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Indonesia: key changes to franchising law as Minister of Trade issues new regulation

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United Kingdom

Introduction

The Minister of Trade of the Republic of Indonesia (MOT) has recently issued MOT Regulation No. 71 of 2019 on Franchise (Regulation 71). This regulation revokes the previous regulations on franchise businesses. Significantly, this regulation removes some of the onerous provisions which apply to foreign franchisors looking to expand into Indonesia.

Before the introduction of this new regulation, franchise regulations were made up of a number of different regulations: the "Indonesia Franchise Regulation" (MOT No. 53/M-DAG/PER/8/2012 and MOT No. 57/M-DAG/PER/9/2014); the Franchising for Modern Store (MOT No. 68/M-DAG/PER/10/2012); the Obligations on the Use of a Franchise Logo (MOT No. 60/M-DAG/PER/9/2013); and the Partnership Development in Franchising for Food and Beverage Services (MOT No. 07/M-DAG/PER/2/2013 and MOT No. 58/M-DAG/PER/9/2014).

Key changes

The key changes introduced by Regulation 71 are as follows:

  1. STPW – validity period

It is an existing requirement that a franchisor and a franchisee must both have a franchise business certificate called a Surat Tanda Pendaftaran Waralaba (STPW) which is issued by MOT.

Obtaining A STPW can be difficult and, under the previous regulations, was only valid for 5 years.

Under the new Regulation 71, there is no longer a limitation on the validity period of an STPW. Once an STPW is obtained, it will remain valid indefinitely, unless:

  • the validity period of the underlying franchise agreement has expired (for franchisees); or
  • either party ceases to carry out the business activities; and/or
  • the registration of Intellectual Property Rights (IPR) by the franchisor is not approved by the Directorate General of IPR or the validity period of the IPR under the franchise has expired.
  1. STPW – 5 years' experience

Under Regulation 71, a company needs to have a minimum of five years' experience in the business in order to apply for a STPW.

  1. STPW – application process

The method for applying for, or revoking, a STPW has changed. Regulation 71 now requires all applications and revocations to be carried out through the Online Single System (OSS). After this process has been completed, the company will then be directed to the Sistem Informasi Perizinan Terpadu (SIPT). However, for a revocation of any STPW issued before the enactment of the new regulation, the previous process should be followed (i.e. visiting the MOT office to use the SIPT).

  1. Removes "clean break" requirement

Previous regulations placed restrictions on early termination by the franchisor in that a franchisor was not able to appoint a new franchisee within the same area without the prior approval of the franchisee (a "clean break") or a final and binding court decision. Regulation 71 removes this restriction.

  1. Local supply requirement

Regulation 71 removes the requirements on the use of 80% locally-sources raw materials, equipment or products and instead obliges the franchisor to prioritise the use of local goods and services so long as the goods and services meet the quality set by the franchisor. This is a significant change as the local content requirements are commonly the main barrier in doing business in Indonesia.

  1. Number of outlets

Under previous regulation, the maximum number of outlets was 150 for "modern shop businesses" and 250 for food and beverage businesses. Regulation 71 removes the restriction on the maximum number of outlets.

  1. IPR

Regulation 71 recognises the importance of having valid IPR protection in conducting a franchise business. The status of IPR may affect the validity of STPW. STPW will be deemed invalid if the registration of IPR by the Franchisor were not approved by the relevant authority, or if the validity period of IPR has expired.

  1. Common control

Previous regulation meant that franchisors could not appoint a franchisee which was involved in a common control relationship with the franchisor (e.g. a subsidiary of the franchisor). Regulation 71 has revoked this restriction which means that it is now possible for a franchisor to enter into a franchise agreement with a company that it controls.

  1. Governing Law

Regulation 71 stresses that all franchise agreements must be governed by Indonesian law.

  1. Obligatory clauses

Along with requiring that the governing law be Indonesian, Regulation 71 further states that the franchise agreement must be executed in the Indonesian language and must include provisions on change of ownership.

  1. Franchise logo

Franchisors no longer need to display their franchise logos at the main office, stores or outlets. It is now illegal for a franchise operator without STPW to use a franchise logo.

Comment

Through this new regulation, the Indonesian government is making it easier to do franchise business in Indonesia. As set out above, Regulation 71 significantly simplifies the requirements in comparison to previous regulations. This presents an opportunity for incoming franchises.

Further, in light of the new Regulation 71, current franchisors and franchisees should adjust their business models and supply chain relationship in accordance with each party’s long-term commercial objectives. Any parties currently operating under alternative business alliances in Indonesia also may well choose to convert to a franchise relationship.