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22 April 2019
South Africa has significant exchange control regulations in place that restrict and require approval for payments in international IP licensing relationships. In particular, Regulations 10(1)(c) and 10(4) of the South Africa Reserve Bank (SARB) exchange control regulations apply.
Regulation 10(1)(c) prohibits "[entry] into any transaction whereby capital or any right to capital is directly or indirectly exported from the Republic" without "permission granted by Treasury in accordance with such conditions as the Treasury may impose".
For the purposes of Regulation 10(1)(c), Regulation 10(4) stipulates that:
South African entities must apply for approval through an authorised dealer (usually the entity's commercial bankers) in a foreign currency. Exchange control approvals are invariably granted on the basis that the consideration payable:
Typically, where the IP right in issue has been commercialised or commercialisation is imminent, exchange control requires an appropriately motivated valuation substantiating the price to be furnished.
The SARB has placed several restrictions on capital flows to and from South Africa. The restrictions are regulated under the SARB exchange control regulations. Commercial banks will authorise some payments where:
In general, non-resident licensors are subject to tax in South Africa only:
Withholding tax is imposed on royalty payments for a number of different types of intellectual property, including patent royalties, copyrights, trademarks and design rights. Under certain circumstances, parties may be relieved from the duty to deduct tax – the most common being where a double tax treaty, concluded between South Africa and the jurisdiction in which the licensor is resident provides that the rate of withholding will be reduced.
Where no reduction in the rate of withholding tax on royalties is possible, the current rate of deduction is 15% of the royalty. This rate may increase during 2019. If a licensor has suffered a withholding, it may be able to claim credit for South African tax withheld in its home jurisdiction, either under local law or under any applicable double tax treaty.
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