A franchise is currently no longer an uncommon term for investors in particular. The Vietnamese market, in general, is regarded as one of the most successful business models in the past 100 years. This is also a mode to dominate market share quickly and still ensure profits for the franchisor. Therefore, the parties are intensely focused on each detail’s content in the franchise agreement when entering into this agreement. However, when performing the contract, the parties mostly “ignore” crucial regulations on the method of royalty payment.
So how to pay the royalty in case the parties enter into the transaction are Vietnamese enterprises? We shall analyze in detail this matter in the following article.
Currently, there is no precise regulation on the payment method in a franchise agreement. Therefore, the choice of the form and payment method entirely depends on the agreement of the parties. Depending on the situation, the parties shall make agreements on the most suitable form and payment method. The most common payment method currently applied by the parties is payment via account by transfer for the contract value of over VND 20,000,000.
So how to perform this payment method? Is it compulsory for the parties to receive and pay via the organization accounts? Or they may receive and pay via personal accounts?
In this regard, the parties may find that the payment of the franchise agreement shall incur taxes, including corporate income tax and value added tax. Therefore, when the parties sign an agreement and choose the payment method via an account, that account is required to be the account of the contracting company.
However, in several exceptional situations, the payment may not be made via the account of the company involved in the transaction, it may be made with the account of the third party – the authorized party, or a third party designated by the seller to receive the money, and is specified in the written contract. This third party may be a legal entity or a person operating under the law.
So, is there any potential risk when Vietnamese enterprises pay franchise fees via individual accounts? And how to handle the solution?
1. For individuals receiving the royalty fee and the franchisor:
- Individuals receiving the royalty:
Suppose the royalty is paid to the individual account. In that case, this may be considered regular income of this individual, depending on the content of the bank transfer to determine if this income is taxable and required individuals to declare personal income tax (PIT) or not. Besides, according to Article 30.2 of Decree No. 126/2020/ND-CP, banks are obliged to provide information related to individual accounts when tax authorities request for inspection and examination of payment obligations. Therefore, if the tax agency determines that this is a compulsory PIT that the individual cannot explain, prove, and do not declare according to the regulations, an administratively sanctioned may be applied with the lowest penalty is warning if there is an extenuating circumstance, the highest fine is VND 12,500,000, and the PIT shall be retrospectively collected.
- Franchisor
The royalty payment under the franchise agreement is considered the revenue of the franchisor. In this case, the franchisor faces the risk of being prosecuted for tax evasion if it is not fully declared because this revenue is the taxable income of the company. Accordingly, the company is responsible for declaring and paying income tax incurred from this income.
For the tax evasion, according to Article 17 of Decree No. 125/2020/ND-CP, the lowest administrative sanction is 01 times the amount of tax evasion if there is at least one extenuating circumstance specified in the Law on the handling of administrative violations and up to 03 times the amount of tax evasion if there are three or more aggravating circumstances, is forced to overcome the consequences, collect the evaded tax amount. In case the company’s tax evasion is from VND 200,000,000 or more, it shall constitute a criminal offense under Clause 5, Article 200 of the Penal Code 2015 (amended in 2017). Accordingly, the lowest fine bracket is from VND 300,000,000 – 1,000,000,000 and the highest is VND 3,000,000,000 – 10,000,000,000 or suspended from operation from 06 months to 03 years.
2. For the franchisee:
Franchisee: royalty payment via this personal account may not be deductible when determining taxable income (especially expenses over 20 million without transfer to the company account ).
In addition, in the event that the parties have a dispute, it shall not be easy to prove the franchisee’s payment obligations. Therefore, the parties need to make a written confirmation of the debt, confirming that the franchisee has fulfilled the payment obligations as agreed by the parties.
So what is the solution to limit the risk and win-win for both parties?
For the royalty amounts below VND 20,000,000, the parties can apply the accounting solution by cash collection. In the case of over VND 20,000,000, the franchisee is obliged to pay this amount from the franchisee’s account to the franchisor’s account to ensure benefits and avoid tax risks. Therefore, the parties should consider and contact a reputable legal consultant to advise on the best protection of rights and interests in each case.
The above are some of the potential risks when the company receives and pays royalties through individual accounts in contravention of the law. We hope through this article, the parties, when implementing a franchise agreement, should pay more attention to the payment method and comply with the law.
If you have any questions or require any additional information, please contact Apolat Legal – An International Law Firm in Viet Nam.
This article is for general information only and is not a substitute for legal advice.
