This information will be useful both for all companies that are already developing their own franchise networks and for entrepreneurs who are just planning to acquire a set of rights and become a franchisee. Under a franchise agreement, the franchisor transfers to the franchisee the right to use its intellectual property (trademarks, industrial designs, inventions, works, commercial secrets, etc.), commercial experience and business reputation.
A major problem that has existed since 2004 until recently was the lack of any formal procedure for state registration of franchise agreements, although the obligation to register such agreements was directly imposed by Article 1118 of the Civil Code of Ukraine. The parties to the deal were legally unable to refer to an unregistered agreement in their relations with third parties. This created problems, for example, in the context of judicial recourse for protection of intellectual property. Dishonest franchisees often avoided paying consideration under the agreements and tried to invalidate the agreements through court. To add insult to injury, tax authorities saw no reason for including royalty payments in the franchisee’s gross expenditures, and this also gave rise to adverse tax consequences. Thus, the franchising business development in Ukraine was seriously hampered by the legal ambiguity of such contractual relations.
On February 12, 2015 the Law of Ukraine “On Amending Certain Laws of Ukraine to Simplify Conditions for Conducting Business (De-regulation)” was adopted, cancelling the mandatory registration requirement for franchise agreements. This Law will considerably reduce the risk of the above-described problems after it comes into force. In this context, the Procedure for State Registration of Franchise (Sub-franchise) Agreements, which was approved by Order No. 1601/5 dated September 29, 2014 and which would enter into effect on April 21, 2015, will lose its practical significance.
Despite the simplified legislative framework, successful franchising will further need specialized legal assistance, including:
- obtaining trademark certificates, patents for inventions, utility models, industrial designs;
- protecting copyright to documents and informational materials, software, design;
- drafting a set of documents for legal formalization of the sale of a ready-made business under a franchising scheme;
- buying a master franchise from a foreign franchisor and adjusting foreign rules to the Ukrainian regulatory legislation;
- providing legal advice in the context of expansion of a franchise network (including antitrust laws, state market surveillance, consumer rights protection, and disputes between several franchisees);
- protecting intellectual property against unauthorized use by third parties;
- counteracting illegal imitation / copying of a business format (model), unfair competition, and other law infringements;
- resolving disputes with the existing and former franchisees, business co-owners and employees;
- providing tax advice and defending taxpayers in court.