Minister of Trade Relaxes Franchise Regulation

On September 4, 2019, the Minister of Trade (the “MOT”) issued MOT Regulation No. 71 of 2019 on Franchise Implementation (“MOT Reg. 71/2019”). MOT Reg. 71/2019 revokes and replaces a number of regulations on franchise, i.e.:

  • MOT Regulation No. 53/M-DAG/PER/8/2012 dated August 24, 2012 on Franchise Implementation as amended by MOT Regulation No. 57/M-DAG/PER/9/2014 dated September 19, 2014 (collectively, “MOT Reg. 53/2012”);
  • MOT Regulation No. 68/M-DAG/PER/10/2012 dated October 29, 2012 on Franchise for Modern Store Business (“MOT Reg. 68/2012”);
  • MOT Regulation No. 07/M-DAG/PER/2/2013 dated February 14, 2013 on Development of Partnership in Franchise for Food and Beverage Business as amended by MOT Regulation No. 58/M-DAG/PER/9/2014 dated September 19, 2014 (collectively, “MOT Reg. 07/2013”); and
  • MOT Regulation No. 60/M-DAG/PER/9/2013 dated October 3, 2013 on Mandatory Use of Franchise Logo.

We set out below the main changes under MOT Reg. 71/2019.

♦  No Limitation on Company-owned Outlets

Previously, MOT Reg. 68/2012 and MOT Reg. 07/2013 limited the maximum number of company-owned outlets for franchisors of modern store (e.g., minimarket, supermarket, or department store) and food and beverage (“F&B”) businesses. MOT Reg. 68/2012 limited modern store franchisors to have maximum 150 (one hundred fifty) company-owned outlets while MOT Reg. 07/2013 limited F&B franchisors to have maximum 250 (two hundred fifty) company-owned outlets. Modern store and F&B franchisors are required to franchise additional outlets if they have reached the maximum number of company-owned outlets. F&B franchisors also have the option to add new outlets by establishing subsidiaries.

MOT Reg. 71/2019 revokes MOT Reg. 68/2012 and MOT Reg. 07/2013 and does not reiterate provisions on maximum number of company-owned outlets. This means that, now, modern store and F&B franchisors can have unlimited number of company-owned outlets in addition to the franchised outlets.

♦  No Requirement for Master Franchise Agreement

MOT Reg. 71/2019 allows a franchisor or sub-franchisor to appoint multiple franchisees or sub-franchisees with clear territory division. This is different than the provision under MOT Reg. 53/2012 that required a franchisor to have a master franchise agreement with a franchisee. With this new provision, a franchisor may appoint different franchisees for different territories in Indonesia.

♦  No Mandatory Local Content

Under MOT Reg. 53/2012, MOT Reg. 68/2012, and MOT Reg. 07/2013, franchisors and franchisees are required to have 80% (eighty percent) minimum local content, in the form of raw material, business equipment, and sale goods. Violation of this requirement is subject to administrative sanctions in the form of written warning up to revocation of Franchise Registration Certification (Surat Tanda Pendaftaran Waralaba or “STPW”). However, exemptions were allowed based on recommendation by the Assessment Team under the Directorate General of Domestic Trade of the Ministry of Trade.

Now, MOT Reg. 71/2019 no longer provides minimum local content requirement and only stipulates that franchise business actors shall prioritize local goods and/or services, as long as the goods and/or services meet the quality standard stipulated in writing by the franchisors. MOT Reg. 71/2019 also stipulates that franchisors shall prioritize processing of raw materials domestically.

♦  No Restriction on Controlling Franchisor

Previously, pursuant to MOT Reg. 53/2012, a franchisor cannot appoint any entity under its direct or indirect control to be its franchisee. This provision no longer exists under MOT Reg. 71/2019.

♦  Franchise Criteria

Similar to MOT Reg. 53/2012, MOT Reg. 71/2019 stipulates that a franchise shall have the following criteria:

  • having distinct business characteristics;
  • proven profitability;
  • having standard of service and offered goods and/or services in writing;
  • easily taught and applied;
  • continuous support; and
  • registered intellectual property (“IP”) rights.

MOT Reg. 71/2019 now provides further details on franchise criteria. The details on franchise criteria are similar with the details stipulated under Director General of Domestic Trade Decree No. 16/PDN/KEP/3/2014 dated March 7, 2014 on Technical Guidelines for Franchise Implementation and Supervision (“DG Decree 16/2014”).

For example, the criterion of “proven profitability” is fulfilled if a franchisor has business experience of at least 5 (five) years, proven with the survival and development of the franchisor’s business in a profitable manner. However, unlike DG Decree 16/2014, MOT Reg. 71/2019 does not require the franchisor to prove its profitability in its financial statements for the past 2 (two) years. MOT Reg. 71/2019 also provides that a franchise shall have a “registered IP rights” and further explains that such IP rights can either be registered already or under registration process with the relevant authority.

In addition to the above criteria, previously, under MOT Reg. 53/2012, franchisors and franchisees can only carry out businesses in accordance with their business licenses. However, MOT Reg. 53/2012 allows franchisors and franchisees to sell supporting products for maximum 10% (ten percent) of the total sale goods. This limitation on sale of supporting products no longer exists under MOT Reg. 71/2019.

♦  Franchise Registration

Under MOT Reg. 71/2019, franchise business actors are still required to be registered to obtain STPW and display the franchise logo in their business location. The difference with the previous regulation is that now, the franchise registration is applied through the Online Single Submission (“OSS”). The OSS Agency will then issue the STPW on behalf of the MOT or the Regent/Mayor in accordance with their authority.

Unlike previously stipulated under MOT Reg. 53/2012, the STPW issued by the OSS will not have a validity period and does not have to be extended every five years. MOT Reg. 71/2019 also no longer requires a “clean break” or a legally binding court decision for the registration of a new franchisee in the event of unilateral termination of the previous franchise agreement by the franchisor.

Existing STPWs are valid until its expiration date and new STPWs shall be applied through OSS after their expiration.

October 4, 2019