This comparative guide was prepared in collaboration with Advaya Legal, a full-service commercial law firm in Mumbai, India.
INDONESIA
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 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?
Indonesia is silent on the terms of how franchise companies are typically structured. MoT 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 are no statutory obligation to join this association. The membership is not mandatory for maintaining the 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 governs franchising activities and licensing in your jurisdiction?
- 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.
The umbrella regulation that governs franchising activities in Indonesia is MoT Regulation 71/2019. Its enactment replaces and revokes the previous regulations:
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 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, sub-franchising structure is allowed under the 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 the 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 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.
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