Franchising Trends in Post-Pandemic Peru

At the beginning of 2020, the Peruvian Chamber of Franchises reported that there were more than 500 franchise systems in Peru – of which 52% were foreign and 48% were Peruvian – following a marked increase during previous years. However, on 15 March 2020, the Peruvian government responded to the COVID-19 pandemic by declaring a State of Emergency and Social Immobilization until 30 June 2020. From thereon in, certain activities slowly and gradually began to resume.

The franchise sector has been among the most affected nationwide in the past three years, as most franchise systems were related to retail and the restaurant industry – specifically, facilities located at the country’s main malls, which were closed for more than six months. However, since the end of 2022, the franchise sector has begun to recover in areas such as gastronomy, education, technology, and health.

Furthermore, there are currently more than 80 shopping centres in Peru that are already open to the public and operating at full capacity. In addition, there are several projects related to new shopping centres and the expansion of existing ones, both in the city of Lima and the provinces. Such plans look set to further promote the reactivation of the franchise sector.

There is no legal definition of franchise under Peruvian law. However, Peruvian business has understood franchise agreements to be arrangements through which a franchisor grants a franchisee the right to reproduce – under the franchisor’s assistance – a system previously developed by the franchisor. This system is distinguished by the franchisor’s trade marks.

Considering there is no specific franchise law, franchisors and franchisees are not required to register before any regulatory authority. There are no disclosure requirements, either.

In the absence of a franchise law, the Peruvian Civil Code and the Peruvian Judicial Procedures Code govern franchise agreements. The general principles of contract law stated in the Peruvian Civil Code apply in relation to their effects, interpretation, termination, as well as the requirement to exercise rights and perform duties in good faith.

Likewise, the franchisee can issue proceedings against the franchisor in an attempt to obtain adequate remedy – most likely an award of damages against the franchisor. However, it will be very difficult to obtain an efficient and fast result before the Peruvian judiciary.

To be protected from third parties, IP rights must be registered before the National Institute for the Defence of Free Competition and the Protection of Intellectual Property (Instituto Nacional de Defensa de la Competencia y de la Protección de la Propiedad Intelectual, or INDECOPI). In Peru, protection of IP can be divided into the protection of industrial property and the protection of copyright.

Industrial property protection applies to all economic activities. All natural or legal persons recognised by the constitution and laws of Peru are entitled to industrial property protection, regardless of whether or not they are domiciled in Peru.

The protected components of industrial property are invention patents, utility models, industrial designs, trade secrets, goods and services marks (among others). Likewise, copyright protection accrues to all intellectual works in the literary and artistic domain – whatever their type, form of expression, merit or purpose.

As regards competition law, franchise agreements are not considered to restrict or distort competition, even though they have special characteristics. Under such circumstances, it is possible to prohibit online sales of the products, state exclusive supply, or fix prices.

On the other hand, consumer protection laws do not limit franchising in Peru. The franchisee should nonetheless be aware that the final consumer may seek consumer protection under the Consumer Protection and Defence Code.

In general terms, there is a withholding obligation on payments made to an overseas franchisor. However, the rate of the withholding will depend on the nature of the underlying payment and the applicability of any double taxation treaties. Currently, Peru maintains treaties to avoid double taxation with Canada, Chile, Brazil, Mexico, Portugal, Switzerland, among others. Therefore, specific tax advice should be sought in each case.

As regards royalties, there currently is a withholding tax obligation on any payment made to an overseas franchisor that amounts to 30% of the total royalty.

There is no local law that obliges the franchisor to renew a contract unless it has been included as an obligation under the original franchise agreement. Under Peruvian legislation, there is no mandatory compensation payable to the franchisee at the end of the term established by the parties. However, one party can terminate an agreement before its expiration in the event of a material breach of contract by the other party. The specific procedure must be stated in the agreement.

The Peruvian Constitution establishes that domestic and foreign investments are subject to the same conditions. The General Companies Act regulates companies in Peru and only requires a minimum of two partners – whether national or foreign, natural or legal persons – to form a company. It is worth noting that there is no limitation in the structure of the capital stock for a company with foreign investment.

Based on the author’s experience in the sector and the current situation in the Peruvian market, the economic crisis caused by COVID-19 has taught franchisors the importance of the following:

In conclusion, it is important to state that – even though some expansion and investment had to be postponed – the economic crisis also forced the franchise sector to adapt to the new reality in Peru. What emerged were reimagined franchise systems with lower investment, reduced costs, line of business changes, increased profitability, increased productivity per square metre, and a fresh focus on sectors benefitting from the pandemic such as gastronomy, education, technology, and health.