Updates to Indonesia’s Franchise Regulatory Landscape – An Overview
Very recently, the Indonesian Government issued and enacted Government Regulation No. 35 of 2024 regarding Franchises (“GR 35/2024”). GR 35/2024 replaces the previous regulation governing the matter i.e., Government Regulation No. 42 of 2007.
Key provisions under GR 35/2024
Criteria
Criteria of business that can be considered as a Franchise:
- Possesses a business system in a form a written operational standard and procedure that is easy to be applied and include a clear framework;
- The business has generated profits which is proven by showcasing that the business has been franchised for at least 3 years consecutively and the business’s audited financial statements for the past 2 years have been reflecting profits;
- Possesses registered intellectual property rights e.g., trademarks, copyrights, patent, trade secret etc; and
- There is a continuous support from the franchisor to the franchisee such as training, operational management, promotion, research, market development and other form of support.
For completeness, GR 35/2024 sets out the following definition:
- Franchise is the special rights possessed by individual or legal entity on a business system which criteria was set in order to market any goods and/or services which was proven as successful and can be leveraged and/or utilized by other party based on the Franchise agreement.
- Franchise agreement is a written agreement between the franchisor and franchisee which contain the granting of the rights to enjoy the economic benefit of a Franchise for a certain period of time.
Offering of the Franchise
The franchisor must deliver an offering prospectus to the prospective franchisee at the latest 14 calendar days before signing of the franchise agreement. The franchise offering prospectus must, at least, include the following details and must be in Bahasa Indonesia:
- Identity of the franchisor;
- Legality of the franchisor;
- Business history;
- Organisational structure of the franchisor;
- Business system;
- Financial statements of the past 2 years;
- Number of franchise outlets save for the franchisor who has just started to offer the franchise arrangement;
- List of the franchisee.
- Rights and obligations of the franchisor and franchisee; and
- Certificate or registration statement of the intellectual property rights involved.
Franchise Agreement
GR 35/2024 specifically governs that the prevailing law of the franchise agreement must be Indonesian law, and the minimum contents are prescribed.
Interestingly, one of the contents of the franchise agreement prescribed by GR 35/2024 is a guarantee from the franchisor to the franchisee for the franchisee to obtain a compensation and/or to receive its rights in case of cease of the franchise business by the franchisor.
Obligations of the Franchisor
One of the key obligations of the franchisor under GR 35/2024 is to provide a continuous support to the franchisee. The continuous support could be in a form of promotion through advertisement, exhibition, or brochure.
In addition to the support, the franchisor is also obliged to divide the distribution area among franchisees.
These provisions indicate that GR 35/2024 wishes to ensure that the franchisor remains responsible to support the franchisee to achieve success with the franchise business, and that GR 35/2024 is not in favor of franchise arrangement where the franchisor is merely accepting as much as franchisee as possible.
Obligations of the Franchisee
On the other hand, one of the key obligations of the franchisee imposed by GR 35/2024 is to safeguard the ethic code/confidentiality of the intellectual property rights owned by the franchisor.
Local content
GR 35/2024 remains consistent with the intention of the Indonesian Government to ensure a minimum use of local content within the goods and/or services offering in franchise arrangements.
The obligation to meet the local content requirement is imposed to both franchisor and franchisee, although in the case of franchisee the fulfillment of the obligation subjects to whether the use of local content meets the standard of quality prescribed by the franchisor.
The minimum percentage of local content is determined by the relevant regulations.
Franchise Registration Letter
The franchisor and the franchisee (respectively) must obtain the franchise registration letter in order to carry out its business and the letter must be obtained prior to entering into any franchise agreement.
The franchise registration letter of the franchisor is deemed invalid when:
- The franchisor ceases its business activity; and/or
- The term of the registered intellectual property rights expires.
On the other hand, the franchise registration letter of the franchisee is deemed invalid when:
- The term of the franchise agreement expires or terminated;
- The franchisor or the franchisee ceases its business activity; and/or
- The term of the registered intellectual property rights involved in the franchise arrangement expires.
Sanctions for Non-Compliance to Key Obligations
|
Obligations |
Party(ies) Affected | Sanctions |
Remarks |
| To provide continuous support | Franchisor | Administrative sanctions ranging from written warning, temporary suspension of business activities, and/or revocation of franchise registration letter. | As mentioned above, GR 35/2024 is clearly showcasing its position against any franchise arrangement where the franchisor is merely accepting as much as franchisee as possible. |
| To obtain the franchise registration letter prior to the commencement of the business or entering into the franchise agreement | Franchisor and/or franchisee | Sanctions as per the regulations governing the risk-based business licensing, which range from written warning to revocation of license. | – |
| In case of franchise arrangement involving offshore franchise business to amend the franchise registration letter in case of changes in the franchise prospectus offering and franchise agreement. | Franchisor and/or franchisee | Administrative sanctions ranging from written warning, temporary suspension of business activities, and/or revocation of franchise registration letter. | GR 35/2024 appears to not differentiate any treatment for franchise arrangements, either involving domestic or offshore franchise business. |
Grandfather Clause
All franchise registration letters issued before GR 35/2024 is grandfathered from any updates made by GR 35/2024.
The franchise registration letters that are currently in progress are not grandfathered and therefore updates could be applied to the review process of these registration letters.
Subsequent Franchisor and Subsequent Franchisee
All obligations and references to franchisor and franchisee apply to subsequent franchisor and subsequent franchisee.
To read the article in PDF version, click here.
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