In February, in an article on the 2017 South African budget review, we wrote that the government had proposed that companies and individuals no longer required approval from the South African Reserve Bank (“SARB”) for “standard intellectual property transactions” and that the “loop structure restriction for all intellectual property transactions” be lifted, provided that such transactions are arm's length and at a fair market price.
The SARB has now issued two circulars relating to IP and exchange control.
The first circular relates to IP and amends section B.2(A)(iii) of the Currency and Exchanges Manual for Authorised Dealers as follows:
“Authorised Dealers may, however, 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 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.”
Section B.2(A)(iv) was amended as follows:
“Authorised Dealers may approve the licensing of intellectual property by South African non-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.”
In both instances, all inward funds or royalties emanating from such transactions must be repatriated to South Africa within 30 days from the date of being entitled thereto and must be reported as required in terms of the Financial Surveillance Reporting System.
A new section B.2A(v) has been inserted as follows:
“the sale, transfer, assignment and/or licensing of intellectual property in (iii) and (iv) above is subject to the appropriate tax treatment.”
It appears that the only “relaxation” introduced by this circular is that applications for exchange control approval for the sale of IP may now be processed by Authorised Dealers (without having to be referred to the Financial Surveillance Department (“FSD”) of the SARB), provided such applications are supported with the required documentation. However, approval still needs to be obtained for these transactions. In addition, the circular has introduced a new requirement for the approval of IP licence agreements between unrelated parties where a market-related price is paid for the licence granted. Previously, these transactions did not require approval from the FSD.
The second circular relates to an amendment of the exchange control guidance on IP transfers for the venture capital sector, which was issued by the FSD in February 2014.
The guidance allowed private (unlisted) technology, media, telecommunications, exploration and other research and development companies in South Africa to apply for approval to primary list offshore to raise loans and capital, for their operations.
The circular now provides that these companies may establish companies offshore without the requirement to primary list offshore. This dispensation effectively provides for the creation of loop structures in order to raise loans and capital, and companies so established may hold investments and/or make loans into South Africa.
A new section B.2(F)(ii) has been inserted in the Currency and Exchanges Manual for Authorised Dealers as follows:
“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.”
This relaxation has been introduced to further assist South African companies in overcoming the challenges that they face in being able to tap into international venture capital markets. Hopefully, this amendment will encourage more companies to make use of the dispensation.