There’s an irresistible appeal to owning a ‘business-in-a-box’ with an established brand. Typical franchisors offer you the chance to start off a business with a leap. They save entrepreneurs the time and investment required to create and launch a new brand and instantly guarantee footfall in a new location. It’s a pragmatic way to create a truly global business on a local level. However, a local business with a global footprint comes with an added layer of complexity in the form of taxes. Here’s what you need to know about your tax implications if you decide to purchase a new franchise:

Double Taxation and Foreign Tax Credits

Although your franchisor could be from any part of the world, there’s a relatively high chance the company is located in the US. The US tax system is as complicated as it is unique. America is one of the only countries that taxes its citizens and companies regardless of where they operate. So, if a US passport holder lives in another country, they still have to pay US taxes.

This unique system extends to companies and can complicate the franchise model. The MacDonalds’ franchise, for example, is one of the many mega corporations that operate a global network of franchises. A McDonald’s outlet in the UK will have to make special arrangements to ensure the operation is tax compliant. One of the issues with an international franchise arrangement is double taxation.

Double taxation occurs when two territories try to tax the same income stream. To avoid this, some countries like the UK impose a withholding tax on the income. Essentially, the local business (franchise) holds back a certain portion of the revenue and pays it to the local tax authority. Once this has been paid, the franchisee obtains a tax certificate that the US franchisor can use to get tax credits from the US government.

Understanding Tax Treaties

Two or more countries can come together to sign a tax treaty that simplifies this process and ensures businesses are not taxed too much. Experts estimate that there are nearly 3,000 tax treaties in effect across the world. The US forms a small fraction of these treaties and only has about 68 active tax treaties at the moment. Fortunately, the United Kingdom is remarkably prolific with these. It has over 130 tax treaties with different countries currently active. One of those treaties is with the United States, which means a broad range of franchisors in the US have easier access to the British market.

Withholding Taxes

Withholding taxes is an interesting phenomenon of international business. These taxes have a direct impact on a franchise where the company is overseas and the operation is in the UK. Around the world, the basic nature of withholding taxes is similar.

The local entity holds back a certain percentage of the profits to pay to the local tax authority, and the overseas firm can reclaim this as a tax credit. The local payee is the last person in the country to hold the cash before it leaves to foreign accounts, which is why this entity is liable for withholding the tax. Failure to do so could result in fines and interest payments to HMRC. Generally, the tax rate for such payments ranges from 0% to 15% on profits, dividends, and royalties.

The UK/US tax treaty specifically mentions terms like ‘royalties’ and ‘industrial, commercial, and scientific experience’. Royalties under this treaty are exempt from taxes. However, it would be wise to consult a tax lawyer before you set up your franchise for the first time. Setting up a franchise for the first time is a daunting experience.

While the business model is relatively easy to understand and requires less effort, there are certain special provisions for franchises – especially when the franchisor is overseas and taxes are to be paid in the UK. Hire or speak to a professional before you sign up for a new franchise offered by a foreign multinational.

Related: Franchise Fees explained – Make sure you consider how to fund both up-front expenditure and various running costs when you start a franchise business.