Termination, Renewal, Fees and Taxation of Franchise Agreements
Termination of a franchise agreement:
First, the franchise relationship is bound by a contract the franchisor and the franchisee made, in order to terminate this relationship, they have to refer to the general principles of contract law. A lot of franchise agreements are made for a specific period of time and after this period come to an end there is no existing relationship. However, there might be particular obligations that exist after the end of the contractual relationship like confidentiality or competition regulated by confidentiality and competition law.
Moreover, if there is no specific time for the termination of the franchisee agreement, the franchisor might be allowed to terminate the agreement by reasonably informing the franchisee for his intention to terminate. However, what is a reasonable time depends on the circumstances of the agreement but reasonableness generally refers to around six months. In case, the franchisee wants to terminate the franchise agreement, the same laws apply and he has in turn to give a reasonable notice to the franchisor.
Aspects regarding the renewal of a franchise agreement:
Moreover, the franchise agreement is likely to state when it is possible to renew it or when the agreement comes to an end. In case renewal is not specifically stated into the agreement, the franchisee and the franchisor might use this and not accept a renewal as they might desire to end their franchise relationship. Additionally, as the franchise agreement is made based on contract law, the renewal of the agreement might be implied by the terms of the agreement or by what actions or intentions the parties showed they had when contracting.
However, in case the franchisor does not intend to renew the agreement, he might refer if possible, to factors included in the agreement and allow him not to renew it, or to minor breaches of the contractual agreement made during the life time of the contract. There is also possible that the parties do not want their intention for renewal to be implied, thus they can state in the actual franchise agreement that any renewal will only be possible if the parties give a written decision for renewal of the agreement.
Issues for ownership interests
Additionally, the agreement between the franchisee and the franchisor should state specifically what rights and obligations the parties have and there should be a particular term regarding the right to transfer the franchise rights granted by the agreement.
Fees, Royalties and relevant taxation
Moreover, fixed fees do not apply for the transfer of royalties, as there are no franchise laws to be followed. Indeed, it is for the parties to decide the amount of the fees. However, in the case the funds are to be remitted abroad as royalties, with the exception of International business organisation; the amount of the fees need to be accepted by the Central Bank. Furthermore, a franchise agreement is considered as a royalty contract based on which rights to a trade mark or good will are bought. Indeed, it is better to have a discussion with the Central Bank about their plans as most of the times royalties are a significant part of a franchise agreement. In turn, the Central Bank will discuss with the Ministry of Industry, Commerce and Tourism and other departments to decide whether to accept the royalty.
When it comes to the taxation of the service fees, they are taxed like trading income on an accrual basis. Based on section 30 of the Income Tax Law, the royalties that come from sources within Cyprus are charged with a 10% of withholding tax if they are to be payed to foreign franchisers. Additionally, royalties are not supposed to come from Cyprus if they have the rights for use outside Cyprus. Nonetheless, there will be zero or reduced tax charged in the case the franchiser has his location in country with which Cyprus has a double taxation treaty. But for the above case to be applied, the foreign franchisers must not have a business that is permanently established in Cyprus. Lastly, there is no specific currency with which the payments should be made, therefore it is on the parties’ contemplation.
For more information and guidance please email Michalaki, Pitsillidou & Co LLC – iMPK Global Business Law Firm – Cyprus Lawyers, at email@example.com or visit our website at www.impklawyers.com.Tel. +357 25660092 – Fax +357 25 660097.