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Doing the Right Thing Right


Franchising in Switzerland


As with any market expansion, your entry to the Swiss market should be very well prepared. Not only are the legal framework conditions different than in other countries, there are also further cultural, country-specific features that will have a major impact on your expansion.

Since some concepts do not travel well from one country to the next, a certain sensitivity for the target market is crucial. In many cases, it is the small things that make the market tick different from your home market. Finding a niche in a well-supplied market is not easy. Is there anything that doesn’t yet exist? What is it that sets your product or service apart? How do you communicate its «difference» or «superiority»? Does you concept fit into the local lifestyle?

Despite all the changes that have taken place, Switzerland represents a very stable environment and an excellent test market for franchise expansions. With its four languages, Switzerland opens the door to France, Germany, Austria and Italy. Directly adjacent, these countries all share a similar cultural background with Switzerland.

 
 
Multilingualism as an opportunity

As a rule, the language borders within Switzerland are seen as a barrier when it comes to opening up the Swiss market as a whole. However, the diversity of our country also represents an opportunity, especially for foreign franchisors.

It is a well-known fact that the different language regions in Switzerland pose difficulties for distribution systems. Certainly, this also applies to franchising, perhaps even more so since the interaction and communication between a franchisor and franchisee must be particularly close in order to work smoothly. However, with the different language regions featuring diverse mentalities and consumption behaviour on a relatively small territory, Switzerland makes for an interesting test market for everyone considering expansion into the big neighbouring countries, such as Germany, France or Italy.

 
 
Media perception of the brand

For foreign franchise systems, the brand’s media perception is of vital importance: If, for instance, a German franchise is launched on the German-speaking Swiss market, it may be generally assumed that the brand is already known by the consumers without requiring the use of specific advertising means. This generally happens via radio and TV advertising on the home market alone. The same is true for French-speaking Switzerland: French brands are frequently known to the public before the first advertising campaign has been launched or while the company is still considering its expansion into West Switzerland. This helps keep the advertising budget low and increases the chances of success. Furthermore, the search for initial franchisees is a lot easier. These are the reasons why French franchisors prefer gaining their first experience abroad in French-speaking Switzerland before considering any further expansion into German-speaking Switzerland, or even bigger markets.

 
 
The issue of language

Aside from the above-mentioned differences in mentality, languages per se certainly also play a crucial role. Once a franchisor is convinced that the step across the language barrier will pay off and the concept will be successful on the new market, there is a plethora of documents which have to be translated. Primarily, this applies to the franchise agreement, the main document governing the future franchise partnership, as well as other documents, such as instructions, codes of conduct, advertising brochures, training documents, etc. Translation not only drives up costs, it can also lead to misunderstandings and discrepancies between the partners. In this context, we would like to point out that the Swiss courts tend to support the weaker party, in this case the franchisee, if the latter argues in a dispute that it has misunderstood a contractual clause or not understood it at all because it was written in a foreign language. It is therefore advisable to procure a diligent translation of, at least, the franchise agreement and have the translation reviewed by a lawyer. A generally applicable English version of the agreement, as frequently utilised by internationally active franchise systems, may also lead to conflict since it must not be assumed that all franchisees in Switzerland are necessarily proficient in this language or have sufficient knowledge to understand the full extent of complicated contractual clauses.

 
 
Opportunities for franchise systems

Switzerland’s multilingualism and diversity also provides advantages and opportunities for franchise systems. Licensors from abroad, for instance the USA, like to use our country as a test market for their concepts. This has many reasons. Thanks to its central location in the heart of Europe, our country is subject to the influence of our surrounding neighbours: It can generally be said that what is popular among Swiss consumers will also be popular in France, Germany and Italy. Furthermore, although the Swiss market is comparably small, the purchasing power of the population is above average in European comparison. Higher prices largely compensate any marketing and communication-related cost disadvantages. Entering a small, closed but profitable market also has the advantage of manageable investment budgets, and failed market launches rarely threaten the financial existence of the franchisor. Hence, there is a number of convincing arguments that favour the launch of franchise concepts in French-speaking or German-speaking Switzerland.

 
 

Legal Environment


Like many other countries, Switzerland has no specific legislation on franchising. However, a certain influence is exerted by the EU Block Exemption Regulation on vertical restraints.

The law does not distinguish between master franchise agreements, area development agreements and local franchise agreements.

In general, the Swiss legal environment is a favourable one for franchising. This is one of the main factors one should keep in mind when choosing the law applicable to international franchise relationships. Swiss law contains far fewer restrictions than many other legal systems. Considering the diverse legal and social parameters which may form the background of the various parties to a transaction, Swiss law as a neutral system can be very helpful.

 
 
Franchise Agreement

It is advisable for a foreign legal counsel to identify problem areas in order to decide whether to involve a corresponding local lawyer. A franchisor who operates internationally via Switzerland - be it through master franchising, area development, direct franchising, subsidiaries, branch offices or joint ventures - is still required to respect the relevant private law and public law rules of the Swiss legal system. Many rules may be similar to those under other legal systems, but a few are special and are not obvious to foreign advisers.

 
 
Limits to contractual contents

It is advisable for a foreign legal counsel to identify problem areas in order to decide whether to involve a corresponding local lawyer. A franchisor who operates internationally via Switzerland - be it through master franchising, area development, direct franchising, subsidiaries, branch offices or joint ventures - is still required to respect the relevant private law and public law rules of the Swiss legal system. Many rules may be similar to those under other legal systems, but a few are special and are not obvious to foreign advisers.

In particular, the following areas must be carefully structured with regard to franchise agreements:

  • The maximum duration of a contractual obligation.
  • Exclusion of the franchisor’s liability vis-à-vis the franchisee.
  • Curbs of the franchisee's entrepreneurial freedom.
 
 
Employment law

In a leading Swiss Supreme Court decision, the court discussed in detail the principles of Swiss employment law when deliberating on the dissolution of a franchise agreement. Franchise contracts shall state in an unmistakable manner that the franchisee will be active as a legally independent entrepreneur and will have sufficient freedom to make his or her own business decisions.

 
 
Dissolution of the contract

A franchise agreement with a fixed duration automatically ends on the agreed date if an extension of the contract is not provided for. In any case, termination of the franchise agreement is always possible for so-called 'important reasons' and, under such circumstances, with immediate effect.

 
 
Obligations after termination

In many cases, these aspects are not given sufficient attention and thus become subject to considerable controversy. They should be carefully considered while drafting the contract.

Analogous to the statutory rules under employment law and the principles of agency law, non-competition clauses must be limited in time, territory and subject matter. Furthermore, non-competition clauses tend to be enforceable according to court decisions handed down in neighbouring countries only if the franchisor pays adequate compensation.

Following termination of the contract, an agent is entitled to compensation for goodwill created on behalf of his mandator and for increasing the customer base (Section 418u of the Code of Obligations). Under certain circumstances, an independent distributor is also entitled to compensation for increasing the customer base. Should a franchisor wish to avoid compensation for customers, it should refrain from requiring the franchisee to give periodic information on his or her clientele, except for statistical purposes. The maximum compensation to which an agent is entitled under Section 418u is a net annual income based on the average of the last five years. No compensation is due if the contractual relationship is terminated for a reason for which the franchisee is responsible.

 
 
Trademarks and Intangible Property Rights

In general, trademarks are protected following registration in the public registry or registration in conformity with the Madrid Convention on International Trademark Registration. The registration is valid for 10 years and commences on the date of filing. Extension is possible for 10 years, effective from the filing and fee payment date.

With regard to franchising, the licensing of know-how is of paramount importance. As under other legal systems, Swiss law does not define the term 'know-how' but, based on practice, it generally designates knowledge and experience of a technical business of an administrative, financial or other nature which may be used commercially and is not protected by a patent (or a registered design). The owner of know-how has no overall and immediately enforceable legal exclusivity. Anyone who develops the same knowledge, or acquires it, may use it freely. However, to the extent that know-how is considered a business secret, the owner is protected against disclosure, espionage or the use of knowledge illegally acquired. This protection is available under the rules of the Unfair Competition Code and the Criminal Code.

 
 
Unfair Trade

As franchise agreements are usually pre-formulated agreements (standard form contracts), the rules on general business conditions (Section 8 of the Unfair Trade Law) are applicable. This section deals with unusual and surprising clauses. Only the deceptive application of general business conditions is illegal. This means that a franchisor who draws the attention of the franchisee to specific rules which deviate from statutory law and highlights those clauses in the written text is not acting illegally.

 
 
Taxes

Switzerland has a very favourable tax environment and excellent links to the international tax system via a vast network of double taxation treaties.

 
 
Income taxes

Payments under a franchise agreement are subject to ordinary income tax in Switzerland. Although Switzerland’s three-level tax system, involving federal, cantonal and communal taxes, varies substantially from one place to another, the country generally has an advantageous tax climate, mainly due to the special rules on holding and domiciliary companies.

 
 
Withholding taxes

Foreign investors should be aware of the 35% withholding tax, especially with regard to distributed dividends. Through an extensive network of double taxation treaties, this tax burden can be partly or wholly reduced. Switzerland is one of the few countries that do not impose any withholding taxes on royalties.
 

Value added tax

Switzerland levies value added tax (VAT) on goods and services (at present, the regular rate is 8 %). Reduced rates apply to certain services and some areas are exempt.

Services by foreign franchisors which franchise directly into Switzerland are subject to VAT (to be paid by the franchisee) if they reach the amount of CHF 10,000.00 within one calendar year. Services provided from Switzerland abroad are not subject to VAT. The supply and import of goods is also subject to VAT. Exports are tax-free.

 
 
Competition Law

With respect to price-fixing agreements and provisions granting absolute geographical exclusivity, the Swiss Competition Law provides that such clauses are deemed to eliminate competition on the relevant market and are therefore prohibited. However, the franchisor can give evidence that: (i) competition remains within the network; and (ii) significant impairment is justified by reasons of economic efficiency.

By additional notification, the Competition Commission has defined further principles on vertical agreements which should be closely observed.
 


Check List


Competitive situation
  1. Is there any demand for my product or is the market saturated?
  2. Are my products appropriately positioned?

Political framework conditions, macroeconomic conditions
  1. Are tensions between employers and employees imminent in my area of activity, which I will have to take into account? Is there a danger of strike action?
  2. Political instability?
  3. What is the unemployment rate and how is the income distributed?
  4. Is the economy expanding?
  5. How innovative is the country?
  6. What is the educational level?

Legal environment
  1. Structure of international expansion (who does what, when, where and how)?
  2. Protection of the system features?
  3. Exclusive rights to the territory, controlled price, exclusivity deals?
  4. Information that may or must be submitted before the conclusion of the agreement?
  5. Adaptation of the franchise system to the target market?
  6. General terms and conditions (use of a standard contract)?
  7. Advertising law (adaptation of marketing concept)?
  8. Social insurance law (how much leeway for the franchisee)?


This list is not exhaustive and must be drawn up individually for each case.    

 

 

Useful Links


 
 

 

About us & Members


Our main offices are in Zurich with a branch in the French speaking part in Morges near Geneva. More information about the Board Members you find in this link.

In case you are interested in obtaining a franchise, please visit our member page.

If you plan to enter the Swiss market, we strongly recommend to look for appropriate advice. We have a list of experts in this link.


If you any further questions, please do not hesitate to contact us via our contact form. Please click here.