Russia gets Frozen Treats from Down Under as New Franchise Expands

New Zealand Natural Ice Cream achieved more than 30 percent growth of export sales in 2008 and just launched its first site in Russia, the 21st country to be granted a licence agreement.  

The east coast island of Sakhalin is the location for the latest outlet; the new master franchisee plans to open more branded stores on the east coast of Russia, then expand to the densely populated west coast to open outlets in Saint Petersburg and Moscow.  

New Zealand Natural Ice Cream managing director Shane Lamont said “Russia is a notoriously difficult market to break into. We weren’t sure if the first consignment of product would even get through the border, we are very fortunate with our choice of master licence holder, as they have strong contacts and understand the problems and challenges of doing business in Russia.   

“First feedback from our new Russian customers is that they love our ice cream, it is in a quality bracket they have never experienced before. They comment on the exceptional mouth feel; the creaminess and texture.”  

Lamont added “The New Zealand Natural franchise network is also showing outstanding growth in China and the US, where both countries have aggressive store opening programs underway.”  

The ice cream brand is also available through more than 1000 supermarket outlets across America and Asia, including Vietnam, Cambodia, Japan and Indonesia.  

The brand’s manufacturer, Emerald Foods, recently won a total of 21 awards across 12 categories in the New Zealand Ice Cream Manufacturers Awards.   

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The amount and type of fees for remuneration under a franchise agreement may be freely agreed upon by the contracting parties. A fee may be structured as a lump sum, a royalty based on sales or other measures, a commission deduction from any sales proceeds or mark-up earned by the franchisee, through any product imported and sold by the franchisee from the franchisor or other commercially negotiated terms. However, a franchise agreement may not be concluded for free, which may be a concern in case of an agreement between affiliated companies.

Another area closely scrutinized by both the tax and customs authorities is the allocation of any franchise fees between use of a system and the import of product for sale in the franchise. 

For example, Customs Code provisions require that any franchise fees for the marks or system be included into the cost of any product imported for sale in the franchised business (e.g., to prevent a designer handbag selling for $800 retail being imported at its material cost of $100 with a separate $700 license fee to the foreign franchisor).

While this is common under many customs regimes, the Russian authorities sometimes try and apply it to service businesses as well, for example claiming a license fee for a branded concept restaurant should be applied to the customs value of small items – coffee or marketing materials – imported as part of the relationship.

Franchise fees are treated favorably from a tax perspective. The franchisee should be able to fully deduct for profits tax purposes any franchise fees paid under a valid franchise agreement.

A foreign franchisor can generally avoid any need to register any local business or tax presence in Russia ( provided they do not themselves engage in the franchise business locally) and can receive the franchise fees free of any withholding tax provided the franchisor is based in one of the many countries with which Russia has a double taxation treaty.

Understanding Franchise Law:
Registration of the Executed Franchise Agreement

The Civil Code requires parties to register signed franchise agreements with two state authorities: the tax authorities and the Federal Service for Intellectual Property, Patents and Trademarks (Rospatent). Registration with Rospatent is compulsory if the franchisor grants to the franchisee the license of any trademark(s) or other IP enjoying legal protection in Russia.

Documents for registration of the franchise agreement both with the tax authorities and Rospatent may be filed either by the franchisor or the franchisee. The agreement should be registered with the tax authority which registered the franchisor as a legal entity in Russia. Where the franchisor has no legal presence in Russia, which will typically be the case if the franchisor merely franchises its business system to a local Russian franchisee and does not itself operate the franchised business locally, registration with the tax authority should be done by the franchisee where it operates the franchised business.

A foreign franchisor may undertake the obligation to register the agreement with Rospatent itself, which it frequently does given its concern in protecting its IP rights, but they may do so only through a duly licensed Russian patent attorney. A Russian-based franchisor or the local franchisee must also make the application through a patent attorney.

The registration requirements also apply to any amendments and/or termination of the franchise agreement. A unilateral termination of the franchise agreement may only be registered by the tax authority; the registration of a termination with Rospatent will only be accepted following the agreement of both parties and not on a unilateral notification by one of the parties. Obviously this can cause an issue where one party does not wish to terminate the agreement and refuses to sign the termination request with Rospatent.

The franchise parties may not assert the benefits of the agreement in relations with third parties (i.e., use of the trade mark, holding oneself out as a franchisee to others, claiming an exclusive territory, etc.) only after it is registered with tax authorities. However, lack of such registration does not invalidate any rights under the agreement between the contracting parties. Without registration with Rospatent, the franchise agreement is technically void.

The tax authorities legally must register the franchise agreement within five business days of filing the required documents. Generally they comply with this term. Rospatent, legally is required to register the franchise agreement within two months from filing, however, in practice Rospatent does not observe this and the registration can extend to three or more months. This is something to be mindful of when planning for any contract as it may delay implementation of the franchise relationship. In such cases where the parties are ready to go but are awaiting the Rospatent registration, the parties assume the risk of a legal challenge should it arise.

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