South Africa: Amendment To Exchange Control Regulations Causes A Stir

Last Updated: 7 August 2012
Article by Ernest Mazansky

For many years the Financial Surveillance Department of the South African Reserve Bank (FSD), which administers exchange controls, has taken the view that intellectual property may not be exported without their approval (and, it must be said, approval was not readily forthcoming). The FSD relied on regulation 10(1)(c) of the exchange control regulations which states that no person may, without permission, export any capital or the right to capital.

Last year in the case of Oilwell Proprietary Limited v Protec International Limited, the Supreme Court of Appeal (SCA) held that an assignment of a trademark to a foreign company was not a breach of regulation 10(1)(c). (It will be noted that the FSD and the Minister of Finance were not parties to this litigation. The parties were the two contracting parties, and one of them sought to have the assignment set aside on the basis that it was in breach of regulation 10(1)(c).) The SCA held that the trademark remained in South Africa even though the party holding the right was not a resident of South Africa (in this sense it is similar to immovable property). Thus nothing was exported.

It was then argued that the ability to pay royalties to the foreign holder of the trademark would allow capital to be exported in the form of such royalties, and therefore facilitated, if not the export of capital, the export of the right to capital. The SCA's response was that royalties are not capital, but income, and thus were not covered by regulation 10(1)(c) (but could be covered by regulation 6).

Following this decision it was widely accepted that exchange control approval was no longer required for an export of intellectual property (though a payment of royalties would still require such approval).

Last month an amendment to regulation 10(1)(c) was published in the Gazette which states that capital includes any intellectual property right, and that the assignment thereof to a non-resident will be construed as the intellectual property having been exported from South Africa.

In a sense the Government's reaction to the Oilwell decision by changing the law is disappointing. Government has consistently stated that it is committed to the phasing out of exchange controls on a gradual basis. The evidence clearly supports this statement, as there have been significant, and sometimes even dramatic, relaxations of controls, especially in the past few years. But these relaxations have all been administrative relaxations which have been achieved by exercising the very wide discretions granted under the regulations. Now, following the Oilwell decision, it became clear that from a legal perspective there was an absolute right to assign intellectual property abroad without requiring approval. In a sense this was a structural relaxation (albeit by the court) rather than merely an administrative relaxation. And yet the Government's response has been to change the law to restore the status quo ante, rather than to accept that this is merely another step in the phasing out of controls.

There is an interesting spin-off of the Oilwell decision, and that is that whatever might be said about intellectual property would apply equally to a non-resident holding shares in a South African company. It is well known that the FSD and Treasury consider it to be a breach of exchange controls if a South African resident has an interest in an offshore structure which, in turn, has interests in assets in South Africa. This is colloquially referred to as a "loop". And the authorities rely on regulation 10(1)(c) in support of their stance. They accept that the shares themselves are not exported, because shares are merely a bundle of contingent personal rights which a shareholder holds against the company, and the company is located in South Africa, and thus there is no capital that can be exported. But the FSD always took the view that the ability to distribute dividends represented an export of a right to capital. If royalties are not, in terms of Oilwell, capital but income, then so are dividends, because clearly dividends are to shares what royalties are to a trademark.

It is noteworthy, however, that the amendment to regulation 10(1)(c) was confined to intellectual property, and did not deal with any other asset that could be potentially fall into the same category, such as shares in a South African company.

It must be noted, however, that the FSD's attitude is that the creation of a loop (unless approved of by the FSD or the Treasury, which is possible in certain circumstances) remains a breach of the exchange control regulations.

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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