Amendments To The Exchange Control Regulations – Help Or Hindrance?

With the passing of the first anniversary of the Exchange Control Regulation amendments of 01 March 2017, (Exchange Control Circulars Nos.  7 & 8 of 2017) we consider whether such amendments have been a help or hindrance over the last 12 months.

Prior to 01 March 2017 South African residents (both natural and juristic) were prevented from selling, transferring or assigning intellectual property (“IP”) to, as well as licensing IP from, a non-resident without first obtaining prior approval from the Financial Surveillance Department (“FSD”) of the South African Reserve Bank (“SARB”).

Form DTP001 was used when licensing IP and such pre-approval was required in respect of:

  • new or substitute agreements as well as extensions of agreements;
  • situations where goods were manufactured in South Africa under license of a foreign licensor; and/or
  • agreements containing clauses relating to down-payments, minimum payments or once-off payments.

In terms of assignment of IP and Exchange Control Regulation 10(1)(c), such pre-approval was required whenever a transaction sought to directly or indirectly export any capital, or right thereto,  from South Africa.

“Capital” has been defined to include any IP right, whether registered or not and “exported” has been defined to include cession, creation of a hypothec, other forms of security or any assignment in favour of a non-resident.

There were several issues with the Exchange Control position in respect of IP prior to 01 March 2017, including, but not limited to:

  • no standardisation of requirements for applications and/or approval (save for Form DTP001);
  • no guidelines / objective basis with which to judge applications;
  • capacity of relevant authorities to appreciate the complexity of IP laws; and
  • perceived bias against permission for assignments in connected party situations (i.e. inter-group assignment of IP).

As a result, in the lead up to former Finance Minister Pravin Gordhan’s Budget Speech of 2017, government recognised that previous regulations “may affect legitimate commercial transactions and discourage the use of ZA-based group infrastructure to further develop offshore IP”.

It was therefore decided that the pre-approval requirement should be relaxed for certain transactions, excluding sale-and-lease-back structures. The relevant transactions are:

  • the sale, transfer or assignment of IP from a South African resident to an unrelated non-resident; and
  • the license of IP from an unrelated non-resident to a South African resident.

The relaxation has not removed the pre-approval requirement, but has shifted the authority for granting such approval from the FSD of the SARB to Authorised Dealers (“AD”) in general. Other requirements include:

  • the transaction must be conducted at arm’s-length and for fair value;
  • the agreement must be authorised by an AD who must have viewed the agreement and an auditor’s letter and/or IP valuation certificate confirming the basis for calculating the purchase price, royalties and/or license fees, as the case may be; and
  • all inward funds emanating from such sale, royalties and/or license fees, as the case may be, must be repatriated to South Africa within 30 days of the recipient and/or licensor becoming entitled thereto.

Essentially government has stipulated that IP must remain registered in South Africa but may be assigned offshore, subject to appropriate tax treatment.

However, there are several issues with the new “relaxed” position, including, but not limited to:

  • government’s failure to understand that assigning IP that is registered in South Africa to a non-resident does not change the registration of such IP in South Africa;
  • competence and liability of ADs as they may not have been educated for the new responsibility that has been thrust upon them;
  • how to test / verify an auditor’s letter / IP valuation certificate. Auditors are generally uneducated when it comes to IP and valuations thereof, therefore they are reluctant to issue such letters attesting to the value of IP;
  • whether interested third parties may intervene in an application, and if so, how;
  • auditor’s valuation v SARS valuation – which takes precedence?
  • lack of provision for complaints / queries procedure; and
  • how rejected applications may be appealed. It would seem that an application would have to be made to High Court where court date availability has a very negative impact on commercial transactions.

The general feeling has therefore been that government’s good intentions have actually introduced more uncertainty to an already uncertain procedure.

The result of which has been that ADs simply refer applications to the SARB, which has the effect of taking us back to square one – obtaining prior approval from the SARB.

Ashton Pollard – Practitioner

Kim Rademeyer – Partner