Franchise Fees in the Philippines: How Initial, Royalty, and Ad Funds Work

Franchise fees in the Philippines are not fixed by a single statute. They are set by contract between the franchisor and the franchisee, and a typical franchise fee structure has three recurring components: a one-time initial franchise fee for the right to join the system and use the brand, ongoing royalty fees usually calculated as a percentage of gross sales, and mandatory advertising or marketing fund contributions pooled for brand promotion. Because these payments are consideration for services and for the right to use a trademark or trade name, they are generally subject to value-added tax (VAT) at the rate imposed under the Tax Code, as implemented by the Consolidated VAT Regulations.

What the initial franchise fee covers

The initial franchise fee is the lump sum paid at the start of the relationship. It typically covers the grant of the franchise, the right to use the franchisor's trademark and system, site selection assistance, training, and initial support. It is separate from the franchisee's own capital outlay for the store — construction, equipment, and inventory.

Under the VAT rules, the right or privilege to use a trademark, trade brand, or similar property or right is treated as goods or properties capable of pecuniary estimation. The grant of that right for a consideration is a taxable transaction.

Royalty fees and the continuing fee

Royalty fees are the continuing payments made throughout the term of the franchise agreement. They are commonly expressed as a percentage of the franchisee's gross sales, though the parties may agree on a fixed periodic amount.

For VAT purposes, the lease or use of, or the right or privilege to use, a trademark or trade brand is expressly included in the definition of "sale or exchange of services." The tax is equivalent to 10% of gross receipts, excluding VAT, under the Consolidated VAT Regulations. This means royalties are generally subject to VAT, and the franchisor — as the seller of the service — is the one statutorily liable, although the tax may be passed on to the franchisee.

Advertising and marketing funds

Many franchise systems require franchisees to contribute to a pooled advertising or marketing fund. These contributions are also consideration for services rendered by the franchisor or the system, so they follow the same VAT treatment as other service fees. The agreement should state clearly whether the fund is held in trust, how it is spent, and whether contributions are subject to VAT on top of the amount contributed.

How VAT applies to a non-resident franchisor

Where the franchisor is a non-resident foreign corporation, the rules on royalties payable to non-residents are specific. Under the Consolidated VAT Regulations, VAT on rentals and royalties payable to a non-resident foreign corporation or owner for the sale of services and the use or lease of properties in the Philippines is based on the contract price agreed upon by the licensor and the licensee. The licensee — the Philippine franchisee — is responsible for paying the VAT on those royalties on behalf of the non-resident franchisor.

What a franchise agreement should address on fees

Because the fee structure is contractual, the franchise agreement is the primary document. It should clearly define:

• The amount and payment schedule of the initial franchise fee;
• The royalty rate, the base on which it is computed, and the reporting and audit rights of the franchisor;
• The advertising fund contribution rate, its permitted uses, and how any surplus is handled;
• Whether fees are inclusive or exclusive of VAT, and who bears the tax;
• The consequences of late payment, including interest and possible termination.

Frequently asked questions

Are franchise fees in the Philippines regulated by law? There is no single statute that fixes franchise fee amounts. The fees are set by the franchise agreement between the parties, subject to general contract law and tax rules.

Is the royalty fee subject to VAT? Yes. The right to use a trademark or trade brand is included in the definition of "sale or exchange of services" under the Consolidated VAT Regulations, and the tax is equivalent to 10% of gross receipts, excluding VAT.

Who pays the VAT when the franchisor is a foreign company? For royalties payable to a non-resident foreign corporation for services and the use of property in the Philippines, the licensee — the Philippine franchisee — is responsible for paying the VAT on the non-resident's behalf.

Practical takeaways

• Franchise fees in the Philippines are contract-driven, not fixed by a single statute.
• Expect three main components: an initial franchise fee, continuing royalties, and advertising fund contributions.
• Royalties and the right to use a trademark are treated as a "sale or exchange of services" subject to VAT.
• If the franchisor is a non-resident, the Philippine franchisee is the one responsible for remitting VAT on royalties.
• The franchise agreement should state whether fees are VAT-inclusive or exclusive, and who bears the tax.

Primary sources

The rules discussed above are drawn from the following primary sources. Where the firm's library holds the document as a PDF it is embedded here in full; the rest are cited by title.

RR No. 16-2005 — Prescribes the Consolidated Value-Added Tax Regulations of 2005 superseding RR No. 14-2005 (Published in Manila Times on Oct. 21, 2005) Digest | Full TextOpen in Law LibraryDownload PDF

• REPUBLIC ACT NO. 11232 - AN ACT PROVIDING FOR THE REVISED CORPORATION CODE OF THE PHILIPPINES

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.