2019’s sure been a year. For South Africa, that means extreme highs and depressing lows, but one things for sure, the country didn’t stop…
At some point those at SA tech companies will ask — how do we move our intellectual property (IP) to an offshore company, one usually owned by the same set of shareholders that own our SA company?
My well-rehearsed answer is often: “You can’t, so please stop fixating about it”.
Well, actually the SA Reserve Bank says that you can only do it with their permission, because that’s basically what exchange control is for. However, the point is that it doesn’t really matter, and you can still achieve the same result.
You are able to commercialise new IP offshore in a foreign company with the same shareholders
You most certainly can develop, enhance, maintain and commercialise new IP offshore in a foreign company (let’s call it ForeignCo) with the same shareholders as your SA company.
If you do that, ForeignCo will own that new IP and importantly this will be entirely independent of Reserve Bank regulation. This solution is perfectly legal and commercially possible, and it is a much more constructive line of enquiry.
Let’s regress back to exchange controls for a moment. South Africa’s exchange controls are essentially intended to stop valuable assets from leaving the country. Whether that is your money, gold bullion or your IP – it’s all the same.
If it represents value of any sort, and earns (or could potentially earn) taxable revenue, then its fair game for the Reserve Bank. So, if you want to move your IP to ForeignCo, then you will need permission from Reserve Bank.
However, it’s one thing if you are selling it to a third party (ie a completely separate person who wants to buy it from you).
If the third party is a non-resident, unconnected party (ie really completely separate from you) and is genuinely buying it for themselves, then you just need to prove to The Reserve Bank that the IP is being sold for a purchase price that is fair value.
But it is another thing completely if you are just moving it to your own company offshore.
In my experience, The Reserve Bank will not agree to your request. They are, after all, responsible for protecting and retaining the valuable assets of South Africa.
So, why would they allow you to move those assets to another country, only to generate lovely taxable profit for some other country’s tax authorities, especially when you built it in SA while living in SA?
To be fair, we understand that some clients have had success in actually getting permission to transfer IP to their offshore companies but this comes “with strings attached”, which we discuss and debate in a follow up article.
Obviously, this is not an acceptable answer the context of free movement of information and virtual businesses that can locate themselves on servers across the world.
You would be forgiven for demanding an explanation, and we can walk you through the exchange control regulations if you’d like, but there it is.
The more constructive solution is to focus on the future location of IP that has not yet been created, and to make sure that is created in ForeignCo’s home country.
After all, you can and should create an offshore company structure of substance (as explained in the previous articles in this series — see below).
If you can show that the ownership elements relating to the IP are located in ForeignCo, then you can show that the IP is owned by ForeignCo, in its country of residence. So, it is a simply a matter of identifying all the “ownership elements”, right?
Here they are: Firstly, ForeignCo must deliver the economically significant functions relating to the development, enhancement, maintenance and commercialisation of the IP.
Secondly, ForeignCo must supply the assets, resources and funds. Thirdly, ForeignCo must truly bear the commercial risk of success or failure of the new IP.
Our next article will provide some practical guidance for each of these ownership elements.
However, we need to make this clear: you can’t do a half job. If the ownership elements are actually located in South Africa, then the IP resides in South Africa.
Worse, if ForeignCo claims ownership of the IP but can’t show that it created the IP, that could be seen as infringing exchange controls by illegally exporting a capital asset (the IP).
On top of that, it is quite possible that the SA Revenue Service (Sars) will reallocate profit from ForeignCo to South Africa – because the profit was earned by intellectual property that was illegally exported from South Africa.
Read more: What startups should know about tax, when setting up an overseas company
Read more: How to structure functions and operations across your international group
Read more: Here’s how SA startups can legally create an offshore company
Read more: The ins and outs of taking your startup offshore
Adrian Dommisse has extensive experience in corporate and financial transactions across Africa, Europe, Eastern Europe, and the Middle East. He founded Dommisse Attorneys law firm in 2008, and holds three degrees in economics and law.
Featured image: Free-Photos via Pixabay