Apply the franchise and licensing test
The route covers in the Union with independent third-party companies, in return for royalties, where the agreements ensure a common identity, a common business concept, and uniform business methods. A contract called a franchise, licence, distribution, or brand agreement does not qualify or fail by label alone. Test the parties' independence, the three operating features, the Union connection, and the royalty arrangement.
For an EU company, both amounts are tested in the last financial year for which annual financial statements have been or should have been adopted: qualifying royalties must exceed EUR 75 million and the company or group must have more than EUR 275 million net worldwide turnover. For a third-country company, both amounts are Union amounts tested in the financial year preceding the last financial year. Equality is not enough: EUR 75 million or EUR 275 million exactly does not pass a threshold stated as 'more than'.
The company may qualify directly or as the of a group that entered into the agreements and met the turnover threshold. Article 2 also requires the complete route to be met in two consecutive financial years. Scope ends only after the conditions cease to be met in each of the last two relevant financial years.
Example: an EU franchisor with EUR 80 million of qualifying Union royalties and EUR 300 million of net worldwide turnover passes the amount tests for that year. It enters this route only if the agreement conditions are also met and the complete test is satisfied in the next consecutive year. A company with EUR 80 million in royalties but EUR 275 million in turnover does not pass because the turnover must be more than EUR 275 million.
A below-threshold franchisee does not become directly subject to merely because an in-scope franchisor requests information, contractual assurances, or corrective action. Keep direct Article 2 scope separate from obligations a franchisee may accept by contract and from requests made through a franchisor's due diligence process.
- Entity and group input: identify the contracting company, every relevant subsidiary, and the ; preserve the control analysis and consolidated financial statements.
- Agreement input: list the Union agreements, independent counterparties, royalty clauses, common identity, common business concept, and uniform business methods; exclude agreements that fail any element.
- Amount input: reconcile qualifying royalties and net turnover to the applicable financial statements for each of the two consecutive test years, including the chosen currency-conversion method and consolidation eliminations.
- EU-company branch: use qualifying Union royalties and net worldwide turnover from the last financial year for which annual financial statements have been or should have been adopted.
- Third-country branch: use qualifying Union royalties and Union net turnover from the financial year preceding the last financial year.
- General-route branch: separately test the EU-company employee and worldwide-turnover thresholds or the third-country Union-turnover threshold; failing the franchise route does not settle general scope.
- Outcome record: state pass, fail, or unresolved for every element, the first of the two consecutive qualifying years, the expected 26 July 2029 application date if scope is maintained, and the reviewer who approved the conclusion.
- Reassessment triggers: new or terminated agreements, a change in counterparty independence or group control, revised royalty accounting, acquisitions or disposals, restated financial statements, or a threshold result changing in either relevant year.
- After scope: map which franchise or licensing activities fall within the chain of activities; scope under Article 2 does not make every downstream activity part of that chain.
Current Article 2(1)(c), 2(2)(c), and 2(5) provide the EU and third-country franchise and licensing tests and the two-consecutive-financial-years rule.
Historical source for the former lower franchise and licensing thresholds.