South Africa: Thinking About Moving Intellectual Property Offshore? Here's What You Need To Know

There are many reasons why a South African entity may want to assign or transfer ownership of their intellectual property (IP) offshore. One reason may relate to the current economic and political instability, whilst others may be motivated to do so in an effort to attract foreign investment. Perhaps you too have considered moving IP offshore, for whatever reason. In such instances, the question arises as to whether the offshore transfer of IP owned by a South African entity or resident, to an offshore entity is both possible and permissible. The simple answer is, "Yes, but." before putting pen to paper, consideration should be given to exchange control laws and possible tax implications.

Exchange control laws

The South African Exchange Control Regulations 1961 (ECR) make provision for how much capital, and on what conditions capital may be transferred offshore.¹ It is crucial to remember that the ECR are applicable to South African residents. A South African resident is a person (natural person or legal entity), whether of South African or foreign nationality, who has taken up permanent residence, is domiciled (even while residing abroad) or registered in the Republic. A non-resident is deemed to be a natural person or legal entity, whose normal place of residence, domicile or registration is outside the Common Monetary Area (CMA).² The CMA comprises the Republic of South Africa (RSA), Lesotho, Namibia and eSwatini. No exchange control restrictions exist between the CMA members as they form a single territory for the purposes of exchange control.

Regulation 10(1)(c) of the ECR, promulgated by the State President in terms of the Currency and Exchanges Act No. 9 of 1933, provides that no person shall, except with permission granted by the Treasury and in accordance with such conditions as the Treasury may impose, enter into any transaction whereby capital or any right to capital is directly or indirectly exported from South Africa. Regulation 10(4)(a) provides that 'capital' shall include, ".any intellectual property right, whether registered or unregistered.", and 10(4)(b) provides that 'exported from the Republic' shall include ".the cession of, the creation of a hypothec or other form of security over, or the assignment or transfer of any intellectual property right, to or in favour of a person who is not resident in the Republic".

The ECR place restrictive controls on the transfer of South African owned IP offshore. Residents who own IP must obtain approval prior to transferring their IP as well as when they intend to license their IP offshore. The main purposes of exchange control are to prevent the loss of foreign currency resources through the offshore transfer of capital and to effectively control the flow of financial and real assets into and out of the Republic. Where the IP emanates from publicly financed research and development, approval must be sought from the National Intellectual Property Management Office (NIPMO), in accordance with the Intellectual Property Rights from Publicly Financed Research and Development Act No. 51 of 2008.³

What if the transfer of IP offshore was concluded without the necessary exchange control approval having been obtained? The Supreme Court of Appeal in the Oilwell[4] decision ruled that nothing prevents the Exchange Control Authorities from consenting to a transaction retrospectively or after the fact. Therefore, where parties entered into a contract that may be affected by the ECR and where transfer of IP has already taken place, such transaction, absent consent by the Exchange Control Authorities, is not void, at the behest of one of the parties to it. However, a breach of the ECR is an offence punishable by way of a fine, imprisonment or both.⁵ Therefore, it is essential to ensure that the required exchange control approval for a transaction in which the rights in and to the IP are transferred offshore is obtained prior to the conclusion of said transaction.

The Minister of Finance is responsible for considering, and approving transactions wherein capital is transferred offshore from the Republic, this task having been delegated to the Exchange Control Department of the South African Reserve Bank (SARB). Certain banks are appointed as Authorised Dealers in Foreign Exchange for purposes of the ECR and their function is to assist the Exchange Control Authority in administering exchange control.⁶ Applications to the Reserve Bank for the approval of outward capital transfers by residents have to be made through an Authorised Dealer. In applications involving transfers between unrelated parties at an arm's length and a fair and market related price (excluding sale and lease back agreements), an Authorised Dealer may attend to the application itself without directly referring the application to the SARB.

What do you need to apply for exchange control approval?

An applicant has to make a full disclosure as to why they wish to undertake the transaction, e.g., showing a lack of a market for the IP in South Africa; the benefits, if any, that will accrue to the applicant or to the Republic; whether there might be subsequent transactions; and whether there are any other direct or indirect underlying, related or connected transactions or arrangements of any nature whatsoever. Importantly, approval will generally only be given where a value can be placed on the intellectual property concerned, and, further, where the consideration to be paid for the assignment of the IP is a fair and market-related value. In this regard, a formal valuation of the IP may be necessary.

Tax considerations

From a tax perspective, IP is considered to be an asset for the purposes of capital gains tax and therefore disposing of, or selling of IP may attract capital gains tax. Another very important factor is where the place of effective management of the foreign entity is deemed to be. If the place of effective management of the foreign company is deemed to be in South Africa, because, for example, the directors and shareholders are all RSA residents, the South African Revenue Service (SARS) has the right to tax foreign income of any such foreign company. Consequently, a foreign entity which has its place of effective management in the Republic will be regarded as a "resident" for tax purposes. The effect hereof is that such entity will be subject to income tax on its worldwide income, i.e., income derived within and outside the Republic.

The above factors should be borne in mind before concluding any foreign IP assignments/licenses.

Footnotes

1. Section 3 of the Exchange Control Regulations 1961

2. Exchange Control Manual for Authorised Dealers 2023

3. Section 12 (2) of the Intellectual Property Rights for Publicly Financed Research and Development Act 51 of 2008

4. Oilwell (Pty) Ltd v Protec International Ltd and Others 2011 (4) SA 394 (SCA)

5. Section 22 of the Exchange Control Regulation 1961

6. South African Institute of Taxation Basic Consideration and Recent Amendments 2019

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.