Before preceding with the conclusion of a Franchise Agreement with a Franchisor a decision must be taken as to what form the franchisee will take. There are several options, these being namely a limited company, a partnership or a sole trader. In general bearing in mind the particulars of the situation we would advise that a limited company is the better form for the franchisee to take.
GENERAL OR LIMITED PARTNERSHIPS
Companies in general are governed by the Cyprus Companies Law, Cap 113 of the Laws of Cyprus – as amended, this law is almost identical to the United Kingdom’s former Companies Act 1948. In relation to partnerships these are registered in Cyprus under the Partnerships and Business Names Law Cap 116 of the Laws of Cyprus as amended and are also closely based on the English Partnerships legislations. It is important to note that as a full member of the European Union all transactions and business matters are also subject to the European Laws which will take precedent in the event of a discrepancy with the national law.
In Cyprus, the Companies Registrar is a governmental body which regulates activities and approves all applications in relation to companies, ensuring that during the initial incorporation / formation and subsequent changes and amendments to the company structure the rules and regulations for Companies are strictly complied with.
For the incorporation of a company it is necessary to have a registered office which must under Cap Law 113 be situated in Cyprus, there must also be the minimum number of directors according to the Cap 113 Laws and a company secretary. The shareholders of the company must be disclosed and will appear on the corporate documents, it is however possible to use nominee shareholders which through the use of a declaration of trust ensures that the anonymity of the shareholders is maintained.
In relation to a partnership there will be 2-20 natural / legal persons who together carry on a business with a view to making a profit.
The Companies (Amendment) Law of 2000 (Law 2(I)/2000) introduced single-member companies. The Companies (Amendment) (No 3) Law of 2000 (151(I)/2000) introduced new provisions as to the validity of transactions of companies and as to the information which must be included in the official documents of companies.
FOREIGN BUSINESS ENTITIES & TAXATION
Foreign business entities and foreign investment are encouraged here in Cyprus and as a result there are no real tenable restrictions that apply which are only relevant to foreign business entities and foreign investment. Any restrictions, for example, the fact that the registered office of the company must be here in Cyprus, also applies to nationals of Cyprus and is not aimed specifically at foreigners.
As of 2009 Cyprus has been included on the “white list” of the OECD as one of only 40 countries in the world which have substantially implemented internationally agreed tax standards, therefore reaching the highest possible international standards.
Corporation tax is based on ‘taxable trading profit’ which is the accounting profit as disclosed by the company’s income statement, as adjusted for tax purposes. The Corporate tax for the profits of a limited company is set at a rate of 10% where as Public corporate bodies are taxed at a rate of 25%.
Cyprus incorporated IBC’s (International Business Companies), which are companies that are totally owned by non residents are subject to tax on their taxable profits at a rate of 10%, since the 1st January 2003, an IBC no longer has a separate taxation status, and is therefore taxed according to the same principles as a regular company.
An individual can be taxed up to 30% depending on their taxable income level under the Cyprus Income Tax Law.
LABOUR LAW AND EMPLOYMENT LAW FOR FRANCHISORS
In theory and in the main in practice also, corporate entities involved in commercial activities as franchisors are subject to the same labour and employment laws as any other corporate entity involved in business activities. Cypriot labour Law is a combination of Common Law and Statute. Primarily the employment relationship is governed by ordinary contract law principles and is supplemented by statutory rights and obligations where appropriate.
There should always be a franchise agreement in place and the agreement should make specific provisions in the relevant sections which refer to any employees, therefore reducing any risk of misinterpretation and any issues which may arise in the event of a dispute or discrepancy.
As with all other laws and regulations due to the European Union participation of Cyprus the European Laws will take supremacy in the event that a contradiction of the Cypriot National Laws occurs.
INTELLECTUAL PROPERTY MATTERS
Intellectual Property Rights (IPR) which become relevant in franchising are protected by statutory provisions and the contractual terms contained in the franchise agreement, such terms may for example stop the franchisee from using the franchisors rights after the expiry of the term of the agreement or prevent the use of the rights in a way which is prohibited.
Trademarks are governed by the Trade Marks Law, Cap 268, which covers the rights of the proprietor (the franchisor) and the registered user (the franchisee), these rights, protections and obligations are like those which cover trademarks in general and are not specifically designed for the franchise relationship. Trademarks of both domestic and foreign franchisors are protected by the same regulations.
Know – how is one of the most important rights granted in any franchising agreement, it is this information that relates to the franchisor’s business and operations and covers all aspects such as the ways in which business is done, the advertising and marketing procedures and techniques, policies for staff training, everyday business and pricing and the giving of the good that comes with the franchisors business for example the ways in which the franchisor has established the quality and consistency of his business and the passing on of the expertise in the products and services.
The best method of protection that is available to the know – how of a business comes through contractual law, this happens by the relevant provisions being placed into the franchise agreement. It is protected by contractual law best because copy right law and trade mark law do not normally cover know – how unless it relates to an original, distinctive representation of the franchise business for example a slogan which would fall under the provisions of copyright law (The Right of Intellectual Property Law, Law 59 of 1976, as amended by Law 63 of 1977 and Law 18 of 1993) and good will is protected separately by the law of passing off.
REAL ESTATE IN RELATION TO THE FRANCHISE
The relevant aspects of both real estate law and the real estate market itself which are applicable to franchisors are applicable to both foreign and domestic franchisors. The general law in Cyprus which covers most aspects of Real Estate / Land Law is the Immovable Property (Tenure, Registration and Valuation) Law which is now Cap 224 as amended several times over the years.
The franchise agreement may in fact make provisions for the use of the franchisor’s real estate or provisions which entitle the franchisor to choose a property for the franchisee to operate from; this is justifiable in that ultimately it is the franchisor’s name and business which are being used. In such a situation contractual law will govern the interpretation of the agreement. The agreement must however be in line with the relevant provisions of Cap 224 and also not cause contradiction to European Law.
LEGAL REGULATION OF THE FRANCHISE
There is no franchise specific legislation in force under Cypriot law, as this article explains the laws and regulations which govern franchises are drawn from the different body of laws governing different aspects such as contractual law, intellectual property law and ultimately European law.
A franchise in its most simplistic form can be described as a ‘licence’ which is given to someone for example a trader or a manufacturer which give him the ability and know how needed to sell or make a particular product for a specified time. This licence is given by the franchisor to the franchisee.
The definition adopted by the European Code of Ethics for Franchising should be considered as it will prove useful in the absence of a national law definition, even though Cyprus is not one of the member associations of the European Franchise Federation to date;
Franchising is a system of marketing goods and/or services and/or technology, which is based upon a close and ongoing collaboration between legally and financially separate and independent undertakings, the Franchisor and its Individual Franchisees whereby the Franchisor grants its Individual Franchisees the right, and imposes the obligation, to conduct a business in accordance with the Franchisor’s concept. The right entitles and compels the individual Franchisee, in exchange for a direct or indirect financial consideration, to use the Franchisor’s trade name, and/or trade mark and/or service mark, know-how(*), business and technical methods, procedural system, and other industrial and/or intellectual property rights, supported by continuing provision of commercial and technical assistance, within the framework and for the term of a written franchise agreement, concluded between parties for this purpose.
(*)”Know-how” means a body of non-patented practical information, resulting from experience and testing by the Franchisor, which is secret, substantial and identified;
“secret” means that the know-how, as a body or in the precise configuration and assembly of its components, is not generally known or easily accessible; it is not limited in the narrow sense that each individual component of the know how should be totally unknown or unobtainable outside the Franchisors business;
“substantial” means that the know-how includes information which is of importance for the sale of goods or the provision of services to end users, and in particular for the presentation of goods for sale, the processing of goods in connection with the provision of services, methods of dealing with customers, and administration and financial management; the know-how must be useful for the Franchisee by being capable, at the date of conclusion of the agreement, of improving the competitive position of the Franchisee, in particular by improving the Franchisee’s performance or helping it to enter a new market.
“identified” means that the know-how must be described in a sufficiently comprehensive manner so as to make it possible to verify that it fulfils the criteria of secrecy and substantiality; the description of the know-how can either be set out in the franchise agreement or in a separate document or recorded in any other appropriate form.
It is important that one doesn’t confuse the franchise relationship with other methods of distribution, commercial agency and employment terms.
It can be said that the general principles of law will apply to the offering and selling of franchises here in Cyprus, as stated above Cyprus does not have a national Franchise association and has not to date adopted the European Code of Ethics which was compiled by the European Franchise Federation, as a result of this such codes can only be used as guidance.
Any fraudulent or deceptive practices will be handled under the relevant countries laws, for example the Companies Law for acts done in relation to a company or general contract law for acts which amount to a breach of contract. This is as a result of the lack of specific franchise laws here in Cyprus.
As previously stated due to the lack of specific franchise legislation in Cyprus the general principles of law are applicable to the franchise relationship. The most important area of law is that of contractual law, followed one could say by intellectual property law and the overriding principles of the European Law. As well as these fundamental laws which will form the basis of the franchise relationship other areas of law such as taxation, competition, real estate and employment law will all be relevant to the relationship. As and when issues arise it will be for the parties to approach their lawyers for advice on the matters and the areas of law concerned.
LEGAL REGULATION AFTER THE FRANCHISE CONTRACT BECOMES EFFECTIVE:
After the franchise agreement comes into affect it will be regulated by the general principles of law. The actual agreement will be governed by contract law and aspects arising out of the agreement will be regulated by the relevant law, for example competition law will be governed by related common law principles such as the restraint of trade doctrine and the tort of passing off which form part of the Cypriot law.
OTHER GOVERMENT & TRADE ASSOCIATION POLICIES
Directly and in writing the franchise relationship is not specifically affected by any other government or trade association policies, however, if a matter arose which is linked to trade then the trade and labour laws of Cyprus would be applicable to the franchise agreement and relationship.
TERMINATION OF THE FRANCHISE RELATIONSHIP
As the franchise relationship is based upon a contract between the franchisor and the franchisee the general principles of contract law will apply to the termination of the franchise relationship. Most franchise relationships are established for a definite period of time, after which the relationship will cease to exist naturally with sometimes continuing obligations, for example that may relate to confidentiality or competition, these being governed by the general principles of confidentiality and competition laws. If the franchisee agreement is for an indefinite period of time the franchisor may be in a position to terminate the agreement if they give a reasonable period of notice to the franchisee, however this will depend on the individual circumstances at the time as to what is reasonable, however a rough guide to the period of reasonableness would be six months.
The circumstances that the franchisee may terminate the franchise agreement / relationship are the same as those stated above for the franchisor and are governed by the same laws and regulations. The rules and regulations do not differ or rank in any different order of priority for either party.
RENEWAL OF A FRANCHISE AGREEMENT
It is generally the case that the duration of the franchise agreement will be stated in the agreement itself, the same is usually said for the renewal potential of the agreement. If renewal is not expressly provided for the franchisor may refuse to renew the agreement as may the franchisee decide that they do not wish to further the relationship by way of renewal. As the agreement will be governed by the general principles of contact law there is always the possibility that renewal of the agreement may be implied from the terms of the agreement or the actions / intentions of the parties. It will also be the case that the franchisor may refuse to renew the agreement for reasons stated in the agreement or for repeated minor breaches of the agreement which did not lead to its termination during its life time. If the parties do not wish for anything to be possibly implied then they should make it clear in the actual agreement that the agreement will not be renewed unless a written decision is taken by the parties stating otherwise.
TRANSFER OF OWNERSHP INTERESTS
The franchise agreement should specify the actual rights and obligations of each party and there should be a specific term which relates to the ability to transfer the rights gained under the franchise.
PAYMENT OF FEES – ROYALTIES – OTHER PAYMENTS
As already discussed above there are no specific franchise laws and regulations and therefore the amounts and payments of fees for example, royalties, will be for the parties to agree between them, however it is worth noting that approval from the Central Bank is required where funds are to be remitted abroad in the form of royalties, except where they originate from an International business entity. Franchise agreements are not considered in a different light than other agreements as such and therefore do not require any specific different consideration, the agreement is seen as a royalty contract under which rights to a trade mark or good will are bought. It is therefore advisable to pre-discuss the plans with the central bank in order to gauge whether approval will be given as it is usually the case that royalties form a large part of each franchise agreement. The Central Bank will consult with the Ministry of Industry, Commerce and Tourism or the relevant governmental departments when considering whether or not it will grant approval for the royalty.
Royalties and service fees are taxed as trading income on an accrual basis.
Under Section 30 of the Income Tax Law royalties derived from sources within Cyprus are subject to a 10% rate of withholding tax when payable to foreign franchisers, royalties are not deemed to derive from sources within the republic of Cyprus when the relevant rights are granted for use outside the republic of Cyprus. However, the withholding tax will be zero or reduced when the franchiser is located in a country with which Cyprus has entered into a double taxation treaty. Foreign franchisers in treaty countries will only be able to claim the reduced or zeroed withholding tax rate in Cyprus is they do not have a permanent business or establishment in Cyprus.
If the franchisor is located in a non treaty country the 10% is payable to the Cyprus tax authorities.
The banks in Cyprus have the ability to make payments in many different currencies and as there are no specific laws or regulations relating to this point, unless specifically contained in the franchise agreement, payments should be able to be made in the currency choice of the parties.
CONFIDENTIALITY COVENANTS & GOOD FAITH PROVISIONS
As there is no particular law designated in Cyprus specifically to franchise agreements the parties must follow the law of contract, in this respect if the agreement contains a confidentiality clause and it is valid and legally placed in the agreement then it becomes part of the agreement, an breach of the clause would most likely constitute a breach of contract which would allow for a legal action to be brought against the breaching party.
It is generally expected that all parties who contract to deal with another party will do so in good faith, The franchise agreement is based upon and regulated mainly by the contract laws of Cyprus, the parties are obliged to comply with any disclosure requirements necessary, to ensure that no misrepresentation occurs or undue influence and also to have the intention to create legal relations. If a situation occurs where one party feels that the other has mislead them they may be able to bring a legal action against the other party.
CONTENTS OF THE FRANCHISE AGREEMENT
The provisions which can be included in the franchise agreement are based upon the contractual law rules and therefore the agreement must comply with the national contractual law. The agreement should not contain any provisions which are contrary to public morals, prejudicial to family life, prejudicial to the administration of justice, prejudicial to foreign relation, that would lead to the committing of a crime or a civil wrong or that are an unreasonable restrain of trade. Further the agreement should not contain any provisions which go against the specific areas of law which are relevant to the franchise relationship, for example, any mention to taxation must comply with the laws of taxation. There are also other potential restrictions which although not legal requirements should be considered and not included in the franchise agreement, for example any trade restrictions should be avoided as should any terms which are unfairly biased towards either party, therefore offending the general principals of contract law. The parties should seek the advice of their lawyers when reviewing the franchise agreement.
No laws have been passed to date in Cyprus which in particular regard franchising and competition issues however there are national Cypriot laws which address related issues and European Law which deals with matters that relate to competition law. The Cypriot courts, although not bound by English case law are often seen to take a persuasive view of the decisions taken. The most relevant law which has been passed in relation to competition law is the Protection of Competition Law, Law 207 of 1989, as amended by Law 111 (1) of 1999 and Law 87 (1) of 2000. The provisions of the law are in general a reproduction of Articles 81 and 82 of the European Community (EC) Treaty formerly Articles 85 and 86 of the Treaty of Rome. The Protection of Competition Law provided for the creation of a Competition Committee which has the authority to order injunctions and impose fines to punish infringements of competition law. In relation to franchising it may be possible in the future for the Competition Committee to put forward recommendations to the Council of Ministers for the issue of regulations relating to activities which come within the ambit of competition policy and require further clarifications.
PROVISIONS RELATING TO DISPUTES
It is possible for the parties to decide between themselves and therefore to implement in the franchise agreement the law which will be applicable, the relevant jurisdiction and the procedure that they wish to be followed should a dispute arise. Particular care should therefore be given to the drafting and reading of the franchise agreement in relation to the jurisdiction and applicable law. It is possible for any dispute that may arise to be resolved through the courts based for example on a contractual dispute, an issue relating to competition law or an intellectual property issue, however an alternative and quite popular method of dispute resolution is that of alternative dispute resolution, this could be through arbitration or mediation and the parties should decide this prior to the signing of the agreement and they should also decide where the arbitration or mediation will take place.
OUTLOOK AND TRENDS
It is apparent that the number of franchises are growing in number and strength here in Cyprus, the existence of such franchising is undoubtedly beneficial for our economy and is welcomed by both governmental and regulatory bodies as well as businesses which are located here in Cyprus. This spread in the existence of franchises is not only good for our industry but also for the consumer to whom it grants wider access to good quality, tried and tested products and services, often those which they are already familiar with due to the good will of the product or service.
Unfortunately it is still the case that Cyprus has not approved and implemented a body of legislation designed specifically for the franchise relationship, this type of legislation is specifically needed now in Cyprus to support the national laws and regulations and work in harmony with the European Laws. It would also be beneficial for Cyprus to implement a type of ethical code, such as that which exists in the United Kingdom, which those entering into a franchise would be bound to follow in their dealings with each other.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Authors: Mr Yiannos Georgiades & Mrs Rebecca Seaberg