Franchise Agreement - Latam

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2 Franchise Agreement - Latam

3 Brazilian Franchise Law and Disclosure Requirements Article 2 of the Brazilian Franchise Law (Law No of December 15, 1994) defines a commercial franchise as a system whereby a franchisor licenses to the franchisee the right to use a trademark or patent, along with the right to distribute products or services on an exclusive or semiexclusive basis and, possibly, also the right to use technology related to the establishment and management of a business or operating system developed or used by the franchisor, in exchange for direct or indirect compensation, without, however, being characterized as an employment relationship.

4 Brazilian Franchise Law and Disclosure Requirements The franchise law requires the delivery of a franchise offering circular, by the franchisor to prospective franchisees, containing several aspects of the business, at least 10 days prior to the execution of any binding document related to the franchise and receipt of any payment. Even when international franchise agreements are governed by foreign law and elect foreign jurisdiction, the delivery of an offering circular to a franchisee, providing the information required by the Brazilian Franchise Law, is extremely advisable to comply with the local law, since the franchise business will be operated in Brazil.

5 Brazilian Franchise - Impositive Clauses Clauses imposing to the franchisee the obligation of acquiring goods and services from suppliers indicated and approved by the franchisor only, are accepted in Brazil. Article 3, XI of the Brazilian Franchise Law establishes that the franchise offering circular must inform if this is an essential condition of the business, and provide to the prospective franchisees a completed list of the suppliers. Although the law is silent in relation to non-competition clauses, Brazilian courts have ruled that these clauses are acceptable provided that the noncompetition period imposed to the franchisee lasts for a reasonable time after the end of the franchise agreement (two years is normally accepted).

6 Registration Requirements: INPI and Central Bank The registration (a LPI usa o termo registro e não averbação para contratos de franquia) of international franchise agreements at the Brazilian Trademark and Patent Office (INPI) is required for the following purposes: Make the agreement effective against third parties, Allow the remittance abroad of royalties and other payments connected with the franchise due to the foreign franchisor, and, Qualify the franchisee for tax deductions of the aforesaid payments for income tax purposes.

7 Registration Requirements: INPI and Central Bank The INPI has a legal term of 30 days to issue a decision approving or denying the registration of the agreement presented for registration, whether, or to issue an official action requesting additional information and/or alterations in the agreement. In practice, the INPI takes 40 days to render the decision or to issue the official action. After the issuance of the decision approving the registration, the INPI will issue the Certificate of Registration of the agreement within the next 15 days. The agreement must, then, be registered at the Brazilian Central Bank in order to enable the remittance of the payments due to the franchisor. This registration is a very simple procedure and can usually be completed in about two days.

8 Taxation on Remittance of Royalties Abroad The following taxes apply to the remittance of franchising royalties abroad: Withholding tax 15% of the total amount remitted (less CIDE). The parties may agree which of them will bear the tax. If this burden fall on the franchisor, the franchisee will make the payment to the Brazilian tax authority in the name of the franchisor, and provide the franchisor with the payment receipt so that he may claim tax deduction in his country (provided there is an agreement to avoid double taxation with Brazil) CIDE Intervention Contribution on the Economic Order 10% of the gross amount due (to be paid by the franchisee) IOF (Financial Transaction Tax) checar com Dr. Miguel ISS (Service Tax) - Idem PIS/COFINS-Import - Idem

9 Franchise in Latam - Chile Chile MNA This country is a very attractive market with steady economic growth, a safe legal and business climate that accounts for the continued success in franchise expansion. Because of the limited size and the conservative nature of the local entrepreneurs, franchise companies should be patient and expect several meetings prior to any serious commitment. Franchise agreements are not subject to specific regulations. Their validity, binding nature and enforceability has been recognised by the civil and anti-trust courts, whose rulings have: Defined and characterised each type of agreement. Regulated permissible terms. Established the circumstances in which they are null and void.

10 Franchise in Latam - Argentina Argentina MNA Even though Argentina continues to recover from its last financial collapse at record-growth levels, it is still considered by most to be a very fragile market. Unemployment figures register as one of the highest in the Americas making for a very nervous investment climate at this time. Continued price-control measures and the rise in tourism are setting the stage for attractive future possibilities. To date, Argentina has not adopted specific franchising legislation, enabling the parties to reach agreements own their own terms without material governmental intervention. Under Argentine law, those agreements that are not specifically regulated by the law are called unnominated agreements and are governed by the free agreement of the parties.

11 Franchise in Latam - Uruguay Uruguay MNA Years ago, when a franchise or development agreement was awarded to someone in Argentina, this small neighbor was traditionally included as part of the package. This was mostly for two reasons; the size of the market and the dependence on Argentina for the majority of their exports. Uruguay took a different direction the last time that its neighbor went into financial crisis by reaching out to the rest of the world with their exports, solidifying free trade agreements and a very favorable and relaxed business climate. There are no specific laws dealing with franchising in Uruguay. Franchises operating in Uruguay are subject to the same commercial laws as any other company doing business in the country. The relationship between the franchisor and the franchisee is established by a private agreement between the two parties. Contracts can include an arbitration clause, which is recommended to avoid the cost and delays of utilizing the courts system.

12 Franchise in Latam - Colombia Colombia MNA In spite of their challenges with guerrilla warfare and the drug trade, Colombia continues to show steady economic growth. Large population centers may lure the attention of some, however, safety continues to be a major concern and many franchise systems are deferring options when it comes to this Andean nation. In Colombia, there are no laws that govern Franchise Agreements. Under this understanding, the Franchise is known like a non-typical contract because it reflects a legal business that is not ruled by a code and its clauses are freely negotiated by the parties. In consequence, as the Franchise is regulated mainly in the frame of a Commercial Contract, the general contract system and obligations of the Civil and Commerce Code apply, which deal with the principle ruling acts, contracts and civil law obligations (effects, interpretation, extinction, mode, cancellation or termination).

13 Franchise in Latam - Colombia Venezuela MNA Just as one thought that things could not get any worst, Pres. Hugo Chavez was re-elected for a third term. This will be a catastrophic blow to foreign investment and future business expansion in this now-declared communist state. In his inaugural address, Chavez vowed to introduce a new constitutional amendment to make him president for life. In this same speech, he declared measures to socialize ( seize ) private industry including the banking sector. With all of the uncertainties, and not a clear picture on how small businesses will fare, it is recommended to stay away for now and focus on other markets in the region. American investors must be informed of the restrictions for currency exchange control implemented in February 2003 by the Venezuelan Government. Restrictions are regulated by the Comisión de Administración de Divisas (CADIVI), where Venezuelan importers are required to submit detailed information regarding specific import transactions. CADIVI states the exporter, must provide supporting documentation when requested.

14 Franchise in Latam Peru, Ecuador and Bolivia MNA Peru, Ecuador and Bolivia The socio-political landscape does not fare well for these Andean nations. Leftist governments firmly entrenched in power, assisted by deep financial crisis, make local sizeable investments unlikely. The poverty levels rate amongst the highest in the Americas.

15 Franchise in Latam - Peru Peru There is no special legislation governing franchising. Franchises in Peru are subject to general commercial law: Decision 486, Decision 608, Decision 291 of the Andean Community, and the general antitrust law. According to articles 162 through 164 of Decision 486, a written license agreement must be registered at the patents and trademarks office. Prospective franchisors need to be aware of a 30% income tax on royalties, 19% value added tax (paid by the local company) and import tariffs of 0, 9, and 17% depending on the type of goods. Countries that have signed double taxation agreements with Peru have a different regime on royalties and withholding income tax (the U.S. is not included.)

16 Franchise in Latam - Bolivia Bolivia There are no specific franchise laws. Franchise agreements, however, must be registered before the Commerce Registry. The only limitation with regards to franchise agreements is tax-related, in that royalties remitted abroad are subject to a 12.5% withholding tax Approval and Registrat

17 Franchise in Latam - Ecuador Ecuador Although not mandated by Ecuadorian law, experience has shown that both foreign and local investors in franchises benefit from the registration of their franchise agreements with the mercantile registry of the city or province where the franchise is to be set up. Registration and notarization of these contracts elevates these documents to the level of public instruments which in turn provides additional evidentiary protections to the parties in the event of a future contractual dispute. With registration (provided that individual clauses do not conflict with the country s civil or commercial code) the parties can be confident that their franchise agreement will control the parties obligations and duties.

18 Latam The Future MNA With a larger combined population than that of the United States, the region continues to be the wise choice for expansion for many international franchise concepts. European and Australian brands have recently discovered the benefits of doing business here and have experienced rapid growth within their respective systems. For franchise systems entertaining expansion into the region, the recommendation is to focus on growing as an extension of a company s current borders, either into Mexico or Puerto Rico, creating a foothold and the necessary experience in adapting to the local business climate. Having said this, do not discount a truly qualified candidate no matter where he or she comes from. These are few and far between and if a concept draws the interest of one of these unique individuals, one must take a serious look.

19 Contato São Paulo - Rua Fidêncio Ramos, 308 Torre A - 2º andar Vila Olímpia - São Paulo - SP Fone: Fax: Rio de Janeiro Av. Treze de Maio, 13 - Sala 2319/2322 Centro Rio de Janeiro - RJ Fone: / contato@mnadv.com.br

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