French Franchising Regulations

This article aims at giving an overview of the essential rules and regulations that apply when a foreign-owned business sets up a franchise in France. It would be oustide of the scope of this article to state every existing law and the help of a lawyer is vital to clearly identify any rules and regulations that could apply to your particular situation. So, with that in mind, let’s have a look at the basic rules applicable to a franchise agreement.

In France, there is no specific legislation on franchising and it’s important to note that there are no legislation pending likely to affect franchising in 2016. The French Commercial Code determines the general principles of Contract Law which in turn determines the validity of a franchise agreement. In addition, France, being part of the European Union (EU), the Commission Regulation also applies to franchise agreements.

Before signing of the franchise agreement, the franchisor must provide the potential franchisee with a document (Document d’Information Pré-contractuelle or DIP) containing certain information about the franchisor’s company (e.i. a description of it’s network and activities, it’s financial situation, the state of the market, the investments required, fees and royalties and the terms and conditions of the agreement, etc.).

The main difference between a franchise agreement and other kinds of contract lies in the transfer of know-how and the commitment of the franchisor to provide assistance to the franchisee. The licensing of a trade mark or sign is also an essential obligation in the franchise agreement. Note that territorial exclusivity, although common, is not necessarily contained in a franchise agreement.

1) Competion Law

When EU competition law is not applicable, clauses contained in franchise agreements are governed by French competition law, although they are quite similar. Some clauses of a franchise agreement having to do with territorial, customer or supplier restrictions as well as resale price maintenance, minimum purchase tragets or fees and royalties can be seen as anti-competitive by their very nature.

In general, competion law prohibits agreements between undertakings that have as their object or effect the prevention, restriction or distortion of competition within a specific market. Simply put, restrictions imposed by the franchise agreement on the franchisee must be proportional and should not exceed what is necessary for the protection of the network’s identity.

2) Intellectual Property

Regarding a franchise agreement, the main intellectual property rights usually licensed are trade marks, trade names, shop signs, utility models, designs, copyrights and know-how or patents. It’s important to note that a trade mark need not be registered in France in order to import products bearing that trade mark. However, in a franchise agreement where transfer or modification of trade mark’s right is likely to occur, it should be registered at the French Office of Industrial Property (Institut National de la Propriété Industrielle) to be enforceable against third parties. Moreover, under French law the franchisee does not become entitled to any rights in a trade mark (or any other intellectual property right) by virtue of selling the trade marked products. Let’s also mention that, usually, goodwill is not subject to any specific provision in franchise agreements. Lastly, the franchisor can impose restrictions on the use of its know-how and other confidential information during or after the expiration of the franchise agreement.

3) The Franchise Agreement

Typically in a franchise agreement, the franchisor agrees to make the trade mark available, to transfer its know-how, which must be “substantial”, “secret”, specific and regularly updated and finally to provide technical or commercial assistance prior to the signing as well as during the course of the agreement.

Almost all franchise agreements are for a definite periode. Usually, before signing the franchise agreement, a preparatory agreement is concluded to give the parties the opportunity to consider all aspects of the project. The preparatory agreement generally provides for the payment of a “reservation fee” that the franchisor will keep if the franchisee refuses to conclude the final contract with no legitimate grounds.

If the agreement is indeed signed the franchisee has no right of renewal, no matter the length of the relationship, nor the amount of investment. Furthermore, as the franchisor is free to refuse to renew the contract, no indemnity is due on termination of the contract, unless French court rules there was an abusive termination of the franchise agreement.

4) International Taxation

French tax law does not specify a precise tax treatment regarding the initial fee paid by the franchisee, it’s determined in accordance with common rules of taxation and depends if the payment is considered capital or operating expenditure. If it is treated as capital expenditure it can be amortized over the duration of the agreement.

In principle, the management and continuing fees paid by the franchisee should be deductible from its taxable results (unless they qualify as capital expenditure) or if the franchisor is located in a so called “tax haven” (where the tax due is less than half of the tax that would have been due in France) or in a non-cooperative state or territory (the list is updated annually).

Regarding French Value Added Tax (VAT), at the standard rate of 20%, it should apply with respect to the fees paid by the franchisee. If the franchisor is not established in France, the franchisee is liable for the payment of the VAT and entitled to claim it back (reverse charge system).

Laslty, the intellectual property royalties, unless they amount to capital expenditure, should also be deductible from the taxable results of the franchisee.

Conclusion:

In summary, although the French franchising market can be challenging; some well-established brands names will not easily enjoy high-brand recognition in France and due to cultural differences (less cars, dense shopping streets, etc.) the real estate element becomes a major issue for the investor. A qualified business lawfirm is a needed partner able to accompany you every step of the way and help you grasp those new opportunities. Let’s not forget that France is one of the most profitable market in Europe for franchises like Century 21 or McDonald’s, but the franchisor must follow the right steps.