South Africa: Intellectual-property exchange control eased, but don’t get too excited

Legal and tax experts have welcomed the recent announcement on some relaxation of exchange-control restrictions relating to intellectual property, reports Business Day. 

But it seems there are reservations on how much excitement the relaxation warrants. There may be "only a narrow window of opportunity" for standard cross-border intellectual property (IP) transactions.

Darren Margo, director at Margo Attorneys, says there are conditions and qualifications attached to the announcement in the budget presentation in February.

Government announced that companies and individuals no longer needed Reserve Bank approval for standard intellectual property transactions.

Also proposed was the lifting of the loop-structure restriction for all intellectual property transactions, provided they are at arms’ length and at a fair market price. Loop-structure restrictions prohibit residents from holding a South African asset indirectly through a nonresident entity.

Ben Strauss, director at law firm Cliffe Dekker Hofmeyr, says the Reserve Bank issued an exchange-control circular setting out announced changes. In terms of the circular, authorised dealers (such as commercial banks) may now approve outright sale, transfer and assignment of intellectual property by South African residents to "unrelated nonresident parties at an arm’s length and a fair and market related price".

Keith Engel, CEO of the South African Institute of Tax Professionals (SAIT), says the relaxation is a good step forward. But continued restrictions on movement of IP undermines its commerciality no matter how well-intended.

"Unfortunately for government, even the revised set of smaller restrictions against potential avoidance will prevent IP from officially being created in South Africa," he says. "One cannot trap intellectual property with regulations. It is like controlling the internet or holding back flooding water with a dam wall."

Ernest Mazansky, tax director at Werksmans Attorneys, says these days one can transfer volumes onto a flash disk and carry it out of the country in one’s pocket. "On the assumption that one is compliant, then yes, it’s possible to control it."

The question is should IP be controlled. "No, it is your asset and you have every right to deal with it as you see fit. Countries equally have the right to tax it appropriately," he says.

Transferring IP offshore has significant tax consequences. Depending on the transaction, it will attract either capital gains tax or income tax, and tax deductions may be disallowed, says Mazansky, also a member of the SAIT international tax committee.

Countries do not like their IP being transferred out of their jurisdictions. "They see it as a loss of capital, no different to any other, and as a loss of potential. Most countries try and control it through their tax systems, but in SA we have exchange control as the added gatekeeper," says Mazansky.

The relaxed provisions apply only to cases where the transaction is between unrelated parties. "So for groups of companies no relief is in sight," says Margo.

A requirement that comes with the "relaxation" is a certificate to confirm the basis for calculating price. Strauss says banks must have an auditor’s letter or a valuation certificate confirming the basis for calculation. This will be time consuming and may be costly.

Margo says that even where this threshold has been met, another significant exclusion applies where the relaxation is not available for sale and leaseback agreements. This means a South African company cannot transfer IP offshore and then license it back into SA.

He says the Reserve Bank circular can hardly be described as "detailed" or "thorough" in setting out required standards and providing detailed guidance. There will be teething problems, Margo says.

"Simply put, only a narrow window of opportunity is available for vanilla sale and vanilla licence agreements."

The Reserve Bank approval was initially introduced in 2011 after the Supreme Court of Appeal ruling in the Oilwell v Protec case. The court found that IP could be transferred abroad without Reserve Bank approval. This prompted an amendment to exchange-control rules which made it compulsory for a South African company to get approval in cross-border IP transactions.

Margo Attorneys says that in terms of the proposal it is no longer necessary to make a full application to the Reserve Bank, but a lesser submission is still required.

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