Buying a Franchise in Lebanon: Tax Due Diligence on Franchisor Fees

Before buying a franchise in Lebanon, do not compare brands on their advertised fees alone. The contract may require you to bear additional taxes or guarantee that the franchisor receives a net amount, making the cost of joining the franchise network higher than the initial offer suggests. The due diligence required here is not about calculating royalties or choosing a payment currency, but about understanding the tax treatment of each payment, who bears the cost and what documentation proves that the tax has been paid.

1. Map the tax treatment of payments before comparing offers

Start by gathering the draft agreement, fee schedule, proposals for ancillary services and a sample invoice. Then ask an accountant familiar with Lebanese taxation to prepare a schedule linking each amount to its actual purpose and recipient. Do not assume that everything the franchisor calls a ‘franchise fee’ necessarily receives the same tax treatment.

Where possible, distinguish between the initial franchise fee, payments for the use of the brand and operational know-how, training, technical support, software and marketing services. This is not a way to reclassify payments artificially; it is about documenting what you are actually buying. Tax treatment depends on the substance of the transaction and the applicable law, not simply the invoice description.

For each payment, record the following questions:

• Who issues the invoice, and where are they resident for tax purposes?
• Is the recipient the franchisor named in the agreement or a related company?
• Where is the service performed, and what documentation proves that it has been delivered?
• Does the price include taxes, or are they added when invoiced?
• Does the Lebanese company have any withholding, filing or tax payment obligations?

Request a written explanation for any payment to a third party. A change in the recipient may require a reassessment of the tax treatment, even if the brand and service remain unchanged.

2. Distinguish between the absence of a franchise-specific law and the existence of tax obligations

Lebanon has no comprehensive franchise-specific law, nor a general statutory regime requiring a franchise disclosure document before a sale. The relationship is governed primarily by the Code of Obligations and Contracts, with the Commercial Code and relevant tax laws applying according to the nature of the transaction. The absence of a dedicated law does not mean that franchise fees are tax-exempt or that the parties can choose their tax treatment.

The legislation your accountant should assess includes the Income Tax Law and Value Added Tax Law No. 379 of 2001, as amended. Check the provisions and guidance in force when the assessment is prepared, rather than relying on a rate quoted in an old offer or another outlet’s experience.

Ask whether payments to non-residents trigger withholding or other tax procedures in Lebanon, and how services received from abroad are treated for VAT purposes. If a double taxation agreement is mentioned, verify that an agreement is in force with the country concerned, along with the eligibility conditions and required documentation. Having a foreign franchisor does not automatically entitle you to a reduction.

The Lebanese Franchise Association’s Code of Ethics calls for written disclosure of material information a reasonable time before any commitment, but it is not a general disclosure law. Ask for the tax assumptions behind the offer to be explained, and do not treat the franchisor’s silence as a guarantee that the fees include all charges.

3. Scrutinise any ‘net amount payable to the franchisor’ clause

The agreement may state that the franchisor receives fees ‘free of any withholding’. This clause can transfer the economic burden of the tax to you: if an amount must legally be withheld, you may have to increase the payment so that the franchisor’s net receipt remains unchanged. Including only the base fee in the outlet’s budget is therefore not enough.

Ask your accountant to prepare two cost comparisons: one where withholding is deducted from the agreed amount, and another where you must increase, or ‘gross up’, the payment to compensate for the withholding. Use the classifications and rates verified by the accountant, not general assumptions. Include the results in your profit and cash-flow forecasts before accepting the offer.

Discuss with your lawyer how to narrow the wording ‘all taxes’ and specify what it includes and excludes. In particular, distinguish between tax associated with the payment and tax on the franchisor’s profits, and between the tax itself and penalties caused by the franchisor’s delay in supplying a required document. Also seek a commitment from the franchisor to provide the documents needed for any lawful, more favourable tax treatment.

The agreement should also expressly permit legally required withholding, provide for evidence of its payment to be supplied, and make clear that fulfilling this obligation alone does not constitute a payment default. How you allocate the financial burden between you must be clear and separate from your legal obligations to the tax authorities.

4. Turn the findings into an implementation and review file

Before signing, bring together the accountant’s memorandum, the tax-inclusive cost schedule, the amended contractual clauses, sample invoices and required supporting documents in one file. Specify who reviews invoices, who carries out withholding when required, and who handles filings and retains proof of tax payments.

Do not assume that tax paid is always recoverable or that every fee automatically qualifies as a deductible expense. Ask for the conditions of each tax treatment to be checked, together with its timing implications for available cash. Review the file whenever the recipient changes, a service is added or the fee structure is revised.

Practical takeaway: Compare brands on the basis of documented costs after accounting for tax, not nominal fees. Do not agree to guarantee a net amount to the franchisor until you understand its impact and have documented both parties’ responsibilities with an accountant and a lawyer in Lebanon.