This chapter is taken from Lexology GTDT’s Practice Guide to Franchise, examining key themes topical to cross border franchising.

Introduction

The Association of Southeast Asian Nations (ASEAN) is a region of increasingly significant interest to global businesses and corporations. It currently comprises 10 member states, namely, Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam. ASEAN nations straddle the pacific region and have long been at the heart of the global trade architecture. As a result, the region is proving to be an appealing market for established brands from the West to expand into.2

The establishment of the ASEAN Economic Community (AEC) in 2015 has paved the way for member states to continue committing to economic integration. The AEC aims to connect and grow the ASEAN economy in view of predictions that the region is poised to become the world’s fourth-largest economy by 2030.3

Although the region is rapidly emerging as a key market for multinational corporations, ASEAN is a diverse group that consists of nations with varying market conditions.4 For example, the 10 countries differ greatly in population size, income level, innovation capability, language and cultural attitudes. As such, companies that have expanded their brand presence in ASEAN countries have had to tailor their business activities in accordance with each nation’s laws and practices. Yet, many have enjoyed success with proper legal protection and support. As each country has its own different sets of laws, regulations and practices, companies should be mindful of the legal setting and associated potential issues or pitfalls surrounding each nation before engaging in investments and partnerships in the region.

Franchise registration laws and regulations

Indonesia

With a population of approximately 268 million, Indonesia has one of the largest consumer markets in the world. Foreign companies have, since the 1970s, tapped into the potential of the Indonesian market leading to many partnerships with local business entities. The government regulates franchising activities through the Ministry of Trade, and the general regulations relating to franchising include the following:

  • Government Regulation No. 42 of 2007 on Franchise;
  • Regulation of the Minister of Trade No. 53/M-DAG/PER/8/2012 on the Implementation of Franchise;
  • Regulation of the Minister of Trade No. 53/M-DAG/PER/9/2014 on Amendment of Regulation of the Minister of Trade No. 53/M-DAG/PER/8/2012 on the Implementation of Franchise;
  • Director General of Domestic Trade Decree No. 16/PDN/KEP/3 of 2014 on the Technical Guidelines for Franchise Implementation; and
  • Regulation of the Minister of Trade No. 60/M-DAG/PER/9 of 2013 regarding the Obligation to Use Franchise Logo.

Other rules may apply depending on the type of franchise operated. For example, businesses in the food and beverage industry are subject to the Regulation on the Minister of Trade No. 58/M-DAG/PER/9/2014 on the Partnership Development in Franchising for Food and Beverage Services.

Under the existing regulations, a franchisor has to meet the following requirements for its franchise before registration:

  • having specific business characteristics that differentiate it from other businesses;
  • being proven to already be profitable;
  • possessing written standard operating procedure for the goods and services offered;
  • having a business method that is easy to teach and apply;
  • being able to provide sustained support to the franchisee; and
  • having registered intellectual property rights in Indonesia.

The regulations stipulate that the details of the franchise arrangement must be documented in a formal franchise agreement. Moreover, before entering into a franchise agreement with a franchisee, a franchisor must provide a prospectus that discloses its business information to the franchisee. These documents must be registered with the Indonesian Ministry of Trade. However, there is no obligation on the franchisor to continue to update the disclosure document.

Other pertinent requirements to note include the obligation on a franchisor to provide support to a franchisee by way of assistance and training in various areas, such as marketing, research and development, depending on the type of franchise operated. In addition, the government encourages franchises to utilise local goods and services in business operations as much as possible.

Malaysia

Malaysia has a population of over 30 million and its economy is the third-largest in ASEAN. It is projected to achieve high-income status from 2020.5 Franchises in Malaysia are regulated by the Franchise Act 1998 (the Act). The Act requires a franchise to be registered. It also governs the conduct of the parties to a franchise, as well as certain provisions in the franchise agreement itself. Under the Act, a foreign franchisor has to furnish the following information to the Franchise Registry of the Ministry of Domestic Trade and Consumer Affairs (KPDNHEP) in an application for registration:

  • information about the franchisor and the franchise business;
  • materials relating to the franchise operations, including the operations manual and training manual of the franchise;
  • trademark registration in Malaysia, where applicable;
  • financial information relating to the franchise, including the franchisor’s relevant audited accounts for the past three years and information on initial investments required by a franchisee; and
  • details of the franchise agreement, which must be for a term of at least five years.

The Franchise Registry may require the franchisor to provide additional information or documents, depending on the type of franchise to be operated, on a case-by-case basis. Once approval has been granted to the franchisor, the partnering franchisee would then have to register with the KPDNHEP before commencing operations.

If a franchisee intends to sub-franchise the business in future, it will similarly need to provide financial information such as relevant audited accounts for the last three years before it can register sub-franchising operations. Furthermore, a sub-franchisee of a local master franchisee is required to register the franchise within 14 days from the execution date of the franchise agreement.

Generally, additional important information that is required to be submitted by a franchisee includes:

  • the obligations of the franchisor and the franchisee;
  • information relating to the company that is to be incorporated; and
  • financial information of the directors of the company that is to be incorporated

Vietnam

In recent years, Vietnam has enjoyed a stable sociopolitical environment that has resulted in a wave of foreign businesses entering a developing market where a population size of approximately 95 million is proving to be an appealing market. In Vietnam, foreign franchises have to register with the Ministry of Industry and Trade (MOIT), while local franchising activities need not be registered. Furthermore, the government requires foreign companies to conduct business operations in Vietnam for at least one year before they can register a franchise.6 Likewise, a Vietnamese master franchisee of a foreign franchise would have to operate the franchise business for at least one year before it can sub-franchise the business.

Franchising activities are regulated by various regulatory instruments issued under the Commercial Law. These include the following:

  • Decree 35/2006/ND-CP;
  • Circular 09/2006/TT-BTM;
  • Circular 12/VBHN-BCT;
  • Decree 120/2011/ND-CP;
  • Decree 185/2013/ND-CP; and
  • Decree 08/2018/ND-CP.

In Vietnam, foreign investment or involvement is prohibited in relation to certain industries. There are also some industries where foreign activity is subject to certain conditions, depending on the type of business operated. When registering a franchise with the MOIT, a franchisor will need to provide the following:

  • trademark registration in Vietnam (either national registration or international registration designating Vietnam);
  • a franchise agreement (in Vietnamese);
  • a franchise disclosure document containing details such as information on the franchisor, intellectual property rights concerning the franchise, descriptions of the business operations as well as the obligations of the franchisor and franchisee; and
  • audited financial statements for the past year relating to the franchisor’s existing business.

Unless otherwise agreed between the parties, draft franchise agreement and franchise disclosure documents must be provided by the franchisor to the franchisee at least 15 days before entering into the franchise agreement.

Other laws that are possibly applicable

While there are no specific franchise laws in the other ASEAN nations, there are requirements specific to each country or industry that a franchisor has to be aware of when setting up a franchise business. While franchising is generally regulated by the relevant franchise agreement or contract, franchisors should also take note of other areas or specific aspects of law prescribed under the type of legal system involved (eg, common law or civil law) that may be relevant to franchising activities in a particular country, including:

  • intellectual property;
  • company or corporation;
  • tort;
  • unfair contract terms;
  • real estate;
  • employment;
  • tax;
  • competition; and
  • data privacy.

Although the remaining ASEAN nations do not have specific franchise regulations, some countries may require documents relating to the franchise to be recorded with the relevant government authorities. For example, in Cambodia, franchise and licence agreements pertaining to registered trademarks have to be recorded with the Ministry of Commerce. If they are not recorded, the franchise business is unaffected but the relevant trademark rights will not be enforceable against any third parties to the agreements. This is similar to Thailand and Laos, where franchise agreements concerning registered trademarks must be recorded with the Department of Intellectual Property of each country in order for trademark licences to be valid. In addition, franchise agreements in Laos must be notarised by the Ministry of Justice and registered with the Ministry of Finance. Meanwhile, in Myanmar, it is advisable to record franchise agreements with the Office of Registration of Deeds so that they may be presented as evidence in the event of a dispute.

Although franchising per se is not regulated in the Philippines, a franchise agreement may, depending on the type of business, be considered a Technology Transfer Arrangement (TTA) under the Intellectual Property Code. TTAs have to be registered with the Intellectual Property Office and typically involve the following two types of agreements:

  • transfer of systematic knowledge for the manufacture of a product, the application of a process, or rendering of a service, including management contracts; and
  • transfer, assignment or licensing of all forms of intellectual property rights, including licensing of computer software (except computer software developed for a mass market).

Meanwhile, many ASEAN countries have private franchising organisations that establish their own practice guide, which members have to adhere to when operating a franchise. For example, the Franchising and Licensing Association of Singapore has a code of ethics that is binding on all members. Likewise, the Philippine Franchising Association has a code of ethics in addition to general guidelines issued for fair franchising practice.

Franchise agreement

Intellectual property

Apart from any applicable franchising law and regulations that apply to businesses, franchises are contractual relationships governed by the franchise agreement entered into by a franchisor and franchisee. Franchising is intrinsically linked to a potential myriad of intellectual property rights through the franchise agreement as they form the basis for the franchisor’s designation of specific rights to the franchisee for franchise operations to function as a model of the original business. Hence, the intellectual assets of companies are inevitably at the heart of franchise agreements. They may include the following:

  • trademarks (eg, brand names, logos, product names, trade dress);
  • copyright (eg, operations manuals, training manuals, operating procedures, product descriptions, marketing materials);
  • patents (eg, products, processes); and
  • trade secrets (eg, ingredients and recipes, manufacturing procedures).

As Indonesia, Malaysia and Vietnam require prospective franchisors to attain approval before implementing a franchise, the contents of a franchise agreement must comply with the relevant requirements. In Indonesia, franchisors must indicate their intellectual property beyond registered trademarks or patents – franchise agreements must specify the name and type of right over all forms of intellectual property, invention or unique business characteristic; for example, a management system, a selling or display method or a distribution method that constitutes a special characteristic that is the object of a franchise.7 However, in Malaysia and Vietnam the requirement is less restrictive in relation to the description of relevant intellectual property, as it is sufficient for franchisors to merely reproduce copies of domestic trademark registration. Although the approach in Vietnam is similar to that in Malaysia, the failure of a franchisor to guarantee the registration of intellectual property rights may form a basis for a franchisee to terminate the franchise agreement.8

The significance of intellectual property recordal or registration means that companies should always conduct clearance searches as part of efforts to expand into ASEAN jurisdictions. This will also help to mitigate against any potential risk of intellectual property infringement in the local market that the business is operating in. Because of the lack of a harmonised ASEAN intellectual property registration system, companies should conduct a clearance search in each country that it is expanding into. For example, trademark searches may be conducted by checking the local trademark register for any identical or similar marks. Companies may also check business directories for any conflicting trade names, and search the internet for any goods and services bearing similar trade names, as well as for any website domains or registered domain names comprising the franchise’s marks.

After a clearance search is completed and any identified obstacles cleared or resolved (through legal challenge, acquisition of local rights, rebranding or otherwise), companies can choose which applications to file in the respective countries they intend to operate in. While a national filing is usually made, companies may also make international filing applications for their trademarks9 or patents.10 However, it should be noted, for instance, that an international trademark application cannot designate Malaysia and Myanmar, whereas an international patent application cannot be made for Myanmar.

Disclosure

As mentioned above, in Vietnam, franchise disclosure documents must be presented to prospective franchisees at least 15 days before the franchise agreement date. In Malaysia, both the franchise agreement and pre-contractual disclosure (as elaborated below) have to be provided at least 10 days before executing the franchise agreement. Moreover, if a local master franchisee is representing the foreign franchisor, the local master franchisee is responsible for providing disclosure documents to sub-franchisees, including its business relationship with the foreign franchisor. Likewise, in Indonesia franchise disclosure documents have to be provided at least 14 days before executing the franchise agreement, although the information required to be disclosed is typically less detailed than in Vietnam and Malaysia.

Aside from the three countries above, the other ASEAN nations do not specifically require prospective franchisors to submit a franchise disclosure document, as any information related to disclosure is usually subject to the arrangement between the parties to a franchise. In the Philippines, TTAs are submitted to the Documentation, Information and Technology Transfer Bureau and must, in addition to the general requirements on technological transfer, provide for the continued availability of and access to improvements in technological techniques and processes during the term of the agreement.11

Meanwhile, franchisors should also note the various laws of each country when deciding what information should be disclosed. For countries without specific pre-contractual disclosure requirements, other legal principles (eg, misrepresentation, tort) may apply such that a franchisor has to reveal information about the business to enforce a valid franchising contract. 

If a prospective franchisor is required to provide a disclosure document, the following information may be considered:

  • details of the franchisor (eg, business profile, history, company information, financial information, business affliates, experience);
  • litigation history (prior incidences of criminal or civil actions taken by or against the franchisor and its affliates, if any);
  • fees and expenses (eg, training fees, marketing or advertising expenses, initial investments, royalties, financial arrangements);
  • details of the goods and services (eg, halal arrangements, source of goods and services);
  • obligations of the franchisee (eg, licensing approval, legal compliance);
  • territory (locations of operations);
  • intellectual property (eg, trade names, trademarks, copyright and patents to be used in the course of trade); and
  • dispute resolution (eg, renewal opportunities, termination clauses, methods of dispute resolution).

Governing law

The franchise agreement should also state the governing law of the contract. Depending on the country, it may be compulsory for the governing law to indicate the country that the franchisee is operating in. Even though Indonesia, Malaysia and Vietnam are regulated by domestic law, only Indonesia requires franchise agreements to be governed by Indonesian law, whereas Vietnamese and Malaysian agreements may be governed by the laws of a foreign jurisdiction. However, the contents of franchise agreements must still be aligned with the laws of the home country for the agreement to be approved and for the contractual terms to be enforceable. Hence, any franchise agreement designating foreign law should also be reviewed under the relevant local law.

Meanwhile, other ASEAN countries will generally recognise a choice of a foreign law as the governing law of the franchise agreement. However, one exception is the Philippines, where the TTA must be governed by Philippine law.12 Depending on the choice of dispute resolution, not every local court will enforce the laws of a foreign jurisdiction if doing so would contravene local laws or customs.

Franchise documents required

The various ASEAN countries may require different documents to be submitted before proceeding with the franchise.

Brunei

Franchises per se are governed by contract, and there is no franchise registration system requiring submission of documents.

Cambodia

Franchises per se are governed by contract, and there is no franchise registration system requiring submission of documents.

Indonesia

For the registration of a franchise prospectus, the following documents must be notarised, attested by the Indonesian Embassy and translated into Indonesian:

  • power of attorney;
  • application letter;
  • the franchisor’s identification, that is, the information provided on identity cards or passports (of the shareholders, commissioners and directors if the franchisor is a business entity);
  • copy of the franchisor’s business licence;
  • a history of the franchisor’s business;
  • the franchisor’s organisational structure (from board of directors, shareholders, commissionaires, up to franchisor’s operational level);
  • the number of outlets owned by the franchisor;
  • a list of current franchisees;
  • composition of franchised goods;
  • employment composition;
  • audited financial statements for the past two years;
  • trademark registration certificates in Indonesia or filing receipt of trademark application in Indonesia;
  • rights and obligations of the franchisor and franchisee; and
  • a copy of the franchise agreement.

Once the prospectus is approved, the franchisee has to file the following documents, to be translated into Indonesian:

  • power of attorney;
  • application letter;
  • a copy of the prospectus of the offered franchise;
  • a copy of the franchisee’s articles of association;
  • a copy of the franchisee’s business licences;
  • a copy of identification of the franchisee’s directors or owners;
  • a copy of the trademark registration certificate;
  • employment composition (local and foreign staff);
  • composition of franchised goods; and
  • a copy of the franchise agreement and its Indonesian translation.

Laos

The following documents are required for the purposes of notarisation and registration (to be translated into the Lao language): (i) copies of corporate documents and/or passports of the parties to the franchise agreement; and (ii) four sets of the signed franchise agreement.

Malaysia

In addition to the documents listed above in the section on franchise registration laws and regulations, the following are required to be submitted by the franchisor for the Registry of Franchise’s approval, without having to be translated into Malaysian:

  • a certified true copy of the franchisor’s certificate of incorporation (when providing information about the franchisor);
  • a certified true copy of trademark registration or application in the franchisor’s home country as well as Malaysia; and
  • a certified true copy of the franchisor’s relevant financial information (audited accounts for the past three years).

Malaysia’s franchise regulations specifically list the information that must be provided in the disclosure document, which includes:

  • a relevant background of the franchisor;
  • relevant details of the personnel;
  • details of any past or pending legal action involving the franchisor or its personnel;
  • whether the company and board of directors are free from bankruptcy;
  • details of franchise fees or any other fees payable by the franchisee;
  • relevant financial obligations of the franchisee;
  • details of the initial investment required for franchise operations;
  • information relating to the purchase or lease of any equipment or items;
  • obligations of the franchisor; and
  • territorial rights granted and terms of use of any intellectual property rights granted.

Myanmar

Franchises per se are governed by contract, and there is no franchise registration system requiring submission of documents. However, it is advisable to record a franchise agreement by filing a copy thereof at the Office of Registration of Deeds.

Philippines

Franchises per se are governed by contract, and there is no franchise registration system requiring submission of documents. However, franchisors would have to comply with the Intellectual Property Code, including the regulations surrounding TTAs. The TTA has to provide the following mandatory clauses:

  • Philippine law as the governing interpretation, and in the event of litigation the venue must be the proper court of the place of the licensee’s principal office;
  • continued availability of and access to improvements in technological techniques and processes during the term of the agreement;
  • Philippine taxes on all payments relating to the TTA must be borne by the franchisor, subject to certain exemptions; and
  • in the event of arbitration, proceedings must be governed by the Procedure for Arbitration of the Arbitration Law of the Philippines, the Arbitration Rules of the United Nations Commission on International Law (UNCITRAL Arbitration Rules) or the Rules of Conciliation and Arbitration of the International Chamber of Commerce, and the arbitration venue must be the Philippines or any neutral country.

Singapore

Franchises per se are governed by contract, and there is no franchise registration system requiring submission of documents.

Thailand

Franchises per se are governed by contract, and there is no franchise registration system requiring submission of documents.

Vietnam

Documents required to be submitted by a foreign franchisor for franchise registration (in the Vietnamese language) are as follows:

  • power of attorney;
  • application letter;
  • a notarised and legalised copy of the franchisor’s business registration certificate;
  • the franchise disclosure document;
  • a copy of the franchise agreement;
  • notarised or legalised copies of certificates of intellectual property protection (if applicable);
  • a certified true copy of audited financial statement for the past financial year; and
  • notarised documentary evidence of approval to sub-franchise (if applicable).

Restrictions

Withholding tax considerations

Franchisors should also be aware of various tax issues relating to franchising in the ASEAN nation that it intends to operate in.

In Cambodia, certain payments related to a franchise and made to non-residents of the country are subject to 14 per cent withholding tax.13 These include payments borne out of royalties, rent, interest, management and technical services, dividends, and marketing and advertising expenses. However, Cambodia has various agreements with other countries relating to the avoidance of double taxation.

In Malaysia, non-resident companies and individuals who receive income from a Malaysian source (including royalties and interest) are subject to 10 per cent and 15 per cent withholding tax, respectively.14 In Myanmar, franchise fees are subject to 2 per cent withholding tax for resident foreigners and 3.5 per cent withholding tax for non-resident foreigners, while franchise-related royalties are subject to 15 per cent withholding tax for resident foreigners and 20 per cent for non-resident foreigners.15However, as in Cambodia, this is subject to double-tax agreements that Myanmar has with certain countries to avoid double taxation.

The Philippine Tax Code imposes a 20 per cent withholding tax on domestic or resident foreign corporations in respect of royalties received, as well as a withholding tax of 30 per cent for royalties paid to non-residents, subject to any applicable tax treaties.16

In Singapore, franchise-related royalties are levied a 10 per cent withholding tax for non-resident foreign franchisors,17 subject to double-tax agreements that Singapore has with certain countries to avoid double taxation. In Thailand, franchise-related royalties are subject to 15 per cent withholding tax for foreign franchisors that do not have a permanent establishment in Thailand,18 again subject to any double-tax agreements with other countries.

The local tax regulations in Vietnam stipulate that the local franchisee has to declare and pay the withholding tax for and on behalf of the foreign franchisor, which is liable to pay value added tax and corporate income tax.19

Anticompetition issues

Generally, franchise agreements tend to include clauses that restrict or prevent competition, particularly through non-competition covenants and restrictions on the sale of a franchisee’s business. However, such practices vary among the different jurisdictions. For example, the Intellectual Property Code of the Philippines prohibits product-tying and non-compete obligations after the expiration of the TTA. Other countries may regulate competition via legislation, such as in Singapore where the Competition Act prohibits provisions promoting anticompetitive practices. Another example is Thailand, where the Trade Competition Act prohibits acts such as price-fixing and product-tying.

In addition, some countries may have anticompetition regulations depending on the type of industry that the franchise is operating in. For example, certain industries in Vietnam are subject to competition law provisions that prohibit agreements leading to any party or parties accruing a market share of 30 per cent and above of the industry in question.

Foreign ownership

The laws relating to the incorporation of companies vary depending on which country the franchisor intends to operate in. In Brunei and Singapore, for instance, the franchising company that is to be incorporated must have a minimum number of resident directors: a Singapore company is required to have at least one resident director on the business register, whereas in Brunei there must be at least one resident director if there are two directors or at least two resident directors if there are more than two directors.

Other countries may regulate foreign ownership through other forms of legislation. In Malaysia, the Act does not allow franchisors to hold any shares in the franchisee company. In Myanmar, depending on the nature of the business, there are restrictions on foreign ownership or control of businesses, such as those involving import, export and sale of goods. Examples include the food and beverage and retail industries where foreign franchisors must conduct the business via joint venture with a local partner.

In Thailand, if the franchise business comes under the Foreign Business Act, foreign individuals and companies are barred from holding a majority shareholding (above 50 per cent). Similarly, Vietnam restricts foreign investment or involvement in relation to certain industries or types of business.

Conclusion

When the AEC was founded, its main priority was to nurture a connected and inclusive economy that would raise the competitiveness of the region.20 In the field of franchising, however, the differences in national regulatory requirements are a reflection of the diverse legal, political and commercial landscapes across the ASEAN nations that serve as obstacles to economic integration. Ultimately, the complex regulatory environment in the respective markets in ASEAN poses a mixture of potential challenges to foreign franchisors, including the lack of a consistent approach to franchising in the region. It is therefore highly recommended that potential franchisors engage appropriate legal assistance and support for each ASEAN nation even at the stage of planning the franchise. When organised, executed and managed properly, franchise operations in ASEAN nations have the potential to be very successful for established foreign market entrants looking to optimise their return on investment by capitalising on a commercially vibrant region that is seeing not only impressive infrastructural development and economic growth, but also increasing brand consciousness and consumer purchasing power.