Indonesia - India Franchising Comparative Guide
This comparative guide was prepared in collaboration with Advaya Legal, a full-service commercial law firm in Mumbai, India.
Access the complete Comparative Guide here.
A. Definition and Scope of Franchising
1. What is the legal definition of “franchise” pursuant to the relevant laws and regulations in your jurisdiction? Does your jurisdiction provide a specific definition for “franchise”?
Franchise is defined as “a special right owned by an individual or entity over the unique characteristics of a certain business system, which has been proven to be successful to promote goods and/or services, and can be used by another party pursuant to a Franchise Agreement” (Art. 1 Point 1 of Minister of Trade (“MoT”) Regulation No. 71 of 2019 on Franchising (“MoT Regulation 71/2019”).
The term “franchise” shall not be used by businesses that meet the following criteria:
- have unique business characteristics that cannot be easily imitated by other parties;
- have been proven to be profitable;
- have written standard operating procedure for the services and/or goods offered;
- are easy to learn and practical;
- provide continuous support to the franchisee; and
- are registered as Intellectual Property Rights (e.g., trademark, trade secret, patent, etc.) at the relevant authority.
(Article 2(2) of MoT Regulation 71/2019).
2. How is franchising typically structured in your jurisdiction?
Regulation 71/2019 states that a franchise business can be established by either an individual or a business entity. In practice, many franchise businesses in Indonesia are typically structured as Limited Liability Company or Perseroan Terbatas (“PT”).
3. What is the limitation of activities for businesses that are defined as a “franchising business”, as both franchisor and franchisee under your jurisdiction?
MoT Regulation 71/2019 does not provide any limitation of activities for franchise business actors. Both the franchisor and franchisee can carry on with their activities so long that such business actors are carrying are still within the permitted activities that it is being licensed for.
However, MoT Regulation 71/2019 requires both franchisor and franchisee to prioritize domestically produced goods and/or services, and raw materials in the processing stages. Moreover, a franchisor is also required to work in cooperation with small-and-medium-scaled businesses operating as either franchisees or suppliers to support production of the goods and/or services.
4. Are there any activities that franchisor and franchisee are prohibited to engage in? What are the consequences for conducting such prohibited activities?
MoT Regulation 71/2019 does not prohibit specific activities of the franchisor or franchisee. However, note that the franchise business should comply with Law No. 5 of 1999 on Prohibition of Monopolistic and Unfair Business Practice as lastly amended by Law 11 of 2020 on Job Creation (“Omnibus Law”), whereas parties are prohibited from practicing a potential monopoly business.
In addition, a foreign franchisor must ensure that its franchisees and/or master franchisees comply with the provisions regulating foreign direct investment, including the foreign ownership limitation, minimum capital requirement, and licensing requirements. Although a foreign ownership limitation is no longer applicable under the current Omnibus Law regime, franchising business actors need to comply with the applicable licensing requirements pursuant to the Risk-Based Business Licensing (“RBA”).
B. Governing Authority & Business Association
5. Is there any specific government agency that regulates and oversees franchising activities in your jurisdiction? Please define what power and authorities such governing agency have towards franchise business activities?
Franchising activities are governed by MoT and the regional government (of the relevant franchising business). Both agencies are responsible for the facilitation, evaluation, and supervision of the business activities.
The facilitation provided by MoT through the Director of Business and Distributor Development includes, among other things, training and/or consultation on the franchise system, supports for the domestic franchisors participating in national and/or international franchise exhibitions. Meanwhile, the evaluation and supervision functions are carried out based on the annual reporting submitted by the franchise organizers.
6. Are there any trade associations for the franchise sector? Is it mandatory for franchise business actors to join such trade associations and what are the consequences of not becoming a member?
No. The Indonesian government does not establish a national franchise association.
However, several franchising associations are established by business players. One of them is the Indonesian Franchise Association (Asosiasi Franchise Indonesia), which members are Indonesian franchisors, franchisees, and master franchisers. The association provides the code of ethics for promoting franchising business in Indonesia. However, there is no statutory obligation to join this association. The membership is not mandatory for maintaining regulatory compliance, as well as applying for the Franchise Registration Certificate.
C. Regulatory Framework & Licensing Requirement
7. What are the applicable laws, legislations, and regulations that govern franchising activities and licensing in your jurisdiction?
The umbrella regulation that governs franchising activities in Indonesia is MoT Regulation 71/2019. Its enactment replaces and revokes the previous regulations:
- MoT Regulation No. 53/M-DAG/PER/8/2012 of 2012 on Franchising;
- MoT Regulation No. 68/M-DAG/PER/10/2012 of 2012 on Franchises for Modern Store Business;
- MoT Regulation No. 07/M-DAG/PER/2/2013 of 2013 on Development of Partnerships in Food and Beverage Franchises; and
- MoT Regulation No. 60/M-DAG/PER/2013 of 2013 on Franchise Logos.
8. What are the required licenses and registrations that must be obtained by franchise business actors to be able to legally operate in your jurisdiction?
Each franchisor and franchisee must obtain a Business Identification Number/ Nomor Induk Berusaha (“NIB”) and a Franchise Registration Certificate/Surat Tanda Pendaftaran Waralaba (“STPW”) under its name.
For this purpose, a prospective franchisor must first register on the OSS system and submit the relevant STPW documentation (i.e., (i) Franchise Offering Prospectus (“Prospectus”) submitted by the franchisor or sub-franchisor; and/or (ii) Franchising Agreement submitted by the franchisee).
9. Is there any requirement for specific types of entities for a franchisor and franchisee to operate in your jurisdiction?
No. As mentioned in our response to question 2 above, there is no requirement on types of entity of franchisor or franchisee. According to MoT Regulation 71/2019, a franchisee or franchisor can be an individual or a business entity (no specifics on the form of entity).
10. What are the mandatory reporting obligations or other statutory compliances to be undertaken by the franchisor and franchisee?
MoT Regulation 71/2019 requires both franchisor and franchisee to submit their annual business activity reports before the deadline on 31 June of the following year. For this purpose, the franchisor is required to submit their report to the Directorate of Business and Distribution Development under the Ministry of Trade. On the other hand, a franchisee shall submit its report to the Department of Industry, Trade, Cooperatives, Small-and-Medium Enterprise of DKI Jakarta (if the business is located in Jakarta) or the relevant local office in charge of the trading sector.
11. What are the applicable administrative or criminal sanctions that franchisor and franchisee may be subject to in case of non-compliance to the (i) licensing obligation and/or (ii) reporting and/or (iii) other compliances? How do the relevant authorities impose such sanctions?
We note that non-compliance with MoT Regulation 71/2019 may be subject to administrative, not criminal sanctions. The failure to comply with the franchise licensing obligation may result in sanctions under the prevailing laws and regulations. However, the regulation does not elaborate on this matter.
In addition, MoT may issue 3 (three) consecutive warning letters (each of which will be applicable for a period of 2 (two) weeks) for non-compliance with the reporting obligation and franchise requirements. If the franchisor or franchisee fails to comply with the terms and conditions of the warning letter(s), the STPW may be temporarily suspended leading to the revocation of the STPW (subject to certain conditions).
D. Franchise Agreement
12. Does your jurisdiction require certain clauses to be included in a Franchise Agreement?
MoT Regulation 71/2019 regulates the clauses, which should be included in the Franchise Agreement:
- Identity of parties;
- Types of intellectual property rights owned by the franchisor, including but not limited to company brand and logo; design; management, and marketing system, or food recipes;
- Types of the franchise’s business activities;
- Party’s rights and obligations;
- Facilitation, including trainee programs and operational guidance given by the franchisor to the franchisee.
- Business area;
- Term of the Franchise Agreement;
- The agreed reward payment method;
- The franchise ownership and transfer of ownership clause;
- Dispute settlement
- Procedure of agreement extension and termination;
- Warranty; and
- Total amount of business areas and/or franchise outlets.
13. Is sub-franchising structure allowed in your jurisdiction? If yes, how is the contractual relationship structured between the franchisor and the sub-franchisor? What are the rights and obligations of each party involved?
Yes, a sub-franchising structure is allowed under Indonesian laws.
Sub-franchising is usually done through a Master Franchising Agreement. The franchise would appoint a local company to act as a master franchisee that has the rights to: (i) exploit the intellectual property rights, including without limitation, the trademarks, manuals, and ‘know-how’ (franchise system) to develop, establish, and operate its franchise units in a specific territory; and (ii) grant sub-franchises and sub-license the trademarks and franchise system to operate franchise units in the territory.
Furthermore, the franchisor provides the necessary technical assistance in connection with the franchised business to the master franchisee. In turn, the master franchisee must provide assistance to its sub-franchisees.
14. What are the material and procedural requirements that apply to the franchise agreement in your jurisdiction (i.e., registration of Franchise Agreement to certain government authority)?
As highlighted in point 7 above, the franchisor and/or franchisee acting as a sub-franchisor must provide a Prospectus, then disclose its comprehensive business data and information to the prospective franchisee not less than 2 (two) weeks prior to the execution of the Franchise Agreement (Note: For a completed list of Prospectus material, please refer to Appendix I of MoT Regulation 7/2019). Upon the execution of the franchise agreement, the parties shall submit the Prospectus and sign the agreement on OSS for the issuance of NIB and STPW.
Please note that MoT Regulation 71/2019 requires the Prospectus and franchise agreement to be made in Bahasa Indonesia. If they are made in a foreign language, they should be translated into Indonesian language by a sworn translator, legalized by a notary, and authenticated by the Indonesian embassy in the home country of the franchisor.
15. What are the procedures for the renewal and termination of franchise agreements
MoT Regulation 71/2019 does not set up a specific provision with regards to the renewal and termination of franchise agreements. The regulation only provides the procedure of submission of the amended agreements to maintain the franchise license.
E. Cross Border Franchising
16. Are there any restrictions applicable specifically to foreign franchisors when entering your jurisdiction?
No. MoT 71/2019 does not stipulate any limitation for foreign franchisors.
17. What is the most typical structure used by foreign franchisors to enter your jurisdiction? Please provide a brief explanation of structures commonly used in your jurisdiction.
Most foreign franchise businesses in Indonesia are commonly structured under a PT. However, please note that a franchisor is prohibited to appoint franchisees who have direct or indirect control over the franchisor (e.g., shareholders, subsidiaries, or affiliates). Consequently, a foreign franchisor must appoint a separate entity that does not have any direct or indirect control over it to be its independent Indonesian franchisee.
18. What are the key aspects to be considered by foreign businesses before adopting a franchise model in your jurisdiction?
Given that Indonesia is an archipelagic country with a high population and consumption level, the most common franchise model in Indonesia is master franchising, as mentioned in point 12 above. This way, the master franchisee would be the one that takes care of all the sub-franchising agreements with the sub-franchisees within the agreed covering area. This model is considered highly profitable and practicable for foreign franchisors to obtain their business expansion as well as market targets in Indonesia.
19. What are the typical dispute resolution mechanisms adopted by foreign franchisors in your jurisdiction?
Most Foreign franchisors would use arbitration or any alternative dispute resolution, such as consultation, negotiation, mediation, or reconciliation as the typical dispute resolution mechanism. Furthermore, both foreign and domestic arbitral awards are enforceable in Indonesia, which also require an execution order to be issued by the relevant court.
Statutorily, MoT Regulation 71/2019 requires that a franchising agreement must contain a dispute resolution clause under Indonesian law. To comply with this provision, it is advisable to use the local arbitration body as the dispute resolution forum.
F. Intellectual Property, Employment, and Tax
20. How are the franchisor’s Intellectual Property Rights (e.g., trademarks and know-how, trade secrets) protected in your jurisdiction? What specific impacts does this have in the context of franchising?
Franchisors can protect their intellectual property rights, i.e., trademarks, know-how, and trade secrets, under the Indonesian prevailing laws. The know-how, i.e., industrial designs, copyrights, or trade secrets, may be protected under the patent or relevant Intellectual Property Law.
It is important to note that MoT Regulation 71/2019 requires a franchisor to register its trademark with the Indonesian Trademark Office of the Directorate General of Intellectual Property Rights before entering into the Franchise Agreement. As such, a clearance trademark search is essential for the franchisor to ensure that no party has filed for the same trademark.
21. Are there any relevant considerations for franchisors from an employment law and taxation perspective?
In terms of taxation, franchisors and franchisees are obliged to pay the income tax. Some taxes that should be considered are Value Added Tax (“VAT”), the withholding tax, and the final permanent establishment tax.
VAT is imposed on: (i) supplies of goods and services within or imported into the Indonesian customs area; and (ii) services performed abroad but consumed in Indonesia. Therefore, the provision of services by the franchisor to the franchisee is subject to VAT.
For the withholding tax, franchisors shall be liable for Art. 23/26 Withholding Tax. Furthermore, foreign companies with no permanent establishment in Indonesia are only subject to a final withholding tax on certain types of income derived from Indonesian sources.
Generally, Law No. 13 of 2003 as amended by Law No. 11 of 2020 on Job Creation does not apply to foreign franchisors located overseas, unless they employ Indonesians or expatriates to work in Indonesia. However, to minimize the risk of a franchisee’s employee being deemed as an employee of the franchisor, the Franchising Agreement should clearly express that the franchisor relationship with the franchisee is that of an independent contractor.
22. In which sectors is franchising most common and successful in your jurisdiction? And what is the outlook in this sector in the upcoming years?
Franchising has expanded rapidly, particularly in the food and beverage industry, followed by retail (more to fashion retail, department stores), lifestyle (such as fitness centers or yoga studios), and education industries.
23. Are there any other specific concerns in connection with franchise business in your jurisdiction apart from the above?
The exploitation of intellectual property, confidential information, manuals, and guidelines is one of the most significant risks a franchisor may face. Misuse of information and failure to fulfill the standard customer service by the franchised units may affect the goodwill, reputation, and image of the franchisor and its business, which may result in economic losses. Thus, these issues need to be handled carefully in the applicable franchise agreement.
In addition, the franchisor must foresee the compliance of the franchisee to file and obtain the required licenses and authorizations for the establishment and operation of the franchised units. If the franchisee fails to do that, the franchised unit may be subject to closure by the authorities, which will cause direct or indirect economic losses to the franchisor.
The above Comparative Guide was prepared by Marshall S. Situmorang (Partner) and Audria Putri (Senior Associate).