Entering the Korean market as a franchisor involves more than just signing a contract—understanding the legal landscape around franchise fees (known in Korea as “gamaeng-geum” 가맹금) is essential. This guide will help foreign franchisors navigate what constitutes a franchise fee, when it must be deposited, and when it must be refunded.
What Is a Korean Franchise Fee?
Under Korea’s Fair Transactions in Franchise Business Act, the term “franchise fee” refers to any payment made by a franchisee to the franchisor to:
- Obtain the right to operate a franchise (e.g., entry fees, training fees, or membership dues)
- Secure franchise-supplied goods, equipment, or real estate
- Cover support or training fees provided by the franchisor
- Pay ongoing royalties or marketing contributions
Examples of Recognized Franchise Fees
- Initial lump sum fees (joining fee, training fee, signing bonus)
- Periodic royalties based on revenue or profit
- Payments exceeding standard wholesale prices for supplies
- Marketing fees, signage rentals, territory guarantees, etc.
These fees are enforceable under Korean law and must be properly documented and reported.
What Is Not Considered a Franchise Fee?
The following payments are excluded from the definition of franchise fees:
- Credit card processing fees paid by the franchisee to card companies
- Gift card redemption discounts paid to issuing companies
- Normal wholesale prices for products, materials, or leases
- Any payment not retained by the franchisor
This distinction is crucial in determining what is subject to pre-contract deposit requirements and what is not.
Franchise Fee Escrow Requirement
To protect franchisees, Korean law requires that certain franchise fees be deposited in escrow before the contract is finalized. This applies to:
- Payments made before contract signing
- Payments for training, setup, or goods supplied before operations begin
Exceptions to Escrow
Franchisors do not need to use an escrow account if they have:
- A valid franchisee damage insurance policy, or
- A contract with a mutual aid cooperative for protection
Who Handles Escrow in Korea?
Authorized escrow institutions include:
- Licensed banks
- Postal savings offices
- Insurance companies
- Trust businesses under Korean capital markets law
Franchisors must provide an official escrow form, and franchisees will receive a certificate after depositing the funds.
Penalties for Violating Escrow Laws
If a franchisor directly receives a deposit that should have gone through escrow, they may face:
- Up to 2 years’ imprisonment, or
- A fine of up to 50 million KRW (approx. $37,000 USD)
Corporate entities may also be penalized unless they exercised due oversight to prevent such violations.
Franchise Fee Refund Rights
A franchisee has the right to request a refund of franchise fees if:
- The franchisor failed to provide a disclosure document or signed a contract before the required waiting period.
- The franchisor provided false, exaggerated, or omitted information.
- The franchisor unilaterally terminated the franchise without just cause.
Refund Request Process
The request must be made in writing within 4 months of contract signing or business suspension, and include:
- Franchisee’s identity and contact info
- Reason for refund (e.g., lack of disclosure, false info, contract breach)
- Exact amount to be refunded
The franchisor must return the fees within 1 month of receiving the request.
Final Thoughts: Legal Preparedness Is Business Readiness
Franchise fees are not just financial—they’re legal commitments. Mismanaging them can result in serious penalties and reputational damage. By understanding your obligations and protecting your franchisees, you build credibility and long-term success in Korea.
Let us help.
For personalized legal support on Korean franchise fees and contracts, contact us at ask@pureumlawoffice.com. We’re here to help you enter the Korean market with clarity and confidence.
