This country-specific Q&A provides an overview of Franchise & Licensing laws and regulations applicable in Indonesia.
Is there a legal definition of a franchise and, if so, what is it?
Yes – according to Government Regulation No. 42 of 2007 concerning Franchise, a franchise is defined as a special right owned by an individual or a business entity to a business system with unique business characteristics that have been proven successful in marketing goods and/or services and can be utilized and/or used by other parties based on a franchise agreement.
Are there any requirements that must be met prior to the offer and/or sale of a franchise? If so, please describe and include any potential consequences for failing to comply.
Yes – In Indonesia, a business may be franchised if it meets the following criteria:
have distinctive business features;
be proven to be profitable;
have written standard operating procedures;
be easily learned and applied;
provide continuous support, including operational guidance, training and promotion;
have registered intellectual property rights (or a submitted intellectual property registration application); and
have been operating as a franchise business for at least five years.
If a business does not meet the above criteria, it could not be franchised in Indonesia.
Are there any registration requirements for franchisors and/or franchisees? If so, please describe them and include any potential consequences for failing to comply. Is there an obligation to update existing registrations? If so, please describe.
Yes – Franchisors are required to register the franchise offering prospectus (i.e., franchise disclosure documents), and franchisees are required to register the franchise agreement. Upon completing the registration, a Franchise Registration Certificate (Surat Tanda Pendaftaran Waralaba / “STPW”) will be granted.
It is unlawful to operate a franchise without obtaining the STPW, and sanctions in a form of fines and/or revocation of business licenses may be imposed in this matter.
If there is change in information relating to the STPW, franchisor and/or franchisee are obliged to update the relevant information.
Are there any disclosure requirements (franchise specific or in general)? If so, please describe them (i.e. when and how must disclosure be made, is there a prescribed format, must it be in the local language, do they apply to sales to sub-franchisees) and include any potential consequences for failing to comply. Is there an obligation to update and/or repeat disclosure (for example in the event that the parties enter into an amendment to the franchise agreement or on renewal)?
Yes – prior to offer the franchise, the Indonesian laws require the franchisor to register the franchise offering prospectus.
The franchise offering prospectus should at least contain the following information:
Identity of the franchisor.
Business legality of the franchisor (corporate documents and business licenses).
History of the franchised business.
Financial statement of the last 2 (two) years.
Number of outlets.
List of franchisees.
List of rights and obligations of the franchisee and franchisor.
Information relating to intellectual property rights.
The franchise offering prospectus shall be in Indonesian language. However, if the offering prospectus is issued in foreign language, it shall be translated into Indonesian language using sworn translator.
The franchisor shall provide the registered offering prospectus to the franchisee at least two weeks prior to the signing of the franchise agreement.
If the franchisee intends to use a special purpose vehicle (SPV) to operate each franchised outlet, is it sufficient to make disclosure to the SPVs’ parent company or must disclosure be made to each individual SPV franchisee?
Assuming that the franchise is a single-unit franchise, the disclosure must be made to each individual SPV.
What actions can a franchisee take in the event of mis-selling by the franchisor? Would these still be available if there was a disclaimer in the franchise agreement, disclosure document or sales material?
In a worst-case scenario, if mis-selling occurs, franchisee may file a lawsuit towards the franchisor, however this rarely occurs in Indonesia.
If lawsuit occurs, a disclaimer will certainly help in strengthening the franchisor’s legal position. However, since Indonesian civil procedures does not adhere an early dismissal process, unless a settlement takes place, it is likely that the parties would have to go through a full trial.
Would it be legal to issue a franchise agreement on a non-negotiable, “take it or leave it” basis?
Indonesian franchise regulations provides that both franchisor and franchisee must have equal legal position, hence in theory it would be unlawful to have a non-negotiable or “take it or leave it” approach. However, in practice, the “take it or leave it” approach may still be allowed for matters relating to intellectual property and business reputation of the franchise.
How are trademarks, know-how, trade secrets and copyright protected in your country?
a. Trademarks are regulated under Law No. 20 of 2016 Concerning Trademark and Geographical Indication (“Law No. 20/2016”). Protection under Law 20/2016 encompasses trademark and service mark in form of picture, logo, name, word, letter, number, sequence of colours, in form of 2 (two) dimension and/or 3 (three) dimension, sounds, hologram, or combination of 2 (two) or more elements to differentiate goods and/or services that produced by person or legal entity in goods and/or services sale activities.
Indonesia uses the “first-to-file” system, where the first party that registers their trademark will be prioritized to obtain the trademark registration and shall be acknowledged as the rightful owner. After registration, trademark will have legal protection for 10 (ten) years may be extended continuously every 10 (ten) years. The trademark owner will also be eligible to transfer its trademark rights to other people or conducting licensing.
Any violation to the trademark rights of a person or entity will be subject to criminal sanctions.
b. Trade Secrets and know-how are regulated under Law No. 30 of 2000 Concerning Trade Secrets (“Law No. 30/2020”). The scope of protection under Law 30/2020 encompasses production method, processing method, selling methods, or any other information in technology field and/or business that possess economic value and unknown to public.
Trade Secrets will automatically be legally protected if the owner considers the Trade Secrets as confidential, have economic value, and the confidentiality is maintained with proper endeavours. The law No. 30/2020 provides protection by prohibiting any person to disclose trade secret or violating the obligation to not disclose the trade secret, or unlawfully obtaining or holding other party’s trade secrets.
Trade Secrets owner are obliged by the Law No. 30/2020 to register if the owner wishes to transfer their Trade Secrets rights or conduct licensing. The transfer or the licensing will not bring legal effect to third-party.
c. Copyright is regulated under Law No. 28 of 2014 Concerning Copyright (“Law No. 28/2014”). Copyright has broader content compared to trademark and/or trade secrets. It is also existed automatically upon the creation by the creator or owner.
Are there any franchise specific laws governing the ongoing relationship between franchisor and franchisee? If so, please describe them, including any terms that are required to be included within the franchise agreement.
Yes – the relationship between franchisors and franchisees is governed by Government Regulation No. 42 of 2007 Concerning Franchise and Minister of Trade Regulation No. 71 of 2019 Concerning Franchising.
In accordance with the above franchise regulations, a franchise agreement should at least contain the following matters:
Name and address of the parties.
Type of the intellectual property.
Franchisor’s right to receive fee or royalties from the franchisee and obligation to provide continuous support to the franchisee.
Franchisee’s right to use intellectual property or business uniqueness of the Franchisor and obligation to maintain ethic code/confidentiality of the intellectual property or business uniqueness that given by the franchisor.
Supports, facilities, operational guidance, training, and marketing that provided by the franchisor to the franchisee.
Business territory that given by the franchisor to franchisee to develop the franchise business.
Effective date and termination date of the Franchise Agreement.
Fees and royalties’ payment procedure.
Change of control in franchisee or franchisor.
The governing law, which should be Indonesian Law.
The procedures of a renewal and termination of the franchise agreement.
Warranties from the Franchisor to conduct their obligations to the franchisee in accordance with the franchise agreement until the end of franchise agreement period.
Number of business outlet that will be managed by the franchisee during franchise agreement period.
Are there any aspects of competition law that apply to the franchise transaction (i.e. is it permissible to prohibit online sales, insist on exclusive supply or fix retail prices)? If applicable, provide an overview of the relevant competition laws.
Yes – there are a several matters relating to competition law which must be taken into account which are relevant to franchise, as follows:
a. Resale price maintenance/fix retail prices
Resale price maintenance is not allowed. In this regard, franchisor may only provide a non-binding sale’s price recommendation.
b. Exclusive supply
Exclusive supply may be allowed to maintain the concept, identity, and reputation of the franchise. However, the franchisor is not allowed to prohibit franchisee to appoint other suppliers if the goods and/or services met with the franchisor’s standards.
Tie-in is allowed if it is intended to maintain the identity and reputation of the franchise.
d. Territorial restrictions
Territorial restrictions are allowed for the purpose of establishing the franchise network. It is not allowed if it is created to establish any barrier of entry.
e. Post-term non-compete clauses
Post-term non-compete clauses are allowed so long that it is not for a long period of time.
Are in-term and post-term non-compete and non-solicitation clauses enforceable?
Yes, but this has not been thouroughly tested due to the lack of cases.
Are there any consumer protection laws that are relevant to franchising? Are there any circumstances in which franchisees would be treated as consumers?
Indonesian consumer protection law only covers protection to the end-consumers. Hence in our view, Indonesian consumer protection law is not relevant to franchising.
Is there an obligation (express or implied) to deal in good faith in franchise relationships?
Yes – Indonesian Civil Code provides that agreement (including franchising) must be performed in a good faith.
Are there any employment or labour law considerations that are relevant to the franchise relationship? Is there a risk that the staff of the franchisee could be deemed to be the employees of the franchisor? What steps can be taken to mitigate this risk?
So long that the employment contract is established between the franchisee and its employee, it would be unlikely that the franchisee’s employee could be deemed as the franchisor’s employee.
Is there a risk that a franchisee could be deemed to be the commercial agent of the franchisor? What steps can be taken to mitigate this risk?
From the regulatory perspective, it would be unlikely that the franchisee could be deemed as the franchisor’s agent. However, to mitigate the risk, it is common to include a “non-partnership or non-agency clauses” in the franchise agreement.
Are there any laws and regulations that affect the nature and payment of royalties to a foreign franchisor and/or how much interest can be charged?
To the best of our knowledge, there are no laws and regulations that affect the nature and payment of royalties to a foreign franchisor.
Is it possible to impose contractual penalties on franchisees for breaches of restrictive covenants etc.? If so, what requirements must be met in order for such penalties to be enforceable?
Yes – If the franchise agreement has met the validity requirements of a contract, the contractual penalties are enforceable.
According to Indonesian laws, the validity requirements of a contract are as follows:
Consent of the parties.
Competency of the parties.
Specific subject matter.
What tax considerations are relevant to franchisors and franchisees? Are franchise royalties subject to withholding tax?
There are several tax considerations relevant to franchising, as follows:
Franchisors and Franchisees are responsible for their respective tax obligations.
Franchisees are responsible to withhold franchisor’s income taxes which arises from franchise fees and/or royalties’ payment.
Sales of products by the franchisees to end-consumers are subject to VAT.
In addition, franchise royalties are subject to withholding tax with the following amount:
for domestic franchisor, the withholding amount is 15% of the gross royalty payment; and
for foreign franchisor, the withholding amount is 20% of the gross royalty payment.
How is e-commerce regulated and does this have any specific implications on the relationship between franchisor and franchisee? For example, can franchisees be prohibited or restricted in any way from using e-commerce in their franchise businesses?
E-commerce in Indonesia is regulated under the Government Regulation No. 80 of 2019 concerning Trade Through Electronic System (“GR80/2019“).
GR80/2019 regulates, among other things, the primary obligations of the relevant parties, which include the following:
obligations of the merchants to provide corect information relating to the goods or services;
requirement for business actors to meet general requirements under relevant laws and regulations; and
obligation of the e-commerce administrator and merchants to secure user’s data.
In this regard, we do not see direct implication of GR80/2019 on the relationship between the franchisor and the franchisee. Restrictions for franchisee to use e-commerce channels are usually stated in the franchise agreement.
What are the applicable data protection laws and do they have any specific implications for the franchisor/franchisee relationship? Does this have any specific implications in the franchising context?
Provisions relating to personal data protection are spreading across several sectoral regulations. However, since issues occur mainly in the electronic systems sector, the rule that is widely used is the Minster of Communication and Information Regulation No. 20 of 2016 concerning the Protection of Personal Data in Electronic Systems (“Reg20/2016”). Reg20/2016 does not directly affect the relationship between franchisor and franchisee since it mainly aims at the electronic system operator.
Notwithstanding the above, on 10 September 2022, the Indonesian parliament passed a new law regarding data protection, which is more comprehensive than Reg20/2016 since it covers not only electronic systems but also other sectors. However, the new law is yet to be enacted at the time of writing, pending the state-administration process.
Is the franchisor permitted to restrict the transfer of (a) the franchisee's rights and obligations under the franchise agreement or (b) the ownership interests in the franchisee?
The franchise regulations are silent on these matters. In practice, these are mainly regulated in the franchise agreement.
Does a franchisee have a right to request a renewal on expiration of the initial term? In what circumstances can a franchisor refuse to renew a franchise agreement? If the franchise agreement is not renewed or it if it terminates or expires, is the franchisee entitled to compensation? If so, under what circumstances and how is the compensation payment calculated?
The franchise regulations are silent on these matters. Generally, these matters would depend on the franchise agreement.
Are there any mandatory termination rights which may override any contractual termination rights? Is there a minimum notice period that the parties must adhere to?
To the best of our knowledge, there is no mandatory termination rights relating to franchise agreement. Hence, the termination should be performed in accordance with the provisions of the franchise agreement.
Are there any intangible assets in the franchisee’s business which the franchisee can claim ownership of on expiry or termination, e.g. customer data, local goodwill, etc.
The franchise regulations are silent on this, therefore it would depend entirely on the franchise agreement.
What due diligence should both the franchisor and the franchisee undertake before entering into a franchise relationship?
From a legal perspective, there is no regulatory obligation to undertake due diligence before entering into a franchise transaction. However, from a practical standpoint, franchisees should undertake due diligence on the franchisor, at the minimum, to check the following matters:
the validity of the franchisor’s intellectual property rights; and
to ensure whether the franchisor has registered its prospectus.
As for the franchisor, in practice, the franchisor usually undertakes due diligence on the franchisee’s financial capability to enter into the franchise transaction.
How widespread is franchising and what are the most active sectors? Are there any specific economic, cultural or regulatory issues that make franchising particularly attractive?
Franchising is considerably widespread in Indonesia, based on the data provided by the Ministry of Trade; currently, there are 228 (two hundred twenty-eight) brands registered as a franchise, which consists of 135 (one hundred thirty-five) foreign franchises and 93 (ninety-three) local franchises. Most registered franchises (54%) are food and beverage businesses. However, this number may not reflect the actual situation since many businesses (especially local brands) are using a franchise arrangement but, for various reasons, do not register the business as a franchise, so the number of businesses using a franchise system may be considerably larger.
From a business perspective, Indonesia has a significant demographic advantage, with more than 66 million people still under 30; and 53,6 million in the middle class and keen to consume. These demographic figures make the franchising business attractive in Indonesia.
Is there a national franchising association? Is membership required? If not, is membership commercially advisable? What are the additional obligations of the national franchising association?
As to date, there are 3 (three) franchise association in Indonesia, namely:
Asosiasi Franchise Indonesia (AFI) (Indonesia Franchise Association);
Asosiasi Pengusaha Waralaba Indonesia (APWINDO) (Indonesia Franchise Entrepreneur Association); and
Perhimpunan Waralaba dan Lisensi Indonesia (Perhimpunan WALI) (Indonesia Franchise and Licensing Association).
There is no regulation that requires, advises, or promotes franchisors and franchisees to register themselves as a member of franchise association. However, joining a franchising association is advisable due to better networking and advocacy activities.
Apart from being the government’s partner in a law-making process, we do not aware of any additional obligations of the national franchising associations.
Are foreign franchisors treated differently to domestic franchisors? Does national law/regulation impose any debt/equity restrictions? Are there any restrictions on the capital structure of a company incorporated in your country with a foreign parent (thin capitalisation rules)?
Save for additional requirements relating to the legalization of foreign documents, there are no major differences between local and foreign franchisors.
As for the regulation which imposes the debt-to-equity ratio, apart from regulation relating to the calculation of tax-deductible borrowing costs, we are unaware of any restriction relevant to the debt-to-equity ratio, especially in franchising.
Restrictions relating to capital structure mainly aim to ensure that foreign investment companies meet the minimum investment value of IDR 10 billion. However, kindly be noted that such minimum investment value may differ according to the business sectors. For example, for a restaurant business, the minimum value of IDR 10 billion is for each outlet.
 In order to be used in Indonesia, foreign documents must be notarized and then legalized before the nearest Indonesian embassy/consulate.
Are there any requirements for payments in connection with the franchise agreement to be made in the local currency?
Yes – according to the Indonesian currency law and relevant regulations, Indonesian Rupiah must be used for transactions which are performed within the Indonesia’s jurisdiction. However, there are certain sectors in which the foreign currency may still be used, as follows:
Export and/or import activities; and/or
Cross-border trade services by way of cross border supply and/or consumption abroad.
We note that there are discrepancies from the government as to whether foreign currency may be used in franchising, specifically for the purpose of paying the franchise fees and/or royalties. Based on our experience, this matter will be assessed on case-by-case basis.
Must the franchise agreement be governed by local law?
Yes – Indonesian franchise regulations specifically mentioned that franchise agreement must be governed by the Indonesian law.
What dispute resolution procedures are available to franchisors and franchisees? Are there any advantages to out of court procedures such as arbitration, in particular if the franchise agreement is subject to a foreign governing law?
In general, the parties have the liberty to choose whether they wish to settle the dispute in-court or using an out-of-court settlement such as arbitration. In this regard, we note that in franchising arbitration is preferable due to its confidential nature.
Since the franchise agreement must be governed by the Indonesian law, the question relating to advantages of out-of-court system would not apply in this.
Does local law allow class actions by multiple franchisees?
Yes – However in practice it would be very difficult for franchisees to opt for a class action since the class action lawsuit requires the franchisees to have similarity in these following matters: (i) factual background; (ii) substantive legal basis; and (iii) type of claims.
Must the franchise agreement and disclosure documents be in the local language?
Yes – the franchise agreement must be executed in Indonesian language (or in practice bilingual version is allowed). The franchise offering prospectus may be issued in foreign language, however it must be translated into Indonesian language using sworn translator.
Is it possible to sign the franchise agreement using an electronic signature (rather than a wet ink signature)?
Yes – However, the electronic signatures must satisfy the following requirements:
The electronic creation data must be related only to the signatories.
The electronic creation data must be in the possession of the signatories during the signing process.
Any post-signing changes to the electronic signatures may still be known.
Any post-signing changes to the electronic information relating to the electronic signatures may still be known.
There are certain methods that can be used to identify the signatories.
There are methods to validate that the signatories have granted approval to the franchise agreement.
Nonetheless, although the electronic signature is allowed, due to reason as mentioned in point 35 below concerning the storage of original documents, it is advisable to sign the franchise agreement using wet ink signatures, which also could be done on a circular or in counterparts.
Can franchise agreements be stored electronically and the paper version be destroyed?
No. In accordance with regulations relating to the storage of company documents, all original documents which contain an ongoing rights and obligations must be kept at least until such rights and obligations is expired and/or being terminated. However please note that the document keeping period may be longer if dispute arises since the adjudication system usually requires the parties to present original documents.
Please provide a brief overview of current legal developments in your country that are likely to have an impact on franchising in your country.
The issuance of Minister of Trade Regulation No. 71 of 2019 Concerning Franchising (“Reg 71/2019”) in September 2019 has made a considerable impact on franchising in Indonesia since Reg 71/2019 was aimed to simplify the Indonesian franchise regulations by way of replacing the entire previous Minister of Trade regulations relating to franchising.
In addition, apart from simplifying the franchise regulations, there are several significant highlights of Reg 71/2019, as follows:
The limitation on the number of company-owned outlets for food and beverages (F&B) and modern store business has been revoked. In the previous regulation, the company-owned outlets for the F&B sector are limited to 250 outlets, while the modern stores are limited to 150 outlets.
The restriction for granting franchise to a controlled subsidiary is revoked. This suggests that franchisors may grant franchise to its controlled subsidiary.
Restriction to franchisors to appoint new franchisees in the same area upon the occurrence of unilateral franchise termination (unless a “clean break” or a final and binding court decision is obtained), is also revoked. This suggests that franchisors may appoint new franchisees in the same area upon the occurrence of the unilateral franchise termination.
The franchise registration certificate (Surat Tanda Pendaftaran Waralaba / STPW) is now valid for indefinite period of time. In the previous regulation, the STPW is only valid for 5 (five) years. However, the STPW will be declared invalid if: (i) the franchise has ceased to operate; (ii) the registration of the intellectual property rights has been declared invalid or has been expired; (iii) the franchise agreement is expired or has been terminated.
In your opinion, what are the key lessons to be learned by franchisors as a consequence of the COVID-19 crisis?
Most of our clients mentioned that business innovation is the main key for a survival in the Covid-19 crisis. In this regard, one of the most noticeable innovations is many franchise businesses are now making a considerable amount of investment to establish or improving their delivery services. The use of technology and targeted advertisement campaign are also becoming noticeable innovations in this pandemic.
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