BUSINESS LAW &TAX
JUNE 2023 WWW.BUSINESSLIVE.CO.ZA
A REVIEW OF DEVELOPMENTS IN CORPORATE AND TAX LAW
The structuring of IP assets Keep in mind tax, IP law and •exchange control considerations Waldo Steyn & Lavina Daya ENSafrica
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espite challenges faced in recent years with the global pandemic as well as political and economic instability, SA has a booming fintech and technology industry. In particular, we are seeing tremendous growth in interest and investment in South African technology businesses. These companies are all rich in intellectual property (IP), as IP underpins the technology assets that their businesses are based on. Funding from nonresident investors is often a major stumbling block for start-ups. One of the reasons is that SA has exchange controls and restricts the externalisation of IP owned by SA exchange control residents to related nonresident parties. Nonresident investors are often reluctant to invest into a South African company where the primary asset, the IP, is subject to exchange control restrictions. South Furthermore, African exchange controls previously prohibited socalled loop structures.
Loop structures typically entailed the formation by a South African resident of an offshore structure, which by a re-investment into SA acquires shares or some other interest in a South African resident company or South African asset. To overcome this issue, parties often had to resort to complex structures such as mirrored shareholdings. On January 1 2021, the financial surveillance department of the SA Reserve Bank abolished its policy on loop structures to encourage inward investments into the country. However, loop structures set up before January 1 2021 are still considered to be “unauthorised” and are required to be reported to the Bank and regularised. Many South African companies are looking to externalise their South African IP to attract foreign investment and/or to grow their business in the international markets. There are three main areas to consider when dealing with a South African-owned IP: ● Exchange controls; ● Tax; and ● IP law So can you sell your South African IP? From an exchange control perspective, while the Bank
PROTECT THOSE LIGHTBULB MOMENTS
/123RF — PERFECTPIXELSHUNTER has relaxed the exchange control rules applicable to IP, at present authorised dealers are only permitted to approve the outright sale, transfer and assignment of IP to unrelated nonresident parties if: ● The transaction is at an arm’s length and the price represents a fair and marketrelated price;
MANY COMPANIES ARE LOOKING TO EXTERNALISE THEIR SOUTH AFRICAN IP TO ATTRACT FOREIGN INVESTMENT
● The authorised dealer views the sale, transfer or assignment agreement; ● The authorised dealer is provided with an auditor’s letter or IP valuation certificate confirming the basis for calculating the sale price; ● The transaction is subject to appropriate tax treatment; and ● The assigned or transferred IP is not licensed back to a South African resident party. Where a South African company undertakes IP development work for a nonresident party under a subcontract, any IP developed by the South African company would need to be assigned to
the nonresident party for such nonresident party to legally own any IP developed under a subcontract. Any such assignment requires approval in terms of the South African Exchange Control Regulations. The sale, assignment, cession and/or waiver of IP rights in favour of a related nonresident party requires the Bank’s prior approval. What about cross-border licensing arrangements? What is possible is the licensing of IP by South African residents from nonresident parties, both related and unrelated, provided it is done at a fair market-related price. Similar to the case of
the assignment or transfer of IP, the authorised dealer is required to view: ● A copy of the licence agreement; and ● An auditor’s letter confirming the basis of the calculation of the royalty rate or licence fee. What are some of the tax considerations? From a tax perspective, it is important to understand that IP is considered to be an asset for capital gains tax (CGT) purposes and assuming such IP is held on a capital account, the disposal/sale of such IP will trigger CGT. If South African companies are paying a royalty in respect of the use of the IP of a nonresident party, their tax deductions may be limited in terms of the Income Tax Act. This applies to licences for so-called tainted IP. In this regard, the Income Tax Act contains anti-avoidance provisions which target IP saleand-leaseback arrangements where certain parties are located outside the tax net. IP will be “tainted” in situations where South Africandeveloped IP is sold to a nonresident or tax-exempt entity and is then licensed back to the South African creator, or other South African end users who pay and claim as a tax deduction the licence fees to use such IP. While there are ways in CONTINUED ON PAGE 2