Buying a Franchise in Egypt: Who Pays the Tax on Franchisor Fees?

When comparing two brands in Egypt’s franchise market, one may appear to charge lower fees, yet its tax clauses could make it more expensive in practice. The question is not simply how much the franchisor charges, but also whether that amount includes tax, who bears it and which documents are needed to make the payment. Before signing, establish the clear cost of each fee to your business, particularly if the franchisor is based outside Egypt.

1. Separate the fee from its actual cost

Start with a schedule of every payment you will make: the initial franchise fee, ongoing fees, marketing contributions, software, training and any other services. Do not group them all under ‘brand fees’, as their tax treatment may differ according to the nature of the payment, the recipient’s identity and where the service is provided and used.

For each item, record the name of the entity issuing the invoice, its country of residence, the currency, the payment due date and whether the price includes or excludes tax. Then ask your tax adviser to determine the appropriate treatment, rather than relying solely on the description chosen by the franchisor.

There is a distinction between the amount the franchisor receives, the cost you bear and any sums that must be paid to the tax authority. Nor should you assume that every tax payment can be deducted or recovered: this depends on the legal requirements, the nature of your business and its supporting documentation.

Ask for a written answer to one specific question: what is the total cash outflow required to settle each invoice correctly? This provides a better basis for comparing brands than the advertised fee alone.

2. Understand Egypt’s framework before applying a foreign model

Egypt has no standalone, comprehensive franchise law, nor a general franchise-specific regime requiring a standard disclosure document or registration of the franchise agreement with a specialist regulator. However, this does not exempt the relationship from general laws or tax obligations.

Contractual obligations are governed by Civil Code No. 131 of 1948 and Commercial Law No. 17 of 1999, depending on the nature of the relationship. Legislation relevant to fees includes Income Tax Law No. 91 of 2005, Value Added Tax Law No. 67 of 2016 and Unified Tax Procedures Law No. 206 of 2020, as amended, together with their associated implementing rules.

There is no single tax treatment that applies to all franchise payments. Payments to a foreign franchisor may require an assessment of withholding tax rules, while some services supplied from abroad call for a review of VAT obligations and the reverse charge mechanism where its conditions are met.

A double taxation treaty between Egypt and the recipient’s country may also affect the treatment, but treaty relief should not be assumed to apply automatically. You must check the treaty in force, the classification of the income, the recipient’s status and the required documentation. Do not simply copy a tax rate from another brand’s agreement or accept a verbal assurance that ‘overseas transfers are exempt’.

3. Examine clauses guaranteeing the franchisor’s net payment

Clauses requiring the franchisor to receive its fees in full, without any deduction or withholding, deserve particular scrutiny. Such wording may oblige you to increase the payment so that the franchisor receives the agreed net amount after tax. The stated fee can therefore become a higher actual cost.

By contrast, if the agreed amount is a gross sum from which statutory withholding is permitted, the financial outcome will be different. Do not infer either meaning from the word ‘fees’ alone: the agreement must expressly explain how withholding will be handled.

Ask your lawyer and tax adviser to review the following questions together:

• Does the agreement permit withholding required by law, with a certificate confirming payment of the withheld tax provided to the franchisor?
• Is there a tax gross-up obligation to guarantee the net payment, and what limits apply?
• Does the business bear the cost if the franchisor fails to provide evidence of its tax residence?
• Who benefits from a tax refund or subsequent adjustment relating to a payment whose cost has already been borne?
• How will the burden be shared if tax rules change during the agreement’s term?

It is advisable to negotiate an obligation for the franchisor to provide the necessary documents by a specified deadline, with clear responsibility for the consequences of delays or missing information. Allocating the cost between you does not change who is legally responsible to the Egyptian Tax Authority; it only governs financial recourse between the parties to the agreement.

4. Test a sample invoice before committing to the agreement

Request a sample invoice showing the service description, the payment recipient, the fee and any taxes added. Then ask your accountant to use it to prepare a reconciliation showing the amount to be transferred to the franchisor, any amount payable to the tax authority and the documents needed to substantiate the transaction.

If the franchisor is based abroad, check with the bank which documents are required for the transfer, and ensure that the recipient’s name and the description of the payment match the agreement and invoice. Completing a bank transfer does not, by itself, establish full tax compliance, just as issuing an invoice does not settle whether the payment has been correctly classified.

Include the results in your operating budget, separating taxes that represent a final cost from amounts that may be deducted or adjusted later under the law. Both may require cash at the time of payment, even if their accounting treatment differs.

The practical takeaway: do not sign on the strength of the fee percentage alone. Obtain a tax cost schedule, a sample invoice and a clear clause covering withholding and net payments, then review them with a lawyer and tax adviser in Egypt before committing to pay.