Franchise operation, tax and intellectual property related issues

(Contract Negotiation and Financial Obligations Phase)

Having mastered the market entry procedures, the enterprise enters the pivotal phase: Negotiating the Franchise Agreement and managing cash flow. This lesson analyzes the three legal pillars that directly affect the rights and financial health of the business: Information Transparency, IP Assets, and Foreign Contractor Tax.

1. The “15-Day” Rule (Mandatory Disclosure Obligation)

In a franchise relationship, the “Franchisor” holds all the know-how and system information, while the “Franchisee” often suffers from Information Asymmetry. To protect the buyer, Vietnamese law (Decree 35/2006) mandates a specific “buffer period.”

Specific Regulation:

The Franchisor must provide a copy of the Sample Franchise Agreement and the Franchise Disclosure Document (FDD) to the prospective Franchisee at least 15 working days prior to the official signing of the contract (unless otherwise agreed by the parties).

Why is this critical? (Risk Analysis)

• Anti-“Pressure Signing”: Prevents the Franchisor from using psychological tactics (FOMO – Fear Of Missing Out) to pressure the buyer into signing immediately at a seminar or event without reviewing the terms.
• Time for Due Diligence: 15 days is the minimum period for the Franchisee to consult with lawyers, check the legal status of the trademark, and evaluate the feasibility of the financial model.
• Legal Consequences: If the Franchisor fails to comply with this regulation, the Franchisee has the right to request the court to declare the contract void due to deception or violation of legal prohibitions, and claim damages.

2. Intellectual Property (The Core Asset)

The essence of a Franchise is the combination of: Operational Process (Know-how) + Trademark. If the IP rights are not secured, the Franchisee is essentially paying for an “empty shell.”

Prerequisite Conditions for Trademarks:

Unlike the looser regulations in some countries, in Vietnam, industrial property rights are established on a “First to file” basis.

• Requirement: The foreign party’s trademark must be legally protected in Vietnam. This is proven via:
  1. A Trademark Registration Certificate issued by the Intellectual Property Office of Vietnam (IP Vietnam).
  2. Or a Notice of Acceptance for Protection in Vietnam (for applications filed through the Madrid System).

Critical Legal Risks:

• Dispute Risk: If the Franchisor has not registered the trademark in Vietnam, the franchise agreement (specifically the trademark licensing portion) risks being declared void.
• Third-Party Risk: If the Franchisee invests billions of VND to set up the store and marketing, but is subsequently sued by a third party (who registered the trademark in Vietnam first) and forced to remove signage. In this scenario, the Franchisee suffers the heaviest damage.

ADVICE: Before negotiating, the Franchisee must search the trademark status on IP Vietnam’s digital library (Wipopub) to ensure the brand is “clean” and owned by the Franchisor.

3. Foreign Contractor Tax (FCT) Obligations

This is the most complex financial aspect when working with foreign partners. When cash flow (franchise fees) moves from Vietnam abroad, the Franchisee in Vietnam is responsible for withholding and paying tax on behalf of the foreign party before remitting payment.

FCT includes two main tax components:

A. Corporate Income Tax (CIT)

• Tax Rate: 10% on taxable revenue.
• Applicable to: Royalty Fees, Initial Franchise Fees.
• Example: If the Franchise Fee is $100,000, the Franchisee withholds $10,000 to pay tax and transfers only $90,000 to the Franchisor (unless the contract specifies a “Net” price, where the Franchisee bears the tax).

B. Value Added Tax (VAT) – Cost Optimization Strategy

Vietnamese tax law clearly distinguishes between “Technology Transfer” and “Services.”

• Subject to VAT Exemption: The value of transferring intellectual property rights and technology transfer (technical know-how, technological processes).
• Subject to VAT (typically 5% or 10%): Associated support services such as: Staff training, store setup, marketing support, management services…

Contract Optimization Strategy (Tax Planning):

To avoid the tax authorities classifying the entire contract value under the highest tax rate, enterprises should Unbundle the contract value into two clear components:

1. Fee for licensing/technology transfer: (Enjoys VAT exemption or lower tax rates).
2. Fee for support services: (Subject to VAT as regulated).

Note: This separation must be reasonable and grounded in reality. If the entire value is shifted to “technology transfer” unreasonably to evade VAT, tax authorities will re-assess and impose penalties.

📞 CONTACT LEGAL CONSULTANT:

TLA Law is a leading law firm with a team of highly experienced lawyers specializing in criminal, civil, corporate, marriage and family law, and more. We are committed to providing comprehensive legal support and answering all your legal questions. If you have any further questions, please do not hesitate to contact us.

1. Lawyer Vu Thi Phuong Thanh, Ha Noi Bar Association

Email: vtpthanh@tlalaw.vn

2. Lawyer Tran My Le, Ha Noi Bar Association

Email: tmle@tlalaw.vn

Nguyen Hien Mai