JURISDICTION REPORT: SOUTH AFRICA
ASSIGNING IP TO FOREIGN ENTITIES: THE ROLE OF EXCHANGE CONTROL
Christine Kalibbala DM Kisch Inc
An exception has been made to the current situation that no South African Intellectual Property (IP) may be exported without South African Reserve Bank permission.
IP rights such as trademarks, patents and designs are valuable assets and can generate or sustain income streams. However, do the rights in and to these assets constitute capital? If so, is exchange control approval required where these rights are exported?
Regulation 10(1)(c) of the Exchange Control Regulations (the Regulations), promulgated in terms of Section 9 of the Currency and Exchanges Act no. 9 of 1933, is aimed at the protection of South African capital reserves and provides that:
“10(1)(c) – 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.”
In 2004, the High Court delivered a decision in the case of Couve and Another v Reddot International (Pty) Limited and Others. Te court was tasked with making a decision on the validity of an assignment agreement that brought about a change of ownership in certain patent applications. A foreign company was to acquire 60 percent of the ownership of the patent applications due to an allotment of shares.
Te court held that the foreign company would have gained a direct and material interest in the rights in and to the patent applications and also the right to receive royalties. It was decided that the effect of the assignment was to directly, or at the very least indirectly, export capital from the Republic of South Africa and that non-compliance with the provisions of Regulation 10(c) of the regulations rendered the assignment agreement null and void.
Shortly aſter the Reddot case was decided, an amendment was made to the Exchange Control Manual to the effect that the disposal of IP requires prior exchange control approval.
Te Supreme Court of Appeal in the case of Oilwell (Pty) Ltd v Protec International Ltd & Others has ruled on the issue of the assignment of IP from a South African resident/entity to a non-resident/foreign entity and in particular, whether approval in terms of Regulation 10(c) of the Regulations is required for such transactions. Te applicant (a South African company) was previously the proprietor of various trademark registrations in South Africa. An assignment was entered into between it and inter alia, the first respondent, whereby the trademark registrations were assigned to the latter.
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“IT MAY NOW BE POSSIBLE TO TRANSFER THEIR IP TO FOREIGN PERSONS WITHOUT THE NEED TO GO THROUGH THE OFTEN COMPLEX AND EXPENSIVE PROCESS OF OBTAINING EXCHANGE CONTROL APPROVAL.”
Te applicant sought an order to set aside the assignment agreement on the basis that the trademarks amounted to a “transaction whereby capital or any right to capital was directly or indirectly exported from the Republic of South Africa” and as a result contravened Regulation 10(c), due to non- compliance with the regulation. Te court held, inter alia:
a) the fact that a foreign entity becomes entitled to exercise certain rights in South Africa, does not mean that these rights have been exported;
b) in the event that a trademark does qualify as ‘capital’ or a ‘right to capital’, a failure to obtain exchange control approval in terms of Regulation 10 (c) does not result in the assignment being null and void, ab initio.
Te court found that the legislature intended the penalty imposed in the regulations to be a sufficient punishment for non-compliance and it did not also wish to render an agreement invalid in the case of non-compliance.
For South African owners of IP, the decision in the Oilwell appeal means that it may now be possible to transfer their IP to foreign persons without the need to go through the oſten complex and expensive process of obtaining exchange control approval.
Despite the euphoria of no longer requiring exchange control approval for the assignment of IP offshore, the tax consequences of such an assignment need to be carefully considered to ensure that all South African tax liabilities are correctly accounted for. For instance, exchange control approval for the payment of license fees and royalties by a South African licensee to a non- South African licensor is still required.
Should you require any information regarding the assignment of intellectual property, potential tax implications and exchange control approval, please feel free to contact DM Kisch Inc.
Christine Kalibbala is an associate at DM Kisch Inc. She can be contacted at:
christinek@dmkisch.com
World Intellectual Property Review November/December 2011 85
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