PROFITSHARING IN FRANCHISES. The franchiser has a duty to ensure that the profit earned bythe franchisee can benefit him/her and that the royalties received ensurecontinuity of the franchise.The franchisers may at times keep a certain percentage of netsales and royalties to themselves.In other cases the franchiser pays an amount to protect thefranchisee against any risks pending.1 TAX IMPLICATIONS ON FRANCHISES INKENYAAccording to the Kenya RevenueAuthority (KRA), franchises are taxed in accordance to the earnings of thefranchisee.
A percentage of the tax can alsoarise from different types of fees for instance consultancy and management fees.2 There are various types of taxes paidby franchises31. INCOME TAX.This is a type of tax paid from any income earned by workers.That means that the franchisee pays a certain amount of tax if he/she earns acertain minimum amount set by the revenue authorities. Franchises are subjectto taxation on any income accrued in Kenya 2. CORPORATION TAXCorporation tax is mainly a tax system that is used by publiclimited companies .When franchises decide to take the format of the limitedcompanies they ought to pay corporation tax.
3. VALUE ADDED TAXThis is a type of tax that is normally imposed on goods. It is adirect form of taxation .
In the United Kingdom, franchises are compelled tocollect value added tax from their customers incase their income exceeds 81000pounds. This happens to be a legal requirement and is strictly adhered to. Tax implications happen to vary from country to country orfranchise to franchise.4 WITHHOLDING TAX ON ROYALTIESIn the franchise system, the franchisor earns royaltiesfor the brand, which are subject to tax under the Kenyan law, It is thereforethe franchisees obligation to withhold the same and to remit it to the KenyaRevenue Authority.
The withholding tax rates according to the Kenya RevenueAuthority are 5% for resident companies and 20% for non-resident companies.5 IN THE CASE OFEXPANDING A FRANCHISE IN THE USA(www.lexology.com)In the case where one wants to expand a franchise in America,the local franchisor gets payments which are due to the withholding tax imposedby the foreign country. This is inclusive of the royalties, rent, service feesand interest.6 In other cases the franchisor who is based in the USA mayconsider to transfer the responsibility of taxation to the franchisee from aforeign country, a process known as gross-up provision to ensure the franchisorwill benefit more income.
This process is however said to be disadvantageous tothe franchisee. The US has also signed treaties with various foreign nationswith an aim of lowering withholding taxes. In the case where the two partieshave comprehended how the withholding tax arises or have a proper organization,it is easy to deal with the issue of the withholding tax savings.For instance, if the American franchisor sells its equipment asopposed to leasing it and performs its services in their country, thewithholding tax may be realized.7It is therefore advisable for a franchisor in America to use thegross-up provision method to relieve them of the tax burden.
1 Amit Nahar; https://www.quora.comupdated 25/10/162Catherine Malinda; Franchising in Kenya P.3 < https://www.franchise.org>3 DaveHowell; A business franchise: (What tax does a franchise owner pay) updated02/02/2017 http://www.abusinessfranchise.co.uk4Ibid 5Kenya Revenue Authority- http://www.kra.go.ke/index.php/domestic-taxes/income-tax/type-of-taxes/about-income-tax6 ThompsonHine, Global USA: International Franchise Business Expansion: TaxConsiderations