The international transfer of South African intellectual property has become a hotly debated - and keenly litigated - topic in the last few years. This is on account of the South African Reserve Bank's (the Reserve Bank) policy to only allow the disposal of South African intellectual property to a non-resident in limited circumstances. This policy seems at odds with the recent relaxation of other exchange control policies.

Although intellectual property may be transferred to an unrelated third party with permission from the Reserve Bank, applications for transfer to related non-residents will be declined. In fact, in our experience, even if the parties are unrelated permission is often declined.

It is different if the intellectual property is licensed to a non-resident. If the licensee is unrelated, no permission is required whereas permission is required if the licensee is related.

Any Reserve Bank approval granted in respect of any licensing arrangements would be made subject to the condition that the royalties are to be repatriated to South Africa and converted to Rand within 30 days of the royalty having been paid.

The rationale for the Reserve Bank's approach seems to be an attempt to preserve South African capital. This rationale has found resonance in the Couve v Reddot International (Pty) Ltd 2002 BIP 7 (W) judgment. The court - consisting of a single judge - held that the effective transfer of ownership in patents to a non-resident by a South African resident fell foul of Exchange Control Regulation 10(1)(c), and the agreement was accordingly null and void.

The debate centres on the fact that neither the Exchange Control Regulations nor the Currency and Exchanges Act mention intellectual property. Nonetheless, the court held that the use of the words 'directly/indirectly' before the term 'export' meant that the intention of the legislator was to afford the widest possible interpretation to 'export'. The court also held that the rights in and to patent applications and the concomitant right to receive royalties are 'capital'. This is as such rights have a monetary value; ownership in respect of patents are altered by assignment; and expenditure in relation to patents are considered as capital expenditure from a tax perspective.

A single judge in another division refused to follow this interpretation. In the Oilwell v Protec International Ltd 2010 JDR 0107 (GNP) judgment, it was stated that as there was no reference to intellectual property in either the Regulations or the empowering legislation, the application of the regulation to intellectual property cannot be inferred. In applying the rules of the interpretation of statutes, the court held that where a contravention is visited by a penalty, the wording of the prohibition must be narrowly and restrictively interpreted. The broad and expansive interpretation afforded the regulation in the Reddot case was therefore incorrect. The court further found that intellectual property was not 'capital'. It accepted the argument that the fact that a foreign entity became entitled to exercise a right in South Africa, as it would when it acquired a South African trade mark, does not mean that such rights have been exported. The judge further accepted that the territorial nature of the trademark is decisive. No contravention of Regulation 10(1)(c) was therefore found.

Our law presently seems to be at an impasse with two conflicting judgments of equal ranking. Until the courts reach clarity on this issue, what is certain is that South African residents face an uphill battle in their attempts to contradict the Reserve Bank on its decided stance. We recommend that exchange control approval be applied for whenever intellectual property is disposed of.

Written by: Afton Appollis, Associate, Tax, and Mariette Cruywagen, Senior Associate, Tax at Cliffe Dekker Hofmeyr