Foreign companies with customers in South Africa often engage a local service provider to manage the customer relationship and provide support services. The foreign company is usually careful to navigate the employment, corporate and tax risks associated with the engagement and the contract with the local service provider will typically assign any intellectual property created or developed by the service provider to the foreign company. Sounds simple, right? Well, not if the assignment cannot be implemented in practice.
The Currency and Exchanges Act ("the Act") governs the export of capital outside of South Africa. In particular, the regulations to the Act prohibit any person from entering into a transaction whereby capital (or any right to capital) is exported from South Africa, unless permission is obtained from the authorities.
Regulation 10 of the Act expressly defines "capital" as including any intellectual property right, and "export" as including the assignment or transfer of any intellectual property right in favour of a person who is not resident in South Africa. In other words, if intellectual property is created or developed in South Africa and vests in a South African resident, approval must be obtained from the authorities before the intellectual property rights can be assigned to the foreign company.
In practice, approval is difficult to obtain. Whilst the Exchange Control Rulings provide a carve out for unlisted technology, media, telecommunications, exploration and other research and development companies, the conditions relating to the carve out are burdensome and impractical. This is especially true for foreign companies with a limited customer base in South Africa. In addition, failure to comply with the Regulations may result in severe penalties - imprisonment of up to five years and/or a hefty fine of up to ZAR 250,000.
What to do?
Foreign companies who are eager to do business in South Africa but alive to inadvertent technical difficulties that could arise, may seek ways from benefitting from intellectual property created or developed in South Africa, without triggering the rules relating to the "export" of "capital". Whilst users are awaiting a view from the courts, options may include the following:
- Agree that there is an automatic and initial vesting of the intellectual property in the foreign company. In this way, the intellectual property does not vest first in the service provider and then transfer over to the foreign company - it vests in the foreign company from its creation.
- Where the foreign company incorporates a subsidiary or registers a branch (external company) in South Africa, use the standard assignment language to vest the intellectual property in the subsidiary/branch. The subsidiary/branch can then grant a licence to the foreign company to use the intellectual property.
Businesses seeking to invest in South Africa need not be deterred from doing so merely because of regulatory concerns. Whilst there is room for removing some red tape that stifles investment into our jurisdiction, proper interpretation of legal obligations could result in less burdensome responsibilities than may appear to be the case at first blush.