8 IP Considerations
The South African Exchange Control Regulations require Treasury approval for the transfer of intellectual property rights from a local company to a foreign company. Failure to obtain exchange control approval may result in a fine or imprisonment.
An assignment transfers ownership of IP rights. However, a licence grants the use of IP rights without transferring ownership.
If ownership does not need to vest with the foreign company, it may be appropriate to licence the IP rights to the foreign company. You will need to ensure that a reasonable royalty rate is applied for the licence of the IP rights, but a licensing arrangement may be easier to structure than outright transferring IP rights to a foreign company.
Proudly South African
If your company is concerned with South African customers, there is nothing pulling you overseas. Tax avoidance is not a suitable reason for transferring your IP rights to a foreign company.
Even if your products have the potential for international success, it may not make commercial sense for you to spend valuable time and money on attempting to get your IP rights out of the country.
A South African Exit
When there is not a relationship between the local and foreign company, the power to grant exchange control approval is delegated to the local company’s commercial bank. Permission will be granted once the details of the transaction and parties are provided, together with a report or certificate setting out the value of the IP rights.
Transferring IP rights to an unrelated foreign company is a straightforward process.
A Sticky Situation
When there is a relationship between the local and foreign company, the local company’s commercial bank will refer an application for exchange control approval to the Treasury. The Treasury will need to be convinced that the foreign company is in a better position to commercialise the IP rights than a local company. Reasons should be provided why the local company is not able to commercialise the IP from South Africa.
In many cases a foreign company is established with same shareholding as the local company. This is called a mirror structure, and the Treasury is not particularly fond of these structures. Other structuring relationships include the foreign company owning a percentage of the local company, or the local company owning a percentage of the foreign company.
The type of structure and shareholding may influence the ease of obtaining exchange control approval.
Location, Location, Location
The Treasury will be sceptical about you transferring IP rights to a related foreign company located in a tax haven. However, there may be good reasons for establishing a foreign company for the commercialisation of your IP rights.
Factors that may be looked upon more favourably include that:
- Your company is providing services to customers in the foreign country, and your company is required to be based there to service those customers
- You are part of a highly regulated industry in a foreign country
- Your IP rights involve classified information or a foreign country’s national security interest
- You are in the process of receiving foreign funding, but the foreign funders require that the IP rights are owned by a company based in the same region as the funder
There is not a closed list, and each circumstance will differ.
Benefits to South Africa
If you can show that transferring your IP to a foreign company will have a net benefit to South Africa, the Treasury may look upon the application more favourably. This could include ensuring that the future development of the IP is done in South Africa.
IP rights like copyright arise automatically and cover most countries in the world. Other IP rights like patents and trade marks need to be applied for in each relevant jurisdiction.
An application for exchange control approval may be looked upon more favourably if those rights which apply in South Africa remain in the local company, and only the foreign IP rights are transferred to the foreign company.
Each company is different. Each company has different strengths, weaknesses, opportunities and threats. There is not a one-size fits all approach to international commercialisation, and you’ll find success and failure in the areas where you don’t expect it. These considerations are a general guide but are not tailored legal advice. You must consult the relevant structuring, tax and IP professionals before transferring IP rights.
View this article in SA Innovation Summit here.
By Nick Pemberton, Trademark Attorney.