How to Start a Franchised Business using an Offshore Business Entity

Big companies that usually multiply by franchising their brand are increasing these days. If your business model is a success in any industry, you will always think of either diversifying or expanding your business by gaining a more physical or online presence.

The primary thing that needs to be considered here is that just expanding your business is not always the brightest idea. An investor should always be on the mission to be efficient in cost and other business decisions.

Entrepreneurs who are looking to expand their business by franchising can benefit enormously from tax-free Offshore companies. The business model of these entrepreneurs involves developing and then commercializing a Franchise Prototype model.

Typically how it works is you establish (i) a zero tax Master Franchise Company and (ii) a zero tax IP Holding Company Offshore.

In general, the days of doing business in the traditional sense are gone. The primary objective is to optimally take your business decisions to get the most out of your investments after offshore company registration.

What is a Franchise Business?

A business system in which the rights of the business logo, model, and the name of a much larger company (an MNC) are sold to the private group of individuals is called a Franchisee Business. A franchise business is the augmentation of an existing successful business. It's performed in a precisely similar way in which parent business works.

These private operators are known as franchisees. The connection between the owner and the seller is contractual.

The Franchisor/Franchisee Relationship

The Franchisor usually supplies the Franchisee with the following things

  1. A Manual that allows the Franchisee to run the business, i.e., the Intellectual Property (IP)
  2. Unique Products which are guaranteed to bring in value to attract customers, i.e., IP
  3. A marketing program guaranteed to attract customers through the Franchisee's door at all times, i.e., IP
  4. The right to use the trademarks of the Franchisor. These type of trademarks are also IP

Does the business need to Register with the Offshore Company?

The answer is in Section 21 (2) of the Corporations Act 2001, which states that an overseas company must not execute business in a particular country unless it is registered with an Offshore company setup of the specific location.

 If the company is investing funds, collecting debts, or holding property, it may not need to register as a foreign company. In simple words, it must be taking part in a commercial enterprise for profit to require registration, which is the standard law view of carrying on a business.

Registration Requirements

A franchisor looking forward to registering as a foreign company must also open an offshore bank account by providing a series of documents viz—a certified copy of the current certificate of incorporation of Offshore Company registration and certified copy constitution.

A foreign franchisee will need to nominate a local agent or representative of a particular country. You must also have a registered office. The agent is personally responsible for anything the foreign company is legally required to do.

The franchise business will be issued with offshore company formation with a bank account. You must ensure that the franchise business/company has its name as registered with the offshore jurisdiction and the place of origin is displayed on public documents.

The Franchise company will also need to meet the annual reporting requirements of the Offshore company setup of that country.

There are multiple things to keep in consideration when it comes to making use of offshore services. It is always recommended to seek the help of a business setup expert to ease the burden of the incorporation process, along with several other core reasons to hire an offshore business consultant.

Business Name and Trademark Issues

A foreign company must register its trading business name with the offshore company if it is different from its name and registered with the offshore company with a bank account. It is required to do a trademark search to reduce the risk of violation and avoid any claim for misleading or deceptive conduct.

This is essential whether the foreign company is trading under its name or a new name.

GST Issues Specific to Franchising

The payment will generally include the taxes on the offshore account when a franchisee makes the payment to a franchisor registered for GST. The Offshore company will then provide a tax credit to the inscribed Franchisee for the GST paid. This covers a franchisee's taxes included in the initial franchise fees, royalties, franchise renewal fees, transfer and training fees, advertising, and marketing fees.

Tax Deductibility of Franchise Fees

The initial franchise in advance is not deductible as a business expense because it is considered a capital cost, which is part of the franchiser's business cost base. However, if this is not the scenario, franchisees may be able to cut down renewal fees, subject to prepayment regulations.

Process of Setting up a Franchised Business using an Offshore Business Entity

  1. The IP is held by one company, i.e., the "IP" Company. This company is usually located in a zero-tax jurisdiction.
  2. The IP Company offers a special use License to the Master Franchise Company, which is basically incorporated in a zero tax jurisdiction or a low tax jurisdiction (tax-haven jurisdiction). Hence, giving the Master Franchise Company the right to commercialize this IP
  3. The Master Franchise Company (Franchisor) sells a Franchise to a Franchisee and collects an advance payment and a percentage of profit moving forward. The Franchise owner (Franchisee) is entitled to use the Franchisor's IP to return for these payments.
  4. The payments made to the Master Franchise Company are usually received in a zero-tax environment.
  5. The Master Franchisor Company pays license fees to the IP Company in case of return for having the unique rights to commercialize the IP.

We Can Help You

We here at Business Setup Worldwide can provide you with customized business solutions. If you need any assistance regarding offshore services, we would be delighted to help you out. Contact us and talk to our advisors today to take the first step towards making sound business decisions.

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