Indonesian Legal Review: Franchise Law

With approximately 260 million people, Indonesia is the largest consumer market in Southeast Asia and the ASEAN region and is attractive to international and local franchise businesses. When the Government of Indonesia (GOI) introduced a number of economic policy packages in a de-regulation effort to stimulate the economy, none of the policy packages focused on the franchising sector. The fact that no regulatory change occurred is noteworthy. The following background information is helpful to understand that there may be no de-regulation in this sector.

Current Law

• Law Number 7 of 2014 on Trade
• Government Regulation Number 42 of 2007 regarding Franchise (GR 42/2007)
• Minister of Trade (MOT) Regulation Number 53/M-DAG/PER/9/2012 regarding Franchise Organization as amended lastly by MOT Regulation No. 57/M-DAG/PER/9/2014 regarding Amendment of MOT Regulation No. 53/M-DAG/PER/8/2012
• MOT Regulation Number 68/M-DAG/PER/10/2012 regarding Franchise for the Modern Store Business
• MOT Regulation Number 07/M-DAG/PER/2/2013 regarding Partnership Development in Franchise for the Food and Drinks Service Business as lastly amended by MOT Regulation No. 58/M-DAG/PER/9/2014 regarding Amendment of MOT Regulation No. 07/M-DAG/PER/2/2013

The above regulations are collectively referred to as the Franchise Regulations. Under the Franchise Regulations, the franchisor and franchisee have legal obligations, be they jointly or separately. Among others, these are:

• Registration: The Franchise Regulations require both the franchisor and franchisee to obtain a Franchise Registration Certificate (Surat Tanda Pendaftaran Waralaba or STPW) issued by the MOT.

• Franchise Logo: The franchisor and franchisee who have obtained the STPW must use the franchise logo. Note that the franchise logo is expected to be further regulated by a ministerial regulation that has not been issued to date.

• Local Content: Eighty percent of the raw materials and business tools used and the goods and services sold by a franchisor and franchisee must be produced in Indonesia. In some circumstances, the MOT may permit a deviation from that local content requirement upon application to the MOT. GR 42/2007 provides that domestic products should be used insofar as they fulfill the written quality standards stipulated by the franchisor.

• Partnership Requirement: A franchisor must cooperate with a small and medium enterprise in the territory as the franchisee or supplier of goods and/or services so long as it fulfills the terms and conditions stipulated in writing by the franchisor.

• Training: The franchisor must provide training and assistance to the franchisee regarding the franchise management system, operational management, market development through promotion, and market and product research and development.

• Reporting Obligations: A foreign franchisor, a domestic franchisor, sub-franchisor of a foreign franchise, a sub-franchisor from a domestic franchise, and a franchisee from a foreign franchise must report on the franchisor activities to the MOT.

There are also GOI regulatory limitations on what franchise businesses can do:

• Limitation to Business Activities: The franchisor and franchisee may only conduct the activities stipulated in their business licenses. However, there is no limitation on the types of businesses that can be franchised. Under certain circumstances, the franchisor and franchisee may sell supporting goods. However, the maximum amount of supporting goods that can be sold is 10 percent of the total goods sold (e.g., branded traveler coffee cups for a coffee franchise).

• Restriction on the Appointment of a Franchisee: The franchisor cannot appoint a franchisee controlled by the franchisor, either directly or indirectly.√Ç  The maximum equity that may be held by such foreign franchisor is 49 percent. This means that neither a foreign nor domestic parent company franchisor may appoint its subsidiary as its franchisee. An appointment of an affiliate is acceptable if it is non-controlled by the franchisor. It also means that a foreign franchisor may not establish a foreign investment (PMA) company to conduct the same business activities as its franchisee.

Termination of the Franchise Agreement

If a franchisee disputes a unilateral termination by a franchisor prior to the expiration of the franchise agreement, the franchisor may not appoint a new franchisee in the same territory before the parties resolve their dispute amicably or until there is a valid and binding court decision.

This article was adapted from SSEK's Indonesian Legal Review, which looks at recent legal and regulatory developments in almost 50 sectors, from Airports to Tourism. This publication is intended for informational purposes only and does not constitute legal advice. Any reliance on the material contained herein is at the user's own risk. You should contact a lawyer in your jurisdiction if you require legal advice. All SSEK publications are copyrighted and may not be reproduced without the express written consent of SSEK.