New Franchise Regulatory Regime - Impact on the Indonesia Franchise Actor

In September 2024, Indonesia enacted Government Regulation (“GR”) No. 35 of 2024 on Franchise (“GR 35/2024”), which replaces the previous regulation GR No. 42 of 2007 on Franchise (“GR 42/2007”). Although GR 35/2024 retains several provisions of GR 42/2007, it introduces various changes that would be relevant to the franchise sector.
This article provides an overview of the key provisions under GR 35/2024, particularly the: (i) Franchise Criteria, (ii) Franchise Prospectuses, (iii) Franchise Agreements, (iv) Licensing Requirements, (v) Prioritization of Local Content, (vi) Reporting Obligations, (vii) Administrative Sanctions, and (viii) Concluding Remarks.
Franchise Criteria
The stipulation on franchise criteria under GR 35/2024 is fundamentally not different from those under the previous regulation, GR No. 42 of 2007 on Franchise (“GR 42/2007”), which includes:
a. owning the business system;
b. generating the revenue;
c. having registered and recorded the Intellectual Property (“IP”) to the Ministry of Law (formerly the Ministry of Law and Human Rights or “MoLHR”);
d. providing the support.
(Article 4 of GR 35/2024)
Under GR 35/2024, further elaborations regarding the franchise criteria are provided.
The business system in point (a) is defined as having a standard operational procedure, which includes the (i) human resource management, (ii) administration, (iii) operational management, (iv) standard operational methods, (v) business location selection, (vi) business location design, (vii) employee requirements, and (viii) marketing strategy (Article 4 (3) of GR 35/2024).
To generate the revenue under point (b), GR 35/2024 requires a business to be engaged in continuous business activities for 3 (three) years. In comparison, the previous regulation mandated the business to last for 5 (five) years (Article 4 (5) letter a of GR 35/2024). Business actors, except those of the local MSME (Medium, Small, and Micro Enterprises), must provide their financial statements already audited by the public accountants that show their business profitability (Article 4 (5) letter b and (6) of GR 35/2024).
Franchise Prospectus
GR 35/2024 introduces more stringent conditions for the franchisor and its extension, where the prospectus must be delivered to the prospect franchisee or extended franchisee no later than 14 days prior to the signing of the franchise agreement (Article 5 (1) and (4) of GR 35/2024). Furthermore, GR 35/2024 requires the franchisor or extended franchisor to include 2 (two) additional information within their prospectus the (i) business system and (ii) IP certificates (Article 5 (2) of GR 35/2024).
Franchise Agreement
The new regulation requires any franchise agreement to include the following:
a. detailed information of the parties;
b. valid intellectual property;
c. business activities;
d. business system;
e. rights and obligations;
f. assistance, facility, operational guidance, training, and marketing provided by the franchisor or subsequent franchisor;
g. business area;
h. guarantee of the franchisor or subsequent franchisor that the franchisee or subsequent franchisee would receive the compensation and/or be granted the rights over the franchise, in case the franchisor or subsequent franchisor ceases its business activities;
i. term of agreement;
j. payment method;
k. ownership and transfer of ownership of the franchise;
l. dispute resolution;
m. procedure for the extension and termination of the agreement;
n. guarantee from the franchisor or subsequent franchisor that it would perform its obligation to the franchisee or subsequent franchisee; and
o. number of outlets to be managed by the franchisee or subsequent franchisee.
(Article 6 (2) of GR 35/2024)
Although the minimum clauses of franchise agreement generally remain the same as those under the previous regulation, GR 35/2024 adds 1 (one) additional clause that should be included by the parties, which is the guarantee by the franchisor or extended franchisor (point (h)). This clause ensures that the (i) franchisee or extended franchisee shall receive the compensation and rights if the franchisor or extended franchisor ceases their business activities and (ii) the franchisor or extended franchisor shall perform its obligations under the franchise agreement until the end of the franchise agreement term (Article 6 (2) letter h and n of GR 35/2024).
Franchise License
GR 35/2024 has removed the validity period of Franchise Registration Certificate (Surat Tanda Pendaftaran Waralaba or “STPW”), as the previous regulation set the 5 (five)-year validity period for STPW that could be extended for another 5 (five) years.
Further, GR 35/2024 outlines the conditions when the STPW will be deemed invalid or terminated by the government:
a. The franchisor or extended franchisor ceases its business activities;
b. The franchise agreement expires; and/or
c. The expiration of the franchise Intellectual Property.
(Article 16 of GR 35/2024)
An application of STPW must be submitted to the OSS system managed by the Ministry of Investment (Article 15 (1) of GR 35/2024).
Local Content Prioritization
Local franchise actors are encouraged to integrate domestic goods and/or services into their operations. Additionally, the franchisor and its extended franchisor need to collaborate with Medium, Small, and Micro Enterprise (“MSME”) in supplying the products or raw materials. Such mandates are also applicable to the franchisee and its extended franchisee where they must prioritize domestic goods and collaborate with local MSME to supply the products or raw materials, provided the MSMEs fulfil the condition set by the franchisor or extended franchisor (Articles 26 and 27 of GR 35/2024).
Reporting Obligations
Franchise businesses are required to provide their annual reports to the government on their activities by no later than 30 June of the following year.
The annual report must, at least, contain the following information:
a. Total franchisee or extended franchise;
b. Total franchise location;
c. Financial report that contains the loss and profit statement;
d. Gross income;
e. Total remuneration;
f. Raw material processing information;
g. Total manpower;
h. IP protection status; and
i. Details of the ongoing support of the franchisor and extended franchisor.
(Article 28 (3) and (4) of GR 35/2024)
In addition to the annual report, businesses are required to make and submit a written report to the OSS system if the franchisor decides to cease its franchise activities (Article 29 of GR 35/2024). Please note that the reporting obligation does not apply to a foreign franchisor.
Sanction
Non-compliance with the obligations under GR 35/2024 will be subject to administrative sanctions:
a. written warning;
b. Temporary suspension of the franchise activities; and/or
c. STPW revocation
All the administrative sanctions shall be notified and gradually imposed by the government through the OSS system.
Concluding Remarks
GR 35/2024 brings opportunities and challenges to franchise business actors. Franchisors must adapt their business models to align with the local content requirements as mandated by the regulation, while franchisees must prepare to fulfil the financial and operational commitments, including prioritizing the use of local goods or services. Moreover, it is important for businesses to review and update their franchise agreements, prospectuses, and operational systems to comply with GR 35/2024. Additionally, the removal of the validity period of STPW license is expected to attract more businesses, including foreign franchise actors, to Indonesia’s franchise market.
Franchise actors must meet their obligations under GR 35/2024, including those requiring them to provide the annual report through the OSS system, and the report when the franchisor ceases its franchise business.
The article above was prepared by Audria Putri (Senior Associate), Mia Sari (Senior Associate), and M. Irfan Yusuf (Associate).
Disclaimer: The information herein is of general nature and should not be treated as legal advice, nor shall it be relied upon by any party for any circumstance. Specific legal advice should be sought by interested parties to address their particular circumstances.