In the context of increasingly expanding franchise activities, tax obligations in commercial franchise agreements have become an important legal issue requiring careful attention in order to ensure compliance with legal regulations and minimize financial risks arising during contract performance.
In the context of increasingly expanding franchise activities, tax obligations in commercial franchise agreements have become an important legal issue requiring careful attention in order to ensure compliance with legal regulations and minimize financial risks arising during contract performance.
I. Current situation related to tax in commercial franchise agreements
1. Tax obligations in franchise agreements have not yet been fully recognized
In practice, many enterprises, when entering into franchise agreements, focus mainly on brand exploitation rights, franchise fees, and operational obligations, while failing to fully assess the tax obligations arising therefrom.
Common payments include:
- Initial franchise fees
- Periodic management fees
- Training fees and technology transfer fees
Each of these payments may be subject to different types of taxes (value-added tax, corporate income tax, or foreign contractor tax), leading to risks of inaccurate tax declarations.
2. Differences between domestic franchising and cross-border franchising
For franchises involving foreign brands entering Vietnam, tax obligations are often more complicated due to matters relating to:
- Foreign contractor tax applicable to foreign income recipients
- Withholding and declaration obligations of the franchisee in Vietnam
- Issues concerning the determination of taxable income
Differences in legal systems and accounting practices between countries make the determination of tax obligations more difficult in practice.
3. Difficulties in classifying the nature of payments
A common issue is determining the legal and tax nature of payments under franchise agreements, such as whether they constitute:
- Service fees
- Royalties
- Technology transfer fees
Incorrect classification may result in the wrong application of the tax category or tax rates, especially in complex franchise agreements.
4. Risks arising from the lack of consistency between contracts and tax dossiers
Many enterprises do not pay sufficient attention to tax clauses during the contract drafting stage, leading to:
- Lack of provisions on tax withholding obligations
- Failure to clearly determine taxable values
- Difficulties when providing explanations to tax authorities
This increases the risk of tax reassessment and administrative sanctions during tax inspections.
5. Increasing trend of tax management for franchise activities
Tax authorities are currently focusing on franchise activities, particularly chain business models and cross-border franchising. The increase in inspections and audits shows that tax compliance requirements in such a sector are becoming increasingly strict.
It can be seen that the current situation of tax in commercial franchise agreements reflects many challenges from both legal and practical perspectives. Properly identifying tax obligations and establishing appropriate management mechanisms are essential factors for enterprises to implement franchise models sustainably and minimize legal risks.
II. Concept of tax in commercial franchise agreements
1. What is tax in a commercial franchise agreement?
Pursuant to Article 284 of the Commercial Law 2005, commercial franchising is defined as a commercial activity whereby the franchisor permits and requires the franchisee to independently conduct the purchase and sale of goods or provision of services under the following conditions:
- The purchase and sale of goods or provision of services must be performed in accordance with the business organization model prescribed by the franchisor and associated with the franchisor’s trademarks, trade names, business know-how, business slogans, business symbols, and advertisements;
- The franchisor has the right to supervise and assist the franchisee in operating the business.
Tax in a commercial franchise agreement means the taxes that the parties must declare and pay to the State arising from the transfer of commercial rights, rights to use trademarks and business know-how, or the provision of support services under the franchise agreement.
These taxes not only reflect financial obligations but also serve as a tool for the State to manage business activities involving the transfer of commercial exploitation rights.
2. Why does commercial franchising lead to tax obligations?
Franchise activities generate tax obligations because they constitute a business relationship that creates income for one or both parties. Payments made by the franchisee to the franchisor are considered income derived from the provision of rights and services and fall within the scope of tax law.
In addition, in cross-border franchising cases, tax obligations also arise to ensure the taxing rights of the country where the business activities are performed, thereby helping prevent State budget losses.
It can be seen that tax obligations in franchising arise not only from the profit-generating nature of the transaction but also from the need to ensure fairness and transparency in the business environment.
3. Which payments in commercial franchise agreements form the basis for tax determination?
In practice, many payments under franchise agreements are used as the basis for tax calculation, commonly including:
- Initial franchise fees: Payments made to obtain the right to use the business model or brand
- Periodic franchise fees: Payments based on revenue or periodic schedules
- Support service fees: Training, marketing, and system management
- Other contractual payments: Technology transfer, software, and operational documents
Correctly identifying the nature of each payment is a crucial factor in applying the correct type of tax and tax rate.
III. Legal regulations related to tax in commercial franchise agreements
1. Principles for determining tax in commercial franchise agreements
Pursuant to Clause 2, Article 6 of the Law on Tax Administration 2025, taxpayers are obligated to pay taxes and other amounts payable to the State budget in accordance with tax laws and other relevant legal provisions.
Tax obligations in commercial franchise agreements must be determined based on the economic substance of the transaction, not merely the title of the payment. Tax arises when there is taxable revenue or income generated from franchise activities.
Such a principle aims to ensure taxation based on the true nature of transactions and to prevent the avoidance of tax obligations through contractual structuring.
2. How is the taxpayer in commercial franchise agreements determined?
Pursuant to Clause 8, Article 3 of the Personal Income Tax Law 2025, income derived from commercial franchising is classified as taxable personal income.
At the same time, under Clause 2, Article 17 of the Personal Income Tax Law 2025, taxable income from commercial franchising is the portion of income exceeding 20 million VND received by the taxpayer under each franchise agreement.
From these provisions, it can be seen that individuals conducting commercial franchise activities must pay personal income tax where the income from each franchise agreement exceeds 20 million VND.
Accordingly, the franchisor, being an organization or individual receiving income from franchise fees, is usually the party subject to income tax. The franchisee may be responsible for withholding, declaring, and paying taxes on behalf of the franchisor in certain cases, particularly where the franchisor is a foreign entity.
3. What types of taxes commonly arise from commercial franchise agreements?
Depending on the transaction structure and the participating parties, the taxes commonly arising from commercial franchise agreements include:
- Corporate income tax under Clause 4, Article 3 of the Corporate Income Tax Law 2025 for income derived from franchise fees
- Personal income tax under Clause 8, Article 3 of the Personal Income Tax Law 2025
The application of specific taxes depends on the nature of the payment and the tax residency status of the income recipient.
4. How is the time of tax obligation determination in commercial franchise agreements regulated?
Pursuant to Clause 3, Article 17 of the Personal Income Tax Law 2025, the time for determining taxable income from commercial franchising is the time when the organization or individual pays income to the taxpayer, specifically the time of payment of franchise fees between the franchisee and the franchisor.
Such a principle ensures that tax obligations are recognized in accordance with the actual occurrence of transactions and cash flows.
IV.Questions related to tax in commercial franchise agreements
1. How are tax obligations determined when the franchisor is a foreign organization or individual?
When the franchisor is a foreign organization or individual without a commercial presence in Vietnam, income derived from franchise fees is generally subject to foreign contractor tax.
Tax obligations include corporate income tax or personal income tax in the case of individuals, calculated based on revenue generated in Vietnam in accordance with foreign contractor tax regulations.
2. Is the franchisee responsible for withholding and paying tax on behalf of the franchisor?
In most cases, the franchisee in Vietnam is responsible for withholding, declaring, and paying foreign contractor tax on behalf of the foreign franchisor before making payment of franchise fees, unless the foreign party has registered for direct tax payment under the deduction method.
3. Does payment of franchise fees in foreign currency affect the determination of tax obligations?
Payment in foreign currency does not change the nature of the tax obligation. However, the enterprise must convert the amount into Vietnamese Dong based on the tax exchange rate at the time revenue arises or payment is made in order to accurately determine the tax amount to be declared.
4. Is it mandatory to separately specify franchise fees and other service fees in the agreement for tax declaration purposes?
The law does not require this in all cases; however, separate specification is highly necessary in practice to accurately determine the applicable type of tax and tax rate for each payment item. If such amounts are not clearly separated, the tax authority may impose tax assessments in a manner unfavorable to the enterprise.
5. Does the amendment or extension of a commercial franchise agreement create an obligation for additional tax declaration?
If the amendment or extension changes the fee value, payment term, or creates new income, the enterprise must make supplementary tax declarations corresponding to such changes. Conversely, if the changes are merely technical and do not affect taxable revenue, no new tax obligation arises.
V. Why should you seek legal consultation from NPLaw for issues related to tax in commercial franchise agreements
Tax matters in commercial franchising activities often simultaneously involve tax law, commercial law, and foreign elements; therefore, legal risks are relatively high if enterprises handle them independently. Consulting a lawyer helps to:
- Accurately determine the transaction structure and tax obligations from the contract drafting stage.
- Minimize the risk of tax arrears and administrative penalties due to incorrect declarations or improper application of tax policies.
- Optimize lawful tax costs through advice on payment methods and fee allocation.
- Receive support in working with tax authorities in the event of inspections, audits, or disputes.
With practical experience in taxation and investment matters, the legal team can help enterprises comprehensively control legal risks, ensuring that franchising activities are implemented smoothly and in full compliance with legal regulations.
The above information is for reference purposes only. Should clients require detailed consultation regarding specific cases, please contact NPLaw Firm for immediate legal assistance.
