Legal Framework for Franchising in Singapore

It should first be noted that there are no restrictions on any foreign or local company to franchise their business in Singapore, and there are no specific criteria that franchisors need to meet.

Relevant Laws and Regulations

Before the enactment of the Franchise Act 2020, Singapore did not have specific laws directly governing franchise operations. Franchising activities were primarily regulated under a combination of general commercial laws, including the Contract Act, the Competition Act, and the Consumer Protection (Fair Trading) Act. These laws provided a broad legal framework, addressing aspects such as contractual obligations, competition issues, and consumer rights, but they did not specifically cater to the unique aspects of franchising agreements.

The introduction of the Franchise Act 2020 marked a significant development in Singapore’s legal landscape, providing a dedicated legal framework for franchising. The Act aims to ensure a balanced and transparent relationship between franchisors and franchisees, thereby fostering a conducive environment for franchise business growth.

If we had to briefly summarize the Key Provisions of the Franchise Act 2020, we would note:

Disclosure Requirements: The Act mandates franchisors to provide prospective franchisees with a comprehensive disclosure document at least 14 days before the signing of the franchise agreement. This document must include critical information such as the business background of the franchisor, financial performance representations, fees and costs involved, and the terms and conditions of the franchise agreement.

Good Faith and Fair Dealing: The Act imposes an obligation of good faith and fair dealing on both franchisors and franchisees, ensuring that both parties act honestly and fairly in their dealings with each other.

Dispute Resolution: The Act outlines mechanisms for dispute resolution, encouraging parties to resolve conflicts through mediation before resorting to litigation. This approach aims to facilitate amicable resolutions and maintain the business relationship between franchisors and franchisees.

Intellectual Property Protection: The Act provides robust provisions for the protection of intellectual property, including trademarks, copyrights, and trade secrets, which are critical assets in franchise operations.

Termination and Renewal of Franchise Agreements: The Act specifies the conditions under which a franchise agreement can be terminated or renewed, offering greater clarity and protection for both parties involved.

Regulatory Bodies Overseeing Franchising

The regulatory oversight of franchising in Singapore involves multiple bodies, each playing a crucial role in ensuring compliance with the Franchise Act 2020 and related regulations.

Among these, we note:

Ministry of Trade and Industry (MTI): The MTI oversees the implementation of the Franchise Act 2020 and ensures that the regulatory framework supports a fair and competitive franchising environment. The MTI is responsible for formulating policies related to trade and industry, including franchising.

Competition and Consumer Commission of Singapore (CCCS): The CCCS enforces competition law and ensures that franchising practices do not result in anti-competitive behavior. It also oversees compliance with the Consumer Protection (Fair Trading) Act, protecting franchisees and consumers from unfair practices.

Intellectual Property Office of Singapore (IPOS): IPOS is responsible for the registration and protection of intellectual property rights in Singapore. It plays a vital role in safeguarding the intellectual property assets that are integral to franchising.

Singapore Mediation Centre (SMC): The SMC provides mediation services to resolve disputes between franchisors and franchisees. It promotes the use of alternative dispute resolution methods to maintain harmonious business relationships.

To these, it is also worth mentioning the existence of

The Franchising and Licencing Association (FLA) : The FLA is Singapore’s national franchise body, and its mission is to nurture and develop the country’s franchise industry.Companies can choose to become members of the FLA. By being a member of the FLA, companies are required to comply with the FLA’s Code of Ethics. FLA’s Code of Ethics has long been the only “normative” reference framework for franchising in Singapore. This code indeed contains     provisions on: standards of conduct; promotion; information on investment requirements; disclosure; limitation on use of others’ trademarks; transferability of franchise; notice of breach and time for remedy; termination with good cause; dispute resolution; etc.

Key Components of a Franchise Contract

Intellectual Property Rights

A franchise agreement fundamentally involves the buying and selling of the franchisor’s intellectual property, such as the licence for the franchisee to sell the products, use the trademarks, and adopt the technical and operational know-how of the franchisor. It is therfore crucial for a franchisor to protect its intellectual property rights (IPRs) before entering into a franchise agreement. IPRs include trademarks, patents, know-how, and other valuable features of the franchisor’s business.

Trademarks are generally protected under the Trade Marks Act (chapter 332), and know-how is protected by confidentiality provisions in the franchise agreement or by entering into a separate confidentiality agreement.

The permitted use of trademarks, trade secrets, and proprietary information should be stipulated in the franchise agreement. This will be useful for maintaining brand consistency while safeguarding intellectual property rights.

Under the Trade Marks Act 1998, the licencing of a trademark is required to be in writing and signed by or on behalf of the grantor. An exclusive franchise licensee of a registered trademark may bring a trademark infringement action against unauthorised use of the trademark by any third party.

The franchise agreement should specify the extent and scope of the rights being granted to prevent any unauthorised use of the franchisor’s rights and know-how. Most agreements also provide that upon termination, the franchisee’s right to use the licenced IPRs and know-how similarly terminates. Franchisors may require a grant-back of the improvements or ancillary IPRs developed by the franchisee to the franchisor for use in its network.

Operational Guidelines

The consultancy, training programme, and ongoing support provided by the franchisor should be expressly provided in the franchise agreement to guide franchisees. Doing so would enhance uniformity in operations and uphold brand standards across all franchise locations.

The procurement and supply chain procedures should also be stipulated as quality control measures to help brands maintain consistency in product and service offerings.

Franchisors usually include clauses that require the franchisee to maintain the quality, standards, and uniformity of the franchise. The franchise agreement may also specify the approach towards executing franchise operations, training, advertising, and other administrative matters relating to the operations of the franchise.

The franchise agreement may be drafted to provide for the above if the franchisor wishes to restrict the franchisee’s liability to transfer its franchise or to restrict transfers of ownership interests.

Financial Terms

Franchisors may require the franchisee to pay an initial franchise fee for the use of the franchisor’s brand and training of the franchisee’s staff.

The initial franchise fee and ongoing royalties, including the manner of calculation, frequency of payment, and method of payment, should be provided in the franchise agreement.

Confidentiality covenants in the franchise agreement are enforceable so that confidentiality may extend to the amount of the initial fee, ongoing royalties, including the calculation method, and their frequency.

There are no laws or regulations affecting the nature, amount, or payment of fees. Apart from withholding tax, there are no laws or regulations restricting a franchisee’s ability to make payments to a foreign franchisor in the franchisor’s domestic currency.

Disclosure Requirements

Pre-contractual Disclosures

The Franchise Act 2020 introduced specific pre-contractual disclosure obligations to ensure transparency and fairness in franchise relationships. These provisions are designed to provide prospective franchisees with essential information, enabling them to make informed decisions before entering into a franchise agreement.

In its time, FLA’s Code of Ethics stated that the disclosure document should be provided to prospective franchisees at least seven days prior to the execution of the franchise agreement. The disclosure document was to contain details of the current operations, investments, performance records, and any other information reasonably required by the franchisee that is material to the franchise relationship. This includes balance sheets and profit and loss statements.

Since the Franchise Act 2020, franchisors are required to provide a comprehensive disclosure document to prospective franchisees at least 14 days before the signing of the franchise agreement. This document must include detailed information about the franchise system, the franchisor, and the terms and conditions of the franchise arrangement.

The disclosure document must contain the following key elements:

Business Background of the Franchisor: Information about the history and background of the franchisor, including the business experience of the franchisor and its key management personnel.

Financial Performance Representations: Accurate and substantiated representations of the franchisor’s financial performance, if any, to give the prospective franchisee a realistic understanding of the business’s financial outlook.

Fees and Costs: A detailed breakdown of all fees and costs associated with the franchise, including initial franchise fees, royalties, advertising fees, and any other recurring or one-time charges.

Franchisee’s Initial Investment: An estimate of the initial investment required to establish and operate the franchise, covering expenses such as equipment, inventory, and leasehold improvements.

Territorial Rights: Information about the geographic territory granted to the franchisee and any exclusivity provisions or restrictions.

Obligations of the Franchisor and Franchisee: A clear outline of the responsibilities and obligations of both the franchisor and the franchisee, including support and training provided by the franchisor.

Intellectual Property: Details regarding the intellectual property rights associated with the franchise, including trademarks, patents, copyrights, and trade secrets.

Renewal, Termination, and Transfer Conditions: The terms and conditions under which the franchise agreement can be renewed, terminated, or transferred, ensuring the franchisee understands their rights and limitations.

Litigation History: Disclosure of any litigation or bankruptcy history involving the franchisor or its key management personnel that could affect the franchise relationship.

The Franchise Act 2020 imposes also an obligation of good faith and fair dealing on both franchisors and franchisees. This means that franchisors must provide the disclosure document honestly and without any intent to mislead, ensuring that all information presented is accurate and complete.

The franchisor must obtain a written acknowledgment from the prospective franchisee confirming the receipt of the disclosure document. This acknowledgment serves as evidence that the franchisee has been given the necessary information within the stipulated timeframe.

Failure to comply with the pre-contractual disclosure obligations can result in significant legal consequences for the franchisor. A franchisee who suffers loss or damage due to non-compliance may seek remedies, including damages or rescission of the franchise agreement. Additionally, non-compliance can undermine the franchisor’s credibility and reputation in the marketplace.

Ongoing Disclosure Obligations

The Franchise Act 2020 of Singapore not only establishes pre-contractual disclosure requirements but also imposes ongoing disclosure obligations on franchisors. These obligations are designed to ensure that franchisees remain informed about important changes and developments related to the franchise system throughout the duration of the franchise relationship. By mandating ongoing disclosures, the Act promotes transparency, trust, and fairness in the franchising sector.

Franchisors are required to provide ongoing disclosures to franchisees about material changes that could affect the franchise system or the franchisee’s business. This includes any significant developments related to the franchisor’s business operations, management structure, financial condition, or legal matters that may impact the franchisee.

The Act also mandates that franchisors inform franchisees of changes to the franchise system or the franchise agreement. Such changes may include alterations to operational procedures, marketing strategies, or policies that could affect the franchisee’s ability to conduct business successfully. Franchisors must communicate these changes promptly and clearly to ensure franchisees are not left unaware of significant developments.

Franchisors must provide franchisees with updates on financial performance, particularly if the franchisor has previously made representations about financial performance in the initial disclosure document. This ongoing obligation allows franchisees to assess their business’s performance against the franchisor’s expectations and make informed decisions about their operations.

Any changes to the fees and costs associated with the franchise, including increases in royalties, advertising contributions, or other financial obligations, must be disclosed to franchisees. This ensures that franchisees are aware of their financial commitments and can plan accordingly.

Franchisors are required to inform franchisees of any legal or regulatory changes that could affect the franchise business. This includes updates on compliance with applicable laws and regulations, as well as any legal proceedings that may impact the franchise system.

The ongoing disclosure obligations continue for the duration of the franchise agreement. Franchisors must maintain a commitment to transparency and open communication with franchisees, fostering a positive and collaborative franchise relationship.

Non-compliance with ongoing disclosure obligations can have serious repercussions for franchisors. Franchisees may seek remedies for any losses incurred due to a lack of essential information, and repeated failures to comply can damage the franchisor’s reputation and lead to disputes or legal action.

Franchisee Rights and Obligations

The Franchise Act 2020 of Singapore establishes a comprehensive framework that outlines the rights and obligations of franchisees, ensuring a balanced and fair relationship between franchisors and franchisees. Understanding these rights and obligations is crucial for franchisees to operate successfully within the franchising model.

Territory and Exclusivity

Under the Franchise Act 2020, franchisees have specific rights concerning the territory in which they operate. Typically, franchise agreements will designate an exclusive territory for each franchisee, granting them the right to operate their business without competition from other franchisees of the same brand within the specified area. This exclusivity is a crucial factor for franchisees, as it helps protect their investment and allows them to build a customer base without direct competition from other franchisees.

While franchisees enjoy territorial rights, they also have obligations to uphold these rights. Franchisees must actively promote and operate their franchise within the designated territory, ensuring they meet the franchisor’s expectations regarding market presence and brand representation. If a franchisee fails to fulfill their obligations, such as neglecting marketing efforts or underperforming within their territory, the franchisor may have grounds to reconsider the exclusivity arrangement.

Performance Standards

Franchisees have the right to clear and reasonable performance standards established by the franchisor. These standards may include sales targets, customer service levels, and operational procedures necessary for maintaining brand consistency. The Franchise Act 2020 encourages transparency in setting these performance benchmarks, allowing franchisees to understand the expectations placed upon them.

In addition to having the right to clear performance standards, franchisees are obligated to comply with them. Franchisees must adhere to the operational guidelines and quality control measures established by the franchisor to ensure the integrity of the brand. This includes maintaining the standards of service, product quality, and business operations as outlined in the franchise agreement. Failure to meet these performance standards can result in penalties, including potential loss of the franchise agreement.

Renewal and Termination

The Franchise Act 2020 provides franchisees with specific rights regarding the renewal and termination of their franchise agreements. Franchisees have the right to a fair process when their franchise agreement is due for renewal. This includes being informed of the terms and conditions for renewal and having the opportunity to negotiate changes if necessary. Furthermore, franchisees should be aware of the conditions under which the franchisor can terminate the agreement, ensuring that they are protected against arbitrary or unjust termination.

While franchisees have rights related to renewal, they also have obligations to fulfill for the agreement to be renewed. Franchisees must comply with the terms of the franchise agreement throughout its duration, including meeting performance standards and adhering to operational guidelines. Additionally, they must provide the franchisor with any required documentation or information necessary for the renewal process. If a franchisee fails to meet their obligations or engages in conduct detrimental to the franchisor’s brand, the franchisor may have legitimate grounds to refuse renewal.

Franchisor Rights and Obligations

The Franchise Act 2020 of Singapore also outlines specific rights and obligations for franchisors, ensuring they have the necessary authority to maintain brand integrity while also fostering a productive relationship with franchisees. Understanding these rights and obligations is crucial for franchisors to effectively manage their franchise systems.

Support and Training

Franchisors have the right to provide support and training to their franchisees as part of their ongoing commitment to the franchise system. This includes the development and implementation of training programs that equip franchisees with the necessary skills and knowledge to operate their businesses successfully. Franchisors can establish the format, frequency, and content of the training programs to ensure that franchisees align with the brand’s standards and operational procedures.

Alongside their rights, franchisors have a duty to provide adequate support and training to franchisees. This obligation includes initial training prior to the franchisee opening their business, as well as ongoing training to address updates in products, services, or operational practices. Franchisors must also provide support in areas such as site selection, equipment procurement, and operational guidance. By fulfilling these obligations, franchisors help franchisees succeed, which ultimately benefits the overall franchise brand.

Quality Control

Franchisors have the right to establish and enforce quality control standards within their franchise system. This includes setting operational guidelines, product specifications, and service standards to ensure consistency across all franchise locations. Franchisors can conduct regular audits and inspections to monitor compliance with these standards, thereby safeguarding the brand’s reputation and integrity.

In addition to their rights, franchisors have a responsibility to communicate quality control standards clearly to their franchisees. They must provide franchisees with the necessary resources and training to meet these standards. Furthermore, franchisors are obligated to support franchisees in achieving compliance, offering guidance and assistance when issues arise. By maintaining rigorous quality control practices, franchisors protect the brand and enhance customer satisfaction, which is vital for the success of the entire franchise system.

Marketing and Advertising

Franchisors possess the right to dictate marketing and advertising strategies for their franchise system. This includes creating brand guidelines, marketing campaigns, and promotional materials to ensure a cohesive brand image. Franchisors can also require franchisees to contribute to a national or regional marketing fund, which is typically used to support brand-wide advertising initiatives.

Franchisors are obligated to provide franchisees with effective marketing support and resources. This includes developing marketing materials, providing access to advertising platforms, and offering guidance on local marketing strategies. Franchisors must also ensure that the marketing initiatives are aligned with the overall brand strategy and that franchisees understand how to implement these campaigns effectively. By fulfilling their marketing obligations, franchisors can enhance brand visibility, attract customers, and drive sales for franchisees.

Dispute Resolution in Franchise Agreements

The Franchise Act 2020 of Singapore provides a structured framework for resolving disputes that may arise between franchisors and franchisees. The Act emphasizes the importance of resolving conflicts amicably and efficiently, thereby preserving the business relationship and minimizing disruptions. The Act explores three key dispute resolution mechanisms: Mediation, Arbitration, and Litigation.

Mediation

Mediation is a voluntary and confidential process where a neutral third party, the mediator, facilitates negotiations between the disputing parties to help them reach a mutually acceptable solution. Under the Franchise Act 2020, mediation is highly encouraged as the first step in resolving disputes. Mediation is generally less expensive and faster than arbitration or litigation, and its collaborative nature helps maintain the business relationship. The process is private, ensuring that the details of the dispute and its resolution are not made public. Either party can initiate mediation by proposing it to the other, and both parties must agree on a mediator, typically a neutral professional with expertise in franchise law. The mediator facilitates discussions, helping parties clarify their positions and explore potential solutions. If an agreement is reached, it is documented in a binding settlement agreement. If mediation fails, parties may proceed to arbitration or litigation.

Arbitration

Arbitration is a formal dispute resolution process where a neutral third party, the arbitrator, makes a binding decision after hearing arguments and reviewing evidence from both parties. The Franchise Act 2020 recognizes arbitration as a viable alternative to litigation, providing a more structured yet private setting for dispute resolution. The arbitrator’s decision is final and enforceable in court, and arbitrators are often experts in the field, providing knowledgeable decisions. Unlike court proceedings, arbitration is private, and the details are not publicly disclosed. The process is typically initiated by a clause in the franchise agreement that mandates arbitration for disputes. Both parties select an arbitrator or a panel of arbitrators; if they cannot agree, an appointing authority may be used. The arbitrator conducts a hearing where both parties present their case, including evidence and witness testimony, and then issues a binding decision, known as an award.

Litigation

Litigation, the process of resolving disputes through the court system, remains an option for disputes that cannot be resolved through mediation or arbitration, or when a party seeks judicial intervention. While the Franchise Act 2020 encourages mediation and arbitration, litigation is a viable option for disputes that require judicial authority and create a public record. Court decisions carry the weight of judicial authority and are enforceable by law, and litigation provides a comprehensive process with the power to compel discovery, subpoena witnesses, and apply legal standards rigorously. The process begins with the aggrieved party filing a complaint in court, outlining the nature of the dispute and the relief sought. Pre-trial proceedings include discovery and pre-trial motions to address preliminary issues. At trial, both parties present their case before a judge (and potentially a jury), including opening statements, witness testimony, cross-examination, and closing arguments. The judge issues a ruling that resolves the dispute, and the losing party may appeal the decision to a higher court if grounds exist.

Tax Implications for Franchises in Singapore

The tax landscape for franchises in Singapore is defined by specific regulations and obligations that both franchisors and franchisees must navigate. Understanding these tax implications is crucial for ensuring compliance and optimizing tax efficiency. This article explores two primary areas: Corporate Tax Considerations and Withholding Tax on Royalties.

Corporate Tax Considerations

Corporate Tax Rate: Singapore offers a competitive corporate tax rate, which is one of the lowest in the world, currently set at a flat rate of 17%. This favorable rate makes Singapore an attractive destination for franchise businesses, encouraging both local and international franchisors to establish operations in the country.

Tax Residency: For corporate tax purposes, a company is considered a tax resident in Singapore if the control and management of its business are exercised in Singapore. This status is crucial as tax-resident companies can benefit from Singapore’s extensive network of double tax treaties, which provide relief from double taxation and reduce withholding tax rates on various types of income.

Tax Incentives: The Singaporean government offers various tax incentives that franchises can leverage, including the Productivity and Innovation Credit (PIC) scheme, which provides tax deductions or cash payouts for investments in innovation and productivity improvements. Additionally, the Start-up Tax Exemption Scheme offers newly incorporated companies significant tax exemptions on their first $200,000 of chargeable income for the first three consecutive years of assessment.

Deductible Expenses: Franchisees can claim tax deductions for expenses incurred in the course of business operations. These include franchise fees, royalties, and other costs directly related to the operation of the franchise. It is essential for franchisees to maintain thorough and accurate records of these expenses to substantiate their claims.

Goods and Services Tax (GST): Franchises in Singapore must also consider the implications of the Goods and Services Tax (GST). The current GST rate is 8%. Businesses with an annual turnover exceeding S$1 million are required to register for GST. Franchisees must charge GST on their taxable supplies and can claim input tax credits for the GST paid on business-related purchases and expenses.

Withholding Tax on Royalties

Withholding tax applies to certain payments made to non-residents, including royalties. In Singapore, the withholding tax rate on royalties paid to non-residents is generally 10%, but this rate can be reduced under applicable double tax treaties that Singapore has with other countries.

Singapore has an extensive network of double tax treaties with over 80 countries, which often provide for reduced withholding tax rates on royalties. These treaties aim to prevent double taxation and foster international trade and investment. Franchisees and franchisors must review the specific provisions of these treaties to determine the applicable withholding tax rate and ensure compliance with both Singaporean tax laws and the tax laws of the treaty partner country.

The franchisee, as the payer of royalties to a non-resident franchisor, is responsible for withholding the appropriate amount of tax and remitting it to the Inland Revenue Authority of Singapore (IRAS). The tax must be withheld at the time the payment is made or deemed to be made. Failure to comply with withholding tax obligations can result in penalties and interest charges.

Franchisees must file a withholding tax form (Form IR37) with IRAS and make the payment within 15 days from the date of payment to the non-resident franchisor. It is essential to maintain accurate records of all royalty payments and the corresponding withholding tax remitted to ensure compliance and facilitate any potential audits by tax authorities.

Conclusion

Navigating the world of franchise contracts in Singapore requires a deep understanding of the legal landscape and careful consideration of key aspects developped in this paper. By paying attention to these key aspects, franchisors and franchisees can build strong, mutually beneficial partnerships that contribute to business.