South Africa: Royalties And Other Payments, Currency Conversion And Taxes

Last Updated: 28 February 2019
Article by Kevin Dam

Is there any legislation that governs the nature, amount or manner or frequency of payments of royalties or other fees or costs (including interest on late payments) in an international licensing relationship, or require regulatory approval of the royalty rate or other fees or costs (including interest on late payments) payable by a licensee in South Africa?

South Africa has significant exchange control regulations in place that restrict and require approvals for payments in international licensing relationships.

The exchange control regulations of the South Africa Reserve Bank (SARB) are applicable are Regulations 10(1)(c) and 10(4).

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'.

Regulation 10(4), stipulates for purposes of 10(1)(c) that: 'capital' shall include without derogating from the generality of that term, any IP right, whether registered or unregistered; and 'exported from the Republic' shall include, without derogating from the generality of that term, the cession of, the creation of a hypothec or other form of security over, or the assignment or transfer of any IP right, to in favour of a person who is not resident in the Republic.

An application for approval is made by the South African entity through an authorised dealer in foreign currency, which is usually the entity's commercial bankers. Exchange control approvals are invariably granted on the basis that: the consideration payable represents a price payable between notional arm's-length parties; and that it is fair and reasonable in all the circumstances; and further, invariably, is supported by that an auditor's confirmation that the proposed price meets these requirements.

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.

Are there any restrictions on transfer and remittance of currency in South Africa? Are there are any associated regulatory reporting requirements?

The SARB has placed several restrictions on capital flows to and from South Africa. The restrictions are regulated in terms to the SARB exchange control regulations. The authorisation of some payments where the parties are unrelated, the payment is for fair value (as supported by an auditor's letter) and is part of an arm's-length transaction may be authorised by commercial banks.

In what circumstances may a foreign licensor be taxed on its income in South Africa?

In general, non-resident licensors are only subject to tax in South Africa on income that is attributable to a permanent establishment in South Africa of that licensor; or to the extent that tax is required to be withheld by the licensee.

Withholding tax is imposed on payments of royalties for a number of different types of IP including patent royalties, copyrights, trade marks and design rights. There are certain reliefs from the duty to deduct tax, the most common being where a double tax treaty (DTT) concluded between South Africa and the jurisdiction in which the licensor is resident provides that the rate of withholding is to be reduced.

Where no reduction in the rate of withholding tax on royalties is possible, the current rate of deduction is 15 per cent (this rate may increase during 2019) of the royalty. 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 the provisions of any applicable DTT.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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