Startups take note: an update on IP exchange control

During the 2017 Budget Speech last week, the National Treasury announced that IP exchange control would be relaxed. While this is still an ongoing process, the South African Reserve Bank (SARB) has now implemented changes to the Currency and Exchanges Manual for Authorised Dealers (Exchange Control Manual).

Speaking to ExCo member of Silicon Cape and IP & tech lawyer at law firm Webber Wentzel, Aalia Manie, once again, she says that “that Exchange Control approval is still a requirement for cross-border intellectual property (IP) transactions. But now some of the approvals can be obtained from Authorised Dealers and will not require approval from SARB.”

An extract of the amendment: “Authorised Dealers may… approve the outright sale, transfer and assignment of intellectual property by South African residents[…]”

According to Manie, the Authorised Dealers are based at select banks and are nominated by the Minister of Finance. The Authorised Dealers engage with SARB on behalf of individuals and businesses when exchange control applications are submitted.

“If Authorised Dealers can approve the transactions, it means that further applications need not be made to the SARB.”

Another part of the amendment reads that the sale/transfer/assignment of IP can be made by a South African resident “[…]to unrelated non-resident parties at an arm’s length and a fair and market related price[…]”

Ventureburn asked Manie to clarify this section. “‘Unrelated non-resident parties’, put simply, means foreign third parties.”

“‘Arm’s length and a fair and market related price’ effectively means that the price must be on par with would have been paid in the ‘market’. Another way of thinking about it is that the price must align with ‘fair value’ or be determined as if the parties act independently, on equal footing and in their own self interest.”

Manie also pointed that while this amendment does not solve all the problems with the Exchange Control policy framework which have been communicated by critics to date, the reforms should simplify administrative hurdles and other transaction delays, and are a step in the right direction.

“The meaning of ‘appropriate tax treatment’ must also be clarified, but we expect this means compliance with existing tax laws.

“It will also be interesting to see whether unlisted technology companies take advantage of the relaxation regarding establishment of offshore companies, given the conditions imposed by SARB.”

Read the full amendment below [link]:

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.”