Franchising

Franchising is governed by the following regulations:

• Government Regulation 42/2007 on Franchising;
• Minister of Trade Regulation 71/2019 on the Implementation of Franchising; and
• Business Competition Supervisory Commission Regulation 6/2009 on Guidelines for Exceptions to the Implementation of Law 5/1999 on the Prohibition of Monopolies and Unfair Business Practices related to Franchising Agreements.

Government Regulation 5/2021 on the Implementation of Risk-Based Business Licensing sets out the requirement for obtaining the relevant licence for franchising in Indonesia. Further, the Civil Code applies where the parties’ general contractual obligations are not specifically covered by a franchise agreement.

Yes. The regulations outlined in question 1.1 also apply to foreign franchisors entering into any franchise business in Indonesia.

In the self-service shop field, if a business entity already has 150 stores/outlets and plans to open more, the additional outlets/stores must be under either a franchise scheme or a joint venture or profit-sharing arrangement with a micro, small or medium business.

Under Minister of Trade Regulation 23/2021 on Guidelines for the Development, Arrangement, and Guidance of Shopping Centres and Self-Service Shop (as amended), the term ‘self-service shop’ covers minimarkets, supermarkets, department stores, hypermarkets and wholesalers.

The Ministry of Trade is responsible for enforcing franchising requirements in Indonesia, with the function of guiding, evaluating and supervising the implementation of franchising.

The current regulations in franchising are more flexible for foreign franchisors. This is in response to the rapid expansion of franchises in Indonesia, which is dominated by foreign global franchisors.

There are several franchising and licensing associations established by business players, such as:

• the Indonesian Franchise Association; and
• the Indonesian Licensing Association.

Requirements for membership may differ between associations; however, in general, they require:

• a business identification number; and
• a franchise registration certificate.

There are no direct commercial implications of not being a member of an association, as the main objective of these associations is to develop networks between members.

The franchise sector in Indonesia began to develop with the arrival of foreign franchises during the 1980s and 1990s, marked by the entry of fast-food franchises. Currently, according to data published by the Ministry of Trade (MOT), there are 346 franchises registered with the MOT. However, this number may not reflect the real situation, since there are many businesses (especially local brands) that are using a franchise arrangement but that, for various reasons, have not registered as a franchise with the MOT.

Most franchises in Indonesia are engaged in the food and beverage industry.

Large global franchisors dominate the franchise market in Indonesia, such as:

• McDonald’s;
• Dunkin Donuts;
• Pizza Hut;
• Haagen-Dazs; and
• Domino’s Pizza.

However, there is no publicly available online information about their franchise structures.

The master franchising model is more popular among foreign franchisors because it allows the franchisor to rely on one master franchisee for a given territory without becoming deeply entangled in operations in which it has little experience. There is no perceptible trend in one direction or the other, it is the franchisor that decides whether to offer master franchising or multi-unit development options. In both cases, the franchisee will be required to open and successfully operate one location before they will be allowed to develop others.

The direct franchising model in the form of single-unit franchises or multi-unit franchises is also commonly used by foreign franchisors.

Given the greater discretion that unit franchisees may have, the master franchise structure allows the business to be more adaptable to the needs of the local market. However, the franchisor’s power to control the business extends only to the master franchisee.

The advantage of direct franchising is that the franchisor can better control the units’ operations, as the developer directly operates the stores. However, business growth may be less effective because the franchisor must enter into separate franchise agreements with each local franchisee.

Franchise agreements must be governed by Indonesian law. This means that a foreign franchise agreement should be adjusted to comply with local laws and regulations.

A ‘franchise’ is a special right owned by an individual or business entity to a business system with certain business characteristics in order to market goods and/or services that have proved to be successful and that can be used by other parties based on a franchise agreement.

Both franchisor and franchisee must have its own franchise registration certificate under its name by registering prospectus and franchise agreement, respectively.

Yes, such registration is required.

Yes, certain contract terms must be provided and considered by the contracting parties.

The following activities in the context of franchising are prohibited under Business Competition Supervisory Commission Regulation 6/2009 on Guidelines for Exceptions to the Implementation of Law 5/1999 on the Prohibition of Monopolies and Unfair Business Practices related to Franchising Agreements:

• Franchisors are not permitted to maintain a resale price that binds their franchisees. Resale price maintenance requires franchisees to charge consumers the same price, thus eliminating price competition among them. The franchisor may, however, provide a resale price to the franchisee as a recommendation that is not binding on the franchisee.
• Franchisors may not prohibit franchisees from purchasing supplies from third parties, as long as the non-designated suppliers meet the franchisor’s quality standards. According to Regulation 6/2009, prohibiting a franchisee from appointing other suppliers may hinder businesses that are capable of providing supplies of the same quality to the franchise business.
• Franchisors are prohibited from requiring franchisees to purchase additional goods or services from them (tie-ins). This prohibition, however, does not apply if tie-ins are necessary to preserve the franchise business’s identity and reputation.
• Franchisors are prohibited from imposing territorial restrictions on franchisees by assigning specific areas to them in order to limit access to the market and consumers.
• Franchisors must not forbid franchisees from engaging in similar business activities after the franchise agreement has expired for a long period of time. The Business Competition Supervisory Commission will determine the length of the time by considering:
• • the franchise product’s technology and its production costs; and
  • whether it has entered the public domain.
• If the technology has become a public domain and the investment made for the business is not significant, the prohibition against engaging in similar business is usually one year.

Violation of prohibited activities may result in the Business Competition Supervisory Commission imposing administrative sanctions in the form of:

• an order to cease franchise activities;
• an order to pay compensation; and/or
• a fine of at least IDR 1 billion.

To apply for a franchise registration certificate (STPW), foreign franchisors must first determine which Indonesian Standard Business Classification (KBLI) code covers its franchised business. The KBLI is a list of business activity classifications, published by Statistics Indonesia. The KBLI selected by the franchisor should be the same as the franchisee’s KBLI under its business licence.

Assuming franchisors here refer to foreign franchisors, the answer is no; foreign franchisors are not required to establish a local presence.

No requirements or restrictions apply with regard to the selection and recruitment of franchisees. However, foreign franchisors must ensure that:

• a prospective franchisee maintains the same KBLI code as the franchisor; and
• the intended franchise business is open to foreign ownership.

While the regulations are silent on the legal obligations of franchisees, they do provide examples of franchisor rights and obligations that may be agreed upon in the franchise agreement. These include maintaining a code of ethics/confidentiality for the franchisor’s IP rights or business characteristics.

Franchisors must provide a prospectus that contains at least the following information:

• the franchisor’s identity – that is, a copy of the citizen identity cards or passports of:
• • the business owner (for individuals); or
  • the shareholder(s), commissioner(s) and director(s) (for business entities);
• the franchise business’ technical licence(s), such as:
• • a trading business licence;
  • a permanent tourism business licence;
  • a licence to establish educational units; or
  • the business licences required in the franchisor’s home country;
• a history of the business’s activities covering, among other things, its establishment, operations and development;
• the organisational structure of the franchisor, from the commissioners and directors down to the operational level;
• audited financial statements for the last two years prior to the submission date of the disclosure document;
• the total number of self-managed and franchised outlets;
• a list of franchisees (including their names and addresses) located in Indonesia and abroad;
• the rights and obligations of the franchisor and franchisee, such as:
• • the franchisor’s right to receive fees or royalties from the franchisee and the obligation to provide continuous guidance to the franchisee; and
  • the franchisee’s right to use the franchisor’s IP rights or business characteristics and its obligation to maintain the confidentiality of the franchisor’s IP rights or business characteristics;
• the IP rights as business characteristics granted by the franchisor, including the registration of the IP rights. A trademark licence agreement granting the right to use the trademarks from the trademark owner to the franchisor should be available, but only if the trademark owner is a different entity from the franchisor.

The complete prospectus must be registered with the Ministry of Trade (MOT) through the Online Single Submission (OSS) system to obtain a business identification number (NIB) and a franchise registration certificate in the name of the franchisor.

The franchisor must first apply for an access code for the OSS system in order to create an account. The foreign franchisor can then apply for an NIB, which is normally issued immediately by the OSS system. The NIB is a basic licence for starting a business and also serves to identify the business.

No pre-contractual disclosure requirements apply to franchisees. Pre-contractual disclosure requirements apply only to the franchisor.

A franchisor that does not register the prospectus with the MOT may be subject to administrative sanctions in the form of up to three written warnings. If the franchisor still does not register the prospectus after the third warning letter, the franchisor may be fined a maximum of IDR 100 million.

It is not mandatory to conduct due diligence for the purposes of franchising. However, it is not uncommon for the parties to conduct their own due diligence before entering into a franchise arrangement.

In practice, due diligence should cover the following minimum information:

• for the franchisor:
• • data on the franchisee’s identity;
  • information on the primary business licence of the franchisee (ie, the NIB), as well as the franchisee’s business technical licences (eg, a trade business licence, a tourism business permanent licence or a licence to establish educational units);
  • the financial condition of the franchisee; and
  • the franchisee’s reputation in the business; and
• for the franchisee:
• • data on the franchisor’s identity;
  • information on the franchised business, its system, operations and so on;
  • the history of the business, including information on its establishment, activities and development; and
  • information on IP rights as business characteristics granted by the franchisor, including the registration status of the IP rights.

Franchise brokers are not common in Indonesia.

Such provisions are not regulated. This will be up to the parties concerned. However, franchisors will have to attach its 2-years audited financial statements to the prospectus, and provide the complete prospectus to the franchisee.

A franchise agreement must contain provisions on the following:

• the names and addresses of the parties – that is, the clear names and addresses of the owners/persons in charge of the companies which enter into the franchise agreement (ie, the franchisor or sub-franchisor and the franchisee or sub-franchisee);
• the IP rights of the franchisor, such as:
• • the company brand and logo;
  • the design of the outlets or business premises;
  • the management or marketing system; or
  • the recipes, cooking method and ingredients that are franchised;
• the agreed business activities, such as retail trading, education provision, or operating restaurants, pharmacies or workshops;
• the rights and obligations of the franchisor or sub-franchisor, including:
• • the right to receive fees or royalties from the franchisee or sub-franchisee; and
  • the obligation to provide continuous support to the franchisee or sub-franchisee;
• the rights and obligations of the franchisee or sub-franchisee, including:
• • the right to use the IP or business characteristics of the franchisor; and
  • its obligation to maintain a code of ethics or confidentiality of the IP or business characteristics granted by the franchisor;
• the assistance, facilities, operational guidance, training and marketing provided by the franchisor or sub-franchisor to the franchisee or sub-franchisee, such as providing and maintaining computers and IT programs for managing the business activities;
• the business territory – that is, the territorial limits granted by the franchisor or sub-franchisor to the franchisee or sub-franchisee to develop the franchise business, such as within a certain province or municipality or throughout Indonesia;
• the term of the franchise agreement – that is, the start and end dates of the franchise agreement from when the agreement is signed by the franchisor and the franchisee or the sub-franchisor and the sub-franchisee;
• the procedure for the payment of fees or royalties, including the time and method of calculating the amount under the franchise agreement by the franchisee or sub-franchisee;
• details of the owner, any transfer of ownership and the rights of the franchise owner’s heirs in case of a change of ownership resulting from a transfer or the death of the franchise owner;
• the settlement of disputes – that is, the selection of a dispute resolution forum that applies Indonesian law;
• the procedure for termination or extension of the franchise agreement – for example:
• • whether it can be terminated unilaterally or will terminate automatically upon the expiry of the term agreed; or
  • whether it can be extended if desired by both parties;
• a guarantee from the franchisor or sub-franchisor that it will continue to perform its obligations to the franchisee or sub-franchisee under the franchise agreement until the term of the agreement expires; and
• the number of outlets or business premises that will be managed by the franchisee or sub-franchisee during the term of the franchise agreement.

The complete franchise agreement signed by the parties must be registered with the Ministry of Trade through the OSS system.

A franchise agreement for a franchise in Indonesia must be governed by Indonesian law.

The franchisor has no mandatory rights and obligations under the franchise agreement. The regulations, however, provide examples of franchisor rights and obligations that may be agreed upon in the franchise agreement, such as:

• the right to receive fees or royalties from the franchisee; and
• the obligation to provide continuous support to the franchisee.

The regulations provide examples of franchisee rights and obligations that may be agreed upon in the franchise agreement, such as:

• the right to use the IP or business characteristics of the franchisor; and
• the obligation to maintain a code of ethics or confidentiality of the IP or business characteristics granted by the franchisor.

Under a franchise agreement, the franchisor may impose sourcing requirements to prioritise the use of local products, as required under Minister of Trade Regulation 71/2019 on the Implementation of Franchising.

Further, the franchisor may assign specific areas to the franchisee as long as this is intended to form a franchise network system and not to limit the franchisee’s markets and consumers.

Under Article 1338 of the Civil Code, any agreement between the parties must be made in good faith. This means that the parties must disclose all material facts about the business that could influence the other party’s decision before entering into the agreement. The agreement also serves as a law for the contracting parties. Therefore, in the franchising context:

• the franchisor must provide the franchisee with a prospectus disclosing information on the franchised business before entering into the franchise agreement; and
• the franchise agreement that will be entered will serve as a law for the franchisor and franchisee and consequently they must abide the terms and conditions therein.

There are no specific requirements regarding the renewal of a franchise agreement under Minister of Trade Regulation 71/2019 on the Implementation of Franchising. However, the franchise registration certificate will be declared invalid if certain requirements are not met, such as maintaining the validity of the franchisee’s business licence and the trademark registration. So it is important for the parties to ensure these requirements are met before renewing the agreement.

In practice, additional conditions for renewal are usually specified in a franchise agreement – for example:

• the franchisee must not be in breach of the franchise agreement; and
• its financial obligations must have been settled.

As the right of renewal is contractual and optional, no remedy is available if a franchisor does not renew. However, this option should be clearly set out in the franchise agreement, including the terms and conditions for renewal.

There are no specific requirements regarding termination of a franchise agreement under Minister of Trade Regulation 71/2019 on the Implementation of Franchising. However, an agreement can be terminated if specifically permitted by its terms or agreed upon by the parties. In practice, the parties may enter into a termination agreement to end an existing agreement.

Under Regulation of the Board of Bank Indonesia Governors 24/10/PADG/2022 on Regulations for Conducting Transactions in the Foreign Exchange Market, foreign exchange transfer transactions are limited to the equivalent of $100,000 per month per customer. If the amount is greater, the customer must submit the transaction documents to Bank Indonesia.

Under Indonesian tax law, as a non-resident taxpayer, a foreign franchisor does not have to withhold taxes. In addition, taxation liability will arise on income derived from royalties. If the franchisor is Indonesian, the income tax is 15% of the gross income derived from royalties; if the franchisor is foreign, the rate is 20%. If the franchisor is located in a country that has a tax treaty with Indonesia, the withholding tax rate may be reduced or exempted.

The Indonesian franchise regulations are silent on the operations manual. The franchisee’s compliance with an operations manual is contractual rather than regulated by law.

A franchisor can ensure that the franchisee complies with the business standards, systems and requirements through regular and ongoing supervision and assistance of the franchisee. The franchisee can also be required to:

• establish and implement a business plan in accordance with the franchisor’s standards; and
• submit a written business development report.

There are no legal restrictions on the right of the franchisor to introduce changes, either to the operations manual or to other aspects of the franchised business. However, if the changes will have a material impact on the local business, the franchisee should ideally be informed of the changes before they are implemented.

Trademarks are protected in Indonesia upon their registration with the Directorate General of Intellectual Property at the Ministry of Law and Human Rights. The registration remains valid for 10 years and can be renewed for the same term. Under Minister of Trade Regulation 71/2019 on the Implementation of Franchising, the franchise registration certificate becomes invalid if the trademark registration of the franchised business is not approved or expires. Maintaining a valid trademark registration is important in conducting a franchise business in Indonesia.

Indonesia only recognises IP rights for:

• trademarks;
• copyrights;
• patents;
• industrial designs;
• integrated circuit layout designs;
• trade secrets; and
• plant varieties.

There is no mechanism for the registration of trade secrets in Indonesia. The other IP rights have no specific implications in the franchising context, as the regulations on franchising only strictly govern trademark usage.

The franchise relationship does not fall under the Indonesian manpower regulations.

No. Franchisees are not considered employees of the franchisor. The relationship between the franchisee and the franchisor is a partnership rather than employment.

The competition regime in franchising is regulated under Business Competition Supervisory Commission Regulation 6/2009 on Guidelines for Exceptions to the Implementation of Law 5/1999 on the Prohibition of Monopolies and Unfair Business Practices related to Franchising Agreements. Please see question 4.3.

There are no statutes, regulations or cases that specifically relate to e-commerce in the franchising context. However, a franchisor can contractually prevent a franchisee from:

• having its own website presence;
• promoting its business on the Internet (advertising the brand and business); and
• engaging in e-commerce (selling products or services online).

If the website of the franchisor is used in Indonesia in relation to its business activities, the franchisor must register its website with the Ministry of Communication and Informatics. The same requirement applies to the franchisee.

Under Law 8/1999 on Consumer Protection, the franchisor and the franchisee must respect consumer rights in providing goods/services to end users – for example, by:

• maintaining the quality of the goods/services; and
• providing correct information on their condition.

See question 13.1.

Data protection is mainly regulated under Law 27/2022 on the Protection of Personal Data. Under the law, ‘personal data’ is defined as data in electronic or non-electronic systems that separately or combined allows individuals to be identified. Personal data must be:

• processed lawfully, fairly and transparently;
• collected for specified, relevant and strictly necessary purposes;
• kept for no longer than necessary; and
• stored securely.

Also, the processing of personal data generally requires explicit consent from the data owner. This means that written consent, electronic or otherwise, must be obtained from the data owner, so implied consent is not allowed.

In franchising, it is common for an agreement to state that the franchisee must maintain the confidentiality of personal data obtained, within permitted limits.

In Indonesia, cybersecurity is mainly regulated under Minister of Communication and Informatics Regulation 20/2016 on the Protection of Personal Data in Electronic Systems. Under this regulation, businesses that receive, process or use personal data electronically must use commercially reasonable methods to safeguard the data from loss, theft or unauthorised use. Similar to the above, the franchisee must maintain the confidentiality of personal data obtained from loss, theft or unauthorised use.

Disputes relating to franchise agreements are typically resolved through arbitration as the process is faster than going through court. Foreign franchises usually prefer settlement through an international arbitration forum, such as the Singapore International Arbitration Centre. Offshore arbitration is acceptable in Indonesia under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958. Arbitration involving local parties typically takes place through the Indonesian National Arbitration Board.

However, franchise agreements tend to state that the parties must first seek amicable resolution of a dispute before proceeding to the next dispute resolution mechanism under the franchise agreement, whether through arbitration or the local courts.

A non-binding mediation is not mandatory nor commonly used.

There is a specific regulation on arbitration in Indonesia, namely Law No. 30 of 1999. Pursuant to Law No. 30 of 1999 district courts shall not be authorized to process a dispute of parties who are bound by an arbitration clause. An arbitration agreement between parties precludes any party from submitting a dispute to the courts. Therefore, the courts do not have any power to intervene in arbitration proceedings. Additionally, Law No. 30 of 1999 states that an arbitration award shall be final, valid and binding with respect to the parties. This means that no appeal to the courts can be made against the arbitration award. The arbitration award could however be cancelled on limited grounds. An application for cancellation of an arbitration award can be made to the District Court, if such award is suspected of containing any of the following matters: (i) the letter or the document submitted for the examination, after the award is rendered, is admitted to be counterfeit or declared to be counterfeit; (ii) after the award is rendered, an important document which may adversely affect the award turns out to be hidden by the opponent; or (iii) the award is rendered on the basis of fraud conducted by either of the parties during the examination of the dispute.

Yes, Indonesia is a member of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958.

Yes, in theory, franchisees are allowed to file a class action lawsuit. However, in practice, a class action lawsuit would face difficulties because it requires similarity of facts or events, legal basis and types of claims between the franchisees, and involves a large number of class members, making it impractical or inefficient to bring the claim individually or in a single proceeding.

In 2022, a franchisee filed a lawsuit against a local franchisor on the grounds that the trademark used for its franchise business had not been registered by the franchisor with the Directorate General of Intellectual Property. Further, the franchisor lacked the necessary licences to conduct a franchise business. The franchisee filed a claim for compensation, which was granted by the judge.

Food and restaurant franchises are a growing trend in Indonesia. Currently, no legislative reforms concerning franchises have been proposed.

The key to successful franchising in Indonesia is finding a local partner with experience in the business. Franchisors should also ensure that they obtain a trademark registration in Indonesia as this is one of the requirements to obtain the franchise registration certificate.