Franchising Your Business in Taiwan: Managing Initial Deposits, Preliminary Agreements and Refunds

When opening an existing business in Taiwan to franchising, franchisors often want to collect an initial deposit to confirm an applicant’s commitment before arranging site selection or assessment. However, the absence of a signed formal agreement does not mean there are no legal responsibilities. A healthy franchise network depends on prospective franchisees understanding what their payment buys, when commitments arise and how they can recover their money if the partnership does not proceed.

1. Decide whether you really need to collect a payment

Do not use an initial deposit as a shortcut for screening franchisees. Someone’s willingness to pay does not demonstrate their ability to manage finances, run an outlet or lead a team. If the franchisor has not yet settled on the proposed business arrangement, free interviews, eligibility assessments and preliminary discussions about trading areas are usually easier to manage than collecting money early.

If a payment is genuinely necessary, first specify the work or rights it covers: for example, assessing a particular site, reserving a franchise opportunity for a limited period or providing a credit against the eventual franchise fee. These purposes must not be conflated. Paying for an assessment service should not automatically amount to a commitment to become a franchisee, and reserving an opportunity to negotiate does not confer permanent territorial protection.

The internal approval form should answer four questions:

• Which legal entity will collect the payment and be responsible for any refund?
• What must the franchisor deliver once payment has been made?
• Does payment oblige the applicant to make further payments or sign an agreement?
• What happens to the money if the parties do not proceed?

If any answer is unclear, recruitment staff should not collect payment first and complete the paperwork later.

2. Labels do not sidestep the rules on preliminary franchise relationships

Taiwan does have franchise-specific regulatory guidance. The Fair Trade Commission has issued the Fair Trade Commission’s Disposal Directions (Guidelines) on the Business Practices of Franchisors and addresses relevant unfair trading practices under the Fair Trade Act. Disputes over payments and refunds must also be assessed under the Civil Code and the actual terms agreed.

Point 3 of the Guidelines covers both ‘franchise relationships’ and ‘preliminary franchise relationships’. Important franchise information must be provided ten days before the relationship is established, or within a period considered reasonable in the circumstances or agreed by both parties. It is therefore unsafe to assume that the requirements are triggered only by a formal franchise agreement. Even if a document is called a ‘letter of intent’ or a receipt describes the payment as a ‘reservation fee’, the parties’ actual commitments must be examined rather than relying on the label.

For example, if paying means that an applicant must sign an agreement within a specified period or forfeit the entire payment, a lawyer familiar with franchise transactions in Taiwan should first assess whether the arrangement creates a preliminary franchise relationship and when disclosure is required.

Point 4 of the Guidelines also requires applicants to be given at least five days, or a period considered reasonable in the circumstances, to review contracts relating to a franchise relationship before signing. A copy of the contract must be delivered within 30 days of signing, unless the delay is attributable to circumstances for which the franchisor is not responsible. Disclosure and contract review are separate requirements: attending a presentation is not a substitute. A breach of Points 3 or 4 constitutes a violation of Article 25 of the Fair Trade Act only where it is sufficient to affect trading order. Not every procedural failing automatically has the same legal consequences.

3. Make refund terms work for specific scenarios

Refund clauses should not simply say ‘subject to company policy’ or ‘non-refundable’. It is better to distinguish between the reasons why a proposed partnership might end and clearly state when a full refund applies, what deductions are permitted and which situations require further agreement. The following are suggestions for designing a policy, not refund standards prescribed uniformly by law.

The franchisor does not approve the application: If the franchisor retains final approval rights, explain in advance how refunds will be handled if approval is withheld. It should not reserve the right to reject an applicant while offering no explanation for retaining their money.

No suitable site is found: Specify the period allowed for searching or assessment, who decides whether a site is suitable, and whether the payment will be refunded when that period ends or the deadline extended by mutual agreement. Avoid leaving the money unresolved indefinitely.

The applicant withdraws: If the intention is to deduct the cost of completed assessments, define the services, calculation method and verifiable supporting records in advance. Do not introduce a vaguely defined administration fee afterwards.

The parties proceed with the franchise: State which fee the initial deposit will be credited against, when the credit will be applied and how it will appear in the payment breakdown, to prevent duplicate charges for the same item.

Also specify how to request a refund, what information is required, the processing deadline and the payment method. Do not determine the legal effect solely from labels such as ‘initial deposit’, ‘advance payment’ or ‘earnest money’. The payment’s legal nature and the obligation to return it must be assessed in light of the substance of the arrangement.

4. Align recruitment promises with financial procedures

The franchisor should establish a single payment-approval process and prohibit recruitment staff from independently promising that money is ‘definitely refundable’ or insisting that applicants ‘pay before seeing the contract’. External communications, payment notices, reservation documents and refund terms must be consistent. Limited-time offers should not be used to pressure applicants into giving up a proper opportunity to understand the arrangement.

For each payment, record at least the payer, the receiving legal entity, its purpose, the applicable terms, outstanding work and refund status. Finance staff should not automatically treat money received as an earned franchise fee. Accounting and tax treatment should be confirmed by professionals based on the substance of the transaction.

Before formally launching recruitment, test the process against three scenarios: the franchisor rejects an application, a site assessment is unsuccessful, and an applicant withdraws midway through. Ask recruitment, operations and finance staff to explain independently how each case would be handled. If their answers differ, the system is not yet ready.

Practical takeaway: first clarify why you are collecting the money, then establish whether the arrangement creates a preliminary franchise relationship, and only then set the payment and refund procedures. You should ask prospective franchise partners to pay only when you can clearly explain what happens if the partnership does not go ahead.