Updated Regulation on Franchises in Indonesia
On September 2, 2024, the Indonesian government issued and enacted Government Regulation No. 35 of 2024 regarding Franchises (“GR 35/2024”). Previously, franchises in Indonesia were specifically governed under Government Regulation No. 42 of 2007 dated July 23, 2007 (“GR 42/2007”). GR 35/2024 replaces GR 42/2027 entirely.
We set out below key provisions of GR 35/2024.
- Coverage and Criteria of Franchises
Under GR 35/2024, a franchise is an exclusive right owned by an individual or a legal entity on a business system with the criteria stipulated for the purpose of marketing of goods and/or services which system has been proven to succeed and may be utilized and/or used by other parties pursuant to a franchise agreement (the “Franchise Business”).The Franchise Business may be carried out within Indonesia. The relevant parties in a franchise business are mainly (i) a franchisor, which may be an individual or a legal entity granting the right to utilize and/or use the franchise it owns to a franchisee, and (ii) a franchisee, which may be an individual or a legal entity granted the right to utilize and/or use the franchise owned by the franchisor.Franchisors and franchisees may be as follows:- a foreign franchisor;
- a local franchisor;
- a subsequent franchisor of a foreign franchise;
- a subsequent franchisor of a local franchise;
- a franchisee of a foreign franchise;
- a franchisee of a local franchise;
- a subsequent franchisee of a foreign franchise; or
- a subsequent franchisee of a local franchise.
In carrying out the Franchise Business, a franchisor and a subsequent franchisor shall meet the following criteria:
- A business system, which system must be in the form of operational standards and procedures covering various aspects (e.g., human resource management and marketing strategy), which must be provided in writing when the Franchise Business is offered to a franchisee, must be easy to teach and apply, and must include work arrangements and clear cooperation between the franchisee and the franchisor.
- The business has been profitable, which must be proven by (i) the business activities that have been franchised for at least 3 (three) consecutive years, and (ii) the audited financial statements (with no qualifications) for the last 2 (two) years which show that the Franchise Business is profitable.[2] The audited financial statements are exempted for franchisors or subsequent franchisors in a micro and small business.
- Registered intellectual property(ies), which criterion refers to the intellectual properties in the form of trademark, copyrights, patents, trade secrets, industrial designs, and/or circuit layout integrated designs; and
- Sustainable support from the franchisor and/or the subsequent franchisor to the franchisee and/or the subsequent franchisee which criterion refers to a training, operational management, promotion, research, market development, and other types of training.
- Franchise Offering Prospectuses
An offering prospectus is defined as a written statement from a franchisor or a subsequent franchisor to a potential franchisee or a potential subsequent franchisee as the information regarding the Franchise Business. (the “Offering Prospectus”).A franchisor or a subsequent franchisor shall submit the Offering Prospectus to a potential franchisee or a potential subsequent franchisee no later than 14 (fourteen) calendar days prior to signing a franchise agreement.The Offering Prospectus shall comprise at least the following:- the identity of the franchisor or the subsequent franchisor;
- the business legality of the franchisor or the subsequent franchisor;
- the history of the Franchise Business;
- the organizational structure of the franchisor or the subsequent franchisor;
- the business system;
- the number of franchise outlets (unless it is the first franchise);
- a list of franchisees or subsequent franchisees (unless it is the first franchise);
- the rights and obligations of the franchisor or the subsequent franchisor and the franchisee or the subsequent franchisee; and
- the certificate of intellectual property or recorded letter of intellectual property.
The Offering Prospectus must be made in Indonesian language.
- Franchise Agreements
The Franchise Business must be based on a franchise agreement entered into by and between (i) a franchisor and a franchisee, or (ii) a subsequent franchisor and a subsequent franchisee. A franchise agreement is defined as a written agreement by and between a franchisor and a franchisee, or a subsequent franchisor and a subsequent franchisee containing the grant of rights to enjoy economic rights of the Franchise Business for a certain period of time and based on certain requirements (the “Franchise Agreement”).The Franchise Agreement shall comprise at least the following:- the names and addresses of the franchisor or the subsequent franchisor and the franchisee or the subsequent franchisee;
- the intellectual property that is still validly protected;
- the business activities;
- the business system;
- the rights and obligations of the franchisor or the subsequent franchisor and the franchisee or the subsequent franchisee;
- the assistance, facility, operational guidance, training, and marketing provided by the franchisor or the subsequent franchisor to the franchisee or the subsequent franchisee;
- the business territory (or area);
- the guarantee of the franchisor or the subsequent franchisor to the franchisee or the subsequent franchisee to receive compensation and/or grant of rights over the franchise, in case the franchisor or the subsequent franchisor ceases its business activities;
- the term of the Franchise Agreement;
- the fees payment method;
- the ownership and transfer of ownership of the franchise;
- the procedures for the extension and termination of the Franchise Agreement;
- the guarantee from the franchisor or the subsequent franchisor to perform its obligation to the franchisee or the subsequent franchisee; and
- the number of outlets to be managed by the franchisee or the subsequent franchisee.
In addition, the Franchise Agreement may allow a franchisee to appoint a subsequent franchisee. In this regard, a franchisor or a subsequent franchisor may appoint more than 1 (one) franchisee or subsequent franchisee. In such a case, the franchisor or the subsequent franchisor must expressly determine the distribution of business territory to the franchisee or the subsequent franchisee.
- Franchise Registration Certificates
Pursuant to Article 12 of GR 35/2024, a franchisor, a subsequent franchisor, a franchisee, and a subsequent franchisee must obtain a STPW (as defined below) as the business license to support the Franchise Business.A franchise registration certificate (or in Indonesian, Surat Tanda Pendaftaran Waralaba or an “STPW”) is the business license to support the Franchise Business which constitutes a valid proof that an individual or a legal entity has been registered as a franchise businessperson.We set out below the distinction of the STPWs of (i) a franchisor or a subsequent franchisor, and (ii) a franchisee or a subsequent franchisee.STPW of a Franchisor or a Subsequent Franchisor
An STPW of a franchisor or a subsequent franchisor must be obtained by the franchisor or the subsequent franchisor prior to signing the Franchise Agreement. The STPW application is submitted by the franchisor or the subsequent franchisor by enclosing the Offering Prospectus.
STPW of a Franchisee or a Subsequent Franchisee
An STPW of a franchisee or a subsequent franchisee must be obtained prior to it commencing the Franchise Business. The relevant franchisee or subsequent franchisee shall submit the STPW application by filling in a registration form and enclosing the Franchise Agreement.
The application for an STPW above shall be submitted through the Online Single Submission system (“OSS”). The OSS will then issue the relevant STPW on behalf of the Minister of Trade (the “MOT”).
- Obligation to Use Franchise Logo
The Franchise Business in Indonesia sets an obligation to the franchise businesspersons to use a franchise logo. The size and requirements for a franchise logo is specifically governed under the GR 35/2024, among others, the obligation to mention “WARALABA INDONESIA” in the logo.With this respect, the MOT will issue the franchise logo when the following parties obtain their respective STPWs: (i) a local franchisor, (ii) a subsequent franchisor of a foreign franchise, (iii) a subsequent franchisor of a local franchise, (iv) a franchisee of a foreign franchise, (v) a subsequent franchisee of a local franchise, (vi) a subsequent franchisee of a foreign franchise, and (vii) a subsequent franchisee of a local franchise. - Administrative Sanctions
Failure to comply with the requirements and provisions under GR 35/2024 may result in the businesspersons to be subject to administrative sanctions as follows:The applicable administrative sanctions under GR 35/2024 are as follows:- Written warnings;
- Suspension of business activities; and/or restriction of business activities;
- Revocation of an STPW.
Please be informed that the above administrative sanctions are in sequential order. A written warning shall be given to the businesspersons for a maximum of 2 (two) times within the maximum timeframe of 14 (fourteen) business days between the first written warning and the second written warning. If within such 14-day period of time, the businesspersons do not remedy their incompliance, then their Franchise Business shall be suspended for a maximum of 14 (fourteen) business days.
If, upon the suspension of the Franchise Business, the businesspersons demonstrate their compliance with the requirements, then the relevant governmental authorities shall issue a decree of revocation of suspension of business activities. In other words, the Franchise Business Activities may resume. But if the contrary occurs, then the STPW will be revoked.
If an STPW is revoked, the relevant businesspersons may still be able to undertake the Franchise Business in Indonesia. However, they must wait for 5 (five) years as of the stipulation of the revocation of the former STPW to submit a new STPW application.
AKSET
Please contact Johannes C. Sahetapy-Engel (jsahetapyengel@aksetlaw.com) or Almira Siti Nadiva Zulfandiari (azulfandiari@aksetlaw.com) for further information.
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Updated Regulation on Franchises in Indonesia