Intellectual property is a general term which includes all products of the human intellect (“IP”). IP can take different forms such as copyright, trade marks, patents, plant breeders’ rights and designs. IP is in turn protected by the common law and bespoke legislation, which provides the owners of IP with certain rights to the IP. A certain commercial value can also be attributable to such IP and the rights attached thereto.
Owners of IP which are South African residents may wish to export such IP or the rights to such IP to a foreign jurisdiction for commercial reasons. As IP has a certain value attributed to it, the question which arises is whether exchange control approval would be necessary for an export of such IP.
Manners in which IP can be exported:
IP can be exported to a foreign person or entity by way of –
- an outright sale of the IP, whereby the ownership in the IP is sold to the foreign party along with the rights attached to it;
- the granting of an exclusive license to the IP, whereby the licensee has an exclusive right to exercise the licensed rights to the IP and ownership of the IP remains with the licensor; or
- the granting of a non-exclusive license to the IP, whereby the rights to the IP are licensed to more than one licensee and ownership of the IP also remains with the licensor.
The 1961 Regulations of the Currencies and Exchanges Act No. 9 of 1933:
Regulation 10(1)(c) of the 1961 regulations of the Currencies and Exchanges Act No. 9 of 1933 (“Regulations”) states that no person may enter into a transaction whereby capital or any right to capital is directly or indirectly exported from South Africa, unless it is with the permission of the minister of finance or an officer in the department of finance who, by virtue of the division of work in that department, deals with the matter on the authority of the minister of finance (“Treasury”) and in accordance with the conditions which Treasury may impose.
For the purpose of the above, the Regulations state that capital includes any intellectual property right whether registered or unregistered, and that the phrase exported from South Africa includes the transfer of any intellectual property right, to or in favour of a person who is not a resident of South Africa. Furthermore, the Regulations do not distinguish between the granting of an exclusive license to IP and the granting of a non-exclusive license to IP.
The Regulations therefore regulate all three forms of exporting IP listed above, namely, the outright sale of IP, the granting of an exclusive license to the IP and the granting of a non-exclusive licensing to the IP and require that exchange control approval is obtained prior to such transactions.
Obtaining exchange control approval:
Prior to 2017, exchange control approval had to be obtained directly from the South African Reserve Bank (“SARB”). This requirement was relaxed by circular No. 7 of 2017 issued by the financial surveillance department of SARB (“Circular”) which amended the currency and exchanges manual for authorised dealers to permit authorised dealers to approve the outright sale, transfer, assignment and licensing of IP by South African residents (excluding mandated state owned companies) to non-resident parties, on the condition that –
- the parties are not related;
- the sale, transfer, assignment and licensing is at an arm’s length; and
- the sale, transfer, assignment and licensing is at a fair and market related price.
The authorised dealer must also have sight of the sale, transfer, assignment or licensing agreement and an auditor’s letter or an IP valuation certificate which confirms the basis for the calculation of the sale price, royalty fee or license fee.
Transactions which do not meet the above requirements may not be approved by an authorised dealer and must be approved by SARB. These are therefore more difficult and may take more time to approve.
It is additionally worth noting that the Circular provides that all funds which become due to the South African resident in terms of the above-mentioned transactions must be repatriated to South Africa within 30 (thirty) days of the date on which the South African resident becomes entitled to such funds.
Proposed further relaxation of the rules:
The section of the budget review issued by Treasury on 26 February 2020 relating to simplifying cross-border trade and financial flows, states that the export of intellectual property for fair value to non-related parties will not be subject to approval.
It therefore appears from the above statement that a further relaxation of the required approval for the export of IP can be expected in the future.
An export of IP from a South African resident by way of a sale of the IP or licensing to a non-South African resident is currently subject to exchange control approval and requires SARB approval or the approval of an authorised dealer, depending on whether or not such sale or licensing is to a related party, at arms’ length and at a fair and market related price.
The requirement for exchange control approval for exports of IP between non-related parties and which transactions are at arms’ length and at a fair and market related price may be removed in future. VDMA will be monitoring any further developments in this regard.
It is therefore recommended that South African resident parties contemplating entering into transactions to sell, transfer, assign or license IP to non-South African residents obtain legal assistance to ensure that the transaction contemplates an export of IP as regulated by the Regulations and if so, the correct procedure is followed.
VDMA’s team of experts is at your disposal for any IP assistance that you or your business may require.
Published 24 May 2022