Franchise Businesses in Indonesia: A Legal and Strategic Guide

Franchise businesses in Indonesia have become one of the most attractive and scalable models for local and foreign investors looking to tap into Southeast Asia’s fourth-largest population. From fast-food giants to retail and education, franchising offers a structured path to brand expansion with minimized operational risks. However, entering the Indonesian franchise market is not as simple as replicating a global business concept—it requires full compliance with Indonesia’s legal framework, including the latest Government Regulation No. 35 of 2024 on Franchising. This guide explores the legal landscape, key regulations, registration requirements, tax obligations, and strategic insights you need to know before launching or expanding your franchise business in Indonesia. Whether you’re a foreign franchisor or a local franchisee, understanding these rules is crucial for ensuring legal certainty and long-term business success.

Key Takeaways

• Franchise Law in Indonesia — Governed by GR 35/2024 and MoT Reg 71/2019
• Franchise Registration — STPW is mandatory for both franchisors and franchisees
• Foreign Franchisors — Can operate via master franchise, direct franchise, or joint venture
• Intellectual Property — Must be registered (not pending) prior to registration
• Taxation — VAT and WHT apply to franchise fees/royalties
• Legal Risks — Non-compliance can result in sanctions or license revocation
• Local Content Requirement — Preference for using Indonesian-made goods and services

Understanding Franchise Business in Indonesia

Franchise businesses in Indonesia have experienced significant growth, becoming a vital component of the nation’s economy. The franchise model allows a franchisor to grant a franchisee the rights to operate under its brand, utilizing established systems and intellectual property, typically in exchange for fees or royalties. This model benefits both parties: the franchisor expands market reach, while the franchisee gains access to a proven business concept.

Legal Definition of a Franchise under Indonesian Law

According to Government Regulation No. 35 of 2024 (GR 35/2024), a franchise is defined as:

“A special right owned by an individual or a business entity to use the business system with certain characteristics in marketing goods and/or services that has proven successful and can be utilized and/or used by another party based on a franchise agreement.”

This definition emphasizes the necessity of a proven business system and a formal agreement between the franchisor and franchisee.

Governing Laws and Regulations

Franchise operations in Indonesia are governed by several key regulations:

• Government Regulation No. 35 of 2024 (GR 35/2024): This is the primary regulation overseeing franchise activities, introducing significant changes to the previous legal framework.
• Minister of Trade Regulation No. 71 of 2019: This regulation complements GR 35/2024 by detailing the procedures for franchise registration and operation.
• Law No. 20 of 2008 on Micro, Small, and Medium Enterprises: This law supports the development of MSMEs, which are often involved in franchise operations.
• Law No. 7 of 2014 on Trade: This law provides a broader context for trade activities, including franchising.
• Intellectual Property Laws: These laws ensure the protection of trademarks and other IP assets crucial to franchise businesses.
• Tax Laws: These laws govern the taxation aspects of franchise operations, including VAT and income tax obligations.

Key Requirements to Start a Franchise in Indonesia

To establish a franchise in Indonesia, both franchisors and franchisees must meet specific requirements:

Requirements for Franchisors (Local & Foreign)

1. Proven Business Model: The business must have been operational and profitable for at least three consecutive years, supported by audited financial statements for the last two years.
2. Registered Intellectual Property: All relevant IP rights, such as trademarks, must be registered with the Directorate General of Intellectual Property (DGIP) before applying for a Franchise Registration Certificate (STPW).
3. Franchise Offering Prospectus: A comprehensive prospectus must be prepared, detailing the franchisor’s business system, financial performance, and other critical information.
4. Franchise Registration Certificate (STPW): The franchisor must obtain an STPW through the Online Single Submission (OSS) system before entering into a franchise agreement.
5. Certificate of Franchise Continuity: Foreign franchisors must provide a certificate from the Indonesian Trade Attache or Representative Office in their home country, verifying the continuous operation of the franchise business.

Requirements for Franchisees

1. Legal Entity: The franchisee must be established as a legal entity in Indonesia, such as a PT (Perseroan Terbatas).
2. Franchise Agreement: A formal agreement must be signed with the franchisor, outlining the rights and obligations of both parties.
3. Franchise Registration Certificate (STPW): The franchisee must obtain an STPW by submitting the franchise agreement through the OSS system.

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Franchise Registration and Disclosure Documents

Proper documentation is crucial for legal compliance in franchise operations:

Franchise Offering Prospectus

The prospectus must be provided to prospective franchisees at least 14 calendar days before signing the franchise agreement. It should include:

• Identity and legal status of the franchisor
• Business history and organizational structure
• Detailed business system
• Audited financial statements for the past two years
• Number and locations of existing franchise outlets
• List of current franchisees (if applicable)
• Rights and obligations of both franchisor and franchisee
• Certificates of registered intellectual property rights

Franchise Registration Certificate (STPW)

The STPW serves as the official license for franchise operations. Under GR 35/2024, the STPW is valid indefinitely unless revoked due to specific circumstances, such as termination of the franchise agreement, cessation of business, or non-compliance with regulations.

Types of Franchise Structures in Indonesia

Franchise businesses in Indonesia can adopt various structures:

Direct Franchising

The franchisor grants rights directly to the franchisee to operate under its brand. This model is straightforward and allows for close control over franchise operations.

Master Franchising

The franchisor appoints a master franchisee, who then has the right to sub-franchise within a specified territory. This model is suitable for rapid expansion and leveraging local market knowledge.

Joint Ventures

The franchisor partners with a local entity to establish a new company, sharing ownership and responsibilities. This model can help navigate local regulations and cultural nuances.

Licensing & IP Protection for Franchises

Intellectual property rights are fundamental to franchise businesses. Under GR 35/2024:

• All relevant IP rights must be registered or recorded before applying for an STPW.
• Pending applications for IP registration are no longer sufficient; proof of registration is mandatory.
• The franchise agreement must include provisions confirming the registration of IP rights.

Ensuring robust IP protection helps prevent infringement and maintains brand integrity.

Taxation Aspects of Franchise Businesses

Franchise operations in Indonesia are subject to various tax obligations:

• Value Added Tax (VAT): Generally applied at 11% on royalties and franchise fees.
• Income Tax (PPh Article 23): A 20% withholding tax on royalties paid to foreign franchisors, which may be reduced under applicable tax treaties.
• Permanent Establishment (BUT): Foreign franchisors with significant presence in Indonesia may be deemed to have a permanent establishment, subjecting them to local tax obligations.

Proper tax planning and compliance are essential to avoid penalties and ensure smooth operations.

Opportunities for Foreign Investors

Indonesia presents a lucrative market for foreign franchise investment due to:

• Large Consumer Base: With a population exceeding 270 million, Indonesia offers a vast market for various franchise sectors.
• Growing Middle Class: Increasing disposable income and urbanization drive demand for diverse products and services.
• Government Support: Initiatives like the OSS system streamline business registration and licensing processes.

Sectors with high growth potential include food and beverage, retail, education, health and wellness, and technology services.

Challenges in the Indonesian Franchise Market

Despite the opportunities, foreign investors may face challenges such as:

• Regulatory Compliance: Navigating complex legal requirements and ensuring timely registration and reporting.
• Cultural Differences: Adapting business models to align with local consumer preferences and practices.
• Supply Chain Management: Meeting the requirement to prioritize locally produced goods and services, as stipulated in GR 35/2024.
• Intellectual Property Protection: Safeguarding against potential IP infringements in a developing legal environment.

Engaging local legal and business experts can help mitigate these risks and facilitate successful market entry.

Practical Comment from Kusuma & Partners

As a leading corporate and commercial law firm in Indonesia, Kusuma & Partners has advised numerous foreign and local clients in successfully establishing and expanding their franchise businesses in Indonesia. Based on our years of hands-on experience, we offer the following strategic and legal best practices:

1. Start with a Legally Compliant Foundation

Many franchisors underestimate the importance of aligning their global franchise model with Indonesian legal requirements. We always advise franchisors to localize their Franchise Offering Prospectus and Franchise Agreement to comply with GR 35/2024 and MoT Regulation No. 71/2019, rather than merely translating existing documents.

2. Secure Your Intellectual Property (IP) Early

A common pitfall is attempting to register a franchise without a registered trademark. Best practice dictates that the franchisor’s trademark must already be registered in Indonesia (not pending) before applying for an STPW. We assist clients in conducting IP due diligence and fast-tracking trademark registration to ensure there are no legal obstacles to franchising.

3. Structure Your Franchise Model Strategically

Whether you choose a direct franchise, master franchise, or joint venture, the legal and tax consequences differ. We always recommend early structuring consultations to optimize for compliance, control, and tax efficiency, especially for foreign franchisors entering the market through a PT PMA entity.

4. Prepare for Regulatory Scrutiny

The Ministry of Trade increasingly reviews Franchise Offering Prospectuses and Franchise Agreements in detail. In our practice, we’ve seen applications rejected due to generic or overly standardized documentation. A tailored, clearly written prospectus with clear disclosures and performance history is key to a smooth STPW issuance.

5. Local Content & Supply Chain Compliance

GR 35/2024 mandates franchisors to prioritize Indonesian-made goods and services. From a compliance standpoint, we encourage franchisors to conduct a supply chain review and work with local suppliers where feasible. This not only meets regulatory requirements but also helps build goodwill and reduce import-related costs.

6. Tax Planning is Crucial

Franchise-related royalties and fees are subject to Withholding Tax (PPh 23) and VAT, and international franchisors must consider Indonesia’s Double Taxation Avoidance Agreements (DTAAs). We frequently assist clients in structuring franchise agreements to ensure compliance with Indonesian tax laws while minimizing unnecessary tax leakage.

7. Avoid Disputes with Clear, Measurable Terms

One of the most frequent causes of franchise litigation in Indonesia is the lack of clarity on performance benchmarks and territorial exclusivity. Our firm ensures that franchise agreements contain precise, enforceable terms, clear renewal and termination clauses, and proper dispute resolution mechanisms (preferably via BANI Arbitration).

8. Monitor Post-Registration Obligations

Obtaining the STPW is not the end. Franchisors and franchisees must comply with ongoing obligations, including business license renewals, periodic audits, and reporting requirements under the OSS system. Our ongoing legal support includes full regulatory compliance management to help clients stay audit-ready.

In short, Kusuma & Partners offers not just legal documentation, but strategic advisory services that combine regulatory compliance, business structure optimization, and risk mitigation—ensuring your franchise venture in Indonesia is built to last.

Conclusion

Franchise businesses in Indonesia offer promising opportunities amid a growing middle class, robust consumer demand, and digital adoption. However, regulatory compliance under Government Regulation No. 35 of 2024 and other supporting laws requires careful planning and execution.

Whether you’re a global brand eyeing Indonesian expansion or a local entrepreneur looking to license a business system, navigating franchise law demands a deep understanding of licensing, taxation, IP protection, and business structuring.

How We Can Help

At Kusuma & Partners, we help franchisors and franchisees launch and grow compliant franchise businesses in Indonesia. Contact us today to schedule a consultation and ensure your franchise operates with confidence under Indonesian law. Fill in the form below to get legal expert guidance from Kusuma & Partners Law Firm.

“DISCLAIMER: This content is intended for general informational purposes only and should not be treated as legal advice. For professional advice, please consult with us.”