10 things to note about Indonesia's new franchise regulations

Indonesia’s Government Regulation No. 35 of 2024 on Franchising (GR 35/2024) entered into force on 2 September 2024, replacing Government Regulation No. 42 of 2007 on Franchising (GR 42/2007) as the country’s main legislation governing franchise businesses. 

For a business to be deemed a franchise under GR 35/2024, a franchisor must own a profitable business operated using a written business system, own registered intellectual property rights, and provide ongoing support related to training, operational management, promotion, research, market development, and fitout / layout of premises to its franchisees. The franchisor’s business system must include operational standards and procedures on human resources management, administration, operational management, standard operating methods, premise selection and design, employee requirements and marketing strategies. 

This article highlights 10 key developments in GR 35/2024. These changes are aimed at strengthening Indonesia’s current franchise regulatory framework, demonstrating the Indonesian government’s continued commitment to fostering a robust franchise industry in the country. It is noted that some of these changes are already reflected in the Minister of Trade’s Regulation No. 71 of 2019 on Franchising (MOT Regulation 71/2019), which remains in effect until new ministerial regulations are issued.

1. There are now eight categories of franchise parties 

GR 35/2024 specifies eight different categories of franchise parties (who are referred to in the regulations as franchise organisers), who are classified as such:

• Franchisors: domestic franchisors, foreign franchisors, master franchisees of domestic franchisors, and master franchisees of foreign franchisors; 
• Franchisees: franchisees of domestic franchisors, franchisees of foreign franchisors, sub-franchisees of domestic franchisors, and sub-franchisees of foreign franchisors. 

2. New two-prong test to prove profitability of the business

To prove the profitability of the business, a franchisor must have operated its business for at least three consecutive years. This is a reduction from the five-year requirement under GR 42/2007 and MOT Regulation 71/2019. However, in line with the requirement under MOT Regulation 71/2019, franchisors are still required to also furnish audited financial statements of the past two years to demonstrate the profitability of the business, except that the audit requirement does not apply to the financial statements of franchisors who are micro or small enterprises.  

3. Franchise registrations no longer need to be renewed 

All franchisors and franchisees must obtain a franchise registration letter known as the Surat Tanda Pendaftaran Waralaba (STPW) issued by the Ministry of Trade, which functions as a franchise business licence. Annual reports of the franchise must be submitted by 30 June of each year. GR 35/2024 removes the renewal requirement of the STPW, which was valid for a five-year period under GR 42/2007. STPWs are now valid until revoked on one of the following grounds: (i) termination of the relevant franchise agreement (only applicable for STPWs held by franchisees); (ii) cessation of business; (iii) expiry or invalidity of the relevant intellectual property rights; and/or (iv) non-compliance with GR 35/2024. 

4. Foreign franchisors are required to provide additional supporting documents 

When applying for the STPW, foreign franchisors are now required to provide a legalised or apostilled business licence issued by the relevant authority in its country of origin, in addition to an official letter confirming the operation of the franchise business, which issued by the Trade Attache of Indonesia or the Indonesian Embassy in its country of origin. 

5. Franchisors must comply with a 14-day franchise disclosure period 

GR 35/2024 requires franchisors to provide a franchise prospectus (also commonly known as a franchise disclosure document) in the Indonesian language to prospective franchisees at least 14 days before the execution of a franchise agreement. The franchise prospectus, which must be submitted as part of a franchisor’s STPW application, must include information on the background of the franchisor including its identification data and legal status, history of the business activities, organisational structure of the franchisor, its business system, financial statements of the past two years, number of franchise stores or premises, list of franchisees (exempted for new franchisors), rights and obligations of franchisees, and certificates or registration documents of intellectual property rights.

6. Intellectual property rights must be registered or recorded

Under GR 35/2024, intellectual property rights related to the franchise, such as trade marks, copyright, patents, trade secrets, industrial designs and integrated circuit layout designs, must be registered or recorded before an STPW application can be submitted. This is a more stringent requirement compared to the previous position, where an application for the STPW can be filed while relevant applications for intellectual property rights remain pending. 

7. Franchise agreements must contain mandatory provisions 

Franchise agreements must be governed by Indonesian law, and must contain the mandatory clauses required under GR 35/2024 and MOT Regulation 71/2019. The new mandatory provisions introduced by GR 35/2024 include provisions on the franchisor’s business system, registration of the relevant intellectual property rights, and franchisor’s guarantee of compensation and/or rights of the franchisee in the event of the franchisor’s cessation of business.

8. There are new administrative sanctions

GR 35/2024 has introduced a new three-stage escalation mechanism, replacing the administrative sanctions outlined in GR 47/2007 and MOT Regulation 71/2019. Non-compliance with GR 35/2024 can lead to (i) the issuance of up to two warning letters; and continued non-compliance may result in (ii) temporary business suspension of up to 14 business days; while further violations may result in (iii) STPW revocation. If an STPW is revoked due to administrative sanctions, the relevant franchise party can only reapply for a new STPW five years after the date of revocation.  

9. Domestic franchisors and franchisees must use the government’s official franchise logo

Domestic franchisors and franchisees are also required to use an official franchise logo, which will be issued by the Minister of Trade upon the issuance of the STPW. The official franchise logo must be displayed prominently in the relevant headquarters and in every franchise outlet.

10. Domestic franchisors and franchisees should procure goods and services locally 

Domestic franchisors are encouraged to prioritise the use of locally-sourced goods and services, and are required to cooperate with micro, small and medium enterprises in their respective local areas as suppliers. Franchisees must adhere to the same requirements, provided that the procured goods and services meet the quality standards prescribed by the relevant franchisors. This aligns with the position under MOT Regulation 71/2019, which removed the previous mandate to use at least 80% locally-sourced materials.

Next steps

GR 35/2024 affects all franchise agreements and STPW applications made after 2 September 2024. Existing STPWs issued prior to 2 September 2024 remain valid until their validity period expires and following which, the relevant franchisors and franchisees will need to apply for new STPWs, and ensure that their franchise agreements and franchise prospectuses comply with the requirements under GR 35/2024.