A one-off franchise entry fee for the right to run a franchise over several years is usually a long-term intangible asset — if it exceeds €2,400, it is capitalised and amortised rather than expensed at once. Ongoing royalties and the contribution to the marketing fund are, by contrast, an ordinary tax-deductible service cost. If the franchisor is based abroad, you also deal with VAT reverse charge and possible withholding tax on royalties.
What payments does a franchise involve?
A franchise rests on three types of payment, each with a different tax and accounting treatment. The first is a one-off entry fee for the right to join the network and use the brand, know-how and system. The second is ongoing royalties — regular licence fees, usually a percentage of the outlet’s turnover. The third is a contribution to the marketing fund, from which the franchisor finances shared advertising for the whole network.
Telling these three apart matters, because they are booked differently. While the entry fee often has the nature of an asset consumed gradually, royalties and the marketing contribution are current-year expenses. Wrongly booking the entry fee straight into expenses is a typical mistake we also touch on in our overview of professional accounting in Slovakia.
How is the franchise entry fee booked?
An entry fee for the right to run a franchise over several years has the nature of valuable rights — a long-term intangible asset. It does not reach tax expenses at once; it is spread through amortisation over the period the company uses the right. For income-tax purposes the intangible-asset threshold is set at €2,400: if the entry fee is higher and its usability exceeds one year, it is an intangible asset under § 22 of the Income Tax Act (595/2003).
In Slovakia an intangible asset is amortised in line with the accounting depreciation — over the period the right is actually consumed, not by a fixed table. Example: if you pay an entry fee of €12,000 for a franchise concluded for five years, you charge roughly €2,400 to expenses each year. If the fee were below €2,400, it can be booked straight into expenses. For how amortisation works in general, see our article on Slovak tax advisory.
How do you handle royalties and the marketing fund?
Ongoing royalties and the marketing-fund contribution are an ordinary operating expense of the period they relate to. They are booked as a service and, if the general conditions are met, they are tax-deductible — they must relate to earning taxable income and be properly supported by an invoice and contract. As payments for using a right and for advertising, they are usually not a problem as long as they match the contractual terms.
Watch the timing. If you pay the marketing contribution a year in advance, the expense belongs to the period it materially concerns, not necessarily to the moment of payment. With percentage royalties on turnover, make sure the amount matches the sales actually reported — this figure is often checked by both the franchisor and the tax authority.
How is VAT handled with a foreign franchisor?
If the franchisor is established in another EU state and invoices royalties to a Slovak franchisee, this is a service whose place of supply, under § 15(1) of the VAT Act (222/2004), is where the recipient is established — that is, Slovakia. The Slovak taxable person therefore applies the reverse charge: they declare Slovak VAT at 23% themselves and, where entitled, deduct it in the same return.
In practice this means the invoice from the foreign franchisor carries no VAT and the recipient “takes over” the tax liability. The same mechanism applies to most services received from abroad. Although the transaction is usually neutral for a taxable person, it must be reported correctly in the return and the control statement.
When does withholding tax on royalties arise?
Royalties paid abroad are Slovak-source income and are subject to withholding tax under § 43 of the Income Tax Act. The basic rate is 19%, rising to 35% for recipients in so-called non-cooperating states. The Slovak franchisee withholds the tax on payment and remits it to the authority.
International law often reduces or eliminates the rate. A double-taxation treaty with the franchisor’s country may cut the rate (for instance to 10% or less). And if the franchisor and franchisee are related parties within the EU — with a direct holding of at least 25% lasting at least 24 months — the royalties may be exempt from withholding tax under § 13 of the Act. This is exactly where it pays to assess the specific arrangement before the first payment.
What is a franchise agreement legally?
The franchise agreement is not separately regulated as a named contract type in Slovak law. It is concluded as an unnamed (innominate) contract under § 269(2) of the Commercial Code, based on the parties’ freedom of contract. That is precisely why its exact wording is key — it defines the scope of brand rights, territorial exclusivity, operating duties, the way royalties are calculated and the terms of termination.
From a tax and accounting angle, everything follows from what the contract actually defines: whether the entry fee is a one-off right for a fixed term, how ongoing payments are calculated and how the marketing fund is set up. A vaguely worded contract can complicate not only the relationship with the franchisor but also the defence of costs during a tax inspection. Before signing, it therefore pays to have the contract reviewed both legally and for tax.
Considering joining a franchise network, or already paying royalties and unsure how to book the entry fee, handle VAT with a foreign franchisor or the withholding tax? We are glad to set your franchise up correctly for both tax and accounting.
FAQ
Can I book the franchise entry fee straight into expenses?
Only if it does not exceed €2,400 or its usability is not longer than one year. If the entry fee is higher and relates to a multi-year right to run the franchise, it is a long-term intangible asset under § 22 of the Income Tax Act. It then reaches expenses gradually through amortisation over the period you use the right, not all at once.
How do I handle VAT when the franchisor invoices from abroad?
If the franchisor is established in another state and invoices royalties to a Slovak taxable person, the place of supply under § 15 of the VAT Act is Slovakia. You apply the reverse charge — you declare Slovak VAT at 23% yourself and, where entitled, deduct it in the same return. The franchisor’s invoice carries no VAT.
Must I withhold tax on royalties paid abroad?
Royalties paid abroad are subject to withholding tax under § 43 of the Income Tax Act, with a basic rate of 19% (35% for non-cooperating states). The rate may be reduced by a double-taxation treaty, and for related parties within the EU with a holding of at least 25% for at least 24 months the royalties may be exempt. Each case must be assessed under the relevant treaty.