Franchise is a business model where franchisee is given the rights to offer, sell or distribute products or services based on the systems and marketing plans set by the franchisor.
Every franchisees who intend to undertake the franchise business are normally required to pay franchise fee, royalty, promotion and advertisement fees, training fees and service fees. These expenses are allowable for tax deduction except for franchise fees as these are classified as capital in nature.
Franchise fees were regarded as capital and not revenue in nature on the basis that the payments were for the acquisition of an assets, that is the payment was made in order to obtain an exclusive right.
Therefore, the franchise fees were not incurred wholly and exclusively in the production of gross income, but to acquire an assets. This was held in the Shaklee case that franchise fees were not deductible under Subsection 33(1) of the Income Tax Act 1967.
As such, it can be seen that the purpose of the expenditure in the form of franchise fees is to obtain the right to commence the business.
It was a great news to all local franchisors and franchisees for such fees are now deductible in tax with effect from 1 January 2012.
Why local? Because this is only applicable to local franchise brands!
This is part of the efforts from the Government to promote local brands in Malaysia for Malaysian.
Visit here for a great story of locally made brand: Franchising with Old Town Coffee