Reserve Bank flexes its muscles
Defending its decision to refuse to export intellectual property rights
ONE OF THE MAIN REASONS inventors and legal practitioners contravene exchange control regulations is the lack of knowledge about the types of transactions that require approval. A case pending in the Cape Town High Court has put that kind of ignorance back in the spotlight.
The SA Reserve Bank is defending an application by Promethea, a company registered in Vanuatu (a country comprising many islands in the South Pacific) to review the Bank’s decision to refuse approval for the expatriation of intellectual property (IP) from South Africa. Commercialisation and survival of the IP are now under threat, due to the parties’ alleged contravention of SA’s exchange control regulations, especially where it requires prior approval for the export of “capital” – which includes IP and the right to receive royalties from SA.
Over 2004/2005, Colin Vale and George Long developed prototype pressure and wick paraffin stoves. Patent applications were filed attorneys. “Once IP leaves SA you can easily use the IP to reduce South African tax (ie, by licensing SA operating companies) and ensure that foreign royalty income isn’t subject to tax in SA. It’s mainly for tax reasons that the expatriation of IP is strictly controlled,” Van Zantwijk says.
It’s thus imperative for South African IP holders who intend to take that IP offshore to obtain Bank approval in the following instances: Where IP is assigned to a foreigner. For example, where a South African inventor assigns his adhesive patents to 3M (US). Where a licence is concluded and consequently royalties paid to a foreigner. For example, where a McDonald’s franchisee in SA pays royalties to McDonald’s (SA) for both inventions. In 2006, Vale and Long assigned their patents to Promethea, a company registered in Vanuatu, in consideration for 10% bearer shares in the company. However, no exchange control approval for the assignment was ever obtained. The relationship between Promethea management and its inventors soured and certain patent rights have consequently been lost.
This isn’t an exceptional case. Back in 2006 a survey conducted on behalf of the SA Revenue Service trawling all IP databases and filtering out IP registrations that cited foreign applicants and South African inventors was conducted. It found 423 patent families only cited SA inventors and foreign applicants (typically in tax havens), which means the entity that filed also owned the patent. A patent family refers to a group of patents, patented in various countries.
“Since the Bank’s policy was to allow the expatriation of IP from SA in exceptional cases only, we can assume most of those patentees are following the Promethea case very closely,” says Anthony van Zantwijk, a partner at Sibanda & Zantwijk patent
for the use of its trademark. Where a foreigner is offered a licence at a discounted royalty rate. For example, where Wimpy SA allows its Botswana franchisee to use its trademark without payment of royalties by franchisee to Wimpy (SA). Where a foreigner is granted a licence permitting it to sub-license the IP and receives more from the sub-licensee than royalties paid to the SA licensor. For example, where an SA patent holder grants a licence to a Mauritian company in consideration for a royalty calculated at 5% of turnover and permits the Mauritian company to grant sub-licences to sub-licensees at 7% royalty, thereby permitting the Mauritian licensee to retain a 2% spread. Where promissory notes relating to royalty payments are transferred to a foreigner. For example, where grants Y a 10-year licence in consideration for annual royalty payments of R10m, evidenced by promissory notes (PNs) (ie, 10 x R10m notes) and then sells those PNs to a foreigner for R50m. Where IP is ceded to a foreigner as security. For example, where Foreign Co grants an SA company a loan and the SA company cedes its IP as security to the foreign company. Where a licensor permits a foreign licensee to institute infringement proceedings relating to the licensed IP and to retain damages. For example, where an SA owner of patents gives a Canadian a licence and allows the Canadian to institute infringement proceedings against an infringer in Canada, permitting the Canadian licensee to retain all damages awarded by the court. “There are no exceptions to the above categories. As such, even where a South African researcher has been contracted by a foreign
This isn’t an exceptional case. Anthony van Zantwijk