Current Reserve Bank ("SARB") policy strictly regulates the transfer of ownership of intellectual property from a South African resident to a non-resident by requiring prior approval ("exchange control approval").
On 18 March 2011, the Supreme Court of Appeal ("SCA") in Oilwell (Pty) Ltd v Protech International Ltd ("Oilwell") dismissed an appeal and held that exchange control approval is not required when a South African resident transfers ownership of intellectual property to a non resident.
This decision overturns the finding in Couve v Reddot International (Pty) Ltd 2002 BIP 7(W) ("Couve") that the assignment of intellectual property to a non-resident amounts to an "export of capital" requiring exchange control approval in terms of Regulation 10(1)(c) of the Exchange Control Regulations.
On 17 February 2010, the North Gauteng High Court in Oilwell disagreed with the view taken in Couve and held that Regulation 10(1)(c) does not apply to intellectual property rights.
On appeal, the SCA held that serious anomalies would arise if "capital" in the context of Regulation 10(1) (c) were to mean everything with monetary value. Further, given that intellectual property rights are territorial and akin to immovables, they cannot be "exported" in the sense envisaged by Regulation 10(1) (c).
In the SCA case, Oilwell had sought an order effectively reversing its transfer of intellectual property to the First Respondent on the basis that there had been no prior exchange control approval so that the transfer was void. The SCA also concluded that the lack of exchange control approval, where approval is prescribed, does not render the transfer void. This particular issue has been the subject of contrary and confusing court decisions.
The SCA's decision that prior exchange control approval is not required where intellectual property is transferred from a resident to a non-resident places the SARB in an awkward position since this is contrary to its strict policy contained in its Exchange Control Manual (which was revised in line with the Couve decision).
The SCA's decision also does not alter the requirement for exchange control approval in terms of Regulation 3(1)(c) in respect of the flow of royalties from South Africa to a non-resident.
The response of the SARB and the Legislature to this decision will be very interesting. An amendment to the Regulations, regulating intellectual property transfers appears to the most obvious response.
Written by Lesley Fitton, Partner, Leanne Mostert, Partner and Bernadette Versfeld, Partner at Webber Wentzel attorneys