6 March 2020 by Tax & Exchange Control Alert

Relaxation of exchange control rules on externalising intellectual property

Essentially, exchange control is governed by the Exchange Control Regulations, 1961 (Regulations) issued under the Currency and Exchanges Act 9 of 1933.

Regulation 10(1)(c) states 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 the Republic”.

For many years the term “capital” was interpreted widely to include essentially any form of property including, in particular, intellectual property (IP).

In the case of Oilwell (Pty) Ltd v Protec International Ltd and Others 2011 (4) SA 394 (SCA), which involved the transfer of intellectual property rights by a resident to a non-resident, the Supreme Court of Appeal held that the term “capital” in this context must be interpreted restrictively to mean cash and money; the term must not be interpreted to include goods, in particular, IP. The court also held that IP is not capable of being “exported”.

The government was clearly perturbed by the judgment in Oilwell as it meant that South Africans became free to transfer IP abroad without exchange control approval being required. On 8 June 2012 the President added Regulation 10(4) which reads as follows:

“For the purposes of sub-regulation [10(1)(c)]–

  1. “capital” shall include, without derogating from the generality of that term, any intellectual property right, whether registered or unregistered; and
  2. “exported from the Republic” shall include, without derogating from the generality of that term, the cession of, the creation of a hypothetic 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.”

In other words, since the introduction of that provision, owners of IP in South Africa were prohibited from transferring IP abroad without exchange control approval.

In Annexure E to the 2020 Budget Review issued pursuant to the Budget Speech of the Minister of Finance on 26 February 2020, it is stated that the National Treasury proposes “modernising the foreign-exchange system”. Essentially, the exchange control rules will be amended to allow all foreign currency transactions, save for those which are specifically regulated.

In particular, it proposes that no approval will be required for the export of IP for fair value to non-related parties. It is possible that some form of documentation will still be required, for example, a valuation stating what the fair value is and some proof that the party acquiring the IP is not related.

This is great news. It will now likely be much simpler for residents of South Africa who create IP to commercialise their IP.

Approval will presumably still be required for the export of IP to a related party, for example, by a subsidiary of a local company to its holding company abroad.

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