News
November 2024
Wednesday, 20 Nov 2024Government Regulation of 2024 on Franchise
Through Government Regulation dated 2 September 2024 No. 35 of 2024 on Franchise (“PP 35/2024”), the Indonesian Government revoked the previous franchise regulation, namely Government Regulation No. 42 of 2007 (“PP 42/2007”).
In general, PP 35/2024 updates the old regulation regarding franchises in Indonesia which have been developing rapidly since 2007 while also providing opportunities for Micro, Small and Medium Enterprises (“MSME”) to play a greater role in franchise businesses, both as franchisees and suppliers of goods and/or services for franchise businesses.
The following are important rules that need to be underlined in PP 35/2024:
1. Expansion of the definition of franchisor and franchisee
PP 35/2024 stipulates that franchises can be given in stages, so that it is possible for franchisees to become further franchisors by appointing further franchisees. Both the franchisor, the franchisee, further franchisor and further franchisee can come from within or outside the country.
Furthermore, if there is more than 1 franchisee or further franchisee, the franchisor is required to clearly regulate the division of business areas so that it can protect the business interests of the franchisee or further franchisee.
This is different from PP 42/2007, although Article 6 (1) of PP 42/2007 states that a franchise agreement may contain a clause granting the franchisee the right to appoint other franchisees, this PP does not define this as a further franchisor, and does not regulate the rights and obligations of further franchisor and further franchisee including franchisor’s obligation to regulate the division of business areas between the franchisees and further franchisees.
2. Establishment of franchise criteria standards
PP 35/2024 provides clear criteria for types of businesses that can be franchised, namely: (i) the business has been running for at least 3 years and has provided profits (shown through financial reports that have been audited by a public accountant for the last 2 years), (ii) has a recorded intellectual property, (iii) has a clear and structured business system that is easy for franchisees to implement.
In addition, PP 35/2024 also requires ongoing support from the franchisor or further franchisor to the franchisee or further franchisee starting from training, management guidance, market development and other forms of training. With these criteria standards, consumers will get a guarantee of the same quality standards from the same franchise so that the sustainability of the franchise business can be better maintained.
3. Offering prospectus and franchise agreement
PP 35/2024 provides an opportunity for franchisees and further franchisees to obtain transparent information and learn it before signing a franchise agreement.
The transparent information is in the form of a prospectus regarding among other things, the franchisor and its franchise business offers. The prospectus must be given to the franchisee or further franchisee no later than 14 calendar days before signing the franchise agreement.
Furthermore, PP 35/2024 also regulates the minimum clauses in the franchise agreement. This certainly makes it easier for franchisees or MSMEs who generally are not familiar with the legal provisions but want to cooperate with franchisors or large entrepreneurs.
4. Obligation to use the franchise logo and prohibition on the use of franchise terms and franchise logos by unauthorized parties.
PP 35/2024, in addition to regulating the use of franchise logos for franchise organizers, also regulates the prohibition of the use of the term franchise for businesses that do not have a Franchise Registration Certificate ("STPW") including using the franchise logo because the franchise logo is given by the Minister of Trade only to franchise organizers who already have STPW.
Meanwhile, the use of the franchise logo by the franchise organizer must be placed or installed in an open and easily visible place at each franchise outlet. If the franchise organizer has a head office, the franchise logo should be placed or installed in an open and easily visible place at the head office.
Violations of the obligation to use the franchise logo will be subject to sanctions, ranging from administrative sanctions in the form of written warnings, temporary suspension of business activities and/or revocation of the STPW.
Violations for the persons or business entities that use the term, logo or name of a franchise but do not have STPW will be subject to administrative sanctions in accordance with the provisions of the law in the field of risk-based business licensing.
5. Use of domestic products
PP 35/2024 prioritizes (i) the use of domestically produced goods and/or services and (ii) the processing of raw materials domestically if they meet the quality standards set by the franchisor.
In addition, the franchisor is also mandated to:
• Cooperate with local MSMEs as suppliers of goods and/or services for franchise businesses
• Provide opportunities for local MSMEs as franchisees if they meet the requirements set by the franchisor or further franchisor.
6. Reporting
PP 35/2024 requires (i) franchisors, (ii) further franchisors, (iii) franchisees and (iv) further franchisees to submit both a report on their franchise business activities and a written report if they are no longer running their franchise business activities to the Minister or to the head of the Trade Department in the Special Capital Region of Jakarta Province or the local district/ city, or the Head of the Indonesian capital Authority through the OSS System.
The report includes the number of franchisees and further franchisees, the number of outlets, financial statements with profit and loss balance sheets, turnover, amount of compensation, information on raw material processing and raw material management in Indonesia, number of workers, intellectual property protection status and forms of ongoing support to franchisees or further franchisees.
Violations of these matters will be subject to sanctions, ranging from administrative sanctions in the form of written warnings, temporary suspension of business activities and/or revocation of STPW.
PP 35/2024 is legally valid from the date of enactment, and automatically revokes the previous franchise provisions. All new STPW applications submitted after 2 September 2024, must comply with PP 35/2024. Meanwhile, all franchise STPWs that have been issued before the enactment of PP 35/2024 are declared to remain valid until the expiry of the validity period of the STPW.
Disclaimer: This legal news serves as general guidance only and should not be treated as legal advice. If you wish to have further information on this topic, please contact Diyah Ratnajati (dratnajati@rosetini.co.id), Andre Suprapto (asuprapto@rosetini.co.id) or Rosetini Ibrahim (ribrahim@rosetini.co.id).