Buying a Franchise in the UAE: Tax Due Diligence on Franchise Fees

Two brands may quote similar franchise fees, but differences in tax treatment and invoice timing can change the amount you actually need to finance. When entering the UAE franchise market, do not simply ask, “How much are the fees?” Also ask whether they include tax, who issues the invoice, when payment is due, and whether input VAT can be recovered or the expense deducted for corporate tax purposes.

1. Understand the rules governing the invoice and the agreement

The UAE has no dedicated federal franchise law requiring a standardised pre-contract disclosure document or registration of franchise offerings under a specific scheme. The relationship is governed by general contract, civil and commercial law, including Federal Decree-Law No. 50 of 2022 issuing the Commercial Transactions Law. Federal Law No. 3 of 2022 regulating commercial agencies may apply to qualifying, registered arrangements, but it does not automatically apply to every franchise.

Tax treatment is governed by separate rules. VAT is regulated by Federal Decree-Law No. 8 of 2017, as amended, while corporate tax is regulated by Federal Decree-Law No. 47 of 2022, as amended. A contractual clause cannot change an obligation imposed by law, but it can clarify how the cost is shared between the parties within legal limits.

Separate two questions: who is legally accountable to the Federal Tax Authority, and who bears the cost under the agreement? Ask a tax adviser to review both answers, and do not treat the franchisor’s acceptance of particular wording as confirmation that it is correct for tax purposes.

2. Turn the fee proposal into a clear tax schedule

The UAE’s standard VAT rate is 5%, but do not automatically add it to every amount. The treatment depends on the nature and place of supply, the status of the parties and other conditions. Nor should you assume that all fees must be invoiced on the same date.

Ask for a schedule attached to the agreement covering initial fees, royalties, training, support and any other services. For each item, record:

• The entity providing the service and the entity issuing the invoice.
• A description of the service and the period it covers.
• Whether the price includes or excludes tax.
• The proposed tax treatment and its basis.
• The invoice timing, payment deadline and required documentation.

The phrase “the franchisee shall bear all taxes” is broader than it may appear. Negotiate a clear definition of the taxes covered, excluding any unintended transfer of taxes on the franchisor’s own income. Also ask for clarification on how changes in legislation, invoice corrections and refunds of amounts paid in error will be handled, rather than leaving these matters to later correspondence.

3. Pay attention to fees paid to an overseas franchisor

Having a foreign franchisor does not mean its invoices have no UAE VAT implications. Imported services may fall under the reverse charge mechanism where the relevant conditions are met. Under this mechanism, the recipient accounts for VAT in accordance with the applicable rules, rather than the foreign supplier collecting it.

Ask your adviser to determine the treatment of each service, rather than treating all services from a brand as a single category. The entity licensing the brand may differ from the one providing training or support. Check that the beneficiary of the bank transfer matches the contracting party and the invoice issuer; any discrepancy needs a documented explanation.

If the franchisor proposes invoicing some fees through a UAE company and others from overseas, request an accurate description of the services and each company’s responsibilities. Do not let split invoicing replace an analysis of the transaction, and do not assume that the absence of VAT on a foreign invoice removes your local obligations.

4. Distinguish between recovering VAT and deducting an expense

Recovering input VAT is not the same as deducting franchise fees when calculating income subject to corporate tax. The former concerns VAT and the conditions for its recovery; the latter concerns the treatment of an expense under corporate tax rules. Their financial effects may also arise at different times.

Do not base your decision on a promise that “all fees are immediately deductible”. Initial fees relating to a right that lasts for several years may require different accounting and tax treatment from recurring support fees. Request advice explaining the nature of each amount, the supporting documentation, when it should be recognised and any restrictions that apply.

For financing purposes, prepare a cash flow forecast that shows gross payments separately from the timing of any expected tax recovery. Even where you are eligible to recover tax, do not assume the cash will return on the day you make the payment. Test whether the business can withstand delays without compromising rent or salaries.

5. Agree correction procedures before signing

Ask for a commitment to issue correct tax invoices where required, provide credit notes when the consideration is adjusted in accordance with the law, and correct errors within an agreed timeframe. Specify the point of contact and the documents needed if you challenge the tax treatment.

Also discuss each party’s responsibility for the consequences of its proven errors, without assuming that the agreement transfers statutory liability towards the Federal Tax Authority. Do not unilaterally stop paying amounts that are due; have a legally reviewed contractual procedure for handling disputed sums.

Practical takeaway: Before signing, obtain a fee schedule setting out the tax treatment, a written tax review and a cash flow forecast that separates payments from tax recovery. Compare brands on the basis of documented actual costs, not just the headline figure in the proposal.