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December 22, 2022

Overview of Franchising in Indonesia

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Rules for franchising in Indonesia were first published in 1997 through a government regulation and a ministerial decree, which was subsequently amended several times. The franchising regulations currently in effect are Government Regulation No. 42 of 2007 concerning Franchises and Regulation issued by the Minister of Trade No. 71 of 2019 concerning the Implementation of Franchising (MOT No. 71 of 2019).

Franchises in Indonesia must meet certain criteria that distinguish them from other types of businesses, and franchising must be based on a franchise agreement governed by Indonesian law. Prior to entering into a franchise agreement, a franchisor must provide a prospectus (disclosure document) to the prospective franchisee at least two weeks before the execution of the franchise agreement so that the prospective franchisee has sufficient time to review the reputation and goodwill of the franchisor through the prospectus. The prospectus must contain various details about the franchise business, its management, its operations, and other relevant aspects.

Both local and foreign franchisors must obtain a franchise registration certificate—referred to as an STPW—from the Ministry of Trade before offering their franchises to prospective franchisees. The franchisee is also required to obtain an STPW. The STPW for the franchisor is the proof of prospectus registration, while the STPW for the franchisee is the proof of registration of the franchise agreement. Franchisors and franchisees who have STPWs are required to submit reports on franchise business activities to the Ministry of Trade’s director of business development and distribution by the end of June each year.

Up to three written warnings will be served on a franchisor or franchisee who does not comply with the registration requirements. A fine of up to IDR 100 million (approx. USD 6,400) will be imposed if the franchisor or franchisee fails to respond to the warnings.

MOT No. 71 of 2019 on franchising was a step forward for the industry, as it streamlined some steps and relaxed some of the more onerous requirements. The table below indicates how some typical franchising concerns in Indonesia are handled under the current regulations.

Issue Rules under MOT No. 71 of 2019
Validity of STPW As long as the franchise agreement is valid
Direct control between franchisor and franchisee No longer regulated
Requirement to use domestic materials Previous requirement to use 80% domestic materials removed by the 2019 ministerial regulation, which states only that use of domestic materials must be prioritized
Intellectual property (IP) IP registration can be pending when the STPW is applied for, but the STPW will be considered invalid if the IP is eventually rejected
Clean break No longer regulated

 

Franchising in Relation to Competition and Antitrust Law

Indonesia’s Law No. 5 of 1999 concerning the Prohibition of Monopolistic Practices and Unfair Business Competition prohibits:

  • restrictive agreements and practices, including oligopoly, monopoly, entering into cartels, price discrimination, and resale price maintenance;
  • abuse of dominance;
  • mergers, amalgamations, or acquisitions of companies that can result in monopolistic practices or unfair business competition; and
  • conglomerate power through interlocking directorates or majority equity stakes in several companies accounting for a market share exceeding 50%.

The law specifically mentions franchising, exempting franchise agreements from its list of prohibited agreements. This is intended to benefit holders of IP rights; in general, if the contents of the agreement are intended to protect IP rights or maintain the characteristics of the IP rights used in the franchise, the agreement can be exempted from Law No. 5 of 1999.

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