New Rules For Franchising In Indonesia: What You Need To Know About Government Regulation No. 35 Of 2024.

The Indonesian government has introduced Government Regulation No. 35 of 2024 regarding Franchises (“GR 35/2024”), which came into force on September 2, 2024, and replaces the previous regulation on franchises in Indonesia, Government Regulation No. 42 of 2007 (“GR 42/2007”).

This new regulation is a significant update to the regulatory framework for franchising businesses and brings clarity and new compliance requirements to the sector. Whether you are a franchisor or franchisee, understanding the key provisions of GR 35/2024 is crucial for ensuring that your business remains compliant and competitive.

Here are key points of GR 35/2024 that businesses should keep in mind, as well as steps to take to ensure alignment with the law.

Mandatory Clauses in Franchise Agreements 

Previously, GR 42/2007 required franchise agreements to include key provisions such as the names and addresses of the parties, types of intellectual property, business activities, rights and obligations of the parties, assistance from the franchisor, business territory, the term of the agreement, payment procedures, ownership rights and the transfer of ownership rights, dispute resolution clause, and procedures for the extension and termination of the agreement. 

GR 35/2024 maintains that such key provisions shall continue to be included in the franchise agreement. However, Article 6(2) of GR 35/2024 marks a change from the previous regulation, requiring that the following matters shall also be regulated in the franchise agreement:

1. The requirement that intellectual property is still under valid protection.
2. The mandatory inclusion of the business system.
3. A guarantee of compensation or the granting of rights in the event the franchisor terminates the business.
4. A guarantee that the franchisor will continue to fulfil its obligations.
5. The number of outlets or business locations to be managed by the franchisee.

Further, although both the new and old regulations require that franchise agreements include a dispute resolution clause, the elucidation of Article 6(2)(l) of GR 35/2024 stipulates that the dispute resolution clause shall determine the forum of any dispute resolution proceedings. GR 35/2024 also provides that the choice of law shall be Indonesian law. Thus, while GR 35/2024 does not require that the dispute resolution mechanism involve a certain type of proceeding, i.e., arbitration, mediation, or negotiation before escalating to litigation, the regulation explicitly requires Indonesian law as the choice of law. 

GR 35/2024 retains the obligation for franchise agreements to incorporate certain clauses that include provisions on the transfer of franchise rights and the termination of agreements. Article 6(2)(k) of GR 35/2024 further stipulates that the transfer of franchise rights shall occur if there is a transfer of ownership or in the event of the death of the franchise owner. 

Article 6(2)(m) of GR 35/2024 elaborates that the franchise agreement cannot be terminated unilaterally and that the franchise agreement shall stipulate the term of the agreement. The new regulation stipulates that the franchise agreement can be extended by the mutual consent of the parties involved.

Franchise Registration Certificate Requirement

The new regulation maintains the requirement that franchisors, sub-franchisors, franchisees, and sub-franchisees (“Franchise Actors”) obtain a Franchise Registration Certificate (Surat Tanda Pendaftaran Waralaba or “STPW”) from the Ministry of Trade. This certificate acts as the business license which allows Franchise Actors to operate their business activities.

Without an STPW, a franchise cannot legally operate in Indonesia. This requirement applies to both foreign and local Franchise Actors. For franchisors and sub-franchisors, the obtainment of an STPW involves the submission of the franchise offer prospectus. Separately, franchisees and sub-franchisees obtaining an STPW will be required to attach the franchise agreement to their application.

Specifically for foreign franchisors, as provided under Article 13(3) of GR 35/2024, this submission shall be accompanied by a business permit document issued by an authorized institution in the country of origin of the foreign franchisor and legalized by either (a) a competent authority (for countries under the Convention Abolishing the Requirement of Legalisation for Foreign Public Documents) or (b) a representative official of the Republic of Indonesia in the country of origin (for countries not participating in the Convention Abolishing the Requirement of Legalisation for Foreign Public Documents). 

A certificate of continuity of franchise business activities from the trade attaché of Indonesia or a representative official of Indonesia in the country of origin of the foreign franchisor must also be furnished.

Utilization of Locally Produced Goods and Services

GR 42/2007 required franchisors and franchisees to prioritize the use of locally produced goods and services, provided they met the franchisor’s quality standards, Chapter IX of GR 35/2024 reinforces this obligation. Aside from encouraging franchisors and sub-franchisors to use local products and services whenever possible, Article 27 of GR 35/2024 provides that Franchise Actors shall prioritize the processing of raw materials domestically. This is in line with Indonesia’s broader goals of promoting local industry and reducing dependency on imported goods.

Franchise Offering Prospectus Requirements

A key focus of the new regulation is transparency between franchisors and potential franchisees. GR 35/2024 requires franchisors to provide a franchise offering prospectus that includes comprehensive information about the franchise opportunity. Among others, the following information shall be provided in the offering prospectus:

1. Data on the identity of the franchisor or sub-franchisor;
2. Business legality of the franchisor or sub-franchisor;
3. Business history;
4. Organizational structure of the franchisor or sub-franchisor;
5. Business system;
6. Financial statements for the last two years;
7. Number of franchise outlets/business locations;
8. List of franchisees or sub-franchisees;
9. Rights and obligations of the franchisor or sub-franchisor and franchisees or sub-franchisees; and
10. Intellectual property certificates or intellectual property registration documents.

The key differences between the new and old regulations include that GR 35/2024 explicitly requires the franchisor’s business system to be included in the franchise offering prospectus, which was not required by the previous regulation. GR 35/2024 also requires the provision of information regarding intellectual property certificates or intellectual property registration documents, which was not required under GR 42/2007.

Training and Support Obligations

GR 35/2024 strengthens the requirement for franchisors to provide adequate training and operational support to their franchisees. Similar to the previous regulation, which specified that franchisors and sub-franchisors must ensure that franchisees and sub-franchisees receive “continuous support,” Article 4(8) of GR 35/2024 stipulates that such support may be in the form of training, operational management, promotion, research, market development, and other forms of coaching.

Franchisors and sub-franchisors should ensure adherence to the requirement that they provide “continuous support” for franchisees and sub-franchisees, as failure to fulfil this requirement may result in administrative sanctions in the form of:

1. written warning;
2. temporary suspension of business activities; and/or
3. revocation of STPW.

Requirement to Utilize the Official Franchise Logo

A significant change from the previous regulation is that Article 21(1) of GR 35/2024 requires Franchise Actors, aside from franchisors originating from abroad, to utilize the official franchise logo. The official franchise logo is attached in the appendix of GR 35/2024 and will be provided by the Ministry of Trade after the Franchise Actor obtains an STPW. 

Pursuant to Article 24 of GR 35/2024, non-compliance with this requirement may result in administrative sanctions, which are elaborated below.

Sanctions for Non-Compliance

Under GR 42/2007, the following administrative sanctions may be imposed for non-compliance with provisions of the regulation: written warnings, fines, and/or revocation of STPW. However, GR 35/2024 generally eliminates the imposition of fines. 

The new regulation upholds that administrative sanctions may be imposed for violations of:

1. The obligation of franchisers and sub-franchisers to provide “continuous support”;
2. The obligation for Franchise Actors to amend their STPW via the Online Single Submission (“OSS”) system for any changes to their data as contained within the franchise offering prospectus and franchise agreements;
3. The obligation for Franchise Actors to utilize the official franchise logo; and/or
4. The obligation for Franchise Actors to submit business activity reports via the OSS system.

A violation of any of the above obligations is subject to administrative sanctions in the form of written warning, temporary suspension of business activities, and/or revocation of STPW. To avoid sanctions, Franchise Actors are advised to ensure they are fully compliant with GR 35/2024.

Actions for Companies to Take

1. Ensure the Obtainment of STPW: As all Franchise Actors must hold a valid STPW issued by the Ministry of Trade, Franchise Actors shall ensure the obtainment of the business license prior to the commencement of their business activities.
2. Review and Update Franchise Agreements: Franchise Actors shall ensure their existing franchise agreements align with the latest regulatory requirements, which requires the inclusion of mandatory clauses. 
3. Review and Obtain Intellectual Property Documents: Understanding the new requirement that franchisors provide intellectual property certificates or registration documents in the franchise offering prospectus, franchisors shall ensure they have registered their intellectual property rights.
4. Provide Training and Continuous Support for Franchisees: As GR 35/2024 requires the provision of training and continuous support for franchisees and sub-franchisees, it is advisable that franchisers and sub-franchisers ensure such support through the provision of training, operational management, promotion, research, and market analysis.
5. Utilize the Official Franchise Logo: Franchise Actors shall ensure compliance with the newly introduced rule on the utilization of the official franchise logo, noting that non-compliance could lead to administrative sanctions. 
6. Submit Regular Business Reports via the OSS System: Another new requirement is that Franchise Actors must submit business activity reports via the OSS system. 

By taking the above actions, Franchise Actors can align with the updated franchise regulation and minimize the risk of administrative sanctions under the new legal framework. (17 October 2024)