Legal View

Relaxations to IP Exchange Controls and Loop Structures

Johannesburg, 06 Mar 2017
Read time 4min 40sec

Until recently, the Exchange Control policy framework in South Africa restricted South African residents from (among other things) selling, assigning or licensing intellectual property (IP) to foreign residents, and paying royalties to foreign residents, without prior approval from the South African Reserve Bank (SARB).

The Exchange Control framework has had severe unintended consequences for the South African economy. It has significantly limited the ability of businesses to be commercially agile, compete on a global scale, obtain much-needed foreign capital and access valuable know-how and partnerships. The problem is compounded in the case of software, technology and IP-rich start-ups who, for example, often license IP to foreign customers in the ordinary course of business and find it difficult to obtain investment from foreign investors as a result of the Exchange Control framework. In an economic climate where high growth potential companies and foreign investment into South Africa are crucial to job creation, the resulting exodus of skills, talent and business interests offshore is particularly concerning.

As a result of these negative effects, Webber Wentzel has led a lobbying initiative on Exchange Control since last year. As part of its lobbying, the firm has engaged widely with stakeholders across industry in order to deepen its practical understanding of critical issues and has had several one-on-one, constructive engagements with the regulators.

National Treasury proposed as follows as part of the 2017 National Budget Review on 22 February 2017:

"Government proposes that companies and individuals no longer need the Reserve Bank's approval for standard intellectual property transactions. It is also proposed that the "loop structure" restriction for all intellectual property transactions be lifted, provided they are at arms-length and at a fair market price."

Following National Treasury's announcement and Webber Wentzel's ongoing lobbying, the SARB has implemented amendments to the Currency and Exchanges Manual for Authorised Dealers (Exchange Control Manual).

Intellectual Property

The following paragraphs (among others) have been inserted into the Exchange Control Manual:

Intellectual Property

"Authorised Dealers may... approve the outright sale, transfer and assignment of intellectual property by South African residents, excluding mandated state owned companies as defined in Schedule 2 of the Public Finance Management Act, 1999 (Act No. 1 of 1999), to unrelated non-resident parties at an arm's length and a fair and market related price, provided Authorised Dealers view the sale, transfer or assignment agreement and an auditor's letter or intellectual property valuation certificate confirming the basis for calculating the sale price. The above-mentioned dispensation excludes sale and lease back agreements."

'Authorised Dealers may approve the licensing of intellectual property by South African residents to non-resident parties at an arm's length and a fair and market related price for the term of the agreement, provided Authorised Dealers view the licence agreement and an auditor's letter confirming the basis for calculating the royalty or licence fee..."

"The sale, transfer, assignment and/or licensing of intellectual property ...[set out] above is subject to appropriate tax treatment."

[our emphasis]

Technology, media, telecommunications, exploration and other research and development companies

"(ii) Authorised Dealers are advised that unlisted South African technology, media, telecommunications, exploration and other research and development companies may establish an offshore company to raise foreign funding for their operations, subject to the following conditions:

(a) registration with the Financial Surveillance Department;
(b) the established offshore company must be a tax resident in South Africa;
(c) full details of the percentage shareholding in the offshore company including the group structure must be provided; and
(d) an annual report must be submitted to the Financial Surveillance Department on the operations, including details of funds raised offshore.

(iii) Companies established in terms of (ii) above, may in turn hold investments and/or make loans into South Africa.

[our emphasis]

Our interpretation of these changes is that Exchange Control approval remains a requirement for cross-border IP transactions. However, such approvals can now be obtained from Authorised Dealers (and will not require approval from SARB) in the circumstances listed above. This proposed change is welcomed as it should ease the administrative burden and shorten the time delays typically associated with Exchange Control approvals.

Weemphasisethat the proposed reforms:

* do not apply to assignments / transfers of IP from SA residents to related offshore companies (ie foreign group companies);
* do not allow Authorised Dealers to approve "leases" (ie licences) of IP from the foreign IP purchaser to the SA IP seller;
* do not simplify the Exchange Control restrictions that apply to cross-border licensing of IP (express or implied); and
* do not permit "loop structures" which require an assignment of IP by SA residents to foreign related persons.

The concrete and positive steps taken by the SARB and National Treasury to relax the Exchange Control policy framework are commended. However, while we recognise and appreciate the importance and value of these reforms, we note that this implementation is not yet as wide as National Treasury's proposal. We are hopeful that these outcomes represent the start of wider reforms to the Exchange Control policy framework. We will continue to liaise with the regulators as part of our ongoing constructive engagement and lobbying.

Businesses planning to enter into cross-border IP transactions and/or group restructures are encouraged to seek legal advice.

Editorial contacts
Webber Wentzel Anita Raubenheimer (+27) 11 53 05185
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