Transfer Of Intellectual Property and Exchange Control Approval
08 July 2010
Posted by: Author: Kevin Dam
Transfer Of Intellectual Property And Exchange Control Approval
In recent years, there has been much debate over the question whether
the assignment of intellectual property from a South African entity or person
to a foreign entity or person requires the exchange control approval.Regulation 10(1)(c) of the Exchange Control Regulations, which was promulgated
in 1961 provides that:"No person shall, except with permission granted by the
treasury and in accordance with such conditions as the Treasury may impose, enter into any transaction
whereby capital or any right to capital is directly or indirectly exported
from the Republic.”
This issue was initially answered in the case of Couve and Another v
Reddot International (Pty) Limited and Others 2004 (6) 245 (W) ("Reddot”).
In the case of Reddot, the High Court – Witwatersrand Local Division, as
it was known then – decided that where intellectual property assets were
assigned or transferred to a foreign entity or person, it would be necessary to
procure the necessary exchange control approval.Failure to do so would render
the transaction null and void, ab initio.
The case of Reddot pertained to the assignment of rights to a patent
and, in this case, the court found that because the transaction was illegal, in
the sense that it was entered into in contravention of Regulation 10(1)(c), it
was null and void, ab initio, as if the transaction never occurred.
In the recent case of Oilwell (Pty) Limited v Protec International
Limited and Others (case number 44838/08 – which judgment was delivered on 17
February 2010) ("Oilwell”), the North Gauteng High Court declined to follow the
decision in the Reddot case. The Oilwell case pertained to the assignment
of trademarks and, in this case, the court ruled that due to the territorial
nature of intellectual property rights registered in South Africa, these rights
are not exported.The court ruled that all that may be exported are the
proceeds generated by the exercise of the rights pertaining to the intellectual
In the Oilwell case, the court found that Regulation 10(1)(c), when
enacted in, was not intended to apply to intellectual property rights, because
the commercial impact of such application would obviously be restrictive on
trade and industry.
Accordingly, it was found that the assignment of intellectual property
without the prior treasury approval did not constitute a contravention of
The court further stated that in accordance with the rules of
interpretation of statutes, which dictates that where a contravention is
visited by a penalty, as in the present case, the contravention of Regulation 10(1)(c) would be subject to a fine of R250 000 or five years’ imprisonment or
both, as imposed in terms of Regulation 22, the wording of Regulation 10(1)(c)
must be interpreted both narrowly and strictly.
The court came to the conclusion that to interpret Regulation 10(1)(c)
as including the assignment of a trademark, amounts to an approach that is too
expansive and broad, and consequently approach that erroneous.It is of
interest to note that in the Oilwell case, the court recorded that the
provisions of the exchange control manual have no legal status and is therefore a mere
internal guideline and not a source of any legislative power for discretion.
Therefore, following the Oilwell decision, exchange control approval is
not required for the assignment of intellectual property; however, exchange
control approval would be required for the export of capital/funds resulting
from the commercialisation and exploitation of such intellectual property.
It is therefore important that when structuring cross-border
transactions involving the commercialisation of South African intellectual
property, that the necessary exchange control approval is procured from the
exchange control authorities.DM Kisch Inc. provides a full spectrum of services
pertaining not only to registration and protection of intellectual property,
but also to the structuring of transactions aimed at the commercialisation and
exploitation of intellectual property.
Source: By Kevin Dam (TaxTALK)