Understanding the legal framework governing franchises in Indonesia is crucial for both franchisors and franchisees. This article reviews the key regulations, including Government Regulation Number 35 of 2024 concerning Franchises (GR 35/2024), which replaced Government Regulation Number 42 of 2007. Additionally, Law Number 20 of 2008 concerning Micro, Small, and Medium Enterprises (MSME Law) governs the partnership between large enterprises and MSMEs and has implications for franchise agreements.
Article 26 of the MSME Law regulates franchises as one of the business systems in partnership. It covers the skills transfer process in production, processing, marketing, capital, human resources, and technology. The MSME Law stipulates that franchise agreements must adhere to the principle of independence and must not create undue dependence of MSMEs on large businesses.
In principle, Article 4, paragraph (2) of GR 35/2024, a franchise in Indonesia must meet the following criterias:
- Possess a business system that includes written Standard Operating Procedures.
- Demonstrate profitability, with at least three consecutive years of operation and financial reports showing profit for the last two years.
- Hold registered intellectual property with the Directorate General of Intellectual Property.
- Provide ongoing support from the franchisor, including training, operational management, promotion, research, and market development.
Franchise Agreement Requirements
Article 6 of GR 35/2024 (and its appendix) requires that franchise agreements be in writing and comply with Indonesian laws and regulations. The agreement must at least cover the following:
- Names and addresses of the parties
- Types of Intellectual Property Rights
- Business activities
- Business systems
- Rights and obligations of the parties
- Assistance, facilities, operational guidance, training, and marketing provided by the franchisor
- Business area
- Guarantee of compensation and/or grant rights if the franchisor terminates its business activities
- Term of the agreement
- Procedures for payment of compensation
- Ownership, changes in ownership, and rights of heirs
- Dispute resolution
- Procedures for extension, termination, and termination of the agreement
- Guarantee from the franchisor to continue fulfilling its obligations to the franchisee
- Number of outlets/business premises to be managed by the franchisee
Through Franchising Agreement, the franchisors able to expand their business both regionally and internationally. It increases customer awareness and capital, facilitating growth through research, development, and advertising.
The franchisor typically receives royalties, license fees, and other income from the franchisee. In return, the franchisor must provide intellectual property rights, a business system, and ongoing guidance to the franchisee. Other than that, the purpose of a franchise system is to enable individuals with capital to operate a business under the franchisor’s guidance, with both parties holding legally equal positions
Role of the Indonesia Competition Commission
The Indonesia Competition Commission (Komisi Pengawas Persaingan Usaha) is responsible for overseeing and monitoring adherence to these regulations. This ensures fairness and prevents undue dependence of MSMEs on large enterprises. The Commission’s oversight includes ensuring that franchise agreements respect the independence of MSMEs as outlined in Article 35 of the MSME Law.
RTe Indonesian Competition Commission acts to monitor whether or not a Franchise Agreement gives Franchisor the right to “owning” or “controlling” the franchisee’s business activity. Such act considers a violation of Article 35, paragraph (1) of the MSME Law where large enterprises are prohibited from owning and/or controlling Micro, Small, and Medium Enterprises (MSMEs) in a partnership.
According to the MSME Law:
- “Owning” refers to the legal transfer of ownership of a business entity or assets from an MSME to a large enterprise.
- “Controlling” refers to the legal transfer of control over business activities or assets from an MSME to a large enterprise.
While franchise agreements are fundamentally based on the principle of freedom of contract (Article 1320 and Article 1338 of the Civil Code), any clause interpreted as transferring ownership or control of the franchisee’s business to the franchisor—including control over financial statements, human resources, and business processes—violates Article 35 of the MSME Law.
The Indonesia Competition Commission may impose administrative sanctions and/or penal sanctions, including imprisonment for up to five years and fines up to Rp10,000,000,000 (ten billion rupiah), as stipulated in Articles 39 and 40 of the MSME Law.
Should you require our legal assistance, please get in touch with office @maulanalawfirm . com.
Disclaimer:
This article’s content is intended for informational and educational purposes only and should not be construed as legal advice. The views and opinions expressed are those of the author and do not necessarily reflect any affiliated organisation’s official policy or position. Readers should consult a qualified legal professional for specific legal guidance and advice. The author and publisher disclaim any liability arising directly or indirectly from the use of or reliance on this information.