Navigating Indonesia’s Franchise Landscape: Key Updates Under GR 35/2024

The Indonesian government has introduced Government Regulation (GR) No. 35 of 2024, marking a pivotal shift in the nation’s franchising landscape. This regulation aims to streamline processes, enhance compliance, and foster the use of local resources, thereby creating a more dynamic environment for domestic and international franchise stakeholders.

Key Takeaways

1. Streamlined Profitability Requirements: Franchisors must now demonstrate at least three consecutive years of profitable operations, supported by audited financial statements from the past two years.
2. Mandatory Intellectual Property Registration: All associated intellectual property rights must be fully registered before applying for the Surat Tanda Pendaftaran Waralaba (STPW), ensuring legal protection and compliance.
3. Expanded Franchise Classifications: The regulation introduces eight distinct categories of franchise parties, providing a comprehensive framework for better regulatory oversight.
4. Permanent Validity of STPW: The STPW now has indefinite validity, eliminating the previous five-year renewal requirement, unless revoked due to specific circumstances.
5. Enhanced Requirements for Foreign Franchisors: Foreign entities must provide additional documentation, including a legalized business license and confirmation of operations from Indonesian authorities.
6. Promotion of Local Goods and Services: Franchisors and franchisees are encouraged to prioritize locally sourced products and collaborate with local MSMEs, fostering domestic economic growth.
7. 14-Day Disclosure Period: Prospective franchisees must receive a franchise prospectus in Indonesian at least 14 days before signing the agreement, ensuring informed decision-making.
8. Mandatory Indonesian Law Governance: Franchise agreements are required to be governed by Indonesian law and include specific clauses as outlined in the regulation.
9. Official Franchise Logo Display: Domestic franchisors and franchisees must display an official franchise logo at their headquarters and all outlets, enhancing brand recognition and compliance.
10. Structured Administrative Sanctions: A three-stage escalation mechanism for non-compliance is introduced, ranging from warning letters to temporary suspension and potential revocation of the STPW.

Simplified Business Profitability Assessment

Under GR 35/2024, the criteria for demonstrating business profitability have been relaxed. Franchisors are now required to have operated for at least three consecutive years, a reduction from the previous five-year mandate outlined in GR 42/2007 and Ministry of Trade Regulation 71/2019.

To substantiate profitability, franchisors must submit audited financial statements for the past two years. Notably, micro and small enterprise franchisors are exempt from this audit requirement, easing their path into the franchising sector.

Mandatory Intellectual Property Registration

A significant enhancement in GR 35/2024 is the stringent requirement for intellectual property (IP) registration. Franchisors must ensure that all associated IP rights—including trademarks, copyrights, patents, trade secrets, industrial designs, and integrated circuit layouts—are fully registered before submitting the Surat Tanda Pendaftaran Waralaba (STPW) application. This contrasts with earlier regulations, which permitted applications during pending IP registrations.

Expanded Franchise Party Classifications

The regulation introduces a comprehensive categorization of franchise parties into eight distinct groups, collectively termed franchise organizers:

• 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.

Permanent Franchise Registrations

GR 35/2024 brings a notable change to the validity of the STPW, the official franchise business license issued by the Ministry of Trade. The STPW now holds permanent validity, eliminating the previous five-year renewal requirement stipulated in GR 42/2007. However, the STPW may be revoked under specific circumstances, such as:

• Termination of the franchise agreement (applicable to franchisee-held STPWs).
• Cessation of business operations.
• Expiry or invalidity of intellectual property rights.
• Non-compliance with GR 35/2024 provisions.

Additionally, franchisors are mandated to submit annual franchise reports by June 30 each year, ensuring ongoing compliance and transparency.

Additional Requirements for Foreign Franchisors

Foreign franchisors seeking to enter the Indonesian market must adhere to new documentation requirements when applying for the STPW, including:

• A legalized or apostilled business license from their country of origin.
• An official letter from the Indonesian Trade Attaché or Embassy confirming the franchise’s active operations in the home country.

Emphasis on Local Goods and Services

In a bid to bolster the domestic economy, GR 35/2024 encourages franchisors and franchisees to prioritize locally sourced goods and services. Collaboration with local micro, small, and medium enterprises (MSMEs) as suppliers is highly recommended, provided these local products meet the franchisor’s established quality standards.

14-Day Disclosure Period

To promote transparency, franchisors are required to furnish prospective franchisees with a franchise prospectus in the Indonesian language at least 14 days before the signing of the franchise agreement. This prospectus, a component of the STPW application, must encompass:

• Background information on the franchisor, including legal status and business history.
• Organizational structure and business system details.
• Audited financial statements for the preceding two years.
• A list of existing franchise outlets and franchisees (excluding new franchisors).
• Comprehensive details outlining the rights and obligations of the franchisee.
• Certificates or official documentation about intellectual property rights.

Mandatory Provisions in Franchise Agreements

Franchise agreements under the new regulation must:

• Be governed by Indonesian law.
• Incorporate mandatory clauses as specified in GR 35/2024 and Ministry of Trade Regulation 71/2019, including:
  • A detailed description of the franchisor’s business system.
  • Confirmation of registered intellectual property rights.
  • Provisions for compensation or rights accorded to the franchisee in the event the franchisor ceases operations.

Official Franchise Logo Display

A notable addition in GR 35/2024 is the requirement for domestic franchisors and franchisees to display an official franchise logo provided by the Ministry of Trade. This logo must be prominently placed at the franchise’s headquarters and all operational outlets. Non-compliance with this mandate can lead to administrative sanctions, including written warnings, temporary suspension of business activities, or revocation of the STPW.

Enhanced Administrative Sanctions

To ensure adherence to the new regulations, GR 35/2024 introduces a structured three-stage escalation mechanism for non-compliance:

1. Warning Letters: Issuance of up to two formal warnings.
2. Business Suspension: Temporary suspension of business operations for up to 14 days.
3. STPW Revocation: Revocation of the STPW for continued non-compliance.

Should an STPW be revoked, the affected party is barred from reapplying for a new one for five years.

Conclusion

GR 35/2024 signifies a substantial advancement in Indonesia’s franchising sector, aiming to streamline operations, bolster compliance, and encourage the utilization of local resources.

Franchisors and franchisees are advised to thoroughly acquaint themselves with these regulatory changes to ensure seamless operations and avoid potential penalties.

For businesses aspiring to establish or expand their presence in the Indonesian market, these updates offer a clearer and more structured regulatory environment.

Navigating the complexities of franchise registration and compliance can be challenging. To ensure your business aligns with Indonesia’s regulatory framework, consider seeking professional assistance. Engaging experts can facilitate a smoother registration process, help maintain compliance, and provide ongoing support as your franchise grows in this dynamic market.

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