in accordance to the earnings of the
A percentage of the tax can also
arise from different types of fees for instance consultancy and management fees.2
There are various types of taxes paid
1. INCOME TAX.
This is a type of tax paid from any income earned by workers.
That means that the franchisee pays a certain amount of tax if he/she earns a
certain minimum amount set by the revenue authorities. Franchises are subject
to taxation on any income accrued in Kenya
2. CORPORATION TAX
Corporation tax is mainly a tax system that is used by public
limited companies .When franchises decide to take the format of the limited
companies they ought to pay corporation tax.
3. VALUE ADDED TAX
This is a type of tax that is normally imposed on goods. It is a
direct form of taxation .In the United Kingdom, franchises are compelled to
collect value added tax from their customers incase their income exceeds 81000
pounds. This happens to be a legal requirement and is strictly adhered to.
Tax implications happen to vary from country to country or
franchise to franchise.4
WITHHOLDING TAX ON ROYALTIES
In the franchise system, the franchisor earns royalties
for the brand, which are subject to tax under the Kenyan law, It is therefore
the franchisees obligation to withhold the same and to remit it to the Kenya
Revenue Authority. The withholding tax rates according to the Kenya Revenue
Authority are 5% for resident companies and 20% for non-resident companies.5
IN THE CASE OF
EXPANDING A FRANCHISE IN THE USA
In the case where one wants to expand a franchise in America,
the local franchisor gets payments which are due to the withholding tax imposed
by the foreign country. This is inclusive of the royalties, rent, service fees
In other cases the franchisor who is based in the USA may
consider to transfer the responsibility of taxation to the franchisee from a
foreign country, a process known as gross-up provision to ensure the franchisor
will benefit more income. This process is however said to be disadvantageous to
The US has also signed treaties with various foreign nations
with an aim of lowering withholding taxes. In the case where the two parties
have comprehended how the withholding tax arises or have a proper organization,
it is easy to deal with the issue of the withholding tax savings.
For instance, if the American franchisor sells its equipment as
opposed to leasing it and performs its services in their country, the
withholding tax may be realized.7
It is therefore advisable for a franchisor in America to use the
gross-up provision method to relieve them of the tax burden.
1 Amit Nahar; https://www.quora.com
Catherine Malinda; Franchising in Kenya P.3 < https://www.franchise.org>
Howell; A business franchise: (What tax does a franchise owner pay) updated
Kenya Revenue Authority- http://www.kra.go.ke/index.php/domestic-taxes/income-tax/type-of-taxes/about-income-tax
Hine, Global USA: International Franchise Business Expansion: Tax