Key highlights of Indonesia’s new Franchise Regulation
On 2 September 2024, Indonesia issued Government Regulation No. 35 of 2024 on Franchise (“New Regulation”), which came into effect on issuance, replacing Government Regulation No. 42 of 2007 on the same subject (“Previous Regulation”). The New Regulation consolidates the provisions of franchise business in Indonesia, previously stipulated in the Previous Regulation and its implementing regulation Minister of Trade Regulation No. 71 of 2019 on the Implementation of Franchise (“Regulation No. 71/2019”).
Scope and jurisdiction
The New Regulation covers various aspects of franchising, including franchise participants (consisting of franchisors, franchisees, sub-franchisors, and sub-franchisees, whether domestic or international), criteria, disclosure documents, agreements, rights and obligations, registration certificates, sub-franchising, logos, the use of domestic products, reporting, guidance and supervision, prohibitions, and sanctions. Franchise business activities may be conducted throughout Indonesia.
Criteria
Similar to the Previous Regulation, franchisors and sub-franchisors must meet certain franchising criteria. However, the New Regulation outlines these criteria in a more detailed and systematic manner. To qualify, franchisors and sub-franchisors must have a written business system that includes operating standards and procedures for human resources management, administration, operations, site selection, business design, employee requirements, and marketing strategies.
In addition, they must operate a profitable business for at least three consecutive years of evidence, reduced from the previous requirement of five years. The financial statements for the last two years must show a profit and be audited by a public accountant with an unqualified opinion. Their intellectual property, including trademarks, copyrights, patents, trade secrets, industrial designs, and/or integrated circuit layout designs, must be duly registered. They must also provide ongoing support to franchisees and/or sub-franchisees through training, operational management, advertising, research, market development, and other forms of guidance.
Franchise disclosure documents
Franchisors or sub-franchisors must provide prospective franchisees or sub-franchisees with a Franchise Disclosure Document (“FDD”) at least 14 calendar days before signing the franchise agreement. The FDD must be written in Indonesian and include detailed information such as the business identity, legal status, history, organisational structure, business system, financial statements for the last two years, number of outlets or business locations, list of franchisees and sub-franchisees, rights and obligations, and intellectual property certificates or records. The inclusion of the business system and intellectual property certificates/records is a new requirement under the New Regulation. Unlike the Previous Regulation, the New Regulation does not require the FDD to be registered with the Ministry of Trade (“MoT”).
Franchise agreements
The franchise business operates under a franchise agreement between the franchisor and the franchisee or between the sub-franchisor and the sub-franchisee, all of which have equal legal standing and are governed by Indonesian law. The franchise agreement must contain certain key clauses, including:
- a guarantee from the franchisor or sub-franchisor to the franchisee or sub-franchisee that provides for compensation and/or the continuation of rights if the franchisor or sub-franchisor ceases to do business; and
- a commitment from the franchisor or sub-franchisor to continue to perform its obligations to the franchisee or sub-franchisee.
The Previous Regulation required a franchise agreement signed in a foreign language to be translated into the Indonesian language. In addition, Regulation No. 71/2019 stipulates that a franchise agreement must be made in the Indonesian language. The New Regulation, however, does not include language requirements. Franchise agreements and other relevant documents should instead comply with the Indonesian Language Law No. 24 of 1999, which stipulates that agreements involving Indonesian private institutions and individuals must be written in the Indonesian language, while those involving foreign parties may be written in the parties’ national language and/or in English.
Similar to the FDD registration requirements, franchisees are no longer required to register franchise agreements with the MoT under the New Regulation.
Franchise registration certification
Before starting their business, franchise participants must obtain a Franchise Registration Certificate (“Registration Certificate”) by applying through the Online Single Submission (“OSS”) system at oss.go.id. The Registration Certificate serves as a business license.
International franchisors applying for a Registration Certificate must submit the following with their FDD:
- Business license documents:
- from the relevant authority in the country of origin, if the country is a party to the Convention Abolishing the Requirement of Legalization for Foreign Public Documents (“Convention”); or
- from the Indonesian Representative Office in the country of origin, if the country is not a party to the Convention; and
- A certificate of ongoing franchise business from the Indonesian Trade Attaché or the Indonesian Representative Office in the country of the franchisor.
A Registration Certificate will be declared void if franchisees cease to do business or when their IP protection period expires. Specifically, for franchisees and sub-franchisees, the Registration Certificate will be declared void upon termination of their franchise agreements.
Under the Previous Regulation, a Registration Certificate was valid for five years and could be renewed for another five years. Under the New Regulation, there is no longer a validity period for a Registration Certificate. All Registration Certificates issued before the New Regulation came into force will remain valid until their original expiration date.
Logos
All franchise participants with a Registration Certificate, except international franchisors, will receive a logo from MoT. The logo must be prominently displayed at each franchised outlet or at the head office.
Prohibitions
Individuals or entities without a Registration Certificate are prohibited from using the term or name of a franchise in their business name or activities. Non-franchise participants are also prohibited from the unauthorised use or misuse of the franchise logo.
Rights and obligations
The New Regulation specifically addresses the rights and obligations of both franchisors or sub-franchisors and franchisees or sub-franchisees. In contrast, the Previous Regulation focused only on the obligations of franchisors and did not specifically address the rights of either party.
Examples of such rights and obligations as set out in the New Regulation include:
- the franchisor or sub-franchisor is entitled to require payment from the franchisee or sub-franchisee and is in turn obligated to provide ongoing support. This support includes training in the franchise management system, guidance on operational management, advertising, participation in exhibitions, and product research; and
- the franchisee or sub-franchisee is entitled to use the franchisor’s intellectual property (“IP”) but is required to comply with the code of ethics and maintain the confidentiality of such IP.
Some key obligations are highlighted below.
Domestic products and processing of raw materials
The New Regulation requires domestic franchisors and both domestic and foreign sub-franchisors to give priority to using domestic products, processing raw materials locally, and working with local micro, small and medium enterprises (“MSMEs”) as suppliers. They must also offer MSMEs the opportunity to become franchisees, provided they meet the requirements set by the franchisor and sub-franchisor.
Domestic and international franchisees and sub franchisees must prioritise the use of domestic products, provided they meet the quality standards established in writing by the franchisor and sub-franchisors, and work with local MSMEs.
Reporting
Franchise participants, whether active or dormant, must submit an annual activity report by 30 June of the following year through the OSS system.
Supervision
The Central Government and Regional Governments supervise franchise business activities in a coordinated and integrated manner by reviewing reports and inspection results from business locations.
Subsidiary regulations
Some sections of the Previous Regulation were implemented in more detail by Regulation No. 71/ 2019. The New Regulation does not require the MoT to issue an implementation regulation but has instead included the relevant details for the franchise business directly in the New Regulation.