How to Assess Withholding Tax Costs When Buying a Foreign Franchise

When joining a foreign brand’s franchise network in Türkiye, the royalty stated in the contract may not match the amount leaving your business’s bank account. In particular, a requirement to pay the overseas franchisor a fixed “net” amount may leave you bearing the economic cost of Turkish withholding tax. Before signing, review not just the payment rate, but also the legal nature of the payment, its tax treatment and the supporting documentation.

1. First, establish the nature of the payment and the recipient

The first step is to clarify which company will receive the money and which rights or services the payment covers. Using a foreign brand does not mean every payment goes directly overseas. Your contractual counterparty may be a Turkish company, the foreign brand owner or a group company based in another country. This distinction is the starting point for the tax review.

Franchise offers may bundle trademark licensing, know-how, training, software and consultancy into a single fee. However, labelling an invoice “franchise fee” does not automatically give every component the same tax treatment. The substance of the transaction must be assessed; artificial splitting is not a safe solution either.

Ask the brand to provide the following information in writing:

• The legal name and tax residence of the entity receiving payment.
• A description of the rights or services supplied in return for each payment.
• Whether the company issuing the invoice is the same as the party entitled to payment under the contract.
• How the fee is allocated between trademark use, know-how and other services.
• The legal basis for using a collection account belonging to another company, if applicable.

Give this information to your tax adviser alongside the draft contract. Reviewing the quotation alone may not be enough to classify the payment correctly.

2. Distinguish Türkiye’s general legal framework from its tax rules

Türkiye has no dedicated statute governing franchise agreements. Nor is there a general requirement for a franchise-specific pre-contractual disclosure document or registration on a franchise register. This does not mean that the parties are bound only by their contract.

General legislation applies to the relationship, particularly the Turkish Code of Obligations No. 6098 and the Turkish Commercial Code No. 6102. Depending on the subject matter, the Law on the Protection of Competition No. 4054 and the Industrial Property Code No. 6769 may also be relevant. The tax treatment of overseas payments requires a separate assessment.

Payments to a non-resident company for the use of trademarks and similar rights may fall within the non-resident taxation and withholding provisions of Corporate Tax Law No. 5520. Where its conditions are met, a double taxation treaty in force between Türkiye and the recipient’s country of residence may affect taxing rights and the withholding tax that can be applied.

Do not build your budget around a single universal “franchise withholding tax rate”. The nature of the payment, the recipient’s circumstances, the applicable treaty and the legislation in force on the payment date must all be considered together. Services or rights obtained from abroad may also give rise to reverse-charge VAT obligations under Value Added Tax Law No. 3065. Do not treat withholding tax and VAT as the same cost item: their cash-flow implications and the conditions for deducting input VAT need separate consideration.

3. Make the cost of a “net payment” clause visible

If the contract states that “all taxes are borne by the franchisee” or that “the franchisor receives payment without any deduction”, do not dismiss this as a minor accounting detail. Such clauses may require the payment to be grossed up to preserve the net amount the franchisor must receive.

The simplified calculation works as follows: where only the relevant withholding tax is taken into account, divide the promised net amount by one minus the applicable withholding rate. The result is the grossed-up fee. This is not a recommendation of any tax rate; your tax adviser should calculate the actual amount for the specific transaction.

Address these three questions separately during negotiations:

1. Is the contractual fee a gross amount from which tax will be withheld, or a net amount that the recipient must receive?
2. Who bears the extra cost if treaty relief cannot be claimed?
3. How will the economic burden be shared if the legislation or the recipient’s tax residence changes?

Statutory obligations towards the tax authority are separate from the parties’ agreement on how to share costs. Making the foreign company responsible for the tax under the contract does not automatically remove your legal obligation to withhold tax or file returns.

Before signing, request two calculations for the same payment: one where the treaty conditions are met and one where relief is unavailable. Each should show separately the amount sent to the brand, the amount paid to the tax authority and the total cash outflow. This will allow you to compare the true impact of a seemingly low licence fee.

4. Allocate the cost of missing documentation in the contract

The existence of a double taxation treaty does not mean a reduced rate can be applied automatically. You need to check the tax residence certificate, any translation or certification requirements, and the treaty’s other conditions. The period covered by the certificate and when it must be renewed also matter.

Negotiate a workable timetable for providing documents in the contract. Specify which documents the franchisor must supply and by when, and how the parties will bear any additional tax caused by missing or late documents. If a refund or adjustment becomes possible later, also establish who will handle the process and who will be entitled to the resulting amount.

Any change of payment recipient by the foreign company also needs scrutiny. If the new company is based in a different country, the previous tax assessment may no longer apply. Ask for a clause requiring advance notice of recipient changes and a review of their financial implications.

Practical takeaway: Before signing, have your lawyer check the contractual allocation of the tax burden and your tax adviser verify the payment calculations. Do not finalise your overseas payment budget until the net or gross fee, applicable taxes and required documents are clearly set out in a single worksheet.