Franchising in Taiwan: How to Manage Performance Deposits, Deductions and Refunds

When opening an existing business in Taiwan to franchising, the franchisor may require franchisees to pay a performance deposit as security for payments for goods or other contractual obligations. But a clause stating simply that the deposit will be ‘returned without interest when the relationship ends’ may not adequately address unpaid debts, disputes or delays in settling accounts. To build trust across a franchise network, treat the deposit from the outset as money whose use must be accounted for, rather than income that can be retained at will.

1. Define what the deposit secures

A performance deposit differs from an initial franchise fee or royalties: the latter are generally payments for licensing rights or services, whereas a deposit secures specified obligations and should be settled and returned under the contract once the refund conditions are met. It also differs from a reservation deposit collected before signing. Similar terminology does not mean the same refund rules apply.

The franchisor should first identify the risks that genuinely need to be covered, such as overdue payments for goods, royalties payable under the contract, or equipment supplied for use at an outlet that has not been returned. Each item should correspond to an identifiable contractual obligation. Avoid blanket wording such as ‘to cover all losses suffered by the franchisor’.

The amount should reflect actual credit risk, including the billing and payment cycle for supplies and the value of loaned assets, rather than the maximum a franchisee can afford. If advance payments, credit limits or other security arrangements are also in place, check whether the protection overlaps. Explain whether the deposit earns interest, whether it must be topped up and the conditions for changing its amount. Recruitment staff should not make their own promises of reductions or waivers.

2. Align deposit terms with Taiwan’s franchise rules

Taiwan has no single dedicated franchise statute, but that does not mean franchise networks are unregulated. The Fair Trade Commission addresses relevant trading practices under the Fair Trade Act and has issued the Fair Trade Commission Disposal Directions (Guidelines) on the Business Practices of Franchisors. These are administrative rules, not a standalone franchise law. Questions about contractual validity, performance of obligations and refund disputes must also be assessed under the Civil Code and other applicable provisions.

The material franchise information identified by the Commission includes fees payable to the franchisor or designated parties before and during operation, as well as restrictions on the franchise relationship and the conditions for its variation, termination and rescission. As a performance deposit affects a franchisee’s funding requirements, the franchisor should clearly disclose the amount or calculation method, who receives the money, what it secures, and the arrangements for deductions and refunds. It should not be omitted simply because it is ‘refundable later’.

Under the Guidelines, material information must be provided ten days before entering into a franchise or preliminary franchise relationship, or within a reasonable period determined for the individual case or a period agreed by both parties. The franchisor must also be able to prove that the information was supplied. This is separate from arrangements allowing time to review the contract before signing. A franchise transaction between a franchisor and franchisee is not a consumer relationship, so consumer refund or cooling-off concepts should not be applied directly.

3. Keep outlet-by-outlet records and require evidence for deductions

Even if deposits are paid into the franchisor’s everyday bank account, maintain a separate deposit record for each outlet, showing the date received, amount, payer, deductions, top-ups and balance. Internal policy may require separate management of these funds to reduce commingling. However, an ordinary bank account or separate accounting records do not constitute a trust, nor do they justify telling franchisees that the funds are protected in the event of insolvency.

A standard deduction procedure should have four steps:

• Check the basis: Confirm that the debt is due, who is responsible and whether the contract permits the deduction.
• Provide a breakdown: Set out the items, calculations and supporting invoices, account statements or handover records.
• Notify and allow a response: Give the franchisee reasonable time to pay, raise an objection or provide further evidence.
• Review and record: Obtain approval from an authorised person, update the balance and issue a settlement statement.

For example, if an outlet disputes the quantity delivered in a batch of goods, the franchisor should not make a deduction solely on a supervisor’s assertion that ‘money is still owed’. First check the dispatch and receipt records, distinguishing undisputed debts from items that still need verification. If the deposit must be topped up after a deduction, the deadline and consequences of failing to do so should also be agreed in advance, rather than imposing an unexpected same-day payment demand.

4. Set refund deadlines, checklists and clear responsibilities

Design the refund system before collecting any money, rather than waiting until a franchisee exits. The contract and internal procedures can specify what triggers the final account reconciliation, who checks it, what information the franchisee must provide and when the refundable balance will be paid.

The handover checklist may include outstanding payments for goods, fees already due and the return of loaned equipment. Avoid conditions such as ‘once the franchisor confirms there are no outstanding issues’ that could allow repayment to be delayed indefinitely. Where some amounts are disputed, agree in advance on a process for returning the undisputed balance first. For any sum temporarily retained, explain the reason, the basis of the estimate and the next review date.

The process should also cover a change of operator during the franchise relationship. The outgoing franchisee’s deposit should not automatically become the incoming franchisee’s deposit without clear authorisation and settlement documents. Finance, operations and legal staff should use the same settlement form, so that money is not left unprocessed after the outlet handover is complete.

Practical takeaway: Before recruiting franchisees, prepare a set of deposit terms, an outlet-by-outlet deposit ledger and a refund checklist. A deposit will help reduce risk across the franchise network, rather than create fresh disputes, only if the franchisor can clearly answer four questions: ‘Why is it collected? When can deductions be made? What evidence supports them? When will it be returned?’