Franchise taxes: what to assess before buying

A well-known brand does not guarantee that two outlets will face the same tax burden. Business activities, location, turnover and ownership structure can all affect tax treatment and the amount payable. Before entering the Brazilian franchise market, it is worth carrying out a tax assessment: this will help you establish whether the figures presented by the network make sense for the company you intend to set up.

1. Identify who is responsible for tax compliance

Law No. 13,966/2019, known as Brazil’s Franchise Law, regulates business franchising in the country. It establishes that the relationship between franchisor and franchisee constitutes neither a consumer relationship nor an employment relationship. Buying a franchise means taking on a business activity, not acquiring an investment with guaranteed returns.

The franchisee company is responsible for its own tax obligations when operating the outlet. Support from the brand, or a recommendation to use a particular accountancy firm, does not automatically transfer that responsibility to the franchisor.

Before signing an agreement, clarify who will:

• Set up the issuing of Brazilian tax invoices (notas fiscais) and maintain product and service records.
• Calculate taxes, submit returns and monitor outstanding compliance issues.
• Update tax settings when operations or legislation change.
• Correct errors and provide explanations during a tax inspection.

Distinguish operational guidance from professional responsibility. A system supplied by the network may help organise sales, but that does not mean all its tax settings are appropriate for your outlet. Ask your accountant to validate the configuration before trading begins.

2. Check business activities, location and ownership structure

The first step in the assessment is not to choose the lowest tax rate: it is to describe the business accurately. Give your accountant a description of the franchise, the products it will sell, the services it will provide and the planned sales channels.

An outlet may combine retail and services, requiring appropriate tax treatment for each revenue stream. Its codes under Brazil’s National Classification of Economic Activities (CNAE) must reflect the activities actually carried out. Copying another outlet’s registration details without reviewing them can create inconsistencies.

Location matters too. Depending on the operation, you will need to check registration requirements, state or municipal rules, the issuing of tax documents and any specific tax treatment applying to goods or services. Do not assume that an outlet in another city provides a directly applicable tax benchmark.

Also disclose who the owners will be and what interests they hold in other companies. This information can affect eligibility for Simples Nacional, Brazil’s simplified tax regime, and needs to be examined before the company is incorporated.

Ask for a written conclusion setting out which activities will be registered, which tax regimes are legally available and what information is still needed to make a decision. This avoids turning a commercial assumption into a premature tax choice.

3. Recalculate the tax figures in the sales presentation

Simples Nacional, governed by Complementary Law No. 123/2006, is neither automatic nor necessarily the lowest-cost option for every franchise. Eligibility and suitability depend on the company’s characteristics and the applicable rules. Where relevant, your accountant should compare it with other regimes, such as lucro presumido (presumed profit) and lucro real (actual profit).

Ask the franchisor for the assumptions behind its tax estimate. A standalone percentage of sales is not enough. Ask which business activity, tax regime, turnover band and location underpin the calculation, and whether any taxes payable fall outside the estimate presented.

When modelling your own outlet’s tax costs, pay particular attention to:

• The separation of retail and service revenue, where applicable.
• The tax treatment of the products actually sold.
• Withholding taxes and obligations relating to services purchased.
• Payroll-related charges and whether these are shown separately or included with other costs in the budget.
• The effect of revenue growth on taxation.

Do not assume that royalties, advertising or other expenses automatically reduce taxes. Their tax effect depends on the regime and the nature of each payment. Ask your accountant to explain the treatment used, so that the model does not include unjustified deductions.

4. Organise documents before making a commitment

The franchise disclosure document, known in Brazil as the Circular de Oferta de Franquia (COF), must be provided in Portuguese and presented clearly and accessibly. Under Law No. 13,966/2019, it must be delivered at least ten days before the signing of the agreement or preliminary agreement, or the payment of any fee to the franchisor or a person or company connected to it. This is a minimum interval, not a deadline for completing your assessment.

Use this period to cross-check the business description and proposed charges against your accountant’s assessment. The COF is not a substitute for a tax study tailored to your future outlet.

Keep contracts, proof of payment and tax documents from the very first expenditure. Agree with your accountant how to record capital contributions, equipment and other set-up costs, including amounts paid before the company is incorporated. Do not automatically treat all investment expenditure as tax-deductible.

Practical conclusion: before buying, obtain a tax model tailored to your business, with documented assumptions and clearly assigned responsibilities. The network’s estimate is a starting point; your decision should reflect the company you will actually operate.