ARTICLE
20 February 2025

Viewing The SARB's Exchange Control Revisions Through An IP Licensing Lens

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Fairbridges Wertheim Becker

Contributor

Fairbridges Wertheim Becker was formed by the coming together of two longstanding, respected law firms, the first being Fairbridges established in 1812 in Cape Town, the second Wertheim Becker founded in 1904 in Johannesburg. This merger makes Fairbridges Wertheim Becker the oldest law firm in Africa, with its strong values and vision, it also makes them the perfect legal partner to assist you in achieving your business objectives.
A recent scenario involved a South African company structuring an intellectual property (IP) licensing agreement with an offshore partner.
South Africa Intellectual Property

A recent scenario involved a South African company structuring an intellectual property (IP) licensing agreement with an offshore partner. The local entity intended to settle royalties via an offset arrangement – effectively exchanging one financial obligation for another. This approach, however, fell outside the specific remits of the country's Exchange Control Rulings and consequently required prior approval from the South African Reserve Bank (SARB). This highlights that, despite recent regulatory updates aimed at simplifying cross-border payments, not all transactions automatically qualify under the new guidelines.

In order to modernise oversight of foreign transactions, the SARB has introduced several revisions to the Exchange Control Regulations. These changes simplify certain procedures – particularly those involving Customer Foreign Currency (CFC) accounts – while ensuring the country's financial system remains protected.

Streamlined Use of CFC Accounts

One of the most notable developments involves how resident businesses can use CFC accounts to settle transactions for South African exporters or pay for imported components in local manufacturing. Historically, this process required multiple steps to validate each party's role and confirm alignment with foreign exchange thresholds. Under the updated framework, businesses have a more direct route for processing and receiving foreign currency, so long as transactions remain within current-account activity. This means companies may promptly settle legitimate invoices and interest obligations through CFC accounts, yet must refrain from using these accounts for capital-type transactions – such as equity investments or dividend distributions – unless specifically approved.

Royalties, Fees, and Transfer Pricing

Another dimension of the regulatory update focuses on paying royalties or service fees to non-residents. When these transfers align with South Africa's transfer pricing rules, local companies generally no longer require separate approval from the Financial Surveillance Department. However, organizations are still responsible for confirming, at a senior management level, that their transfer pricing documentation complies with SARS requirements, and that fees are in line with fair market rates.

It is important to note that certain royalty arrangements, especially those featuring offset structures, are not automatically exempt from scrutiny. For instance, if a South African business plans to settle royalties that incorporate an unusual payment flow, the SARB approval may still be required. In line with the Currency and Exchanges Manual for Authorised Dealers, offset transactions or other non-standard arrangements are subject to prior Financial Surveillance Department approval. Meanwhile, recurring royalty payments tied to invoices older than twelve months can be settled interest-free, provided the company obtains annual confirmation from an independent auditor.

Permitted vs. Restricted Transactions

Although these revisions indicate the SARB's commitment to fostering smoother cross-border transactions, they also underscore the distinction between permissible current-account activities and restricted capital outflows. Routine operational expenditures generally fall into the first category, meaning they can be processed swiftly via CFC accounts. In contrast, any payment that involves capital movements – such as loans, equity stakes, or dividends – still demands the SARB's explicit approval.

Why the IP Licensing Scenario Matters

The offset-based royalty example reveals the SARB's delicate balancing act: while working to streamline everyday commercial activities, the regulator retains its right to review and approve payments that do not conform to standard exchange control norms. The updated regulations broaden business latitude, but with greater freedom comes a heightened need for vigilance.

Ultimately, any entity planning a cross-border payment – especially when it involves IP licensing or arrangements that deviate from standard processes – should carefully evaluate whether the SARB approval is necessary. Consulting legal and financial advisors can help businesses tap into the benefits of the updated Exchange Control Regulations while steering clear of potentially costly compliance pitfalls.

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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