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April 27, 2011

Franchising in Thailand – Some Current Issues

Asia Franchise & Business Opportunities

In Thailand, the franchising agreement is a legally binding agreement which outlines the franchisor’s terms and conditions for the franchisee. As in most jurisdictions, it governs duties, rights, and obligations between the parties. The franchisor transfers to the franchisee a concept, a brand, and know-how, while the franchisee agrees to obey to all the specifications of the franchisor.

Today, there are currently more than 400 franchisors (majority foreign-owned) and more than 10,000 franchisees in Thailand. Most franchise operations take place in the food and restaurant sector, followed by services, education, and retailing, according to the Thai Department of Internal Trade.

No specific legislation in Thailand offers a comprehensive guide to franchising in general. Several laws are applicable to a franchising contract such as the Civil and Commercial Code or Trademark Act or even the Revenue Code.

It is within the Thai Revenue Code that many issues particular to franchising are addressed. In Thailand, 15% of the royalties owed to foreign franchisors not carrying on business in Thailand must be paid by Thai entities as the Thai withholding tax. The franchisee, as the payer of royalties, has the duty to withhold 15% income tax and remit the tax to the Revenue Department. Moreover, Thai franchisees have the duty to withhold 3% income tax and remit the tax to the Revenue Department. Likewise, VAT is imposed on payment of royalties to foreign franchisors. The Thai licensee, as a payer of royalties, is required to self-assess and remit 7% VAT to the Thai Revenue Department. The VAT paid to the Thai Revenue Department can subsequently be used by the Thai licensee as a credit against its VAT payable, or claimed as a refund. Those three taxes are the cornerstones of Thai tax law on franchising agreement.

It should be added that under Thai tax law, a foreign corporation (or in this case a foreign franchisor) may be considered as carrying on business in Thailand if it has in Thailand an employee or a representative whose activities generate income or gains in Thailand for the overseas corporation/overseas franchisor. Because this person is generating revenue for the foreign franchisor in the form of the royalty stream, the franchisor might be subject to Thai income tax (30% corporate income tax on net profits). The relevant regulation under the Thai Revenue Code is Section 76 bis.  Here, the practical application would be to carefully monitor the number of days and the type of services an employee of the overseas corporation/franchisor provides services to the Thai franchisee in order to not be deemed as carrying on business.

A new issue has been tackled by the Supreme Court in the judgment No. 4440/2552 of 2009. It concerns the treatment of local marketing expenses incurred by a franchisee in Thailand. In that case, the franchise contract stipulated that in addition to paying the foreign franchisor a franchise fee for the use of its intellectual property, the franchisor will control and supervise the marketing activities including advertising and promotion schemes of products. The marketing costs shall be borne by the franchisee, depending on the gross sale. The expenses are aimed at increasing brand awareness and generating local revenue, which hopefully will directly benefit the local franchisee. The Court decided that such payments should be considered taxable income to the franchisor. The Supreme Court held that the marketing expenses paid in Thailand to Thai firms should be treated as a part of the royalty fees payable to the foreign franchisor, and as such should also be subject to the 15-percent Thai withholding tax. Said benefits received by the foreign franchisor fall under the definition of “taxable income” under Section 39 of the Thai Revenue Code. The Court provided several reasons to justify that the marketing fees shall be taxable to the foreign franchisor. Firstly, the franchisor derives an economic benefit from having effective control over the franchisee’s marketing activities and does not have to promote its brand itself. Secondly, the minimum marketing expenses to be incurred are calculated on a similar basis to the franchise fees, and therefore are of a similar nature to the royalty fees. Last but not least, a Thai franchisee providing consideration in the form of indirect benefits, not subject to withholding tax would be unfair avoidance of Thai tax and encourage tax planning by foreign companies not carrying on business in Thailand.


Revenue US$1,000,000
Gross Royalty (e.g. 5%) US$50,000
Withholding Tax 15% US$7,500
Income Tax 3% US$1,500
VAT 7% N/A

Marketing Contribution
(e.g. 2%; 15% of 2%)

Net Royalty Income to Franchisor US$38,000

Accordingly, franchisors may be exposed to additional tax consequences in regards to how local marketing/advertising spend may be calculated as taxable under this decision.  According to Thai tax regulations, foreign franchisors will face lower ‘net’ royalties (here, in our example, a net Royalty of 3.8%  instead of 5%). Careful tax planning is critical.

In order to get around the solution of the Supreme Court judgment, two possible ways can be used. The first one would be to redraft the contract so that the marketing activities are not completely controlled or dictate by the franchisor. The second way would be to design a clause with a new mechanism to calculate marketing expenses that is different from the royalties’ stipulation in order to differentiate the two concepts.


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