Controls on capital transactions, what South Africans refer to as exchange control, can take many forms. South Africa is one of a decreasing number of countries where the flow of currency or capital is regulated by national government.
The South African Reserve Bank (SARB) regulates the transfer of large sums of currency in terms of the Currency and Exchanges Act 9 of 1933 (C&EA) and the regulations passed thereunder, most particularly the Exchange Control Regulations (GNR.1111) (“the Regulations”).Until 2012, our courts derived the definition of “capital” from the Regulations, further supported by the judgment of Couve and another v Reddot International (Pty) Ltd 2004 (6) SA 425 (W) (“Couve”), which held that “capital” was to be interpreted broadly to include intellectual property, and consequently, all transactions pertaining to the expatriation of intellectual property by a South Africa resident to a non-resident, required the prior approval of the National Treasury. Failure to obtain such approval would result in the transaction falling foul of regulation 10 (1)(c) of the Regulations and rendered the transaction void ab initio.
In 2010, the Supreme Court of Appeal, in the matter of Oilwell (Pty) Limited v Protec International Limited and others 2011 (4) SA 394 (SCA) (“Oilwell”), overturned the Couve position in respect of the definition of capital and limited same to exclude intellectual property. The consequence thereof was that intellectual property could not form the subject of the export of capital as contemplated in the Regulations and accordingly, intellectual property transfers by South African residents to non-residents no longer required the approval of the National Treasury provided that fair value was received.
On 8 June 2012, the Oilwell position was reversed by the amendment of regulation 10 of the Regulations (Government Notice number R 445 of 8/6/2012,) to the effect that capital shall once again include any intellectual property right, whether registered or unregistered. The regulation further prohibited the export of intellectual property without SARB approval and licensing of IP may also be scrutinised in certain circumstances (between related entities where regulation 6(5) is relevant). The amended regulations (gazetted without explanation) provide that; the transfer of intellectual property by a South African resident offshore would, absent prior SARB approval, constitute a contravention of Regulation 10(1) (c). Such a transfer would be a criminal offence with the possibility of the imposition of a fine of no more than R250k and imprisonment of no longer than 5 years (per offence).
The future development of software / IP in South Africa for a foreign entity would constitute a transfer of IP. The exchange control approval of a contract for ongoing development work should be sought through the banking institution where the account that receives the foreign exchange is held.
What is ‘capital’? Although not defined in the regulations “capital” means “anything that had a monetary value” (Couve and Another v Reddot International (Pty) Ltd and Others 2004 (6) AS 425 (W) at 430E and 430H) and now includes any intellectual property right, whether registered or unregistered.
What is ‘export’? According to the amendment it includes “the cession of, the creation of a hypothec or other form of security over, or the assignment or transfer of any intellectual property right, to or in favour of a person who is not resident in the Republic.”
These regulations are relevant to research and development agreements, licensing arrangements, royalty payments and the transfer of IP between related entities.
The Constitutional Court’s decision in the case of South African Reserve Bank and Another v Shuttleworth and Another