Foreign franchise businesses in Thailand
Thailand’s franchise markets: Thailand has over 500 franchises and more than 12,000 domestic franchisees, mainly in the food and restaurant sector, but also regarding services, education, fitness, lifestyle, and retailing. The USA is the leader among international franchises and controls 65% of the international market. Pioneers of U.S. franchise brands include KFC, McDonalds, Burger King, Carl’s Junior, Starbucks, Swensen’s, Au Bon Pain, Pizza Hut, Krispy Kreme, IHOP, Cinnabon, Baskin Robbins, A&W, Subway, Coffee Beans and Tea Leaf, 7-Eleven, Outback Steak House, Sizzler, Domino’s Pizza, Dunkin Donuts, Anytime Fitness, and Taco Bell to name a few.
The general concept: The general idea is to start a business of choice at a selected location with a well-recognized brand. It bases on proven systems and processes that can be successfully replicated. While getting continuous coaching and support from experienced partners, the investor remains an independent entrepreneur.
Success factors: From a legal and tax perspective, the long-term success of the tried-and-true, time-tested business model depends on a solid corporate and investment structure, especially with respect to Thailand’s foreigner legislation,a beneficial franchise agreement which properly takes into consideration future developments on the business, regulatory, and on the taxation level a tax-efficient structuring of the cross-border business, especially with respect to withholding tax minimization, and legal advice and support starting from visa, work permit issues to leasing and employment agreements.
The franchisee’s negotiating power: The franchise system, the contractual framework of different agreements and the quality and standards set by the franchisor are essential to protect the brand and the franchise system’s image. Therefore, these elements are not negotiable. Other legal and business essentials as territory, a right of first refusal, contractual cure periods, and other tasks can be negotiated.
Franchised location, protected territory, intellectual property rights
Trademarks and more: The franchisor (sub-)licenses its trademark rights in the brand as well as additional or substitute trademarks, service marks, logos and commercial symbols in connection with the operation of the business. Also, the use of specified methods, procedures, standards, and specifications is educated to the franchisee, which qualifies as a trade secret under the Thailand Trade Secrets Act of 2002. All IP might be improved, further developed or otherwise modified from time to time.
The protected territory: Typically, the franchise is personal in nature and may not be used at any location other than the franchised location, and can’t be delegated, subfranchised, or sublicensed. An area surrounding the franchised location is defined as protected territory and the franchisor covenants not to operate or to license to anyone else the right to operate any business from any other location in the protected territory.
Thailand’s regulatory framework on franchises
Positive stance: Thailand’s Ministry of Commerce (Department of Business Development) actively promotes franchising as a “business strategy which could help franchisor and franchisee to grow their business and many of Thai franchise brands are now running stores abroad.”
Unregulated business: Franchise business is currently unregulated and needs no license. The Trademark Act, the Trade Competition Act, Patent Act, Copyright Act, Trade Secret Act, and Trade Competition Act, Foreign Business Act, etc. apply and have a significant impact on the franchise businesses.
No franchise whitepaper: Under current legislation, there is no need to prepare a franchise disclosure document (FDD, UFOC) with 23 specified areas of disclosure to provide franchise buyers with vetted and validated information that can be used to make an educated decision.
Draft legislation: Franchise is defined under the pending draft of Thailand’s Franchise Business Act as „the operation of a business in which one party, called a ‘franchisor’, agrees to let the other party, the ‘franchisee,’ operate the business using the forms, systems, procedures and intellectual property rights of the franchisor, or to use its rights to operate a business during a specified time or in a specified area, such operation being under the direction of the franchisor’s business plan, and the franchisee having a duty to reimburse the franchisor.“
License requirement: Under the current draft version, the franchisee will require a franchise license and the franchise agreement has to be in written form and registered with the Ministry of Commerce. The Franchise Commission Agency will be created as a regulatory body.
Professional services in the franchise industries
PUGNATORIUS Ltd. is the Bangkok-based specialist provider of transactional legal and tax advice on foreign investments in Thailand’s manufacturing and service industries as well as property developments and acquisitions.
In the franchise industry, the law firm provides, in particular, these seven professional services:
#1. Adoption to Thai laws: Support and assistance in the adjustment of U.S./international franchise systems to Thailand’s civil law system, regulatory framework, and taxation rules.
#2. Corporate structure: Designing and implementing a protected Thai corporate structure as a legal vehicle for the international franchisor in Thailand. Also, setting up a Thai Co. Ltd. for the franchisee in accordance with requirements set by the franchisor.
#3. Compliance: Review of current franchise projects regarding compliance under Thai laws and regulations, as well as tax reduction opportunities.
#4. Acquisition: Legal support and assistance of investors in the acquisition of franchises in Thailand. Negotiation of protected territory, renewal rights, Transaction support services in the evaluation of commercial conditions, franchise fees, advertising and promotion support, and other business aspects, based on deep market knowledge.
#5. Development of new Thai franchise projects including licensing and tax structuring. Preparation for internationalization of local franchises.
#6. Intellectual property management: Drafting and structuring of trademark agreements and other IP rights to protect the franchise brand. Registration of trademark licensing with the Thai authorities. Prevention, investigation, detection, and prosecution of IP right infringements. Confidentiality agreement with a franchisee.
#7. Ongoing assistance: Continuous support and assistance as a franchise lawyer as well as general legal counsel on the ongoing business. Franchise litigation.
PUGNATORIUS Ltd. has a unique hands-on franchise industry experience and knows the typical tasks and steps to enter the Thai market by an international franchise brand.