Philippines - Franchising Philippines - Franchising
Franchising continues to be one of the fastest growing sectors of the Philippine economy. Demand continues to grow for new products and services, providing new opportunities for U.S. companies. Population growth, consumer preferences, and increased economic activity have contributed to the growth of franchises in the Philippines.
Foreign franchisors offer financing schemes and marketing support to local franchisees in order to sustain overseas franchises. The most successful companies that are expanding market share generally receive such support from their foreign principal.
Master franchise fees vary widely depending on the type of business and are defined in the agreement between the parties. The royalty fee that a franchisor collects from a franchisee incorporates all aspects of the franchise business, which may include the use of trade name, trademark, and the system or concept of the franchise.
One hundred percent foreign ownership is allowed for Philippine retail trade enterprises (which most franchise outlets are) provided they comply with the pre-qualification requirements and which meet all of the following requirements: (a ) upfront paid-up capital of US$ 2.5 million or more, provided that investments for establishing a store is not less than $830,000 or (b) specializing in high-end or luxury products, provided that the paid up capital per store is not less than $ 250,000.00 (Section 5 of Republic Act 9762). No foreign equity is allowed in Retail Trade Enterprises with less than the above-mentioned capital.
The GRP’s liberalized trade practices are embodied in the Intellectual Property Code of the Philippines – Republic Act No. 8293. Under the law, franchisors do not have to register their franchise agreements as long as these agreements do not contain any of the prohibited clauses under Section 87 and do contain all the mandatory provisions under Section 88 of the IP Code. The law also removed the ceiling on royalties. Royalty payments may be remitted through any Authorized Agent Bank (AAB) of the Philippine Central Bank (Bangko Sentral ng Pilipinas (BSP).
- Franchise agreement clauses prohibited under Section 87 are those that:
- Impose upon the licensee the obligation to acquire from specific source capital goods, intermediate products, raw materials, and other technologies, or of permanently employing personnel indicated by the licensor;
- Reserve the right to fix the sale or resale prices of the products manufactured on the basis of the license;
- Contain restrictions regarding the volume and structure of production;
- Prohibit the use of competitive technologies in a nonexclusive technology transfer arrangement;
- Establish a full or partial purchase option in favor of the licensor;
- Obligate the licensee to transfer for free to the licensor the inventions or improvements that may be obtained through the use of the licensed technology;
- Require payment of royalties to the owners of patents for patents that are not used;
- Prohibit the licensee to export the licensed product, unless justified for the protection of the legitimate interest of the licensor such as exports to countries where exclusive licenses to manufacture and/or distribute the licensed product(s) have already been granted;
- Restrict the use of the technology supplied after the expiration of the technology transfer arrangement, except in cases of early termination of the technology transfer arrangement due to reason(s) attributable to the licensee;
- Require payments for patents and other industrial property rights after their expiration or termination arrangements;
- Necessitate that the technology recipient shall not contest the validity of any of the patents of the technology supplier;
- Restrict the research and development activities of the licensee designed to absorb and adapt the transferred technology to local conditions or to initiate research and development programs in connection with new products, processes, or equipment;
- Prevent the licensee from adapting theimported technology to local conditions, or introducing innovation to it, as long as it does not impair the quality standards prescribed by the licensor;
- Exempt the licensor for liability for non-fulfillment of his responsibilities under the technology transfer arrangement and/or liability arising from third party suits brought about by the use of the licensed product or the licensed technology; and
- Other clauses with equivalent effects.
- The laws of the Philip pines shall govern the interpretation of the contract and, in the event of litigation, the venue shall be the proper court in the place where the licensee has its principal office;
- Continued access to improvement in techniques and processes related to the technology shall be made available during the period of the technology transfer arrangement;
- In the event the technology transfer arrangement shall provide for arbitration, the Procedure of Arbitration of the Arbitration Law of the Philippines or the Arbitration Rules of the United Nations Commission on International Trade La w (UNCITRAL) or the Rules of Conciliation and Arbitration of the International Chamber of Commerce (ICC) shall apply and the venue of arbitration shall be the Philippines or any neutral country; and,
- The Philippine taxes on all payments relating to the technology transfer arrangement shall be borne by the licensor.