Foreign Currency Payments for Hong Kong Franchises: Clarify Exchange Rates, Transfer Fees and Payment Responsibilities Before Signing

When operating an overseas franchise in Hong Kong, you will usually receive revenue in Hong Kong dollars (HKD), while fees payable to the franchisor may be calculated in Japanese yen or another foreign currency. In a case featured in the Trade and Industry Department’s ‘Ask the Experts’ service, a prospective franchisee was considering bringing a Japanese food and beverage brand to Hong Kong and paying annual franchise rights fees in yen. This highlights an important point for Hong Kong’s franchise community: even if a brand’s quoted fee is fixed, its actual cost in Hong Kong dollars can fluctuate. Currency conversion and payment responsibilities should therefore be clearly set out before signing.

1. Distinguish between the currency used to calculate fees and the payment currency

‘Paying an annual fee in yen’ is not the same arrangement as ‘paying the equivalent amount in Hong Kong dollars’. Under the former, the franchisee generally buys the yen themselves. Under the latter, you need to know who performs the conversion, which exchange rate applies and when the rate is fixed. If the contract merely refers to ‘the prevailing exchange rate’, the parties may interpret the amount due differently.

Ask the franchisor for a complete fee schedule specifying the currencies used to calculate and pay the initial franchise fee, recurring licence fees and any other cross-border service charges. Do not assume that every charge uses the same currency as the franchise fee, or rely solely on the indicative Hong Kong dollar price in the franchise sales presentation.

For each payment, confirm at least the following:

• Basis of calculation: Is it a fixed foreign currency amount, or an amount converted from Hong Kong dollar revenue?
• Exchange rate benchmark: Which named bank or other verifiable source will be used, and does its buying or selling rate apply?
• Rate-setting date: Is the rate fixed on the invoice date, the due date or the actual payment date? What happens on public holidays?
• Calculation details: How many decimal places are used, how are amounts rounded, and what alternative applies if the exchange rate source becomes unavailable?

If a fee is calculated as a proportion of Hong Kong dollar turnover and then converted into foreign currency for payment, request a worked example to avoid unnecessary differences arising from two successive conversions.

2. Include exchange rate risk in your payment budget

To assess your foreign currency exposure, list known foreign currency payments by month. Then convert them using both currently available bank quotes and hypothetical scenarios in which the foreign currency strengthens or weakens. This is a stress test, not an exchange rate forecast. The aim is to see whether adverse movements could cause an otherwise affordable franchise fee to put pressure on day-to-day working capital.

The exchange rate a bank actually offers may differ from the indicative rates reported in the news or displayed online. When comparing services, ask: ‘How much must I pay in Hong Kong dollars in total for the recipient to receive the specified foreign currency amount?’ Do not compare transfer fees alone.

You could negotiate a fixed Hong Kong dollar price, instalment payments or adjustments to the conversion method within an agreed range. These are negotiating options, however, not automatic rights for franchisees. If the franchisor agrees to fix the exchange rate, check whether a higher fee is being charged to compensate for the risk.

For payments with confirmed amounts and dates, you can ask a bank about forward foreign exchange arrangements. However, a forward contract may involve credit facilities, collateral requirements and cancellation costs. Abandoning the franchise project does not automatically cancel the foreign exchange transaction. Understand the product’s obligations first, and avoid taking positions beyond your payment needs in pursuit of exchange gains.

3. Specify bank charges, receipt of funds and refund arrangements

‘Funds sent’ does not necessarily mean ‘payment completed’. Cross-border transfers may pass through intermediary banks, and the receiving bank may also deduct charges. If the franchisor requires the full amount to reach its account and the contract treats every shortfall as an outstanding debt, disputes over top-up payments and late fees may follow.

Address each of these issues when signing:

• Who pays the charges? Who bears the sending, intermediary and receiving banks’ fees? Are there any caps or requirements for supporting evidence?
• When is payment considered complete? When the bank accepts the instruction, when the funds leave your account, or when the franchisor actually receives them?
• How are delays remedied? What evidence is required if bank compliance checks, public holidays in either jurisdiction or incorrect details cause a delay? Is there a reasonable period to remedy the issue?
• Which currency is used for refunds? Is the original foreign currency amount returned, or is it converted using a rate fixed on a specified date? Who pays the bank charges for the refund?

Refunds are particularly easy to overlook. Even if the franchisor returns the full foreign currency amount, it may be worth less in Hong Kong dollars than you originally paid. A ‘full refund’ does not necessarily cover exchange losses; the contract should address these separately.

The recipient’s account name should also be consistent with the contractual arrangements. If the franchisor nominates an affiliated company to receive payment, obtain written confirmation that payment to that company discharges the corresponding fee obligation. Verify any notification of a change in bank details through a previously confirmed contact channel, rather than transferring funds on the strength of an email alone.

4. Understand Hong Kong’s rules: customary practice is not a legal safeguard

Hong Kong currently has no franchise-specific legislation, nor a statutory pre-sale disclosure regime, franchise registration system or mandatory franchise code generally applicable to franchise transactions. You should therefore not assume that the franchisor must disclose foreign currency payment risks in a prescribed format, or that a franchisee can demand a price adjustment because exchange rates have moved against them.

Franchise transactions remain subject to general law, including common law principles of contract. The Misrepresentation Ordinance may also apply where misrepresentation is involved. Whether losses can be recovered or a contract rescinded depends on what was represented, the extent of reliance on it and the relevant legal requirements. A payment becoming more expensive simply because a foreign currency has strengthened will not usually create an automatic right to a fee reduction.

The Hong Kong Franchise Association’s code of ethics for members requires written agreements to clearly set out both parties’ rights and responsibilities. Such membership standards are not legislation, however, and do not automatically fill gaps in exchange rate provisions across all franchise contracts. Where an overseas franchisor is involved, have a lawyer review the governing law and payment clauses, and ask a bank or financial adviser to check the currency conversion arrangements.

Practical takeaway: Before paying, draw up a single table covering currencies, exchange rate sources, rate-setting dates, bank charges, the criteria for completed payment and refund methods. Then incorporate the agreed arrangements into the contract. A workable foreign currency payment arrangement should allow you both to calculate the Hong Kong dollar cost and to prove that you have met your payment obligations.