South Africa to Liberalize Exchange Control for IP

On 22 February 2017, the South African Minister of Finance, Pravin Gordhan announced that the government intends to liberalize the current regime of exchange control restrictions placed on intellectual property transactions.

Consequently, South African entities will no longer be required to obtain Reserve Bank approval for standard offshore intellectual property transactions.

Government proposes that companies and individuals no longer need the Reserve Bank’s approval for standard intellectual property transactions. It is also proposed that the “loop structure” restriction for all intellectual property transactions be lifted, provided they are at arms – length and at a fair market price. Loop structure restrictions prohibit residents from holding any South African asset indirectly through a non-resident entity

Capital transactions into and out of South Africa have been the subject of exchange control approval since the 1930s with Treasury amending the Exchange Control regulations to include intellectual property rights within the definition of “capital” in 2012.

The move is a positive one for South African companies especially within today’s global knowledge economy that is driven by intellectual capital. As a result of previously first having to obtain Reserve Bank approval for the transfer of IP rights out of the country, South African entities were often unable to fully exploit their research and development efforts and derive maximum value from their intellectual property.

These companies were also often unable to obtain foreign investment as a result of the restrictions on the transfer of IP, resulting in the growth of our economy being hampered.

Following on from the announcement, the Reserve Bank updated its Currency and Exchanges Manual to give effect to the proposed changes and now provides that an authorised dealer may approve the outright sale, transfer and assignment of IP by a South African entity to an unrelated, non-resident party within an arm’s length transaction and at a fair and market related price.

The only requirement is that the authorised dealer has to have reviewed the sale, transfer or assignment agreement and an auditor’s letter or IP valuation certificate should accompany the request to provide a basis for calculations regarding the sale price.

Now that intellectual property is exempt from the previous hurdles, this should pave the way for an increase in foreign direct investment into South African businesses – especially those that are heavy in R&D.

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