Key Changes in Indonesia’s Franchise Laws

Effective on September 2, 2024, the Indonesian Government enacted Government Regulation No. 35 of 2024 on Franchising (“GR 35/2024”), introducing significant updates to the regulatory framework for franchises in Indonesia. This new regulation replaces the previous Government Regulation No. 42 of 2007.

GR 35/2024 was introduced in response to the growing legal demands and evolving dynamics of franchise businesses in Indonesia, particularly to ensure business fairness and legal certainty for both franchisors and micro, small, and medium enterprises (“MSMEs”). Through this regulation, the Government aims to foster a more balanced business environment, ensuring both fairness and legal clarity in franchise partnerships.

Outlined below are key updates to the Indonesian franchise regulations following the enactment of GR 35/2024.

Franchise organizers

GR 35/2024 expands the categories of parties that can be classified as Franchise Organizers compared to the previous regulation, which now includes:

1. Domestic and Foreign Franchisor: Individuals or business entities that grant the rights to utilize and/or use the franchise they own to franchisees.
2. Domestic and Foreign Franchisee: Individuals or business entities that are granted the right by a Franchisor to utilize and/or use the franchise owned by the Franchisor.
3. Domestic and Foreign Advanced Franchisor: Franchisees who have been granted the right by the Franchisor to appoint other individuals or business entities as Advanced Franchisee.
4. Domestic and Foreign Advanced Franchisee: Individuals or business entities that receive the right from an Advanced Franchisor to utilize and/or use the franchise from the original Franchisor.

Criteria of franchises  

GR 35/2024 stipulated updated criteria that a business must meet to be classified as a franchise. These include:

Having a business system

The franchise must provide a comprehensive business system, including standard operational and procedural guidelines. These cover various aspects such as human resource management, administration, operations, standard operating procedures (SOPs), business location design, employee requirements, and marketing strategies. The business system must be provided in written form to Franchisees or Advanced Franchisees and should be easy to teach, implement, and encompass the clear working arrangement and cooperation between the Franchisor/Advanced Franchisor and the Franchisee/Advanced Franchisee.

Proof of profitability

The franchised business must have operated for at least three consecutive years. This should be proven by audited financial statements from the last two years showing that the revenue has been generated and contains a non-exceptional reasonable opinion from the auditor. MSMEs are exempted from the requirement to provide audited financial statements.

Registered intellectual property

The franchise must have registered intellectual property rights, including trademarks, copyrights, patents, trade secrets, industrial designs, and/or integrated circuit layout designs, directly related to the business.

Continuous support from the franchisor and/or advanced franchisor

Franchisors and/or Advanced Franchisors must provide continuous support to Franchisees and/or Advanced Franchisees. This support includes training, operational management, promotions, research, market development, and other forms of business assistance.

Prospectus offers

Under GR 35/2024, Franchisors/Advanced Franchisors are required to provide a Franchise Prospectus Offer to prospective Franchisees/Advanced Franchisees at least 14 calendar days before the signing of the Franchise Agreement.

This prospectus must include the following information:

1. Identity data of the Franchisor/Advanced Franchisor
2. Business legality of the Franchisor/Advanced Franchisor
3. History of business activities
4. Organizational structure of the Franchisor/Advanced Franchisor
5. Business systems
6. Financial statements for the past two years
7. Number of franchise outlets/business premises
8. List of Franchisees/Advanced Franchisees (this requirement is exempted for new franchise businesses)
9. Rights and obligations of the Franchisor/Advanced Franchisor and the Franchisee/Advanced Franchisee
10. Intellectual property certificates or intellectual property registration documents.

Franchise agreements

Franchisors or Advanced Franchisors must enter into Franchise Agreements with their Franchisees or Advanced Franchisees, governed by Indonesian law.

GR 35/2024 expands the list of mandatory clauses, adding:

1. Business system.
2. Compensation or granting of franchise rights if the Franchisor/Advanced Franchisor ceases operations.
3. Guarantee that the Franchisor/Advanced Franchisor will continue fulfilling obligations to the Franchisee/Advanced Franchisee.
4. The number of outlets/business premises managed by the Franchisee/Advanced Franchisee.

Franchisors may also include an optional clause allowing Franchisees to appoint Advanced Franchisees, offering flexibility for business expansion.

Franchise registration letters

All Franchise Organizers must possess a Franchise Registration Letter (Surat Tanda Pendaftaran Waralaba or “STPW”), which functions as a business license supporting their business activities (PBUMKU).

It is important to note that the requirements and procedures for obtaining an STPW differ between Franchisors and Franchisees:

1. Franchisors/Advanced Franchisors: They must obtain the STPW before entering into any Franchise Agreement by applying along with their Franchise Prospectus Offer through the OSS (Online Single Submission) system.
2. Franchisees/Advanced Franchisees: They are required to secure their STPW before commencing business operations, submitting their application along with the relevant Franchise Agreement through the OSS system.

For foreign Franchisors, the application for an STPW must include a business license from the relevant authority in the Franchisor’s country of origin (which must be legalized), as well as a certificate confirming the continuity of the franchise business, issued by the Trade Attaché of the Republic of Indonesia or the Indonesian Embassy in the Franchisor’s country of origin.

Failure to comply with these requirements may result in administrative sanctions as stipulated under Government Regulation No. 5 of 2021 on the Implementation of Risk-Based Business Licensing, which may include administrative fines.

Franchise logos

GR 35/2024 introduces a new requirement for all Franchise Organizers to use an official franchise logo, which will be issued by the Minister of Trade to each Franchise Organizer upon obtaining their STPW. This logo must be displayed prominently in every franchise branch and at the main headquarters, ensuring visibility in public areas.

Failure to comply with this requirement may result in administrative sanctions, including, but not limited to, the revocation of the STPW. However, this obligation does not apply to Foreign Franchisors, who are exempt from using the official franchise logo.

Obligations of use of domestic products

GR 35/2024 mandates that all Franchisors/Advanced Franchisors, except for Foreign Franchisors, prioritize the use of domestically produced goods and services. Additionally, they are required to collaborate with local MSMEs as suppliers of goods and/or services.

Franchisees/Advanced Franchisees are also required to prioritize the use of domestic goods and services, provided they meet the quality standards set in writing by the Franchisor/Advanced Franchisor. Furthermore, Franchisees/Advanced Franchisees must collaborate with local MSMEs as suppliers of goods and/or services, as long as these MSMEs fulfill the requirements set by the Franchisor/Advanced Franchisor.

In addition, Franchisors/Advanced Franchisors must provide opportunities for local MSMEs to become Franchisees if they can meet the requirements. All Franchise Organizers are also encouraged to prioritize the use of domestic raw materials in the operation of their franchise businesses.

 Need further guidance?

The changes introduced by GR 35/2024 have significant implications for franchise businesses in Indonesia, whether you are a Franchisor, Franchisee, or considering entering the franchise market. Our firm is well-equipped to guide you through the complexity of this updated regulation, ensuring compliance and maximizing the potential of your franchise operations. Please feel free to reach out to us for personalized consultation or assistance with your franchise agreements and regulatory requirements.

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