Franchise agreement - how should it be accounted for?
Franchise, otherwise known as franchising, is a rather specific sales system that involves constant and close cooperation between two companies. The franchisor gives the rights and indicates the obligations of the franchisee. In addition, it provides its partner with a brand and - most importantly - knowledge. Provisions on this subject are included in the franchise agreement.
Franchise agreement and initial franchise fee
Under the franchise agreement, as already mentioned, rights are transferred (e.g. to use the company's name and logo), including licenses and patents. Then the franchisor charges an initial franchise fee, which is documented by an invoice. How should a taxpayer conducting simplified accounting account for it?
In the opinion of the tax authorities, the franchise agreement is similar to a license agreement, therefore, if the value of the initial franchise fee exceeds PLN 10,000 (net for active VAT payers, gross for entities exempt from VAT), and the rights and licenses will be used for a longer period than 1 year, the taxpayer should treat it as an intangible asset, and thus - subject to depreciation. From January 2018, the one-time depreciation limit was increased from PLN 3,500 to PLN 10,000. Therefore, in the opinion of the Company, the above means that the initial fee incurred constitutes an expense for the acquisition of a license, which, under the Corporate Income Tax Act, is an intangible and legal asset subject to depreciation. The criteria which under Art. 16b paragraph. 1 above Acts are necessary to recognize that the license constitutes an intangible asset, have been met, because: The above position is confirmed by the interpretation of the Director of the Tax Chamber in Poznań of November 28, 2012, ref. no. ILPB4 / 423-281 / 12-2 / ŁM: “(...) In connection with the granting of a franchise permit to the Company, the Company obtains the right to use the System developed by the Franchisor. The individual elements of the System are intangible assets that are protected under PA or PWP and, in principle, may be licensed (trademark or know-how). In the opinion of the Company, the right to use the System and its components is granted to the Company on the basis of a license agreement, i.e. the Company is granted a comprehensive license to use the trademark, know-how and other legally protected elements.
- the purchase of a license is made by the Company in connection with its business activity and
- the license in question will be used by the Company for a period longer than one year (...). "
The company's explanations were found to be correct.
Amortization of the initial franchise fee
Pursuant to Art. 22b paragraph. 1 point 5 and point 7 of the Personal Income Tax Act (hereinafter: updof), the acquired goods suitable for economic use on the day of acceptance for use are subject to depreciation:
- value equal to the obtained information related to industrial, commercial, scientific or organizational knowledge (know-how)
- with an expected period of use longer than one year, used by the taxpayer for the purposes related to his business activity or given by him for use on the basis of a license agreement (sub-license), rental agreement, lease or leasing agreement, known as intangible assets.
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The period of making amortization write-offs on intangible assets may not be shorter than 60 months (5 years) in the case of other CCI, which results from Art. 22m of paragraph 1 point 4 updof. Consequently, the maximum depreciation rate in this case is 20% per annum.
The taxpayer keeping the revenue and expense ledger, the aforementioned intangible assets, should show in the register of fixed assets and intangible assets. On the other hand, depreciation write-offs should be included in column 13 of the ledger - other expenses. In the case of lump sums, the intangible assets should be shown in the relevant records in which the company's property is shown.
Franchise agreement and additional fees
In a situation where, apart from the initial fee, the entrepreneur incurs other fees, e.g. depending on the profit achieved, they should be settled directly in costs. The taxpayer then does not treat them as intangible assets. When keeping the KPiR, you should enter them in col. 13 of the book - other expenses. On the other hand, entities taxed in the form of a lump sum, due to the fact that they do not keep records of costs, do not book such expenses. However, as a rule, they are obliged to store invoices that document them.