Landmark judgement on the export of IP for the Silicon Cape?

Reposted from http://www.justinstanford.com/2011/03/landmark-judgement-on-the-exp...

On the 18th of March, the Supreme Court of Appeals (SCA) delivered judgement on Case 295/10, in what appears to be a landmark ruling with a direct impact on the Silicon Cape community and the local tech industry.

A point of debate over the years has been whether intellectual property is regulated by our Exchange Control laws, meaning that South African entrepreneurs and companies cannot freely export their IP from the country without getting prior approval from the SA Reserve Bank.

The decades-old ExCon regulations talk about controlling the export of ‘capital’ (originally setup to protect SAs foreign reserves), without being specific as to what capital means. SARB along the way decided that capital must mean anything of monetary value, including intellectual property, and IP lawyers adopted this view, generally advising clients along similar lines to be assured of no comeback from SARB.

This limitation has been seen as one of many stumbling blocks for South Africa in becoming a properly global tech-startup player, putting off local entrepreneurs who are worried about limitations this might impose on the global growth of their businesses, and concerning foreign investors who are worried about the IP being locked-in to the country. This has sometimes lead to some costly structuring or re-location of entrepreneurs and startups to ‘externalise’ the IP legitimately.

This interpretation of the regulations however has never been tested in court — until now. In what I believe to be a possible landmark ruling, the SCA in this judgement has clearly put forth the opinion that IP does not constitute capital in terms of the regulations, and goes into significant detail around it.

I am not a legal expert by any stretch of the imagination, but it would seem that, in effect, unless Treasury decides to change the laws, this now means that we have at last some clear legal precedent, that in theory should support the free and unrestricted export of IP.

As I understand it, the receiving of royalties or licensing fees against IP that resides in the Republic is still governed by ExCon, as are a number of other things, but otherwise, it would appear that going forward, IP created here is not necessarily locked-in here or subject to intensive and drawn out processes for externalisation, as was previously believed. I would love to invite those in the legal profession to provide more colour to this with comments.

Read the full text of the judgement on the SCA website athttp://www.justice.gov.za/sca/judgments/sca_2011/sca2011-029.pdf.

 

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Comment by Brendan Hughes on May 9, 2011 at 15:27

Here's a comment from an attorney and a heads up for those considering a quick export of IP to a foreign based entity in light of this judgment - the transfer of an IP asset may still trigger a capital gains tax liability on the basis that the IP asset, when transferred, should result in the conversion of the asset into capital. Capital gains tax cannot be avoided by transferring valuable IP, for example, for R1 - the valuation of the asset has to be fair and must stand up to SARS scrutiny, otherwise both taxation and penalties may be imposed. So it seems there is, at the very least, a window of opportunity to assign IP offshore, but capital gains tax should be assessed and taken into account before making any decision to do this.

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