Note: Following the case of Oilwell v Protec (SCA) and the amendment to the Exchange Control Regulations dated 8 June 2012, the Manual may need to be revised.
Exchange Control Regulations, 1961
Restriction on export of capital
10.(1) No person shall, except with permission granted by the Treasury and in accordance with such conditions as the Treasury may impose –
(c) enter into any transaction whereby capital or any right to capital is directly or indirectly exported from the Republic.
Amendment to Regulations dated 8 June 2012:
For the purposes of sub-regulation (1)(c) [of Regulation 10]-
(a) ‘capital’ shall include, without derogating from the generality of that term, any intellectual property right, whether registered or unregistered; and
(b) ‘exported from the Republic’ shall include, without derogating from the generality of that term, the cession of, the creation of a hypothetic or other form of security over, or the assignment or transfer of any intellectual property right, to or in favour of a person who is not resident in the Republic.
22. Every person who contravenes or fails to comply with any provision of these regulations, or contravenes or fails to comply with the terms of any notice, order, permission, exemption or condition made, conferred or imposed thereunder, or who obstructs any person in the execution of any power or function assigned to him by or under these regulations, or who makes any incorrect statement in any declaration made or return rendered for the purposes of these regulations (unless he proved that he did not know, and could not by the exercise of a reasonable degree of care have ascertained, that the statement was incorrect), or refuses or neglects to furnish any information which he is required to furnish under these regulations, shall be guilty of an offence and liable upon conviction to a fine not exceeding two hundred and fifty thousand rand or to imprisonment; provided that where he is convicted of an offence against any of these regulations in relation to any security, foreign currency, gold, bank note, cheque, postal order, bill, note, debt, payment of goods, the fine which may be imposed on him shall be a fine not exceeding two hundred and fifty thousand rand, or a sum equal to the value of the security, foreign currency, gold, bank note, postal order, bill, note, debt, payment of goods, whichever shall be greater.
Exchange Control Manual
2.1.8. Acquisition of patents, copyrights, trademarks, franchises and/or intellectual property in general
The acquisition of any of the aforegoing requires prior Exchange Control approval. Applications should be supported by the agreement or contract of purchase. If not evident therefrom, a clear explanation of how the values were arrived at must accompany the application.
22.214.171.124. Royalties and fees arising from the use of copyrights, designs, patents and trademarks
Agreements by South African companies to pay royalties, licence and patent fees to non-residents in respect of the local manufacturing of a product, are subject to the approval from the Department of Trade and Industry.
Accordingly such companies must submit to the Department of Trade and Industry three copies of the draft royalty Agreement as well as a completed questionnaire (Form DTP001), which is obtainable from the aforementioned Department or any commercial bank. The Department of Trade and Industry will communicate their decision to the licensee, or Exchange Control where applicable which will enable an approach to a bank directly to transfer the royalty payments. Agreements by South African companies to pay royalties, licence and patent fees to non-residents, where no local manufacturing is involved, are subject to the approval of Exchange Control.
Any royalty payment eventually made to the non-resident licensor must be substantiated by an auditor’s report confirming the basis of calculation and that it is in terms of the agreement.
Any advance payments of royalties even if recoupable from future royalties payable, are invariably declined. Exchange Control is also not in favour of minimum payments should the royalty not reach a certain amount during a specific period – the royalty payable should be in proportion to the production and sales achieved.
Norms applied and factors considered
Royalty payments are usually calculated as a percentage of the manufacturing cost or a percentage of the net ex-factory selling price, excluding any taxes such as value added tax.
A distinction is made by the government department concerned between royalty agreements covering consumer goods and those for intermediate and capital goods. For consumer goods a royalty of up to 4% of the ex-factory selling price is regarded as acceptable. In the case of intermediate and capital goods a payment of up to 6% may be considered favourably.
The government department concerned considers all cases on merit and the following factors, inter alia, are taken into account:
- the strategic importance of the product;
- the economic importance of the product in the furthering of industrial development by means of import replacement, export promotion or expansion of the domestic market and its contribution to the national income and employment;
- the new technological know-how entering the country through the manufacturing process in question;
- the domestic content of the particular product;
- the financial interest of the licensor in the local venture;
- the duration of the contract; and
- the nature of any restrictions contained in the agreement, e.g. on the exportation of South Africa products.
Royalties and rentals on cinematograph films/video’s and royalties and fees on records (Defined as any disc, tape, perforated roll or other device in or on which sounds are embodied so as to be capable of being automatically reproduced therefrom or performed, produced and sold under licence) and royalties on musical works.
Authorised Dealers may approve applications by South African residents to make payments in the prescribed manner to persons outside the Common Monetary Area in respect of royalties and fees per title on cinematograph films/video’s, records reproduced and musical works sold under licence in the Common Monetary Area, subject to certain conditions as accepted in the trade which specific information is available from the Authorised Dealer.
126.96.36.199 Technical service payments
Authorised Dealers may approve, against the production of documentary evidence applications by South African residents to effect payment of fees due in respect of non-residents brought to South Africa for the specific purpose of installing or repairing specialised machinery and equipment or for commissioning and supervising the installation thereof as well as training local personnel in this connection.
Exchange Control Circular no. 7/2017 – Intellectual Property
Section B.2(A)(iii) (new section added to the Currency and Exchanges Manual for Authorised Dealers)
“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, 199 (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.
(a) all inward funds emanating from such transactions must be repatriated to South Africa within a period of 30 days from the date of becoming entitled thereto and reported under category 210 of the FinSurv Reporting System.”
Section B.2(A)(iv) (new section added)
“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 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.
(a) All royalties and/or fees emanating from such transactions must be repatriated to South Africa within a period of 30 days from the date of becoming entitled thereto and reported under category 201 on the FinSurv Reporting System.”
Section B.2(A)(v) (new section added)
“The sale, transfer, assignment and/or licensing of intellectual property in (iii) and (iv) above is subject to appropriate tax treatment.”
Exchange Control Circular no. 8/2017 – Technology, media, telecommunications, exploration and other research and development companies
Section B.2(F)(ii) (new section added to the Currency and Exchanges Manual for Authorised Dealers)
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.”
Section B.2(F)(iii) (new section added)
“Companies established in terms of (ii) above, may in turn hold investments and/or make loans into South Africa.”