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The Cartels and Leniency Review
Reproduced with permission from Law Business Research Ltd.
This article was first published in The Cartels and Leniency Review, 2nd edition(published in January 2014 – editor Christine A Varney).
For further information please [email protected]
The Franchise
Law Review
Law Business Research
Second Edition
Editor
Mark Abell
The FranchiseLaw Review
The Franchise Law ReviewReproduced with permission from Law Business Research Ltd.
This article was first published in The Franchise Law Review - Edition 2(published in January 2015 – editor Mark Abell).
For further information please [email protected]
The Franchise
Law Review
Second Edition
EditorMark Abell
Law Business Research Ltd
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The publisher acknowledges and thanks the following law firms for their learned assistance throughout the preparation of this book:
ADVOCARE LAW OFFICE
ADVOKATFIRMAN NOVA
ARAMIS
BAKER & McKENZIE
BEAUCHAMPS SOLICITORS
BIRD & BIRD
DANNEMANN SIEMSEN ADVOGADOS
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GÓMEZ-ACEBO & POMBO ABOGADOS SLP
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K&K ADVOCATES
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MST LAWYERS
NIXON PEABODY LLP
NOBLES
ACKNOWLEDGEMENTS
Acknowledgements
ii
PLESNER LAW FIRM
PORZIO, RÍOS & ASOCIADOS
SARAH CHARLES – PRACTICAL STRATEGY
SMITH & HENDERSON
STEWART GERMANN LAW OFFICE
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SUBIDO PAGENTE CERTEZA MENDOZA & BINAY (SPCMB) LAW FIRM
TAY & PARTNERS
iii
Editor’s Preface ..................................................................................................viiMark Abell
Chapter 1 WHAT IS FRANCHISING? ......................................................1Mark Abell
Chapter 2 FRANCHISING AS PART OF AN INTERNATIONAL MULTICHANNEL STRATEGY ...............................................3
Mark Abell
Chapter 3 THE REGULATION OF FRANCHISING AROUND THE WORLD ............................................................................8
Mark Abell
Chapter 4 COMMERCIAL PLANNING .................................................29Sarah Charles
Chapter 5 SUSTAINING RELATIONSHIPS ..........................................37Steven Frost and Mark Abell
Chapter 6 INTELLECTUAL PROPERTY ...............................................45Allan Poulter and Robert Williams
Chapter 7 DATA PROTECTION ............................................................52Ruth Boardman, Francis Aldhouse and Elizabeth Upton
Chapter 8 TAX CONSIDERATIONS ......................................................60Mathew Oliver
Chapter 9 TITLE TRADE SECRETS AND FRANCHISING ..............110Warren Wayne and Mark Abell
Chapter 10 RESOLVING INTERNATIONAL FRANCHISE DISPUTES .............................................................................119
Victoria Hobbs
CONTENTS
iv
Contents
Chapter 11 E-COMMERCE AND FRANCHISING ..............................133Ben Hughes
Chapter 12 THE COMPETITION LAW OF THE EUROPEAN UNION ..................................................................................139
Mark Abell
Chapter 13 EDITOR’S GLOBAL OVERVIEW .......................................141Mark Abell
Chapter 14 GCC OVERVIEW .................................................................148Melissa Murray
Chapter 15 AUSTRALIA ...........................................................................159Philip Colman
Chapter 16 AUSTRIA ...............................................................................180Eckhard Flohr
Chapter 17 BELGIUM ..............................................................................195Olivier Clevenbergh, Jean-Pierre Fierens, Noémie Verborgh and Eric-Gérald Lang
Chapter 18 BRAZIL ..................................................................................208Cândida Ribeiro Caffé, Rafael Atab de Araujo, Mariana Reis Abenza, Fernanda Souto Pacheco and Juliana Bussade Monteiro de Barros
Chapter 19 CANADA ...............................................................................227Peter Snell
Chapter 20 CHILE ....................................................................................236Cristóbal Porzio
Chapter 21 CHINA ...................................................................................250Sven-Michael Werner
Chapter 22 CZECH REPUBLIC ..............................................................262Vojtěch Chloupek
Chapter 23 DENMARK ............................................................................273Jacob Ørskov Rasmussen
v
Contents
Chapter 24 FINLAND ..............................................................................286Patrick Lindgren
Chapter 25 FRANCE ................................................................................298Raphaël Mellerio
Chapter 26 GERMANY ............................................................................309Stefan Engels and Bahne Sievers
Chapter 27 HONG KONG ......................................................................315Michelle Chan and Alex Wong
Chapter 28 HUNGARY ............................................................................324Péter Rippel-Szabó and Bettina Kövecses
Chapter 29 INDIA ....................................................................................338Nipun Gupta, Divya Sharma and Mumuksha Singh
Chapter 30 INDONESIA ..........................................................................352Risti Wulansari
Chapter 31 IRELAND...............................................................................364Imelda Reynolds
Chapter 32 ITALY .....................................................................................382Claudia Ricciardi
Chapter 33 MALAYSIA .............................................................................396Lin Li Lee
Chapter 34 MEXICO ................................................................................417Jorge Mondragón
Chapter 35 NETHERLANDS ..................................................................433Hans E Urlus
Chapter 36 NEW ZEALAND ...................................................................451Stewart Germann
Chapter 37 PHILIPPINES ........................................................................463Claro F Certeza
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Contents
Chapter 38 POLAND ...............................................................................484Maciej Gawroński
Chapter 39 RUSSIA ...................................................................................495Margarita Divina
Chapter 40 SINGAPORE .........................................................................512Sheena Jacob, Angelique Chan and Just Wang
Chapter 41 SOUTH AFRICA ...................................................................524Ian Jacobsberg, Charles van Staden, Janine Reddi, Phillip Lourens and Cara Shahim
Chapter 42 SPAIN .....................................................................................538Mónica Esteve Sanz, Remedios García Gómez de Zamora and Bárbara Sainz de Vicuña Lapetra
Chapter 43 SWEDEN ...............................................................................552Anders Fernlund
Chapter 44 UKRAINE ..............................................................................561Volodymyr Yakubovskyy and Graeme Payne
Chapter 45 UNITED KINGDOM ...........................................................571Graeme Payne
Chapter 46 UNITED STATES .................................................................592Steven Feirman, Sara Farber, Gina McCreadie, Keri McWilliams, Vincent Napoleon, Kendal Tyre and Diana Vilmenay
Chapter 47 CASE STUDY – THE DWYER GROUP .............................614Duke Johnston
Chapter 48 DISPUTE RESOLUTION APPENDIX ...............................618Fidel Porcuna
Appendix 1 ABOUT THE AUTHORS .....................................................621
Appendix 2 CONTRIBUTING LAW FIRMS’ CONTACT DETAILS .....647
vii
EDITOR’S PREFACE
Since the publication of the first edition of The Franchise Law Review, there have been some significant economic and geopolitical developments that have had a significant impact on world trade. The apparently inexorable march towards the globalisation of commerce, however, has again continued unabated despite, or perhaps even because of, these changes.
Despite the slow emergence of a few economic bright spots, the economy of what was once called the ‘developed’ world continues on the most part to struggle, while even Brazil – one of the much-vaunted BRICS nations – has fallen into recession. As a consequence, businesses are often presented with little choice but to look to more vibrant markets in Asia, the Middle East and Africa for their future growth.
At the same time South–South trade is on the increase, perhaps at the expense of its North–South counterpart. All of this, coupled with the unstable wider geopolitical landscape, presents business with only one near certainty: there will be continued deleveraging of businesses in the coming years and, thus, growing barriers to international growth for many of them. All but the most substantial and well-structured of such businesses may find themselves facing not only significant difficulties due to their reduced access to funding to invest in their foreign ventures, but also challenges arising from their lack of managerial experience and bandwidth.
Franchising, in its various forms, continues to present businesses with one way of achieving profitable and successful international growth without the need for either substantial capital investment or a broad managerial infrastructure. In sectors as diverse as food and beverages, retail, hospitality, education, health care and financial services, it continues to be a popular catalyst for international commerce and makes a strong and effective contribution to world trade. We are even seeing governments turning to it as an effective strategy for the future of the welfare state as social franchising gains still more traction as a way of achieving key social objectives.
Given the positive role that franchising can make in the world economy it is important that legal practitioners have an appropriate understanding of how it is
Editor’s Preface
viii
regulated around the globe. This book provides an introduction to the basic elements of international franchising and an overview of the way that it is regulated in 32 jurisdictions.
As will be apparent from the chapters of this book, there continues to be no homogenous approach to the regulation of franchising around the world. Some countries specifically regulate particular aspects of the franchising relationship. Of these, a number try to ensure an appropriate level of pre-contractual hygiene, while others focus instead on imposing mandatory terms upon the franchise relationship. Some do both. In certain countries there is a requirement to register certain documents in a public register. Others restrict the manner in which third parties can be involved in helping franchisors to meet potential franchisees. No two countries regulate franchising in the same way. Even those countries that have a well-developed regulatory environment seem unable to resist the temptation to continually develop and change their approaches to regulation – as is well illustrated by the new changes in the Australian regulations.
Many countries do not have franchise-specific regulation, but nevertheless strictly regulate certain aspects of the franchise relationship through the complex interplay of more general legal concepts such as antitrust law, intellectual property rights and the doctrine of good faith. This heterogeneous approach to the regulation of franchising presents yet another barrier to its use as a catalyst for international growth.
This book certainly does not present readers with a full answer to all the questions they may have about franchising in all the countries covered – that would require far more pages than it is possible to include in this one volume. It does, however, try to provide the reader with a high-level understanding of the challenges involved in international franchising in the first section and then, in the second section, explain how these basic themes are reflected in the regulatory environment within each of the countries covered.
I should extend my thanks to all of those who have helped with the preparation of this book, in particular Graeme Payne, Victoria Hobbs, Caroline Flambard and Melissa Murray, who have invested a great deal of time and effort in making it a work of which all those involved can be proud.
It is hoped that this publication will prove to be a useful and often-consulted guide to all those involved in international franchising, but needless to say it is not a substitute for taking expert advice from practitioners qualified in the relevant jurisdiction.
Mark AbellBird & Bird LLPLondonFebruary 2015
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Chapter 17
BELGIUM
Olivier Clevenbergh, Jean-Pierre Fierens, Noémie Verborgh and Eric-Gérald Lang1
I INTRODUCTION
Franchising is a not a new concept in Belgium. The first franchise network was already established in 1930. Today, franchising forms an integral part of the way goods and services are sold and rendered in the Belgian economy, and it is constantly expanding.
Based on recent figures from the Belgian Franchise Federation, approximately 100 franchisors and 3,500 franchisees are currently active on the Belgian market, covering 30,000 franchised outlets and resulting in a total turnover of €2.4 billion. Most of the franchise networks are active in business sectors such as food retail, do-it-yourself (construction) and ready-to-wear.2 International franchisors (mainly of French and US origin) represent about 47 per cent of the total franchise concepts in Belgium, whereas 53 per cent of the franchise concepts have a Belgian origin.3
The Belgian Franchise Federation has, since its establishment in 1992, supported the development of franchising in Belgium and has strong ties with the European Franchise Federation. Members of the Belgian Franchise Federation are mainly franchise networks (franchisors and franchisees), lawyers specialised in franchising and entities with a strong focus on franchising.4
No specific regulatory authorities are entrusted with regulating franchising in Belgium. However, the Belgian Ministry of Economy follows the development of franchising in Belgium. To evaluate the implementation of the legislation on
1 Olivier Clevenbergh and Jean-Pierre Fierens are partners and Noémie Verborgh and Eric-Gérald Lang are senior associates at Strelia.
2 Source: www.fbf-bff.be/nl/over-franchise/franchising-in-belgïe.html.3 Source: survey of the Belgian Franchise Federation of 2012: www.fbf-bff.be/Fbf/enquête_
franchise_NL.pdf.4 The authors are members of the Belgian Franchise Federation.
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pre-contractual obligations in commercial partnership agreements (including franchising), an Arbitration Commission was established in 2006. It makes (non-binding) recommendations on this legislation and any future amendments to it.
II MARKET ENTRY
i Restrictions
Under Belgian law, there are no restrictions on the development of a foreign franchisor’s network in the Belgian market, including by way of master franchising.
Foreign franchisors do not face restrictions on participation or foreign investment in a Belgian business entity.
ii Foreign exchange and tax
There is no foreign exchange control in Belgium and there are no specific tax regulations dealing with cross-border franchising, neither inbound nor outbound. Cross-border franchising may give rise to tax residency, withholding tax (notably on royalties) or transfer pricing issues, which are to be dealt with through proper planning and documentation. Belgium offers a broad range of double tax treaties and domestic exemptions allowing the setting of tax-efficient franchising structures.
III INTELLECTUAL PROPERTY
i Brand search
The Benelux Trademark Register (BTR) holds all deposited and registered brands that are valid in the Benelux (i.e., Belgium, the Netherlands and Luxembourg) and To verify whether a trademark is registered at EC level, the database of the Office for Harmonization in the Internal Market (OHIM) should be consulted. The database of the World Intellectual Property Organization also holds a registration of trademarks worldwide. Searches for registered brands can be conducted easily using these online trademark databases.
ii Brand protection
Trademarks must be registered to be protected (even though the use of certain unregistered names can provide some degree of legal protection under the rules of unfair competition). There are separate registration procedures for Benelux, EU and worldwide trademark registrations. If the franchisor licenses or sublicenses its trademark to the franchisee, the franchisee can (but it is not compulsory to) register the licence with the Benelux Office for Intellectual Property.
The registration process of a trademark involves the following steps: (1) filing of a trademark application and payment of a fee, (2) publication of the deposited application, (3) examination of the application and any opposition by third parties, and (4) formal registration of the trademark (if no opposition has been made or if the objections were rejected and the application complies with the registration requirements).
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The registration process with the BTR takes about four months, and with the OHIM it takes 26 weeks.
A trademark registration with either the BTR or the OHIM is valid for 10 years.
iii Enforcement
Most franchise agreements explicitly give the franchisee the right to use the franchisor’s trademarks or distinctive signs, or both, during the performance of the franchise agreement. If a dispute arises between the parties relating to this right of use, either party may sue the other party, including initiating urgent proceedings, to obtain provisional measures.
iv Data protection, cybercrime, social media and e-commerce
Belgian legislation on data protection5 applies to data controllers that are located in Belgium or use processing means that are subsequently available on the Belgian territory.
Franchisors and franchisees must comply with this legislation; for example, when dealing with the processing of data of their consumers (data subjects). The Belgian regulatory authority for matters relating to data protection is the Commission for the Protection of Privacy.
Failure to comply with the legal obligations on data protection can lead to sanctions imposed by both the Commission for the Protection for Privacy and the Belgian courts.
Cybercrime, social media and e-commerce are subject to several specific laws. These topics do not give rise to a lot of difficulties or disputes in relation to franchising.
IV FRANCHISE LAW
i Legislation
There is no legislation in Belgium that specifically and exclusively governs franchise agreements. Therefore, franchise agreements are regulated by ordinary Belgian law of contract (mainly under the Belgian Civil Code) and are subject to national and EU rules on competition law.
The only area in which franchising (and other, similar types of contract) is specifically regulated is the pre-contractual phase. These regulations are stipulated in the Disclosure Law, which has been recently made part of Section 2 of Book X of the Belgian Economic Code (see below). Although the legislators did not mention franchising as such in the Disclosure Law (since it refers to ‘commercial partnership agreements’ in general), it is clear that they had considered franchising as a contractual relationship under a typical commercial partnership agreement.
There is debate in case law and among scholars concerning the application of the Law of 27 July 1961 on the termination of exclusive distribution agreements to certain types of franchising agreements. The general trend, however, is that a franchise agreement
5 Law of 8 December 1992 on privacy protection in relation to the processing of personal data (as modified by the Law of 11 December 2008 to implement the Data Protection Directive).
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is a sui generis agreement that cannot be qualified as an exclusive distribution agreement even if it contains an exclusive purchase clause. The Law of 13 April 1995 on commercial agency should normally not apply to franchise agreements because the franchisee sells products in its own name and not on behalf of the franchisor. However, in certain specific circumstances, the courts have decided differently. Since May 2014, the Laws of 27 July 1961 and 13 April 1995 have also been added to the Belgian Economic Code.
ii Pre-contractual disclosure
Under Belgian law, the mandatory rules of Section 2 of Book X of the Belgian Economic Code regarding pre-contractual information in relation to commercial partnership agreements (the Disclosure Law) regulate the pre-contractual disclosure obligations of the franchisor towards a prospective franchisee. The Disclosure Law was initially part of the Law of 19 December 2005, which was recently replaced by Section 2 of Book X of the Belgian Economic Code, which entered into force on 31 May 2014. On that occasion, the legislators tried to clarify certain provisions of the law and take into account certain practical difficulties that have arisen ever since the Law of 2005 came into force. The Disclosure Law has a broad scope because it applies to all ‘commercial partnership agreements’, and these are:
agreements concluded between two parties, who each act on their own behalf and in their own name, pursuant to which one of the parties grants to the other, in consideration of a remuneration of any nature whatsoever, whether direct or indirect, the right to use, in the course of the sale of products or the provision of services, a business process, comprising one or several of the following features:• a common sign or brand;• a common trade name;• a transfer of know-how;• commercial or technical assistance.
Franchise agreements are one of the categories of the commercial partnership agreements covered by the Disclosure Law, and the franchisor is under an obligation to disclose pre-contractual information to the prospective franchisee.
According to the Disclosure Law, at least one month before signing the franchise agreement, the franchisor must provide the prospective franchisee with (1) a draft of the franchise agreement, and (2) a disclosure document, or pre-contractual information document (PID). This one-month period is intended as a cooling-off period to give the prospective franchisee time to evaluate the prospective business. During that period, the franchisee may not engage in any undertaking in respect of the franchisor, except for a confidentiality undertaking.
The PID consists of two separate parts. The first part must set out the ‘main contractual obligations’ of the yet-to-be-concluded franchise agreement, such as the remuneration of the franchisor (royalties, etc.), the consequences of the franchisee’s failure to comply with its obligations, the conditions for renewal, the non-competition restrictions, etc. The second part of the PID aims to give the prospective franchisee the necessary information for it to make a correct assessment of the commercial
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opportunity. This requires disclosure of certain information such as the history and state and ‘perspectives on the market’ from both a local and general point of view, history and experience of the franchise network, perspectives on the expansion of the network, etc. The main new feature of the PID is that the franchisor must disclose not only its ‘direct remuneration’, but also how its ‘indirect remuneration’ is calculated. Indirect remuneration is the amount it receives from third parties in relation to the franchise agreement (e.g., the principle of a margin on the products sold by the franchisor to the franchisee).
In the event that no draft agreement and PID are provided before the signing, or a draft agreement and a PID are provided less than one month before the signing of the agreement, or the franchisee has engaged in an undertaking before the end of such a one-month period, the franchisee may request the nullity of the whole agreement during a period of two years starting from the date of signing the contract. Failure to comply with the requirements with respect to part I of the PID (main contractual obligations) entitles the franchisee to invoke the nullity of the relevant provisions of the franchise agreement (i.e., the provisions not mentioned in the PID). The Belgian Economic Code has clarified that if the franchisor fails to comply with the requirements to provide the information required with respect to part II of the PID (information required to make a correct assessment), the nullity of the franchise agreement can only be sought if the conditions of the ordinary rules for avoiding a contract are met. This means that the franchisee has the burden of proving that its consent to enter into the agreement was affected because of the incomplete or inaccurate information in part II of the PID.
Ever since the Disclosure Law has become part of the Belgian Economic Code, franchisors with existing franchise agreements in Belgium also clearly have a disclosure obligation in these instances: (1) when they renew a fixed-term franchise agreement, (2) when they conclude a new franchise agreement with the same party or parties, and (3) when they amend a franchise agreement that has been in effect for more than two years. The scope of the pre-contractual information that the franchisors will need to provide in these instances is more limited than the pre-contractual information required before concluding entirely new franchise agreements. A simplified PID can be provided, showing the changes that have come about since the initial PID was provided.
The Belgian Economic Code has clarified that if the pre-contractual information (including the draft franchise agreement) provided is modified after it has been provided to the franchisee (but before the franchise agreement is concluded), the franchisor is obliged to provide a new PID (limited to the changes) to the franchisee, after which a new one-month cooling-off period must be respected before concluding the contract. This means in practice that it is only after the parties have reached an agreement on the final text of the franchise agreement that the one-month period can start. However, if a change to the franchise agreement was requested by the franchisee in writing, no new PID is required.
Furthermore, since the Disclosure Law has become part of the Belgian Economic Code, the franchisee can also waive its right to invoke the nullity of the agreement on grounds of failure to comply with the law. However, this waiver is subject to two conditions: (1) it can only be invoked after a period of reflection of one month following the signing of the agreement, and (2) the franchisee must expressly specify the grounds
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for invoking the nullity (for example, because the franchisor did not provide a PID at least one month before the signing of the agreement).
If a court declares the nullity of the agreement, the parties must be put back into the position as if the agreement had never been concluded. In practice, this means that the parties will have to reimburse each other for the costs that they have each incurred (such as investments, fees, costs relating to the concluding and signing of the agreement, etc.). However, some case law and doctrine consider that franchise agreements contain reciprocal obligations for the franchisor and the franchisee so that the parties compensate each other during the performance of the agreement and that, therefore, parties are not held by a restitution obligation.
The lack of a restitution obligation does not exclude the right of the parties to seek damages under ordinary Belgian rules, whereby the sum of the damages will be calculated by reference to actual costs and lost profits. The franchisee must prove the existence and extent of its loss.
If the term of two years in which to invoke the nullity under the Disclosure Law has elapsed, the franchisee can still invoke the nullity of the agreement under ordinary Belgian rules or seek damages, or both, if it can prove that it had been misled at the time of the conclusion of the agreement, and that it had suffered losses because of inaccurate or incomplete pre-contractual information provided by the franchisor.
Even though the purpose of the Disclosure Law is to regulate the pre-contractual phase, it contains a provision that goes beyond that. The Disclosure Law indeed stipulates that if in doubt, the franchise agreement must always be interpreted in the way that is the most favourable to the franchisee.
iii Registration
Under Belgian law, no specific registration requirements apply to franchise agreements. Franchisors or franchisees may, however, be subject to certain regulatory provisions, depending on their business (e.g., specific permits need to be obtained for businesses in the food industry, travel industry, etc.).
iv Mandatory clauses
There is no legislation in Belgium imposing the inclusion of certain mandatory clauses in franchise agreements. One inferred consequence of the Disclosure Law is that it seems that franchisee agreements must necessarily be concluded in writing (since a draft of the agreement must be communicated in writing), which is a deviation from the ordinary rules. For a contract to be qualified as a franchise agreement, it must have certain characteristics that have been laid down by case law, those being the partnership between two independent parties in which one party (the franchisee) distributes goods or services of the other party (the franchisor) in a network by using a common trademark, together with know-how that has been transmitted to the franchisee, and certain assistance given by the franchisor in exchange for remuneration to be paid by the franchisee. Therefore, it is advisable to include clauses in the franchise agreement that reflect these characteristics.
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v Guarantees and protection
There are several ways for a franchisor to secure payments that the franchisee owes. The most common are the personal guarantee of the franchisee (more specifically, a guarantee from the individuals who manage the company franchisee or who hold its shares) and a bank guarantee. Depending on the type of franchise, the franchisor can also add in the franchise agreement that it has a retention right over the goods that are delivered to the franchisee.
To ensure the most protection from non-payment by the franchisee, a franchisor is advised to conclude with the franchisee that the latter must provide several guarantees and preferably a third-party guarantee on first demand (e.g., bank guarantee). Recent amendments to the Belgian law of securities will allow a franchisor to obtain a pledge over the business of the franchisee. This was previously a security reserved for the banks. It remains to be seen whether the franchisors will make use of this opportunity, since they will then often come into conflict with the bank that finances the business of the franchisee. Other contractual protections are also possible, such as a call option on the business of the franchisee that is granted to the franchisor, combined with the right to set off the sums owed to the franchisee with the debts owed by the franchisee.
V TAX
i Franchisor tax liabilities
Belgian tax law does not contain specific provisions for franchising activities.The franchisor, being a company, is subject to Belgian corporate tax at a rate of
33.99 per cent on its net profit, as determined in accordance with Belgian generally accepted accounting principles and the Belgian Income Tax Code. Reduced rates can apply to small and medium-sized enterprises. Furthermore, different tax incentives are available under certain conditions, notably the Notional Interest Deduction (i.e., a notional interest tax deduction calculated on the company’s adjusted equity) and the Patent Income Deduction (i.e., an 80 per cent tax deduction on certain patent income).
A non-resident franchisor, being a company, is subject to Belgian non-resident corporate tax at the same rate and under similar rules and incentives. Subject to the relevant double tax treaty (DTT), only the profit derived through a local permanent establishment would prove taxable in Belgium.
Franchise fees derived from franchisors generally include royalty payments and, therefore, like dividend and interest payments are normally subject to the Belgian withholding tax at a rate of 25 per cent, unless a relief is available under applicable domestic or DTT provisions. Under Belgian tax law, this withholding tax is usually not creditable or refundable for non-resident franchisors.
Specific anti-abuse rules ensure that transactions are dealt at arm’s length, with a focus on affiliated parties or parties enjoying a favourable tax regime.
Franchisors will usually have to register and account for VAT on goods and services supplied to franchisees, in accordance with the Belgian VAT Code and the VAT Directive 2006/112/EC. Franchise agreements may include complex supplies that need to be segregated for this purpose. Other indirect taxes, such as excise or registration duties, can apply depending on the transactions.
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ii Franchisee tax liabilities
The franchisee, being a company, will be subject to Belgian corporate tax at the same rate and under the same rules and incentives as for franchisors – as specified above. All costs borne under the franchise agreement are, as a rule, tax deductible, subject to anti-abuse provisions and limitations for certain kinds of expenses.
Belgian withholding tax might need to be retained on certain payments – as also specified above.
Unless franchisees are involved in VAT-exempt businesses, they will usually have to register and account for VAT on goods and services supplied to their clientele, in accordance with the same Belgian VAT Code and VAT Directive 2006/112/EC. Depending on the business, franchisees will be able to recover all or part of the VAT-incurred input. Other indirect taxes, such as excise or registration duties, can apply depending on the transactions.
iii Tax-efficient structures
Tax efficiency of franchising structures should be examined cautiously before implementation. Where tax optimisation involves parties and assets (especially IP rights) to be located in certain jurisdictions, this can typically trigger withholding tax and transfer pricing issues.
In this respect, Belgium has a broad range of DTTs, which vary to a large extent in scope and conditions, providing relief for the withholding tax on royalty payments. Full exemptions exist notably under DTTs with Germany, France, Luxembourg, Ireland, Netherlands, the United Kingdom, Russia and the United States. Full exemptions also exist for interest and royalty payments between qualifying EU associated companies (requiring a 25 per cent direct holding) based on the Interest and Royalty Directive 2003/49/EC). Subject to certain conditions, Belgium grants foreign tax relief, compensating the withholding tax (up to 15 per cent) incurred abroad on interest and royalty payments.
Advance tax rulings can be requested conveniently from the Belgian tax authorities as means of seeking full legal certainty on the tax consequences of contemplated transactions. The ruling procedure may be initiated on a no-name basis and usually lasts between three to six months. In the distribution or franchise sector, rulings are frequently requested to confirm efficient transfer pricing policies from a Belgian tax perspective (e.g., cost-plus markup).
Various tax and non-tax reasons make Belgium a recognised place to locate certain distribution or financial functions.
VI IMPACT OF GENERAL LAW
i Good faith and guarantees
The Belgian Civil Code’s Article 1134 lays down a general obligation for parties to perform their contract in good faith. The principle of good faith has several consequences: it is used to interpret the contract, to fill in the gaps of the contract and to protect a party against the excessive behaviour of the other party. Belgian courts put the duty of good faith at the centre of the franchisors’ obligations because it is considered that the franchisor must
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make reasonable efforts for the franchisee’s business to be successful. Thus the franchise agreement stipulates a reinforced duty of good faith. Franchise agreements are regularly terminated by the courts on grounds of the franchisor’s contractual breach consisting in the non-compliance with the duty of good faith in its performance of the franchise agreement (e.g., failure to assist, delay in acting when a franchisee does not comply with its obligations and different treatment of franchisees in the same network). A concept close to that of good faith is the prohibition of the abuse of right. This can prevent a party from exercising a right in certain circumstances, notably when the benefit of the exercise of the right by such a party is greatly disproportionate to the damage caused to the other party. The abuse of right is sometimes invoked by a franchisee when a franchisor refuses to renew its contracts.
ii Agency distributor model
Under the Law of 13 April 1995 on commercial agency, which implements EU legislation on commercial agency, now included in the Belgian Economic Code, (the Agency Law), a commercial intermediary will be qualified as an agent if it is entitled to negotiate and possibly conclude an agreement in the name and on behalf of its principal. Under the Agency Law, the agent is entitled to a notice period or (additional) indemnity if the principal terminates the agreement.
Since a franchisee often does not solely act as an intermediary to negotiate or conclude an agreement in the name of the franchisor, but invests in its franchise project and bears an actual economic risk if the products or services are not being sold to the customer, case law hardly considers that the Agency Law applies to franchise agreements. Only if the franchisee sells products or provides services on behalf of the franchisor and meets the other criteria of an agent can the Agency Law apply.
On the other hand, a franchisee whose franchise includes a distributorship of goods may be qualified as a distributor and may benefit from the application of the Law of 27 July 1961 on the termination of exclusive distribution agreements (the Distribution Law), now also included in the Belgian Economic Code, if certain conditions are met. Under the Distribution Law, if the agreement is terminated, a franchisee–distributor is entitled to a reasonable notice period or a substitute indemnity plus additional compensation if the conditions for this indemnity are met.
iii Employment law
When a franchisor exercises strict authority over the franchisee (e.g., by giving the latter instructions and orders in too much detail) that leads to an actual lack of legal independence of the franchisee, and on condition that the franchisee is a natural person, the franchise relationship may be qualified as an employment contract. This means that the strict legislation on employment contracts becomes applicable. Legislation governing employer–employee relationships gives a lot of protection to the employee (e.g., regarding salary that is due when the employment contract is terminated) and imposes various obligations on the employer regarding tax and social security, which have a serious impact on the employer.
Franchisees have been qualified as employees more than once by the Belgian courts. Parties must therefore be careful when drafting and performing their franchise
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agreement. They should maintain an independent relationship to avoid the possibility of the court requalifying the franchise contractual relationship as one of employment. The franchisor should also make sure that the other elements that characterise a franchise agreement, such as the communication of know-how and the existence of a network, are present. Such elements can indeed justify to a certain extent the control exercised by the franchisor over the franchisee (e.g., to maintain the uniformity of the franchise network).
Another topic is the relationship between the franchisor and the franchisee’s personnel. Normally, the franchisor is not responsible for the compliance of the franchisee, who is an autonomous employer, with its obligations. In at least one instance, however, charges have been brought against a franchisor for non-compliance with the labour regulations by franchisees in its network.
iv Consumer protection
The Law of 6 April 2010 relating to market prices and consumer protection regulates the protection of consumers. Clauses that do not comply with this Law will be declared null. Since franchisees act with a business purpose and conclude franchise agreements to meet business needs, they are not qualified as consumers under Belgian law.
v Competition law
Franchise agreements are subject to competition law, both at EU level and at a national level.
The Law of 15 September 2006 on the protection of economic competition (the Belgian Competition Law) is the most important Belgian law on competition. Article 2 of this Law states that the parties must refrain from concluding agreements that result in a restriction of competition within the concerned Belgian market. This provision is in line with and nearly identical to Article 101 of the Treaty on the Functioning of the European Union (TFEU), which has direct effect in Belgium. Whereas Article 2 of the Belgian Competition Law concerns the Belgian market, Article 101 TFEU relates to the internal EU market.
A franchise agreement (or one of its clauses) that holds a restriction of competition may benefit either from the Block Exemption Regulation (under EU Regulation EC/330/2010) if its conditions are met or from an individual exemption.
Franchise agreements often contain non-compete clauses. For these clauses to be valid, they must be limited in time and place and are necessary to protect the transferred know-how and to maintain the identity of the franchise network. On the basis of the EU rules, non-compete obligations during the contract must be limited to five years. Post-contractual non-compete obligations are only valid if they are limited to one year after expiration of the agreement.
A franchisor is not allowed to impose, directly or indirectly, minimum or fixed resale prices to the franchisee. However, a franchisor can include a clause in the franchise agreement imposing maximum and recommended resale prices.
Franchisors often include a purchase exclusivity clause in the agreement. This clause imposes an obligation on the franchisee to (quasi-)exclusively buy the products from the franchisor or its approved suppliers. This type of clause is widely accepted because it is intended to maintain a certain degree of uniformity in the franchise network.
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Disputes relating to competition law can be brought before the Belgian Competition Authority or the Belgian courts. The Belgian Competition Authority is intended to protect mainly the public interest, whereas parties may bring their case before the Belgian courts to obtain relief for their own interests.
Case law is divided on the sanction for franchise agreements that contain forbidden competition clauses. Some defend the annulment of the entire agreement, while others accept that only the forbidden clause must be declared null.
vi Restrictive covenants
During the term of the franchise agreements, restrictive covenants such as non-compete clauses and purchasing exclusivity clauses are enforceable on condition that they comply with the competition legislation (see above).
During the term of the agreement when disputes arise concerning restrictive covenants, the Belgian courts will apply relevant competition laws and often accept the application of those covenants if they (1) comply with legislation; (2) have been concluded to maintain the uniformity, identity and quality of the franchise network; and (3) are not applied in an abusive way by one of the parties.
vii Termination
The termination of franchise agreements is governed by the general principles of Belgian contract law.
Under Belgian law, parties are free to decide to conclude a franchise agreement for a definite (fixed) term or an indefinite (open-ended) term. In practice, franchise agreements are often concluded for a fixed term with a possibility of (automatic) renewal. Whereas a fixed-term franchise agreement cannot be terminated before expiry of the term, a franchise agreement with an open-ended term may be terminated by either party at any time if a reasonable notice period is respected and served to the other party, and on condition that the termination is not abusive. In both cases, a franchise agreement may be terminated at any time if one of the parties commits a serious breach (e.g., failure to meet payment obligations under the agreement).
If the Agency Law or Distribution Law is found to apply to the franchise agreement (which is the case only in a minority of court decisions – see above), its termination provisions, which are of mandatory law, will prevail.
Post-term restrictive covenants such as confidentiality clauses and non-compete clauses are enforceable under certain conditions (see above).
With a view to maintaining the integrity of the franchise network at the end of a specific franchise agreement, some franchise agreements contain a clause granting the franchisor an option to take over the franchisee’s business (often including goodwill, a lease agreement, furnishings, material, stock, etc.) at a price (or method of calculation of the price) that is fixed in the agreement. Apart from the framework of a franchisor’s purchase of the franchisee’s business, a franchisee does not have a right under Belgian law to any indemnification (e.g., for loss of clientele) at the end of the franchise agreement.
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viii Anti-corruption and anti-terrorism regulation
Anti-corruption and anti-terrorism legislation is mainly included in the Belgian Criminal Code. This legislation is applicable to franchise agreements. We are not aware of case law on this matter that shows specific issues regarding franchising as such.
ix Dispute resolution
In an international context, the questions of which courts have jurisdiction and which law applies are determined, with respect to Europe, on the basis of EU law (Brussels I Regulation 44/20016 and Rome I Regulation 593/2008).7 As a result, the parties benefit from relative freedom to agree on the jurisdiction and the applicable law (subject to the possible application of local mandatory rules). The Disclosure Law states that the Belgian courts have exclusive jurisdiction to settle disputes resulting from the application of this Law and that Belgian law applies to such disputes. It is, however, generally considered that EU law (mentioned above) has pre-eminence over the Disclosure Law in that respect.
Internally, the Belgian ordinary courts (often the commercial courts) normally have jurisdiction over disputes arising out of the interpretation, performance and termination of franchise agreements. The parties have the possibility to lodge an appeal before the competent court of appeal against the decision rendered by the commercial court. On certain occasions, further appeal is possible before the supreme court in Belgium, the Court of Cassation. Like all EU Member States, the Belgian courts can refer questions to the Court of Justice of the European Union concerning the interpretation of EU law.
The parties can also include an arbitration clause in the franchise agreement, providing for national or international arbitration. Mediation can be used to resolve franchise disputes but is not mandatory.
Traditional judicial proceedings before Belgian courts often take a lot of time. Depending on the court where the case is pending, judicial proceedings in first instance tend to last approximately one year to 18 months. On appeal, normally proceedings last about 18 months to five years. Parties may refer the matter to Belgian courts, notwithstanding any pending lawsuit on the merits of the case, to obtain provisional measures (e.g., a measure restricting a former franchisee from continuing to sell under the franchisor’s trade name). To obtain such a provisional measure, the claimant must prove that there is a situation of urgency.
The costs for launching proceedings in Belgium are probably lower than in most other jurisdictions since the proceedings are mainly done in writing (it is exceptional to have live witness depositions, etc.). In judicial proceedings, the prevailing party is entitled to an indemnity covering the costs of the proceedings, which is fixed by law and capped in accordance with the amount being sought. The higher the amount being sought in the dispute, the higher the procedural indemnity will be.
6 Regulation (EC) No. 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters.
7 Regulation (EC) No. 593/2008 of 17 June 2008 on the law applicable to contractual obligations.
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VII CURRENT DEVELOPMENTS
Current discussions relating to franchising are often related to the pre-contractual obligations of the franchisor, its obligation to perform the franchise agreement in good faith and competition matters. The decision in 2005 to legislate only on the pre-contractual phase of the agreement was the result of a compromise with those wanting to have a law that regulates the franchise agreement completely and in particular its end, as is the case for agency and exclusive distribution agreements. There are still many supporters of such a specific regulation.
Although the Disclosure Law was recently adapted and clarified on the occasion of its becoming part of the Belgian Economic Code, a lot of questions raised by practitioners, and which would have a big practical impact, remain unanswered (e.g., if a new disclosure document must be provided in a simplified format by the franchisor, there is still a lack of clarity on what this simplified format should contain and what the actual sanction is if this obligation is not fulfilled).
The economic crisis that continues in Belgium has had an important impact, among other things, on the behaviour of franchisors with respect to the end market and in their relationship with franchisees. Concerning the end market, the competition to attract and retain customers is fiercer than ever, and the franchisors manage their networks as best they can to that effect. This can lead to discussions relating to price clauses in which the franchisors want to have retail prices applied by their franchisees. Since, in the current trend, franchisors try to push certain prices down, this does not, however, violate competition rules if those price clauses are drafted adequately. In addition, the franchisors compete with each other to develop their network and, in certain sectors such as retail or food, to obtain the best locations and to retain their franchisees. Another effect of the economic crisis is the increasing number of franchisee bankruptcies. This leads the franchisors to seek better protection and, as a result, gives rise to disputes concerning which party is to blame for the business’s failure.
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ABOUT THE AUTHORS
OLIVIER CLEVENBERGHStreliaOlivier Clevenbergh has specific expertise in the field of retail and distribution law and is an acknowledged specialist in franchising. He advises pre-eminent clients in this sector. He is also active in the field of corporate law. He combines his transactional practice with a contentious practice covering the same areas.
Mr Clevenbergh was admitted to the Brussels Bar in 1989 and was admitted as a solicitor of England and Wales in 1995.
Before being one of the founding partners of Strelia in 2013, Mr Clevenbergh was a partner at Stibbe, from 2000 and, in addition to his client activities, was managing partner of Stibbe Brussels from 1 January 2005 until 30 June 2011.
Mr Clevenbergh is listed as a ‘leading lawyer’ in the main international directories for dispute resolution and corporate law.
JEAN-PIERRE FIERENSStreliaJean-Pierre Fierens specialises in distribution law and corporate law. Over the past 10 years he has been appointed numerous times as sole arbitrator, co-arbitrator or chairman of an arbitral tribunal. He also acts as counsel in arbitration matters. He is an Accredited Mediator at the Centre for Effective Dispute Resolution.
Mr Fierens was president of the Dutch-speaking Bar Council of Brussels from 1998 until 2000. He was admitted to the Brussels Bar in 1973 and holds a master of laws degree from Columbia University (1980).
Before being one of the founding partners of Strelia in 2013, Mr Fierens was, from 1986, a partner in the Brussels office of Stibbe. He chaired the board of Stibbe and was the head of the litigation department at Stibbe Brussels.
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Mr Fierens has published numerous articles on distribution law in general and on franchising. He is listed as a ‘leading lawyer’ in the main international directories for dispute resolution.
NOÉMIE VERBORGHStreliaNoémie Verborgh started her career as a lawyer in 2009 at Stibbe and was part of the team that formed Strelia in 2013. She specialises in commercial dispute resolution, in particular in the field of distribution.
ERIC-GÉRALD LANGStreliaEric-Gérald Lang obtained a law degree from the Université libre de Bruxelles (ULB) in 2005 and a tax degree from the ULB in 2006. He started his career as a lawyer in 2006.
STRELIARoyal Plazarue Royale 1451000 BrusselsBelgiumTel: +32 2 627 00 90Fax: +32 2 627 01 [email protected]@[email protected]@strelia.comwww.strelia.com