Franchising in Germany

The past ten years have seen the number of people wishing to open a franchise business in Germany triple. That’s mainly attributable to the lack of specific legal provisions governing the conclusion of franchise agreements in Germany; however, some general provisions of contract law do apply.

While resolving franchise disputes in Germany, courts tend to rely on the general provisions of liability, consumer protection, licenses, IP, competition & antitrust laws. EU law is also directly applicable.

Entrepreneurs seeking to launch a franchise business in Germany can do so by establishing an LLC, JSC or LLP in Germany. In any of those legal forms, franchisors grant their franchises to individual franchisees. The latter are then granted the right to establish a management company in Germany in which they must own a controlling stake & be managing directors.

The franchisee are then allowed to franchise through their management company; however, that doesn’t necessarily mean that they become partners. The franchisor usually requires franchisees to provide information about their background, training & financial situation. Unlike a franchisor, whose company details are usually publicly available, information about a potential franchise is usually limited to what they provide to the franchisor upon request.

Most franchisors charge a minimum monthly fee that’s independent of turnover. In addition, it’s a common practice for franchisors to require payment of a certain percentage of the franchisee's monthly turnover (the so-called ‘advertising fee’). 

Under German law, renewing the franchise agreement isn’t permitted. However, such a clause is frequently included in a franchise agreement. If there’s such an option, the franchisee can notify the franchisor of unilaterally exercising their right to renew a franchise agreement in Germany for an agreed period.

If a franchise agreement provides for such an option, it also provides the franchisor with a right to not extend an agreement if the franchisee doesn’t comply with the agreement’s standards or has breached its terms.

The term of validity of a franchise agreement must ensure the amortization of the franchisee's investment. This must be taken into account when determining the initial duration of a franchise agreement.

Most franchise agreements provide the franchisor with a right to oversee the franchisee's compliance with quality standards by paying unannounced inspection visits. It’s a common practice for franchisors to have their regional managers visit the franchisee & conduct such inspections. If any violations are detected & if the franchise agreement provides for penalties, they may be imposed.

German law allows the franchisor to make certain changes to the franchise agreement & requires the franchisee to comply with them. To be able to do that, they must:

• notify franchisees beforehand;
• ensure that the changes have no undesirable effect on the franchisee.

Income Tax

Income tax is determined pursuant to the Income Tax Act, if the income is derived from franchising activities. If the franchisee is a legal entity, they must pay corporate tax. In this case, corporate income tax is the equivalent of personal income tax.

Businesses managed by individuals or legal entities must pay a nineteen percent VAT.  A reduced VAT of seven percent is applied to the sale of food, books & magazines & artworks. 

Trade Tax

Trade tax is paid on income derived from local business operations. Its rate varies from seven to eighteen percent & depends on the establishment’s location.