All questions

Introduction

In Germany, the concept of franchising was almost unknown until the 1960s. With the foundation of the German Franchise Association (GFA) in 1978 the franchising market finally established itself in Germany, and has been developing rapidly ever since.

According to statistics from the GFA the German franchise industry has been recording a turnover increase for years. Compared to 2021, the turnover of all franchise systems grew by 4.6 per cent to €142.2 billion in 2022.2 Nationwide, there are currently 930 franchise systems with 186.028 franchise businesses (1.5 per cent more than in 2021) and more than 814.304 employees (2.8 per cent more than in 2021).3

For years, the most popular industrial sector in Germany has been the service sector. In 2022, around 52 per cent of all franchise systems in Germany were service companies.4 This is followed by the retail sector with 22 per cent and the gastronomy sector with 20 per cent.5

Even if most of the franchise systems active on the German market come from Germany or Austria, the market also offers great opportunities for other foreign franchise systems. According to a report from the GFA, 8 per cent of the franchise systems in Germany were from the United States in 2022.6 The success of companies such as McDonald's has shown that one can be very successful in Germany with the right system within the right sector.

Market entry

i Restrictions

In Germany, there are no specific government consents or official authorisations required relating to the offer and sale of a franchise. Thus, foreign franchisors do not need any specific approval to enter the German market or to grant a master franchise or development rights.

ii Foreign exchange and tax

In general, in Germany there are no foreign exchange controls or restrictions on foreign currency payments applicable to cross-border franchising. However, the franchisor or the franchisee might be considered as tax-resident under German law, and such a tax resident may be subject to unlimited tax liability in Germany on its worldwide income.

Intellectual property

i Brand search

A trademark is one of a franchise system's most important assets. Before entering the German market, it is necessary to establish in particular whether the desired trademark of the franchise system (e.g., words, letters, numbers, pictures, sounds, colours and colour combinations) is already protected or whether a similar or identical trademark already exists. Therefore, the German Patent and Trademark Office (DPMA) provides, inter alia, for an online register, DPMAregister, free of charge.7 The DPMAregister contains, inter alia, German national trademarks as well as European Union trademarks and international registrations of marks enjoying protection in Germany. Information is provided on:

  1. the applicant or owner;
  2. the current legal status of the application or intellectual property (IP) right;
  3. when the IP right was granted or registered;
  4. whether the IP right is still in effect or has already lapsed; and
  5. when the next fee is due.8

Trademark searches are important, both before filing a trademark application and after the registration of a trademark, as the German Patent and Trademark Office (DPMA) does not check during the application procedure of a trademark whether identical or similar trademarks have already been registered.9 In cases where an identical or similar trademark is already registered with earlier rights or is registered later, there is a risk of conflict.

ii Brand protection

To protect the trademark at national level (which means that the trademark only enjoys protection in Germany), the registration needs to be filed with the DPMA in Munich. The registration can be filed online or via a paper-based application and is not that expensive (e.g., the fee for the registration is €300).10

However, most franchisors apply for a European Union trademark to obtain protection across all Member States of the European Union (including Germany). The registration of the European Union trademark needs to be submitted to the European Union Intellectual Property Office in Alicante.

To obtain international protection of the trademark, the registration needs to be filed with the World Intellectual Property Organization in Madrid, as Germany is a party to the Madrid Protocol.

In all cases, upon registration of the trademark, its owner acquires the exclusive right to use the trademark for the protected goods and services and to deal with the trademark. The protection starts on the filing date and initially lasts 10 years. It can be renewed for a further 10-year period, upon payment of the renewal fee. If the renewal fee is not paid, the trademark will be cancelled.11

iii Enforcement

The trademark owner is entitled to commence enforcement proceedings based upon its trademark rights; for example, the trademark owner can take legal action against any infringement or unauthorised use of its trademark. The trademark owner can, for example, obtain a preliminary injunction. This allows the trademark owner to swiftly halt infringing activities without the need for a lengthy court process. Under certain circumstances, a preliminary injunction can even be granted without an oral hearing. However, it should be noted that both parties involved in a legal dispute must be represented by a qualified German lawyer.

iv Data protection, cybercrime, social media and e-commerce

In Germany, the franchisor and the franchisee must comply – just like any other company based in Germany – with data privacy laws, including the General Data Protection Regulation (GDPR) and the German Federal Data Protection Act (BDSG). The GDPR is a regulation of the European Union that sets rules for the processing of personal data of end users (and employees). It applies to all Member States of the European Union, including Germany. The BDSG is a (German) national law that complements the GDPR. Both the franchisor and the franchisee must comply with the GDPR's provisions when handling personal data. When it comes to the import and export of data, franchise businesses must especially comply with the restrictions on international data transfers. The GDPR imposes strict rules on the transfer of personal data outside the European Union to ensure that the level of protection of individuals afforded by the GDPR is not undermined.

Further, the new German Trade Secrets Act requires companies such as franchise businesses to take appropriate confidentiality measures to protect trade secrets.

The use of social media by the franchisee can be restricted by the franchisor, for example, through social media guidelines. However, every restriction must especially comply with the German Civil Code concerning standard terms and conditions and German competition law.

In terms of cybercrime, the German Criminal Code contains several violations that can be assigned to the area of cybercrime, including spying on and interception of data, computer fraud, computer sabotage and data alteration.

There are no specific requirements for doing e-commerce business in Germany. However, e-commerce business must comply especially with the general provisions of German law.

Franchise law

i Legislation

In Germany, there is no specific law that regulates the offer and sale of franchises. Therefore, the offer and sale of franchises is only governed by the general provisions of German law (for example, contract law (the German Civil Code), consumer law, commercial law (the German Commercial Code), competition law and unfair trade law.

In particular, the provisions of the German Civil Code concerning standard terms and conditions are applicable if the franchisor uses standard franchise agreements being signed by the franchisee on a take-it-or-leave-it basis (Section 305 German Civil Code). According to German law on standard terms and conditions, all standard-term provisions need to be reasonable and may not unduly disadvantage the other party contrary to the requirements of good faith; otherwise, they are null and void.

ii Pre-contractual disclosure

Regarding pre-contractual disclosure obligations, German law provides for the principle of culpa in contrahendo (Section 311 German Civil Code). According to this principle, the franchisor must ensure that all relevant facts have been clearly presented to the potential franchisee before the conclusion of a franchise agreement. The scope and content of the duty depend on each individual case, taking the experience and knowledge of the franchisee into account.

According to German case law, in principle, the franchisee is obliged to obtain information at its own initiative about the general market conditions and their impact on the prospective franchise business. However, the franchisor must disclose information that only the franchisor is aware of and that is recognisably of importance to the potential franchisee's decision as to whether to enter into the franchise agreement or not. For example, the franchisor must disclose all relevant information about the franchise system and other franchisees. The franchisor must also refrain from providing misleading information.12

It may be derived from German case law that at least the following items should be disclosed:

  1. information about the franchise concept, including in particular the date of the beginning of the franchise system. the actual number of franchisees, the fluctuation rate;
  2. an indication of the people in charge who act on behalf of the franchisor;
  3. the franchise offer, including, among other things, the location, performance and experience of the pilot business, and the required investment and workforce for the franchisee's business;
  4. information that enables the franchisee to elaborate its own location analysis and profitability calculation of the franchise business;
  5. information about situations where compulsory statutory pension insurance for the franchisee applies;
  6. the franchise agreement and the franchise handbook (including all standard appendices);
  7. memberships in franchise associations;
  8. information on other distribution channels for the franchise product or service;
  9. pending lawsuits with a potential impact on the franchisee's business; and
  10. an indication of any initial and ongoing support by the franchisor.13

The pre-contractual information should be disclosed within a reasonable period prior to the conclusion of the franchise agreement. This applies also to any (preliminary) binding agreement between the franchisor and the franchisee.

If the pre-contractual information provided by the franchisor is incorrect or misleading, the franchisee can withdraw from the franchise agreement, as this significantly influences its decision to join the franchise system. The franchisor can then be obliged to repay all payments received (entry fee, ongoing franchise, etc.).

iii Registration

There are no specific registration requirements for franchise systems in Germany.

iv Mandatory clauses

German law is characterised by the principle of contractual freedom that allows the franchisor and the franchisee to agree on the provisions of the franchise agreement at their own discretion. Therefore, restrictions on provisions in franchise agreements are an exemption and mainly follow on from German antitrust law and the German Civil Code concerning standard terms and conditions (in particular, Section 307 German Civil Code). However, for reason of clarification, the franchise agreement should contain at least the following:

  1. a preamble;
  2. the subject matter of the contract;
  3. the contractual territory and business premises;
  4. the duties of the franchisor;
  5. the purchase or sale of goods in the case of an obligation to purchase;
  6. the duties of the franchisee;
  7. marketing;
  8. contract duration and termination;
  9. regulations in the case of disputes; and
  10. withdrawal information.14
v Guarantees and protection

In cases where the franchisee plans to operate its franchise business through a separate franchisee entity (i.e., a limited company), it is common in Germany that the franchisee (normally the director or key shareholder of the franchisee entity) needs to provide a personal guarantee. The personal guarantee makes the franchisee personally accountable to the terms of the franchise agreement. This includes the payment of franchisee fees, marketing fees or other ongoing fees set out in the franchise agreement.

Tax

i Franchisor tax liabilities

In Germany the franchisor is considered a tax resident in Germany if its corporate entity has its registered office or place of management in Germany. Unless otherwise provided for in an applicable double tax treaty, a tax resident is subject to unlimited tax liability in Germany on its worldwide income.

The German tax system for corporate entities (such as companies operated by the franchisor) can be characterised as a combination of corporate income tax and trade tax.

Corporate income tax is payable at a rate of 15 per cent (plus a solidarity surcharge of 5.5 per cent of the corporate income tax, resulting in an aggregate corporate income tax rate of 15.82 per cent).

Trade tax is a municipal tax individually imposed by local authorities at the seat of the franchisor`s company, and varies between approximately 7 and 18 per cent. The trade tax base is the taxable profit for income tax or corporate income tax purposes, modified by some add-backs and deductions.

To mitigate the double burden of income tax and trade tax, income tax on business income is to a certain extent reduced by trade tax (trade tax rate relief allowance). Trade tax cannot, however, be deducted from the total corporate income tax amount.

Non-tax-resident business entities or entrepreneurs are subject to limited tax liability on their domestically sourced income. Income received from a permanent German business is regarded as domestically sourced income and is therefore subject to income tax (for individuals not tax-resident in Germany) or corporate income tax (for companies not tax-resident in Germany), as well as trade tax at the normal rate.

Income tax on domestic taxable income from the licensing of know-how or rights of use of non-tax-resident business entities or entrepreneurs not having a permanent business in Germany is levied at source by way of a withholding tax, unless otherwise provided for in an applicable double tax treaty. The withholding tax is normally paid by the debtor (the franchisee) on account of the creditor (the franchisor). The tax rate is 15 per cent. The solidarity surcharge amounts to 5.5 per cent of the income tax or the corporate income tax.

Goods and services supplied in Germany by an entrepreneur are generally subject to German value-added tax (VAT). Therefore, services relating to the licensing of rights or the provision of know-how supplied by the franchisor to the franchisee are generally subject to VAT, if the franchisee is based in Germany. The standard rate is 19 per cent; however, some deliveries are taxed at a rate of 7 per cent and some supplies are tax-exempt (for example, financial services).15

ii Franchisee tax liabilities

The tax liabilities of the franchisor apply accordingly to franchisees.

iii Tax-efficient structures

Tax-efficient franchising in Germany involves careful planning and adherence to Germany`s tax regulations. While each franchise system is different, only a general outline can be provided. Three best practices to consider are:

  1. Choosing the right business entity: franchisors wishing to set up a franchise business in Germany have a variety of legal forms (partnerships and limited liability companies) from which to choose. The most common form of corporate vehicle to be established by a typical franchisor in Germany is a private limited liability company (GmbH). This corporate form requires a minimum amount of capital investment (at least €25,000) and offers limited liability, so only the company's assets are liable to the company's creditors.
  2. Franchise fee structuring: the structure of franchise fees can impact the tax efficiency of each franchise business in Germany. The allocation of fees between royalties, marketing fees and other components should be considered. Understanding the tax treatment of each component can help optimise the overall tax position.
  3. Understanding VAT requirements: VAT is applicable to most goods and services in Germany. Understanding the VAT registration requirements and compliance obligations is essential for each franchise business.

Impact of general law

i Good faith and guarantees

In Germany, the duty of good faith is a fundamental principle that is implied in all contractual relationships, including franchise agreements, and is stated in Section 242 of the German Civil Code. However, the duty of good faith is a broad principle, and its application depends on the specific circumstances of each contractual relationship. The courts in Germany assess each case individually, considering the parties' behaviour, the nature of the agreement, and the overall fairness and reasonableness of the parties' actions.

In principle, under the duty of good faith, both franchisors and franchisees are obligated to act honestly, fairly and in a trustworthy manner towards each other. They must consider each other's legitimate interests and cooperate in a manner that promotes the success and sustainability of the contractual relationship. This duty includes various aspects of the franchise agreement, including pre-contractual negotiations, performance of contractual obligations and dealing with any disputes that may arise.

In the case of a breach of the duty of good faith, various consequences are possible. For example:

  1. Termination: if a party's breach of the duty of good faith is severe or persistent, the non-breaching party may have grounds to terminate the franchise agreement. However, termination is generally seen as a last resort, and courts in Germany tend to favour the continuation of the franchise relationship if possible.
  2. Non-enforceability of provisions of the franchise agreement: further, in case where a provision in a franchise agreement contradicts or undermines the duty of good faith, the provision may be deemed unenforceable by a court. This means that even if such a provision is included in the franchise agreement, it may not be upheld if it is found to be contrary to the principle of good faith.
  3. Damages: further, a claim for damage suffered because of a breach of good faith is possible.
ii Agency distributor model

Under German law, franchising is generally considered a separate system next to agency and distributorship systems. However, some provisions of German agency law apply by analogy to franchise agreements. For example, in the case of a termination of the franchise agreement, the franchisee may be able to claim compensation, like an agent, if the franchisee is obligated to transfer customer data to the franchisor during or upon termination of the franchise agreement (Section 89b German Commercial Code).

iii Employment law

Franchisees are usually self-employed entrepreneurs who are not allowed to act on behalf and for the account of the franchisor. Therefore, in general, the franchisor may not be held liable for the acts or omissions of its franchisees or their employees.

However, depending on the nature of the relationship between a franchisor and a franchisee, there may be a risk that the franchisee is considered an employee or quasi-employee of the franchisor, leading the franchisor to be confronted with employer obligations and employee rights of the franchisee. Whether a franchisee will be classified as a self-employed entrepreneur or as an employee (or quasi-employee) depends on the scope of the control exercised by the franchisor, and on the extent of the entrepreneurial risk assumed by the franchisee. In this respect, the courts in principle rely on the criteria of personal dependency (employees) or economic dependency (quasi-employees).16

Personal dependency (i.e., as an employee) will be assumed if the franchisee is excessively bound to the franchisor's instructions regarding the subject matter, conduct, time, length and place of its activity. Self-employment on the other hand will be assumed where the franchisee is mainly free to determine its activity and bears the entrepreneurial risk. A franchisee organised in the form of a company limited by shares will in general not run the risk of being qualified as an employee (except in the case of a one-person company in which the characteristics of dependent employment prevail).17

Economic dependency (i.e., as a quasi-employee) will be in general assumed if the franchisee's basis of existence arises out of the franchise business. If the franchisee is considered a quasi-employee, some German employment law provisions are applicable.

To avoid the risk of German employment law being applicable, the franchisor must make sure that the franchisee is not personally or economically dependent. This can be achieved by tailoring the franchise agreement, as well as the corresponding execution of the agreement.

iv Consumer protection

Under the German Civil Code, a consumer is any natural person who, when acquiring the claim or establishing the legal relationship, does not act predominantly within the framework of his or her commercial or self-employed professional activity. Therefore, franchisees are in general not considered consumers.

However, according to German consumer credit law, a franchisee that is not organised in the form of a company limited by shares is entitled to withdraw from the franchise agreement within a period of 14 days of its conclusion if it thereby establishes an independent business enterprise, the agreement contains an obligation to repeatedly take supplies of goods and the total value of the franchisee's investments does not exceed €75,000.

v Competition law

In 2005, German antitrust law was completely harmonised with European antitrust law. All forms of competition restraints contained in franchise agreements, such as non-compete clauses, price-fixing, guaranteed exclusive areas and purchasing restrictions, are therefore now treated in full compliance with European antitrust law. European antitrust law (Article 101(1) Treaty on the Functioning of the European Union (TFEU)) prohibits agreements between undertakings that may affect trade between Member States and that have as their object or effect the prevention, restriction or distortion of competition within the common market. Exemptions are made either on an individual basis or, if applicable, under a block exemption. Vertical restraints, such as those typically encountered in franchise agreements, can be, to some extent, exempted under the EC Block Exemption Regulation. The new Block Exemption Regulation (No. 2022/720) (BER) entered into force on 1 June 2022.

vi Restrictive covenants

In Germany, non-compete and other restrictive covenants can be enforced during the term of the franchise agreement if certain conditions are met.

Obligations not to compete during the term of the franchise agreement are subject to competition law, as they restrict the franchisee's freedom of business activities and prevent other suppliers from distributing their products or services through the franchisee involved. Under competition law, non-compete obligations are lawful if they are essential for maintaining the identity and reputation of the franchise system or to protect the know-how transferred by the franchisor to the franchisee (Pronuptia case).18 According to the BER, non-compete clauses during the term of the agreement must not be agreed for more than five years to benefit from the BER.

Post-term non-compete clauses on the other hand may fall under the ban on cartels (Article 101(1) TFEU) if they have an appreciable impact on competition. Those post-term non-compete clauses are generally not exempted by the BER. Nevertheless, the BER states an exemption: non-compete clauses can be agreed for one year after termination of the agreement if they only apply to competing products or services, are essential for the protection of know-how and are restricted to the business location of the franchisee during the term of the agreement. Moreover, after the term of the agreement, the franchisee can be prohibited from using and disclosing know-how provided by the franchisor that has not entered the public domain. There are no time restrictions for such clauses. Note that the franchisee may claim reasonable compensation for a post-term non-compete obligation.

The exemptions of the BER are only available to franchisors and franchisees with a market share of less than 30 per cent. If the market share is higher, the block exemption does not apply, and the clause is invalid.19

vii Termination

Franchise agreements can be entered into for a definite or an indefinite term.

Definite term

A franchise agreement with a definite term can end because of lapse of time or by termination for cause. Under German law, a termination for cause without notice requires good cause and (usually) a warning letter beforehand. Good cause exists if the terminating party, considering all circumstances of the individual case and weighing the interests of both parties, cannot reasonably be expected to continue the contractual relationship until the agreed termination or until the expiry of a notice period (Section 314 German Civil Code). That said, only major infringements of the duties of the franchise agreement constitute good cause; for example, a refusal to pay the franchise fees or a repeated breach of important rules of the franchise system (such as a prohibition on cooperating with competitors). To assess whether an action justifies the termination of the agreement for good cause requires an overall evaluation of the circumstances of the individual case and weighing the interests of the franchisor and the franchisee. The termination declaration has to take place within a reasonable time after the occurrence of the activity that led to the friction in the relationship. It should be noted that neither the necessity nor the requirements for good cause (including a warning letter) can be waived within a pre-formulated standard franchise agreement.

Indefinite term

A franchise agreement with an indefinite term can be terminated either for good cause (without notice, as specified above) or without cause. In cases of termination without cause, contractual or statutory periods of notice must be considered. German law provides for the following statutory notice periods depending on the duration of the agreement: one month within the first year of the term; two months within the second year of the term; three months within the third to fifth year of the term; and five months after five years of the term. The parties may agree on a longer notice period as provided for by the German Commercial Code but may not shorten it. Unless otherwise agreed by the parties, any termination is valid only until the end of a calendar month.

viii Anti-corruption and anti-terrorism regulation

Under German law, there are no specific anti-corruption or anti-terrorism regulations exclusively tailored for franchisors or franchisees. Instead, general legislation applies.

For example. the German Criminal Code contains several violations that can be assigned to the area of fraud and corruption. However, in general, only individuals are subject to criminal liability under German law.

Furthermore, the German Money Laundering Act sets out obligations for businesses to prevent money laundering and terrorist financing. The Act was last amended in 2017, and includes provisions for risk management, internal safeguards and the designation of a money laundering reporting officer. The German Money Laundering Act applies to certain 'obliged entities' as defined in Section 2 of the Act. These include, among others, credit institutions, financial services providers, insurance companies, lawyers, notaries, auditors, tax advisers, real estate agents, casinos and dealers in goods.

Apart from these laws, there are also industry codes of practice that businesses can adopt to mitigate fraud, corruption and money laundering risks. For instance, the Federal Financial Supervisory Authority (BaFin) offers guidance on compliance with the Money Laundering Act and other relevant regulations.

ix Dispute resolution

In Germany, parties involved in franchise agreements have the option to pursue litigation through state courts or opt for arbitration. The choice between the two largely depends on the preferences of the parties involved. If both the franchisee and the franchisor are domiciled in Germany and German law applies to the franchise agreement, the state courts are regularly preferred. Arbitration is, however, more common in international franchise systems. Both state courts and arbitration have advantages and disadvantages. The biggest disadvantage of arbitration is the fact that an arbitral award is not directly enforceable in Germany, as arbitral awards must be declared enforceable by a state court (Section 1060 German Code of Civil Procedure).

Civil and commercial matters like franchise disputes fall under the jurisdiction of the civil courts. Unlike countries that have separate court systems at both the federal and state levels, Germany has a single unified court system consisting of local courts, regional courts, higher regional courts and the Federal Court of Justice.

The procedure and timelines for disputes that come to court can vary. Generally, the court process involves submitting written pleadings, followed by oral hearings where parties present their arguments and evidence. The length of the process depends on factors such as the court's caseload, the complexity of the case and any appeals that may be filed.

Unless there is exclusive jurisdiction, such as in disputes related to real property or antitrust law, German law recognises agreements between the parties regarding jurisdiction. This means that franchisors and franchisees can choose the competent court to settle their disputes.

In cross-border franchise agreements, the parties are also permitted to choose their own governing law. However, notwithstanding the existence of a choice of law clause, it is always necessary in an individual case to examine whether the law of a country other than that of the chosen legal system remains applicable.

The allocation of litigation costs in Germany follows the loser pays principle, where the losing party generally bears the costs of the proceedings, including attorneys' fees. However, the courts have the discretion to deviate from this principle based on the circumstances of the case. Cost caps or limitations exist, but they are determined on a case-by-case basis.

Mediation is recognised as a form of alternative dispute resolution in Germany. It provides an opportunity for the parties to reach a mutually agreeable resolution, but it does not result in a legally binding judgment. Unless otherwise agreed in the franchise agreement, mediation is not mandatory. However, it is increasingly acknowledged and utilized by franchisors and franchisees to resolve conflicts. It is also common that franchise agreements provide for a mediation clause before going to court.

Current developments

Currently, there are no major new entrants in the German franchise market, no pending legislation and no foreseeable impact on future practice.

The most recent legal development was the release of the BER plus accompanying guidelines, which include rules for all vertical agreements, including franchise agreements. However, the basic rules governing franchise agreements remain very similar to the 2010 BER. The new BER does particularly introduce additional regulations for online services.

Since 2020, the outbreak of the coronavirus pandemic has affected the real estate market in Germany, especially in the area of commercial leases, which has subsequently affected the German retail and franchise industry. Some tenants refused to pay their rent during government-ordered shutdowns. The tenants argued that the government-ordered shutdowns constitute a defect in the leased premises (Section 536 German Civil Code) or, in any case, that there was a contractual adjustment due to the German law on frustration of contract (Section 313 German Civil Code). In its ruling dated 12 January 2022, the Federal Court of Justice made it clear that where commercial leases are concerned, covid-related business closures do not constitute a defect in the leased premises (Section 536 German Civil Code), although a rent reduction may be possible based on the law on frustration of contract (Section 313 German Civil Code). However, the Court has rejected the idea of a blanket 50 per cent cut in rent. Instead, the effects of business closures on both tenant and landlord need to be weighed up in detail in a case-by-case assessment. It will now be interesting to see how the courts of first instance will further specify the guidelines set out by the Federal Court of Justice for making such an assessment.