Franchise Tax in Tahiland (1)

Franchise Tax in Tahiland (1)

Local advertising and promotion spending by Thailand franchisees has been ruled to be a royalty payment under their franchise agreements. Foreign franchisors enter into franchise agreements with franchisees in Thailand in virtually the same way they enter into agreements with franchisees in other countries around the world, and it is normal for the foreign franchisors to incur withholding tax liability in the country of the franchisee when franchisees remit their fees to the foreign franchisor.

But in Thailand, this withholding tax liability has now been extended to the local advertising and promotion spending that is required of the franchisee under the terms and conditions of the franchise agreement. The framework of a franchise agreement is that the franchisor provides the franchisee with access to and the right to use the system and intellectual property of the franchised business for a fee, commonly known as the franchise royalty fee. The franchise royalty fee can be paid up front, and usually, as a percentage of the franchisee’s on-going sales revenues.

In addition to the payment of the franchise royalty fee, the terms and conditions of the franchise agreement requires the franchisee to spend an amount on local advertising and promotion activities (again, usually a certain percentage of the franchisee’s on-going sales revenues). And before a franchisee can carry out the local advertising and sales promotion activities, the franchisee is required to obtain the approval of the franchisor in order to ensure that it complies with the franchisor’s rules and conditions and that it will not harm the brand and the image of the franchised.