Franchising in Portugal: accounting for the initial franchise fee

When turning an existing business into a franchise network, deciding how much to charge franchisees to join is only part of the process. You also need to establish what that payment covers and how each party will account for it. The initial franchise fee may have different accounting implications for the franchisor and the franchisee: receiving or paying a sum does not necessarily mean recognising revenue or an expense of the same amount immediately.

1. Identify what the initial franchise fee covers

Before issuing the first invoice, prepare a clear description of the rights and services included in the initial payment. Calling it an ‘initial franchise fee’ does not, in itself, determine its accounting treatment.

The agreement may cover the right to operate the business concept, use the brand and access working methods for a specified period. It may also include initial training, help with setting up the premises or other identifiable services. It is important to establish whether there are distinct components and when they are actually provided.

Create a worksheet covering four points:

• Contractual entitlement: the right or service the franchisee receives.
• Timing of provision: on signing, before opening or throughout the agreement.
• Supporting documentation: the agreement, invoice and evidence that the rights or services have been provided.
• Refund conditions: circumstances in which all or part of the amount may be refunded.

This worksheet should reflect the actual agreement, rather than an artificial allocation designed to produce a particular accounting outcome. Give it to your Portuguese certified accountant and lawyer so that the agreement, invoicing and accounting records are consistent.

2. Distinguish the franchisee’s accounts from the franchisor’s

In the franchisee’s accounts, the initial franchise fee may qualify for recognition as an intangible asset. Under Portugal’s Accounting and Financial Reporting Standard NCRF 6 — Intangible Assets, this depends on whether the recognition criteria are met; it does not follow automatically from the description used on the invoice.

Where recognition as an asset is appropriate, the cost is allocated through amortisation over its useful life. The contractual term is an important reference point. Renewals require a separate assessment: it is not enough to assume that the relationship will continue indefinitely. Including renewal periods must comply with the applicable accounting criteria, taking account, in particular, of the costs associated with renewal.

Monthly royalties for using the system are generally recognised as expenses in the period to which they relate. They should not be confused with the initial investment simply because both arise from the same agreement.

For the franchisor, the analysis is different. The franchisee’s accounting treatment does not determine how the recipient recognises revenue. The substance of the rights and services provided and the applicable accounting framework must be assessed. Money arriving in the bank account does not, in itself, establish that all the revenue should be recognised in that month.

For this reason, do not promise prospective franchisees a particular accounting classification. Provide clear contractual information so that each business can confirm the appropriate treatment with its accountant.

3. Align the agreement, invoicing and VAT in Portugal

Portugal has no specific franchise law or general mandatory pre-contractual disclosure regime specifically for franchising. Applicable rules include the Civil Code, with its principles of freedom of contract and good faith, and the rules governing standard contract terms, where relevant. The European Code of Ethics for Franchising is a self-regulatory instrument, not Portuguese law.

The absence of specific legislation does not remove accounting and tax obligations. The agreement should make clear what the payment covers, when it becomes due and the conditions for any refund. Invoicing must comply with the Portuguese VAT Code and reflect the actual transaction.

VAT incurred by the franchisee is not automatically recoverable. Deduction depends on meeting the requirements of Article 19 onwards of the Portuguese VAT Code, including those relating to documentation and the use of goods or services in transactions that carry a right to deduct VAT.

Before receiving advance payments or issuing adjustment documents, confirm the relevant VAT timing with your accountant. The payment schedule, accounting recognition and the point at which VAT becomes chargeable may not coincide.

4. Establish a procedure before the first franchisee joins

Test the documentation workflow using a template agreement: signing, collecting payment, invoicing, granting rights and delivering initial services. Identify who confirms each stage and where the supporting evidence is stored.

Include less favourable scenarios too: a delayed opening, early termination or a partial refund. Depending on the circumstances, these events may require a review of accounting entries, an impairment assessment or corrections to documentation.

The sales team should use the same description of the rights and services as the agreement. Avoid promises such as ‘the whole payment can be expensed immediately’ or ‘the VAT is always deductible’.

Practical takeaway: before collecting the first initial franchise fee, obtain a documented accounting assessment and align it with the agreement and invoicing. This preparation reduces misunderstandings and promotes transparency across the franchise network.