Starting a franchise as a freelancer: entry fee, royalties and VAT

What you pay the franchisor

Most franchise agreements have three types of fees. The entry fee is a one-off amount for the right to use the formula, often including training and start-up support. The royalty is an ongoing fee, usually a percentage of your revenue or a fixed monthly amount. The marketing fee is a contribution to national advertising and the formula's website. On top of that there may be mandatory purchases, software costs or prescribed fittings for your premises.

The Franchise Act has applied since 2021. The franchisor must give you information well before signing about, among other things, the fees and the financial side of the partnership, and after that information there is a cooling-off period of at least four weeks during which the agreement may not yet be concluded. Use those weeks: have the figures calculated in a business plan and ask other franchisees about their experiences. Costs you incur before registering, such as advice on the contract, can often still be included later, see reclaiming VAT on pre-start costs.

The entry fee: capitalise and depreciate

The entry fee gives you a right for several years. That is why you do not deduct it in one go, but put it on your balance sheet as an intangible asset and depreciate it over the term of the agreement. For tax, such an asset may be depreciated by at most 20% a year. With a five-year contract that fits neatly; if the contract runs ten years, you depreciate over ten years. How that choice works in general is explained in capitalise or deduct at once and depreciation: straight-line or declining.

If you take over an existing branch with regular customers, part of what you pay may be goodwill. For tax, goodwill may be depreciated by at most 10% a year. In that case, have the purchase price split in the agreement into equipment, stock, the franchise right and goodwill, so each part gets the right treatment. If your contract runs for less than five years, agree the treatment with your bookkeeper.

Royalties, marketing fee and VAT

Royalties and the marketing fee are ordinary business costs that you deduct in the year they relate to. A Dutch franchisor normally charges 21% VAT on them, which you reclaim as input tax. If the franchisor is based in another EU country, you receive an invoice without VAT and declare the VAT yourself in your return, then deduct it again in the same return. How that reverse charge works is set out in when VAT is reverse-charged.

Mind the difference between revenue and profit. A royalty of, say, 6% of your revenue is also due in a month in which you keep hardly anything. Check in your contract whether the percentage is calculated on revenue including or excluding VAT, and include the fixed payments in your cash flow forecast. That way you see in advance which months will be tight.

An independent entrepreneur, even within a formula

For income tax, as a franchisee you are simply an entrepreneur: you bear the risk yourself, you invest your own money and your customers are the public, not the franchisor. With enough hours that entitles you to the self-employed deduction and, as a starter, the starter deduction. But the more tightly the formula prescribes your work, the thinner that line becomes. If the franchisor sets your working hours, your prices and your customers, and you effectively only work for them, the question may arise whether you are really employed. That test resembles the one for bogus self-employment.

Also look at the legal form. Some franchisors require a private limited company, for instance because of the size of the investment or liability. A sole trader business is simpler and cheaper, and with the entrepreneur's deductions often more favourable at a modest profit. What suits you depends on your expected profit and your risks; the trade-off is covered in sole trader or private limited company.

Frequently asked questions