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Insights | Attracting Capital from International Investors

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Published Date: May 26, 2016

‘How do I export my IP out of South Africa?’ This is a question that the IP Live team have been asked a number of times. The answer, unfortunately, is that is is not as easy as on might have thought.

The Currencies and Exchanges Act, 1933 (“the Act”) prohibits the export of any capital without first obtaining prior exchange control approval from the Financial Surveillance Department of the South African Reserve Bank (“SARB”). What was once a hotly contested debate about whether intellectual property was considered “capital”, the amended Regulation 10(1)(c) of the Act defines capital as including intellectual property rights ending any debate on this topic.

In our experience obtaining approval for a transaction of this nature from the SARB can be a costly affair and a local entity may face significant obstacles in the process. The unfortunate impact of this is that IP owned by a South African resident or entity is not as an attractive investment opportunity from a foreign investor’s point of view.

Ashlin Perumall from our IP Live team had answers to a few of the frequently asked questions on this topic.

caption id”attachment_5255″ align”alignright” width”200″ Ashlin Perumall/caption

IP Live:  Why do you think the SARB are taking such a hard line on approving these transactions.

Ashlin: SARB’s primary mandate is to protect South Africa’s currency reserves and its tax base, and, in doing so, to regulate capital movement into and out of South Africa (actually, to be correct, it is into or out of Common Monetary Area consisting of South Africa, Namibia, Lesotho and Swaziland). In this context, Intellectual Property presents a unique risk.

IP plays a vital role in any economy which strives to be competitive in the global marketplace and in attracting foreign direct investment. It is also an asset which is capable of generating value simply by allowing others to use it, for example, by way of royalties or license fees, which value forms part of South Africa’s tax base for so long as such IP is owned by a South African tax resident.

For these reasons (amongst others) there is a strong incentive for a country like South Africa to find ways to regulate intellectual property outflows to keep this value within our economy. This is exacerbated by the fact that, unlike many other capital assets, such as fixed property, intellectual property can be transferred with minimal effort and is often assigned for inadequate or no consideration.

SARB thus has adopted a hard line approach where applicants cannot show that good consideration has been received by the local assignor for the IP and that there is some public benefit that the transfer will create which outweighs the detriment that such ‘export’ out of South Africa will cause.

IP Live: There was a time when capital wasn’t considered capital, right?

Ashlin: Yes. Prior to the amendment to the Exchange Control Regulations in 2012, the term ‘capital’ in the Regulations did not specifically include intellectual property, which led to controversy over whether SARB’s approval was required for assignment of IP. SARB obviously argued that the Regulations covered intellectual property and followed this policy in applying the Regulations.

This controversy culminated in our courts in March 2011 in the Supreme Court of Appeal decision ofOilwell (Pty) Ltd v Protec International Ltd, which held that ‘capital’ within the context of the Currencies and Exchanges Act, 1933 (in terms of which the Exchange Control Regulations were promulgated) was used in the financial sense, rather than having a broader economic or accounting connotation and, accordingly, did not include intellectual property.

This led to a very short lived ‘open season’ during which no SARB approval was required for the export of intellectual property on the basis of Regulation 10(1)(c). The doors were quickly shut on 8 June 2012, when Regulation 10(1)(c) was amended by Gazetted notice to specifically include intellectual property, which amendment has not been successfully challenged since.

IP Live: Surely this will lead to people ensuring that their IP just isn’t owned by a South African resident or entity?

Ashlin:   That has, to some extent, been a prime effect of the Regulations. In an effort to avoid approaching SARB for approval, many seek ways to ensure that their IP vests offshore, either by registration of registrable forms of intellectual property in the name of a non-resident proprietor, where permissible in terms of the relevant IP legislation, or by using elaborate schemes to ensure that non-registrable IP, such as copyright, vests offshore.

Ultimately, one needs to be cautious of these mechanisms as both our tax and exchange control authorities adopt a substance-over-form approach and have the ability to look through these structures. It is advisable to discuss your options with a legal advisor before utilizing such mechanisms.

by Ashlin Perumall and Nic Rosslee

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