Franchising in Guatemala: withholding tax on overseas payments

Buying an overseas franchise involves more than transferring money to the brand. Before signing, you need to know whether income tax (ISR) must be withheld, who will bear that cost and how to document each transaction. Clarifying these points helps prospective franchisees compare offers without confusing the advertised price with the business’s actual cash outlay.

1. Identify what you are paying for and who receives the money

Start by listing all planned overseas payments. Separate the initial franchise fee, trade mark licence, technical assistance, training and any other items. Do not assume they all receive the same tax treatment simply because they appear in a franchise agreement.

Guatemala’s Tax Update Law, Decree 10-2012, governs ISR. Its rules on non-resident income provide for withholding obligations on certain payments of Guatemalan-source income. Articles 104 and 105 are relevant when reviewing tax rates and the obligation to withhold. Their specific application depends on the nature of the income and the recipient’s circumstances, including whether there is a permanent establishment.

Do not classify a payment solely by the description on the invoice. Ask an accountant to check the commercial description against the agreement and what you will actually receive.

Prepare a record for each payment category covering:

• The recipient’s legal name, address and tax residence.
• The service or right giving rise to the payment.
• The invoicing entity and receiving bank account.
• The amount, due date and supporting documents.
• The proposed tax treatment and who is responsible for validating it.

If one entity collects the licence fee and another provides assistance, assess the two relationships separately. An international business structure does not remove the payer’s obligations in Guatemala.

2. Distinguish the gross price from the promised net amount

The key contractual question is straightforward: does the agreed amount include withholding tax, or must the franchisor receive it in full?

Where the price is gross and withholding applies, part is paid to the recipient and part is remitted to the tax authority. By contrast, if you promise a net amount after tax, you may need to increase the gross payment so that the recipient receives the agreed sum.

Do not calculate this increase simply by adding the withholding percentage to the net amount. Request a worked calculation showing the correct approach for the applicable tax treatment.

To compare offers, ask for a table with three columns: the contractual amount, the overseas transfer and the withholding tax to be remitted. Add bank charges separately; they are not the same as tax.

Pay particular attention to phrases such as “tax-free”, “net of deductions” or “all taxes shall be borne by the franchisee”. They may pass on a cost that was not clearly disclosed in the sales presentation. Also clarify how the budget will be adjusted if the applicable rules change.

3. Set out the tax arrangements clearly in the agreement

Guatemala has no franchise-specific law or special mandatory pre-contractual disclosure regime equivalent to a franchise offering circular. A franchise agreement is an atypical commercial contract: the Commercial Code, Decree 2-70, applies, with the Civil Code, Decree Law 106, applying on a supplementary basis. The trade mark licence is also subject to the Industrial Property Law, Decree 57-2000.

This contractual freedom does not allow the parties to exclude their tax obligations to the state. They can allocate the economic cost of the tax between them, but a contractual clause cannot make a payment exempt from withholding where withholding is legally required.

Ask for the agreement to specify:

• Whether each price is gross or net of withholding tax.
• How the withheld amount will count towards meeting the payment obligation.
• Which supporting documents each party will provide, and when.
• Who will handle requests for tax information.
• How classification or invoicing errors will be corrected.

Ensure that tax lawfully withheld and documented is not treated under the agreement as an unpaid balance. This protection should be expressly negotiated, rather than left to a salesperson’s verbal explanation.

4. Organise your records before the first transfer

Keep the agreement, invoice or equivalent document, evidence of the service or right received, bank payment confirmation, and withholding tax filing and payment records together.

Ask your accountant to prepare a schedule of obligations to Guatemala’s tax authority, the Superintendencia de Administración Tributaria (SAT). Do not confuse an invoice’s commercial due date with the tax deadline.

Also check whether the expense is tax-deductible. Transferring money and withholding tax do not, on their own, guarantee deductibility: the applicable requirements and limits must be reviewed for the payment category and your tax regime.

Practical conclusion: before signing, obtain a worked tax calculation for every overseas payment and ensure it aligns with the agreement. This will tell you how much cash leaves your business, how much the brand receives and what you need to declare.