Foreign Franchisor/Licensor, BEWARE: Rules on Importing Goods into Indonesia Have Changed

Jan 10, 2022

An important new regulation is now in place in Indonesia that will have a major impact on the operations of franchises and/or licences in Indonesia of international retail brands.

In response to the issuance of the Job Creation Law and the changes therein, the government enacted Government Regulation No. 29 of 2021 concerning the Implementation of the Trade ("GR 29/2021"). While GR 29/2021 mainly deals with the simplification of procedures to trade in Indonesia, it also stipulates new rules that require trading companies in Indonesia to adjust their business practices. In particular, one of these new rules is the prohibition against the importation of goods into Indonesia by local retailers.

Historically, foreign brands were prohibited from the retail trade in Indonesia which forced them to engage local retailers to operate under franchise or licence models. The products to be sold to consumers were typically imported by the retailer directly from their franchisor or licensor abroad. With this new rule, the local franchisee(s) or licencee(s), if engaging in retail sales, will no longer be permitted to continue the streamlined process of direct importation.

To respond and comply with this new rule, both local franchisees/licensees and foreign franchisors/licensors will need to make some adjustments. First, both parties should revisit the underlying franchise or licence contract, particularly clauses pertaining to the supply of products to address the responsibilities surrounding importation. Most franchise and licence contracts were made with the assumption that the local franchisee/licensee could import the products directly from the franchisor/licensor abroad. Second, local franchisees/licensees must now begin looking for a reliable third party that is unrelated to the party handling the retail trade of the products. Alternatively, some of our clients have considered establishing an Indonesian subsidiary solely for the purpose of importing the products from abroad. If an Indonesian subsidiary is not established, a foreign franchisor/licensor should also be prepared to deal with the economics of a new entity (the “supplier”) appointed by the local franchisee/licensee for the supply of products.

The GR 29/2021 stipulates a general transitional period. Every trade-related licence issued before the issuance of GR 29/2021 shall remain valid until the expiration of the licence, which arguably means every local retailer that holds a valid import license can still import the products from abroad until the expiry date of the import license. However, the Ministry of Trade's official position and enforcement procedures on this matter has not been officially promulgated. As such, further clarification from the Ministry of Trade will be needed to do a more accurate risk assessment. (dnk)

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K&K Advocates

K&K Advocates