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Franchising in Indonesia

September 16, 2014

The increasing development of Indonesia's economy and, in particular, the spending power of its growing middle class, have meant that franchising, both domestic and international, has expanded rapidly as a method of conducting retail investment and retail sales. Indonesia, however, has a franchise regulatory regime aimed at controlling the activities of franchises and ensuring that local franchisees are protected from unscrupulous or even fraudulent franchisors.

This regulatory regime has recently become both more extensive and more complex, at least in terms of the number of regulations. Enforcement by the authorities of this regulatory regime has been slow and mixed. It remains to be seen whether the strict procedures discussed below will be followed and enforced—or whether they will fail to achieve their objective to protect both franchisees and consumers.

Current Regulatory Regime

Franchising in Indonesia is governed by Government Regulation No. 42 of 2007 regarding Franchises (Regulation 42), Minister of Trade Regulation No. 53/M-DAG/PER/8/2012 regarding The Implementation of Franchising (Regulation 53) and the Director General of Domestic Trade franchising technical guidelines No. 138/PDN/KEP/10/2008 (collectively the “Regulations”).  Specific regulations have also been issued by the Minister of Trade regarding certain specific activities such as the use of a franchise logo and partnerships in food and drink franchise businesses.

Under the Regulations, a franchise is defined as a special right that is owned by an individual or an entity over the unique characteristics of a business system that has been successful in promoting goods and/or services and can be used by another party pursuant to a franchise agreement.  In order to franchise in Indonesia, a franchisor must meet the following criteria:

  • Have a specific business characteristic
  • Have at least five years of experience
  • Have a written standard operating procedure and a description of the proposed goods and/or services
  • Have a system that is easy to learn and apply
  • Be able to provide continuous support to the franchisee
  • Have a registered intellectual property right (trademark or copyright)

Disclosure Document

A franchisor must provide a disclosure document to a prospective franchisee at least two weeks before the franchise agreement is executed. The disclosure document must contain the following information:

  • The business history of the franchisor covering its establishment, business activities and business development
  • Information about key executives and the organizational structure of the franchisor
  • Audited balance sheets for the last two years
  • The number of company and franchised units and a list of franchisees
  • The contractual rights and obligations of the franchisor and the franchisee
  • Information about training to be provided
  • Information regarding intellectual property rights
  • Information about exclusivity granted to the franchisee
  • A copy of all contracts to be signed

In contrast to the U.S., there is no need to provide pre-sale disclosure in Indonesia each time a franchisee signs a new agreement.  Pre-sale disclosure only needs to be provided one time. Accordingly, there is no need to provide the disclosure document to a franchisee before he signs the second or subsequent franchise agreement.

Franchise Agreement

Regulation 53 requires that the franchise agreement must be governed by Indonesian law. In addition, the Regulations require that the agreement identify the number of outlets to be open, but do not prohibit granting the franchisee exclusivity.  Sub-franchising is permitted, but the master franchisee must operate at least one outlet.  The Regulations do impose a maximum number of permitted company stores ranging between 150 and 250 depending on the type of business.

Early termination of the franchise agreement by the franchisor or franchisee will not automatically enable the franchisor to appoint a new franchisee.  An STPW (as described below) for the new franchisee will only be issued by the Ministry of Trade once the parties have resolved all outstanding issues and either (1) the parties have filed a written agreement to that effect (known as a clean break letter); or (2) a final and binding court decision to that effect has been issued.

Local Products and Small and Medium Scale Business

Regulation 53 requires franchisors and franchisees to use domestically produced goods and/or services for at least 80% of their raw materials, business equipment, and sales.  While Regulation 53 also provides that the Minister of Trade may exempt a franchise from this requirement in “certain cases” based on a recommendation from an assessment team, no explanation is provided as to what may be considered “certain cases.”  This local content statement must be included with both STPW applications and again with the annual report.

Franchise Registration Certificate (Surat Tanda Pendaftaran Waralaba—STPW)

The franchisor and the franchisee each must file for, and obtain, an STPW.  Each STPW is valid for five years and may be renewed each time for five years. In addition, an annual report must be filed with the Ministry of Trade.

The franchisor must apply for, and obtain, its STPW before the franchise agreement may be signed.  The following are required for the STPW submission by the franchisor:

  • The disclosure document in the Indonesian language (and a legalized disclosure document if prepared in another language) the minimum content of which is explained above
  • A copy of the passport of the franchisor's representative
  • Legal documents of the franchised business, i.e., technical business permits or the license issued in the franchisor's home country
  • Statement Letter/Reference Letter issued by the Trade Attaché of Indonesian Consulate in the franchisor's home country
  • The franchisor's Indonesian trademark registration certificates
  • The local content statement
  • A list of manpower to be employed for the operation of a typical outlet
  • A copy of the draft franchise agreement in the Indonesian language (translated by a sworn Indonesian translator)

The franchisee must apply for its STPW following execution of the franchise agreement and must also file an annual report.  Its STPW submission must include:

  • The franchisor's Disclosure Document in the Indonesian language
  • Copies of the signed agreements in the Indonesian language
  • The local content statement
  • A list of manpower to be employed at the typical outlet
  • The franchisor's Indonesian trademark registration certificates
  • The franchisor's STPW
  • The franchisee's Deed of Incorporation/Articles of Association with its approval from the competent government authority

In theory, within two business days of receipt of a complete registration application, the Ministry will issue the STPW.  If the application is incomplete, the Ministry must notify the applicant of its rejection of the application and provide reasons for the rejection within this two-day period.  In practice, up to two weeks may elapse between the filing and the issuance of the STPW.  As of late, the Ministry of Trade has been scrutinizing the local content statement and may ask for further clarification or require that changes be made to the statement.  These delays are problematic since the franchisee may not be able to remit monies abroad to the franchisor until the franchisor's STPW is issued.

Galinar Kartakusuma is a partner in the Jakarta, Indonesia office of Makarim & Taira S.  She acts for many Indonesian and international franchise systems and regularly advises about international expansion to Indonesia.  Robert A. Smith is a partner and chair of the Franchise Group at Wiley Rein LLP.  Maureen A. O'Brien is special counsel at Wiley Rein LLP.  Reagan Roy is an associate in the Jakarta, Indonesia office of Makarim & Taira S. He regularly assists many Indonesian and international clients and advises on franchise matters, general corporate commercial matters, and intellectual property matters.   

You may also be interested in the other articles in Wiley Rein's International Franchise Development Series:

Franchising in China

Franchising in Australia

Franchising in Brazil

Franchising in India

Franchising in Nigeria