Franchising in Taiwan: How to Design Referral Rewards and Avoid Multi-Level Marketing Risks

When opening an existing business to franchising, satisfied outlet owners are often the most persuasive advocates. However, once referral rewards shift from a one-off introduction fee to ongoing commissions across recruitment tiers, the legal assessment cannot rest on the ‘franchise’ label alone. Before launching a scheme, the franchisor should establish who introduces whom, where the rewards come from and what responsibilities new entrants actually take on.

1. Distinguish franchise referrals from a multi-level organisation

Taiwan has no single dedicated franchise law covering every aspect of franchising, but that does not mean franchises are unregulated. Franchise operations are subject to the Civil Code, the Fair Trade Act and, depending on the arrangements involved, other legislation such as the Trademark Act. The Fair Trade Commission (FTC) also has guidelines on franchisors’ business practices, covering matters such as disclosure of important information during recruitment, contract review and delivery of contracts.

Referral schemes also need to be assessed under the Multi-Level Marketing Supervision Act. The Act defines multi-level marketing as a marketing method in which distributors introduce others to participate, building a multi-level organisation to promote and sell goods or services. Whether the Act applies depends on the actual structure and operation, not whether the contract is headed ‘franchise’, ‘business partner’ or ‘brand ambassador’.

A one-off reward for a direct introduction should not be treated as multi-level marketing simply because a payment is involved. Equally, the existence of physical outlets does not automatically place a scheme outside the Act. If franchisees can recruit participants below them and receive remuneration from those participants’ recruitment or sales activities, the scheme should undergo a professional legal review before launch.

2. Map the flow of payments to identify risks

Start by mapping the relationships between the franchisor, the referrer, the new franchisee and any other payment recipients. For each payment, clearly identify who pays, who receives it and what triggers it. Do not simply state that ‘successful referrals earn a reward’: define what success means.

Work through the following questions:

• Is the referrer paid solely for directly introducing an applicant?
• If the new franchisee introduces someone else, does the original referrer continue to receive a share?
• Are there organisational tiers, promotion thresholds or team recruitment targets?
• Must franchisees first pay a fee, purchase goods or buy eligibility before they can earn recruitment rewards?
• Does the promotional material focus on running an outlet, or on earning income by recruiting partners?

For example, if A introduces B, B later introduces C, and A still receives a payment when C joins, the arrangement warrants further scrutiny. These questions are an internal screening tool, not a statutory test. The absence of any one feature does not guarantee legality.

If the arrangement does constitute multi-level marketing, requirements include filing with the FTC in advance, providing specified information before participation, and entering into a written participation agreement and giving the participant an original copy. An ordinary franchise agreement cannot replace this compliance process. Filing does not mean that the government endorses the scheme’s earning potential or guarantees its legality.

3. Limit rewards to verifiable introduction services

For brands just starting to franchise, a more manageable approach is to treat referrals as a supporting channel for finding suitable operators, rather than a separate income system. A direct, single-tier, one-off introduction reward can reduce structural complexity, but the legal risks still need to be assessed against the actual arrangements.

Written rules should cover at least the following:

• Valid referrals: How to record when an introduction was made, handle duplicate leads and confirm that the prospective applicant is willing to be contacted by the franchisor.
• Payment conditions: Which verifiable events trigger payment, such as approval of the application and the outlet actually opening. These conditions should be explained in advance.
• Scope of the reward: The amount or calculation method, who receives payment and whether any further remuneration is available.
• Cancellation: How accrued rewards will be handled if an application is withdrawn, information proves false or the outlet fails to open.
• Limits on authority: Referrers must not promise acceptance on the franchisor’s behalf, guarantee that an investment will be recouped, change fees or collect franchise payments.

Referral rewards must not replace the franchisor’s approval process. Even an applicant introduced by a high-performing outlet owner needs an independent assessment of their finances, commitment and ability to run the business. The finance team should retain supporting records for payments and establish the applicable tax and documentation requirements based on the recipient’s status.

4. Keep referrals subject to franchise disclosure rules

Referrers can help establish contact, but the franchisor should still explain the franchise terms directly to applicants. ‘The outlet owner has already explained it’ is not a substitute for providing important information.

Under the current franchise guidelines, important information must be provided ten days before entering into a franchise or preliminary franchise relationship, or within a period deemed reasonable in the circumstances or agreed by both parties. The franchisor bears the burden of proving that the information has been provided. Before signing, applicants must also be given at least five days to review the contract, or a period deemed reasonable in the circumstances. A referrer urging an applicant to ‘pay now to secure your place’ is no reason to bypass these procedures.

The franchisor should provide standard referral guidance, require referrers to disclose clearly that they may receive a reward, and prohibit unverified earnings claims. If the reward cost is effectively passed on to the new franchisee, the associated charges must not be hidden in verbal arrangements.

Before launch, run a simulation: have a referrer introduce an applicant, then work through contact, explanation of terms, approval and payment. Check that every step has a named person responsible and a supporting record. If tiered commissions or fees for recruitment eligibility are proposed after launch, put those changes on hold while the arrangement’s legal status is reassessed.

Practical takeaway: Map the payment relationships first, then write the reward rules. Provide reasonable compensation for introductions while ensuring that the franchise network’s income remains grounded in running outlets, rather than continually recruiting the next partner.