South Africa has significant exchange control regulations in place that restrict and require approval for payments in international IP licensing relationships. In particular, Regulations 10(1)(c) and 10(4) of the South Africa Reserve Bank (SARB) exchange control regulations apply.
Regulation 10(1)(c) prohibits "[entry] into any transaction whereby capital or any right to capital is directly or indirectly exported from the Republic" without "permission granted by Treasury in accordance with such conditions as the Treasury may impose".
For the purposes of Regulation 10(1)(c), Regulation 10(4) stipulates that:
- 'capital' will include, without diminishing the generality of the term, any IP right whether registered or unregistered; and
- 'exported from the Republic' will include, without diminishing from the generality of the phrase, the cession of, the creation of a hypothec or other form of security over, or the assignment or transfer of any IP right, in favour of a person who is not resident in South Africa.
South African entities must apply for approval through an authorised dealer (usually the entity's commercial bankers) in a foreign currency. Exchange control approvals are invariably granted on the basis that the consideration payable:
- represents a price payable between notional arm's-length parties;
- is fair and reasonable in all circumstances; and
- is always supported by an auditor's confirmation that the proposed price meets these requirements.
Typically, where the IP right in issue has been commercialised or commercialisation is imminent, exchange control requires an appropriately motivated valuation substantiating the price to be furnished.
The SARB has placed several restrictions on capital flows to and from South Africa. The restrictions are regulated under the SARB exchange control regulations. Commercial banks will authorise some payments where:
- the parties are unrelated;
- the payment is for fair value (as supported by an auditor's letter); and
- the payment is part of an arm's-length transaction.
In general, non-resident licensors are subject to tax in South Africa only:
- on income that is attributable to the licensor's permanent establishment in South Africa; or
- to the extent that tax must be withheld by the licensee.
Withholding tax is imposed on royalty payments for a number of different types of intellectual property, including patent royalties, copyrights, trademarks and design rights. Under certain circumstances, parties may be relieved from the duty to deduct tax – the most common being where a double tax treaty, concluded between South Africa and the jurisdiction in which the licensor is resident provides that the rate of withholding will be reduced.
Where no reduction in the rate of withholding tax on royalties is possible, the current rate of deduction is 15% of the royalty. This rate may increase during 2019. If a licensor has suffered a withholding, it may be able to claim credit for South African tax withheld in its home jurisdiction, either under local law or under any applicable double tax treaty.
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