Franchising in Thailand
- Seventh heaven or something else!
by
Stephen Frost and Teerakarn Noichiaum,
Bangkok International Associates
Introduction: Franchising of products and services by foreign or Thai franchisors to
Thai franchisees is very popular. Franchises are found not just in the world of fast
food, but convenience stores, fashion brands/stores, photography shops, auto service
centres, educational services and other services may be the subject of a franchising
arrangement. Thailand has no specific law regarding franchising. Drafting a franchise
agreement will involve consideration of the Civil Code, the Trade Competition Act,
the Unfair Contract Terms Act, the Trademark Act, the Direct Selling Act and other
legislation. In addition, there are several tax points to be wary of when drafting
franchise agreements that will be performed in Thailand or where payments are to be
made in or sent out of Thailand.
Registration of trademark or trademark licensing agreement: As referred to above,
there is no specific law that applies to franchising, thus it cannot be said
authoritatively whether such an agreement is or is not subject to public registration. If
the franchise agreement includes trademarks, then those trademarks should be
registered in Thailand with the Department of Intellectual Property, so that copying or
imitation can be prevented by civil or criminal proceedings. Trademark licensing
agreements should also be registered with the DIP. A practical problem arises with a
Franchising Agreement. It is unclear whether such an agreement may be registered
with the DIP or not. There are no clear court decisions on this issue either. It is
suggested that a franchise agreement ought to be submitted to the DIP and their
opinion sought as to whether it constitutes a ‘trademark licensing agreement’ and thus
may be registered.
Trade competition aspects: The Trade Competition Act prohibits anti-competitive
conduct, as defined. The Act is enforced by the Trade Competition Commission as the
regulatory authority. If an exclusive franchisee is appointed for Thailand, or there is a
geographical limitation on the area in which the franchisee may be active, then these
matters are subject to the provisions of the Act and the right of the TCC to challenge
such provisions either on its own behalf, or upon a complaint submitted to it, on the
grounds that they amount to anti-competitive conduct. If the franchisor is a foreign
entity, such action would not usually be taken. But if such provisions were challenged
in court proceedings in Thailand, then the Thai court may hold provisions that breach
the Act to be unenforceable in Thailand on the grounds of public policy.
Taxation aspects: There are several tax aspects that require discussion:

Franchise fee: payment of the franchise fee would be subject to Thai
withholding tax of 15% prior to remittance to a foreign franchisor, subject to
any applicable double taxation treaty which may impose a different rate. It
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would also be subject to VAT of 7% which the franchisee would be liable to
pay on behalf of the franchisor as its input VAT.

Payment of marketing expenses: if the franchisee is liable to pay for marketing
expenses either to a foreign franchisor or (due to a court decision a few years
ago) to a Thailand based advertising company, this would be subject to Thai
withholding tax of 15% prior to remittance to a foreign franchisor or 3% when
paid to Thai based recipient, and in the case of a foreign recipient, subject to
any applicable double taxation treaty which may impose a different rate. It
would also be subject to VAT of 7% which the franchisee would be liable to
pay on behalf of the franchisor as its input VAT.

Contribution to a marketing fund: With regard to payment into a marketing
fund, by analogy to the tax treatment of payment of marketing expenses, this
also would be subject to Thai withholding tax of 15% when paid to a foreign
franchisor subject to the terms of any relevant tax treaty. It would also be
subject to VAT of 7% which the franchisee would be liable to pay on behalf of
the franchisor as its input VAT.

Import duty: If goods are imported pursuant to the Franchise Agreement, then
the method of calculation of customs duty should be noted. The base value for
import duty purposes will be the total of: the cost of goods imported; licensing
fee or royalty; insurance premium; and all freight and handling charges. Then
import duty and VAT will be calculated using this base figure.

Stamp duty: No stamp duty arises on the execution, transfer or extension of a
Franchise Agreement. This is the case unless the Revenue Department
construed the Franchise Agreement as a “Hire of Work” in which case stamp
duty would arise at the rate of 0.1% of the remuneration stipulated.

Tax grossing up clause: In practice, many franchise agreements would contain
a tax grossing up clause so that the franchisor would not suffer a loss of
income. A grossing up clause is permissible and enforceable, but it must be
drafted carefully.
Exchange control aspects: With regard to payments to a franchisor outside Thailand
of any monies pursuant to a Franchise Agreement, this will be subject to the Thai
remitting bank granting exchange control permission for the outbound payment on
behalf of the Bangkok of Thailand as central bank, and to the exchange control
regulations in force at the time payment is sought to be made, but at present:

in general, payment out will be permitted, subject to evidence being submitted
to the remitting bank of the contractual obligation to make such payment: in a
case of doubt, the remitting bank is entitled to ask for the opinion of the BOT;
and

where payment is to be made in a foreign currency, this will be on the basis of
the average of the sell/buy rate of the remitting bank based on the rates
advised by the BOT to them on the date payment is sought to be made, or such
other rate provided by contract.
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Conclusion: Doing business via a franchising arrangement will continue to be
popular although this raises several legal and taxation issues. Although plans to
pass a Franchising Act have been considered on several occasions in the past, it
would seem that this is not considered as a priority for parliamentary time.
Perhaps a Franchising Act may appear some time in the future!
©
Stephen Frost and Teerakarn Noichiaum, Bangkok International Associates 2012
__________________________
Bangkok International Associates is a general corporate and commercial law firm.
For further information, please contact Stephen Frost by email at sfrost@bia.co.th or
telephone (66) 2 231 6201/6455.
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