Franchising in Ukraine

The development of market economy, implementation of Western business standards entailed the emergence of new forms of commercial activity in Ukraine, such as franchising. Today, the term “franchising” is used so widely that in many cases it ceased to correspond to its legal essence. Despite the fact that the term “franchising” is widely used in the modern legal and economic literature, the legislation of Ukraine does not provide any definition established for this concept. This fact causes certain problems, especially in the organization of tax and accounting records.

Despite the absence of such a concept, franchising exists and is actively developing in Ukraine. This can be explained by the fact that the domestic legislation provides for the concept “commercial concession”, which is economically equivalent to franchising. This position is stated in the letter of the State Committee of Ukraine on Regulatory Policy and Entrepreneurship No. 761, dd. 11.02.2004. The issues of commercial concession are regulated by the Civil and Economic Codes of Ukraine.

Article 1115 of the Civil Code of Ukraine stipulates that under the Commercial Concession Agreement, one party (a right holder) shall be obliged to grant

the other party (a user) for a fee the right of use of a set of rights belonging to it aimed at manufacturing and/or sale of a specific type of goods, and/or providing services.

Article 366 of the Economic 

Code of Ukraine specifies this concept for entrepreneurs. Under the Commercial Concession Agreement, the right holder shall be obliged to concede the user the right to exercise the scope of rights in business activities for the set term or without such. The user shall respect terms and conditions for exercising the rights conceded and pay the agreed remuneration to the right holder.

Thus, commercial concession entails full compliance with several mandatory conditions:

• Conclusion of an agreement, the subject matter of which shall be the right to use objects defined by law;
• Transfer of the right holder’s rights to the business entity under certain conditions;
• Compensated use of the rights.

According to the provisions of the Civil and Economic Codes of Ukraine, the Commercial Concession Agreement may provision the transfer of rights to use business reputation of the right holder, as well as intellectual property objects. The agreement may contain the territory specifications for business activities.

Under the Commercial Concession Agreement, the right holder shall provide the user with the necessary documentation and other information necessary for exercising of the rights conceded to the user under the Commercial Concession Agreement, as well as instruct the user and his/her staff on the issues related to exercising of these rights.

According to the requirements of the Ukrainian legislation, the Commercial Concession Agreement shall be concluded in writing only. In case of violating this requirement, such agreement shall be invalid (Article 367 of the Economic Code of Ukraine / Article 1118 of the Civil Code of Ukraine).

It’s worth noting that the parties to the Commercial Concession Agreement may be only economic entities: individual entrepreneurs and legal entities (Article 1117 of the Civil Code of Ukraine).

Article 1118 of the Civil Code of Ukraine and Article 367 of the Economic Code of Ukraine stipulate that the Commercial Concession Agreement shall require state registration, which shall be performed by the authority that has registered the economic entity acting as the right holder under the

Agreement. If the right holder is a non-resident, the registration of the Commercial Concession Agreement shall be performed by the authority that has registered the economic entity acting as the user under the

Agreement. Therefore, the registration procedure shall be performed in Ukraine.

Economic entities shall be registered by the State Registration Service of Ukraine. According to Article 210 of the Civil Code of Ukraine, any transaction subject to the state registration shall be considered concluded since the moment of its state registration. After the registration, the parties to the Commercial Concession Agreement are entitled to refer to it in their relations with other persons.

On September 29, 2014, the Ministry of Justice of Ukraine issued Order No. 1601/5 “On Approval of the Procedure for State Registration of Commercial Concession (Sub-Concession) Agreements”.  This Order came into force on October 21, 2014. Thus, as of today, the registration of the Commercial Concession Agreements shall be performed by the state registrar.

Please note that sometimes the Commercial Concession Agreement may be confused with a Trademark License Agreement, since the latter may involve the transfer of both intellectual property rights and technical documentation to the user. This is actually franchising, as the subject matter of the agreement is not only the trademark, but also the acquisition of another right (the right to use technical documentation). Therefore, the License Agreement, which is a Commercial Concession Agreement by its nature, may be recognized as contrary to the legislation of Ukraine (void or fictitious transaction).