Franchises in Luxembourg
As in other parts of the world, Luxembourg also has franchises and the general concept is similar to the concept present in many other countries, however, the legal definition and the way they are structured and regulated is different. Let's start our analysis by reviewing what a franchise is and its legal basis in Luxembourg.
What is a franchise and how is it regulated?
Unlike France, which has the Doubin law, or Belgium, which has the Laruelle law, in Luxembourg there is no specific legislation for franchises, so they are governed by general contract law and competition law, together with general rules on intellectual property and taxation.
In the absence of specific legislation, Luxembourg case law has been key to clarifying how franchises should be understood and regulated.
The franchise agreement
The lack of a specific legal framework for franchises means that the contract between franchisor and franchisee is the fundamental pillar for structuring this commercial relationship. Its terms can be freely established as long as they do not violate legal norms or fundamental principles such as good faith and public order, and its main functions are as follows:
- Formalize the commercial relationship between franchisor and franchisee.
- Establish the rights and obligations of both parties.
- Regulate the use of intellectual property assets such as brands and logos.
- Define the operating rules and quality standards that the franchisee must comply with in order to preserve the brand's identity and reputation.
- Ensure that economic expectations are clear and agreed upon.
However, although the terms can be freely established, the definition provided by the District Court of Luxembourg in the case of Wintergarten Feddersen SARL v. Soluver SARL establishes the essential elements that every franchise contract must include to ensure that the relationship between the parties is clear and in accordance with expectations:
1. Use of the brand and insignia
The franchisor must grant the franchisee the exclusive or non-exclusive right to use the brand, logos and commercial insignia that they own. This includes access to the prestige and reputation that the brand already has in the market.
2. Assistance and experience of the franchisor:
The franchisor must provide ongoing support to the franchisee, including initial and regular training, technical and commercial advice and access to its know-how. But this assistance is not limited to this, as the definition states that the assistance covers “all areas” necessary for the development of the business.
3. Financial compensation:
The franchisee agrees to pay certain financial compensation to the franchisor in exchange for the rights granted and the assistance provided. This may include an initial payment or entry fee, royalties on income or sales, and various other recurring payments such as contributions to a marketing fund.
4. Independence of the franchisee:
Although the franchisee operates under the franchisor's standards, the franchisee remains an autonomous company with its own responsibility for the management of its business.
5. Franchisor's rules and guidelines:
The franchisee agrees to operate its business according to the guidelines dictated by the franchisor which may include maintaining quality standards, the need to follow specific operating procedures or having to maintain certain commercial policies. These limitations are necessary as they guarantee the homogeneity of the franchise network and protect the value of the brand.
6. Collaboration in mutual interest:
The contract and the relationship between the parties should be designed to maximize the benefits for both the franchisor and the franchisee and effective collaboration based on common objectives should be promoted.
Advantages and disadvantages of franchising and why to do it in Luxembourg
When talking about the advantages and disadvantages of franchising, two points of view must be taken into account: first, the advantages and disadvantages of franchising as a business model and second, the advantages of establishing a company following this model in Luxembourg. Let's examine both aspects separately.
Advantages and disadvantages of franchising
We will first analyze some of the advantages and disadvantages of this business model regardless of its location. In the next point, we will look at the particularities and advantages that Luxembourg offers to franchises.
- ➕ Proven model: the franchisee operates a business based on a successful and proven system, which reduces the risks compared to starting a business from scratch.
- ➕ Brand recognition: franchises can benefit from an already established brand and can therefore attract customers much more quickly and easily than an independent business.
- ➕ Support from the franchisor: the franchisor provides initial training, technical assistance, marketing and ongoing advice. This facilitates the operation of the business and can be extremely useful for entrepreneurs with little experience.
- ➕ Economies of scale: the franchisee can take advantage of the franchisor's purchasing agreements and thus reduce supply costs.
- ➕ Fewer barriers to entry: it is a more accessible entrepreneurship option for entrepreneurs with little experience as the franchisor offers help and advice in all areas.
- ➖ Lack of autonomy: the franchisee must operate under strict guidelines from the franchisor.
- ➖ High initial and recurring costs: entry fees, ongoing royalties and other contributions can be significant and affect profitability.
- ➖ Risk of dependency: the success of the franchisee depends to a large extent on the strategic decisions and reputation of the franchisor.
- ➖ Territorial restrictions: many franchises limit the franchisee's area of operation, which can restrict the growth of the company and affect profitability.
- ➖ Potential conflicts: differences with the franchisor over royalties, guidelines or support provided can generate contractual tensions.
Why establish a franchise in Luxembourg
Luxembourg is a very attractive destination for establishing a franchise due to its combination of economic, strategic and legal advantages. The following are just a few of them:
1. 🏦 Solid and stable economy
Luxembourg is one of the most economically stable countries in Europe and the world, with a high GDP per capita, a strong consumer market and a high standard of living. This political and economic stability offers a safe and reliable environment for business.
2. 🌍 Strategic geographical position
The country's location in the center of Europe allows companies to directly access neighboring markets. This proximity, together with its excellent land and air transportation infrastructure, allows for very fast access to neighboring markets such as France, Germany and Belgium, and within a reasonable time to a large percentage of European countries. This is ideal for franchises wishing to expand regionally.
3. 🤝 Favorable business environment
Luxembourg is known for being a business-friendly place, with efficient administrative processes and a strong focus on supporting new business initiatives. The government and local institutions offer various support mechanisms including financial support to encourage entrepreneurship.
4. ⚖️ Absence of specific regulations for franchises
The lack of specific legislation for franchises allows the parties a great deal of contractual freedom to agree the terms of their relationship. It simplifies the process for international franchisors who wish to operate in Luxembourg under their own standards.
5. 🧾 Competitive tax system
Although franchises are subject to general tax laws, Luxembourg offers various tax advantages such as the possibility of benefiting from the VAT-exempt small business regime, which applies to businesses with a turnover of less than 50,000 euros.
In addition, Luxembourg has an advantageous tax regime for intellectual property (IP) rights introduced by the Law of April 17, 2018, which offers significant benefits for companies that develop or use intangible assets such as patents or software. This regime allows 80% of the net income derived from certain intellectual property rights to be exempt from corporate income tax and for such assets to be partially excluded from the tax base for net wealth tax.
For franchises this can represent a significant advantage if the business model includes the use of eligible IP assets such as the development of proprietary operating software or patented technologies associated with the franchise. For example, a franchisor that has developed a specific application for the management of its franchise network could benefit from the IP tax regime and thus reduce its tax burden on the income generated by the use or license of that technology.
However, this regime has its limitations since trademarks, trade names and other distinctive signs associated with franchises, which are central assets in this business model, are excluded from the IP tax regime. This means that franchisors who base their revenue strategy mainly on royalties derived from the use of trademarks cannot benefit from this tax advantage. In addition, the current regime requires that eligible IP rights be linked to actual research and development (R&D) activities carried out by the taxpayer in Luxembourg, which may limit its application to franchisors who do not develop technology or innovation directly in the country.
How to open a franchise in Luxembourg?
To finish, we will explain the step-by-step process for establishing a franchise in Luxembourg, whether acting as a franchisee or franchisor.
Decision of the role
Opening a franchise in Luxembourg begins with the decision to act as a franchisee or franchisor. In the first case it is necessary to research the franchises available on the market and consider factors such as the initial costs, the royalties to be paid and the support offered by the franchisor. On the other hand, those who wish to become franchisors must develop a replicable business model, register a trademark and design operating manuals, training programs and a detailed contract for future franchisees.
Preparing a business plan
Before starting the legal process of incorporation, it is essential to carefully prepare a franchise business plan that contains a market analysis, a marketing strategy, the organizational structure and financial projections, among many other considerations.
This document is essential as it serves as a roadmap to guide the growth of the company and make informed decisions. In addition, it is a key tool for attracting investors, obtaining financing, evaluating the viability of the business and anticipating challenges and opportunities.
Review and signing of the franchise agreement
As mentioned at the beginning, in Luxembourg there is no specific legal framework for franchises, so the franchise contract is the pillar of the relationship between franchisor and franchisee. That said, the time to review and sign the franchise contract depends on the role assumed. If acting as a franchisee, the franchise agreement is signed before setting up the company as it formalizes the rights and obligations necessary to proceed with the investment. If, on the other hand, acting as a franchisor, the franchise agreement is prepared and used after the company has been set up, as this entity will be the owner of the intellectual property rights and responsible for granting licenses to franchisees. In both cases, it is essential to have legal advice to ensure that the terms of the contract are clear and balanced.
Formalization of the company
Before you can start operating, it is necessary to formally establish the company in Luxembourg. This includes the drafting and signing of the statutes, the registration of the company in the Trade and Companies Register (RCS), and the publication of the constitutive act in the RESA Electronic Bulletin.
Obtaining a business license
In Luxembourg, all companies wishing to carry out commercial, industrial or craft activities must apply for an establishment authorization from the Ministry of Economy. This process requires demonstrating professional competence and the viability of the business project.
