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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.
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