Now, at least some 300 salespersons of the Remax network will face tax assessment for the distribution of the brokerage (commission), funneled pursuant to the franchise contract, to the franchisor being the broker but redistributed, less certain withholdings (franchise and service fees), to the franchisee being the company of the salesperson. And the franchisor is likely to face assessment for tax and ancillary employer payments (including insurance premiums) which, pursuant to the court judgement, should have been withheld when paid to the franchisee.
In principle, the tax ruling is about ignoring the franchisee, kind of lifting the corporate veil for tax purpose. However, the repercussions of the adjudication are estimated to be profound and far-reaching. They are, indeed, believed not to have impact on merely the Remax concept as structured in Finland but to become perceived by many other networks functioning alike thereby affecting some 1 000 franchisees.
Hitherto, the use of the company vehicle by salespersons has been believed a means by which the franchisee is shielding the salesperson from perils of business. Either employed by or merely the shareholder (or whatsoever proprietor) of his company, the salesperson has had reason to believe the company vehicle enables him to accumulate with his company the distribution of the sales revenues received from the franchisor less the company tax (20 %) paid. Since company tax is distinctly lower than that of individual wage or salary earners (generally, varying between 35 and 56 %), the scheme has proved attractive.
Now the scheme is in shambles. Pursuant to the court decision, the concept of the U.S. originated world-wide Remax network has, in Finland, rested on a master franchisee acting as the national sub-franchisor with local sub-franchisors who have sold franchises to companies owned by one or more real estate salespersons.
The concept, in so far as the salesperson representing the franchisee solicits (“supplies”) clients to the franchisor and receives his share of the sales revenue not from his client but from his franchisor, may have to be remodeled quite soon. The same pertains both to the fact that the master franchisee gets title in all data pertaining to clients, marketing, prices and a number of other matters in connection with the brokerage. And even more so, because the court attached importance to on one hand the fact that under the franchise agreement the franchisee has to comply with “the updatable instructions” (i.e., manual, etc.) and ethical code of conduct of the master franchisee and on the other hand to the fact that the liability insurance of the local franchisor covers the perils of the real estate agent business of the franchisee and the franchisor takes responsibility in respect of any clients solicited by the franchisee. Having regard to all these aspects, the franchisee was deemed by the court not to act independently but its director (the salesperson) to act under the supervision of the franchisor (broker).
An additional factor shown consideration was the fact that the franchisee was neither licensed as real estate brokerage by the supervising authorities, nor did the franchisee have a nominated managing broker. The fulfillment of both conditions are a prerequisite for carrying on the business of brokerage in real estate.
Suchlike facts as [i] that the franchisor, pursuant to the Remax franchise concept, did not take any responsibility for the demand for brokerage services of the franchisee, [ii] that the franchisee bore the responsibility for that the customer solicited by him will pay the commission to the franchisor and he gets his share from the franchisor, [iii] that the franchisee is to pay for the use of certain items and services, and [iv] that the franchising agreement did not limit the right of the franchisee to carry on other industries, were set aside by the court as being of no or merely minor relevance. The same is true as to contractual obligations on the division of liability as employer, such as that the franchisee had undertaken to bear, alone, any tax consequences of his business, to pay all and any insurance premiums, and to bear all employer duties.
It is believed this court decision is to have repercussions to many a franchise network, probably not only within the real estate brokerage industry, but largely. Tax aspects are of paramount importance, in particularly, in the Nordic countries with a high tax rate for individuals.
The decision is in sharp contrast to what we, fairly recently, have learned the French Supreme Court ended up in at refusing to recognize the franchisor as co-employer of the employees of his franchisee (see below 2015-10-15 Didier Ferrier). Sooner, the Finnish court decision can be compared to the recent tendencies appeared in the U.S. for erasing the responsibilities between franchisors and franchisees (see below Carl Zwisler 2015-01-15 on lawmakers threaten to bring the franchise industry to the precipice).
Patrick Lindgren, IDI franchising Country Expert for Finland