Key changes

Here are the key elements that franchisors and franchisees need to pay attention to in applying for a franchise certificate ("STPW"):

• Minimum requirement on franchise business system — Three franchise criteria mentioned under the previous regulation, i.e., Government Regulation No. 42 of 2007 on Franchise ("GR 42/2007") — (a) having business characteristics, (b) having written service standards for goods and/or services, and (c) being easy to teach and apply — are now combined into one criterion: having a business system that is written and easy to understand and has a clear framework. This business system must consist of standard operational procedures that include:
  • Human resource management
  • Administration
  • Operational management
  • Standard methods of operation
  • Business location selection
  • Business premises design
  • Employee requirements
  • Marketing strategy

Every prospectus and franchise agreement must reflect the above points.

• Profitability assessment — GR 35/2024 provides that profitability is proven by both of the following:
  • The franchise business activities have been running for a minimum of three years.
  • The franchise business has recorded profits for the last two years as shown in audited financial statements with an unqualified opinion.

This is a new requirement as GR 42/2007 stipulated that profitability is proven if the franchisor has had at least five years' experience and has business strategies to overcome business problems (shown by the franchisor's business resilience and profitable development). 

While there is a possible exemption for the two-prong test above, unfortunately, it is unlikely that foreign franchisors will benefit from this exemption. GR 35/2024 provides that only micro- and small-scale businesses are exempted from the requirement to provide audited financial statements.

The relevant regulations provide that micro, small and medium enterprises are categorized based on their capital investment (excluding land and buildings) or annual sales, as follows:

• Registered or recorded intellectual property rights —The relevant intellectual property (IP) rights for the franchised business must have been (i) registered if the franchise is granted based on trademark or (ii) recorded if the franchise is granted based on copyright, as demonstrated by a registration certificate or a recordal notification (document of which document must be included in the prospectus). GR 35/2024 also says that the protection period of the relevant IP rights must still be valid when the parties sign the franchise agreement.  This is a stricter requirement since GR 42/2007 allowed franchisors to apply for an STPW by submitting pending applications.
• Mandatory compensation — Franchisors must include provisions in their franchise agreements relating to (i) compensation or (ii) rights to continue the business, which would be triggered if the franchisor ends the franchise business.
• Cooperation with small- and medium-scale enterprises (SMEs) — While the requirement does not apply to foreign franchisors, GR 35/2024 requires certain local franchisees and franchisors to collaborate with SMEs or to provide opportunities for certain SMEs that meet the requirements to become franchisees.
• Local content — GR 35/2024 emphasizes that franchisors and franchisees should (i) prioritize the use of local products/services and (ii) prioritize the processing of raw materials in the country.
• Prohibition to classify an agreement as a franchise — Individuals and business entities are prohibited to use the term "franchise" for their agreement names or business arrangement or activities if they do not have an STPW. This is a stricter requirement as Minister of Trade Regulation No. 71 of 2019 on Franchise as the implementing regulation of GR 42/2007 was focused on prohibiting business entities from displaying the franchise logo if they did not have an STPW.
• STPW validity — The franchisor's STPW will expire when: (a) the franchisor's business activity comes to an end; or (b) the franchisor's IP registration/recordal expires in accordance with the relevant prevailing laws and regulations.
• Change of data — Franchisors/franchisees are required to update their STPWs through the Online Singe Submission (OSS) system if there is any change in the following:
  • Information stated in the prospectus, except for the number of outlets, the list of franchisees, and financial report information
  • The franchise agreement

It is still unclear whether this means that any amendments to the prospectus or franchise agreement will automatically require changes to the STPW, or if the requirement to update the STPW is only triggered when the amendments affect the information contained within the STPW. We assume it should be the latter. GR 35/2024 does not include a transitional period or mechanisms to adjust and ensure compliance.

• Sanctions — A new type of administrative sanction, i.e., temporary suspension of business activities, is included for certain violations of the provisions of GR 35/2024.

Franchise agreements must be governed by Indonesian law. Moreover, consistent with the previous regulations, prospectuses and franchise agreements must be made in the Indonesian language.

Things to consider

GR 35/2024 will affect any franchise agreements concluded with franchisees established in Indonesia after the regulation has taken effect. It may also affect existing franchise agreements. Businesses that use franchise agreements with franchisees established in Indonesia should consider how the new franchise regulation will affect their franchise agreements.

Please contact us if you have any questions on the above.

* Wiku Anindito, Associate Partner, and Kristi Tomasouw, Associate, have contributed to this legal update.

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