In depth

GR 35/2024 revokes Government Regulation No. 42 of 2007 on Franchise ("GR 42/2007") but does not revoke the Ministry of Trade (MOT) Regulation No. 71 of 2019 on Franchise ("MOT 71/2019"), which serves as an implementing regulation of GR 42/2007. Therefore, the main regulations covering franchise arrangements in Indonesia are now GR 42/2007 and MOT 71/2019. It is unclear if the MOT will issue an implementing regulation to replace MOT 71/2019.

In Indonesia, a franchise registration certificate (Surat Tanda Pendaftaran Waralaba, or STPW) is required for both franchisors and franchisees to legally operate a franchise. The key elements for applying for the STPW now include:

• Minimum requirement on franchise business system ─ The three criteria previously outlined in GR 42/2007 — having identifiable business characteristics, having written service standards for goods and services, and being easy to teach and apply — have now been consolidated. Now, there is one requirement: having a clearly written and understandable business system that includes standard operational procedures in the following areas:
  • 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 the business must be profitable as evidenced by both of the following:
  • The franchise business activities have been running for a minimum of three consecutive years.
  • The franchise business has recorded profits for the last two years as evidenced by audited financial statements with an unqualified opinion.

This marks a shift from GR 42/2007, which allowed profitability to be demonstrated through a franchisor's experience and business strategies over five years, evidenced by business resilience and consistent profitability.

There is an exemption to the two-prong "profitability" test under GR 35/2024, but it is unlikely that foreign franchisors will qualify for it. GR 35/2024 specifies that only micro- and small-scale businesses are exempt from the requirement to submit audited financial statements.

For reference, the relevant regulations in Indonesia provide that micro, small and medium enterprises (SME) 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)  for the franchise must be registered (if based on a trademark) or recorded (if based on copyright). Proof of registration, must be included in the franchise offering prospectus. GR 35/2024 also states that the protection period for the relevant IP rights must still be valid when the parties sign the franchise agreement.

The stricter IP requirements under GR 35/2024, which no longer allow franchisors to apply for an STPW with pending IP applications as permitted under GR 42/2007, will likely impact franchisors with pending trademark or copyright registrations, potentially delaying their ability to enter the Indonesian market until full registration is obtained.

• Mandatory compensation ─ Franchise agreements must now include provisions for compensation or rights to continue the business, if the franchisor ends the franchise.
• Cooperation with SMEs ─ While this requirement does not apply to foreign franchisors, GR 35/2024 requires certain local franchisees and franchisors collaborate with SMEs or provide opportunities for eligible SMEs to become franchisees.
• Local content ─ GR 35/2024 emphasizes that franchisors and franchisees should prioritize using local products/services and processing of raw materials within Indonesia.
• STPW validity ─ The franchisor's STPW will expire when the franchisor's business activity ceases or the franchisor's IP registration/recordal expires under relevant laws.
• Change of data ─ Franchisors and franchisees must update their STPWs through the Online Single Submission (OSS) system for any changes in (i) information in the prospectus (excluding the number of outlets, list of franchisees, and financial report information), or (ii) the franchise agreement

It remains unclear if amendments to the prospectus or franchise agreement will automatically necessitate changes to the STPW, but we assume that updates are only required when the amendments impact the information contained within the STPWs. GR 35/2024 does not include a transitional period or mechanisms to ensure compliance with its adjustments.

• Prohibition to classify an agreement as franchise ─ Individuals and business entities are prohibited to use the term "franchise" in their agreement names, business arrangement, or activities without an STPW, which is a stricter requirement than MOT 71/2019, which focused on prohibiting the display of franchise logos without an STPW.
• Sanctions ─ GR 35/2024 introduces a new administrative sanction of temporary suspension of business activities for, specific violations related to franchising and franchise agreements.
• Indonesia law ─ Franchise agreements must be governed by Indonesian law. Moreover, consistent with MOT 71/2019, prospectuses and franchise agreements must be made in the Indonesian language.

Key takeaways

With the issuance of GR 35/2024, franchisors considering expansion to the Indonesian market should consider that they will not be eligible for registration under the franchise law if any of the following items are not met:

• The franchisor entity does not have audited financial statements showing clear profitability over the last two years or has been operating for less than three years.
• The trademarks for the system are not fully registered (and not merely pending) in Indonesia.

Moreover, franchisors must now include a provision on how they will compensate franchisees in the event the franchisor ceases operating in the future.  It remains unclear what the MOT will accept under this requirement and whether such compensation may be waived by a franchisee.

Franchisors that fail to meet these new requirements will face significant hurdles in registering and legally operating their franchise in Indonesia as a result of GR 35/2024. As a result, franchisors should thoroughly evaluate their current standing in relation to these criteria and take necessary actions to ensure compliance before attempting to expand into the Indonesian market.

* * * * *

This article builds on our previous client alert, shifting from a local to a global focus for a comprehensive exploration of the issue.

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

© 2024 HHP Law Firm. All rights reserved. In accordance with a common terminology used in professional service organizations. reference to a "partner" means a person who is a partner, or equivalent in such a law firm. Similarly reference to an "office" means the office of any such law firm. This may qualify as 'Attorney Advertising' requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome