Indonesia Ministry of Trade relaxes franchise business regulation

Introduction

The issuance of Minister of Trade Regulation No. 71 of 2019 on Franchise (MoTR 71/2019) revokes all previous regulations on franchise businesses.

Particularly, the new regulation amends provisions related to common control restriction, the allowed maximum number of outlets, requirements related to the use of locally-sourced raw materials, equipment or products, as well as the prevailing regulation governing franchise agreements.

Prior to MoTR 71/2019, franchise regulations were spread over several regulations, namely: (a) regulation on franchise business (MoTR No. 53/M-DAG/PER/8/2012 and its amendment), (b) regulation on franchise for modern shop business (MoTR No. 68/M-DAG/PER/10/2012), (c) regulation on the development of partnership in franchises for food and beverages (MoTR No. 07/M-DAG/PER/2/2013 and its amendment) (d) regulation on franchise logo (MoTR No. 60/M-DAG/PER/9/2013).

Key items of Minister of Trade Regulation No. 71/2019

Common control restriction now revoked

Previously, franchisors could not appoint a franchisee involved in a common control relationship with the franchisor. Common control relationships usually occur when a company controls or is controlled by another entity.

With the new regulation, a franchisor could now enter into a franchise agreement with its own subsidiary.

Number of outlets

MoTR 71/2019 removes the existing requirements on the maximum number of outlets. In the previous regulation, the maximum number of outlets by a franchisor was 150 outlets for what is categorized in the regulation as modern shop businesses and 250 for food and beverage businesses.

Local content requirement

The new regulation eliminates previous requirements on the use of 80% locally-sourced raw materials, equipment or products, now only obliging franchisor to “prioritize the use of local goods and services”.

However, MoTR No. 47/M-DAG/PER/6/2016 still requires retailers to have at least 80% domestic products out of overall inventories.

In implementation, this means retailer-type franchisors must still comply with the requirement of 80% locally-sourced products.

Governed by Indonesian law

The new regulation emphasise that franchise agreements must be governed by Indonesian law. The previous regulations was unclear on this particular aspect.

Conclusion

In general, MoTR 71/2019 is less restrictive compared to previous regulations governing franchise businesses, presenting an opportunity for incoming or current franchisors and franchisees to adjust their business models and supply chain relationship in accordance with each party’s long-term commercial objectives.