How much tax is deducted when a franchise pays royalty or franchise fee to a foreign food brand?

A Pakistani franchisee of an international burger, pizza or coffee brand usually pays the brand owner two kinds of money: an upfront franchise fee and a running royalty on sales. Under the Income Tax Ordinance, 2001, both are likely to be royalty, and royalty paid to a non-resident is taxed at 15% of the gross amount, deducted by the payer.

What counts as royalty?

Section 2(54) defines royalty as any amount paid or payable, however described or computed, “whether periodical or a lump sum”, as consideration for, among other things:

• the use of, or right to use, any patent, invention, design or model, secret formula or process, trademark or other like property or right;
• the supply of any technical, industrial, commercial or scientific knowledge, experience or skill;
• the use of, or right to use, industrial, commercial or scientific equipment;
• assistance that is ancillary to enabling the use of any of those rights.

The word “franchise” does not appear in this definition. A franchise agreement for a food brand typically grants the right to use a trademark, recipes and operating methods, which fall within the listed items. Whether a specific payment is royalty depends on what the contract pays for. A payment for something else, such as buying imported ingredients, is not royalty merely because it goes to the franchisor.

What does the law say about the tax?

Section 6(1) imposes tax, at the rate in Division IV of Part I of the First Schedule, on every non-resident person who receives any Pakistan-source royalty. Section 6(2) applies that rate to the gross amount.

Section 101(8) makes a royalty Pakistan-source income if it is paid by a resident person, unless it relates to a business the resident carries on outside Pakistan through a permanent establishment there.

Division IV sets the rate at “15% of the gross amount of royalty or fee for technical services”, with 10% in any other case.

Section 152(1) requires every person paying royalty or fees for technical services to a non-resident, where the amount is chargeable under section 6, to deduct tax from the gross amount paid at the Division IV rate.

Section 6(3)(a) excludes a royalty where the right giving rise to it is effectively connected with a permanent establishment in Pakistan of the non-resident. A foreign brand that licenses from abroad, with no Pakistani branch, is not in that position.

Worked example (illustrative figures)

Crust and Co., a pizza franchise in DHA, Lahore, pays a foreign brand owner under a contract with made-up terms: a one-time franchise fee of Rs. 8,000,000 for a new outlet, and a monthly royalty of 6% of sales. Sales in one month are Rs. 15,000,000. The rate applied is the real one from Division IV.

Monthly royalty

• Royalty due: 6% x Rs. 15,000,000 = Rs. 900,000.
• Tax to deduct: 15% x Rs. 900,000 = Rs. 135,000.
• Remitted to the brand owner: Rs. 900,000 - Rs. 135,000 = Rs. 765,000.

One-time franchise fee

• Fee: Rs. 8,000,000, a lump sum, which section 2(54) still treats as royalty if it pays for the listed rights.
• Tax to deduct: 15% x Rs. 8,000,000 = Rs. 1,200,000.
• Remitted: Rs. 8,000,000 - Rs. 1,200,000 = Rs. 6,800,000.

What if a tax treaty applies?

Section 107 lets the Federal Government enter into agreements for the avoidance of double taxation, and gives them effect so far as they provide relief from tax under the Ordinance. The treaties themselves are not held in this corpus, so this page cannot say which rate applies to a brand from any particular country.

Section 152(5) is relevant here. Where a person intends to pay a non-resident without deducting tax, other than a payment liable to a reduced rate under a double taxation agreement, the payer must first give the Commissioner written notice with the non-resident’s name and address and the nature and amount of the payment.

What if part of the payment is for something else?

Franchise agreements often bundle royalty with charges for training, marketing funds, software or supplies. Division IV applies 15% to royalty and fees for technical services. Payments to a non-resident that are not covered by section 152(1) fall under other sub-sections of section 152, at rates in Division II of Part III of the First Schedule, which this page does not cover.

Common mistakes

• Treating the upfront fee as outside the tax because it is paid once. Section 2(54) covers lump sums as well as periodical payments.
• Deducting on the net remittance. Section 152(1) requires deduction from the gross amount paid.
• Applying a treaty rate without checking the treaty. The Ordinance gives treaties effect under section 107, but the rate comes from the treaty text, which is not in this corpus.
• Calling every payment to the franchisor royalty. Payment for goods is a sale, not the use of a right.

What to check in the official text

Read section 2(54), sections 6, 101(8), 107 and 152 of the Income Tax Ordinance as amended to 30 June 2026, and Division IV of Part I of the First Schedule for the 15% rate, which applies in tax year 2027. Check the franchise contract to see what each payment is for, and the relevant double taxation agreement, which is not held here.