If you plan on going international with your intellectual property (IP) and capitalizing on your IP’s value, it is important to think about where you will create and hold your IP.
South Africa’s exchange control regime can present significant challenges for those looking to sell or commercially exploit IP internationally.
By creating and holding IP outside of South Africa, you can avoid the barriers and restrictions imposed by exchange controls, allowing you to focus on maximizing the potential of your IP. It may not be the most beneficial choice for South Africa’s economy, but protecting and promoting your own interests should be a top priority.
The South African government may reconsider exchange control rules to attract investment rather than deter it. In view of our current economy, South Africa seems to stand to gain more than it stands to lose.
South Africa’s Current Exchange Control Regime
As South Africa’s technology sector continues to grow, Intellectual Property (IP) intensive industries still face challenges in accessing offshore markets for the commercialisation of IP, as well as securing financing and protection for such transactions.
South Africa’s current strict exchange control regime is unique and a deterrent for foreign investors by severely limiting the transfer and licensing of South African-owned IP. Under the current rules, both the licensing and transfer of South African-owned IP to a non-resident, whether related or not, requires approval from either an authorised dealer (a bank) or the South African Reserve Bank.
Is Relief on the Horizon?
The National Treasury’s 2020 Budget Review suggested that there may be a move towards relaxing these restrictive exchange controls regulations in order to allow South African residents to fully leverage the commercial potential of their IP. It indicated that “the export of intellectual property for fair value to non-related parties will not be subject to approval”.
However, two years on no changes have yet been implemented.
South Africa follows an international tax regime and has transfer pricing rules in place to ensure value is received for IP in the country. The extra layer of bureaucracy in the form of South African Reserve Bank approval is therefore largely unnecessary. The auditor’s letter required for such approval is an administrative burden, particularly as there are no auditing standards regulating the valuation of IP in South Africa.
Relaxation of exchange control regulations is likely to increase investment into South Africa as technology and other IP-intensive companies feel more confident in dealing with the transfer of IP assets developed in the country.
Conquering the Challenges: IP Investment and Fintech in South Africa
South Africa’s exchange control regime presents a significant challenge for Fintech and intellectual property-relevant deals in the country. The strict approval rules for transfers raise concerns for venture capital investors regarding global expansion and means that many owners hold their IP in offshore vehicles.
For the time being, Companies that intend to sell or otherwise commercially their IP internationally are often advised to ensure that IP is created and held outside of South Africa
IP Holding Companies
IP holding companies are separate legal entities that manage and hold a business or group’s intellectual property assets such as patents, trademarks, designs, copyright, trade secrets, and other proprietary know-how.
These companies can be used to strategize a business or company structure and reduce administrative costs and minimize tax. They can protect and shield intellectual property assets in the event of litigation, financial difficulties, or insolvency of the operating company.
The IP holding company handles the registration, enforcement, assignments, marketing, and licensing of the group’s intellectual property assets and licenses them to other companies or third parties. By creating a separate entity for the purpose of owning and exploiting intellectual property assets, they can be used as security and can be sold or licensed independently.
Taking IP Global
South Africa offers a strong infrastructure and potential for growth. However, setting up an offshore company can facilitate ease of trade and pay suppliers and receive funds in foreign currency without needing approval from the Reserve Bank – but it is important to ensure that IP is created within the offshore jurisdiction to avoid it being considered South African IP.
As a result, more and more clients are considering establishing offshore operations in various countries like Mauritius, Gibraltar, the Isle of Man, Guernsey, the UAE, Cyprus and Malta. This is due to their flexibility in terms of accessing new markets, the ability to generate wealth in these locations, and the potential for future pathways for residency and immigration.
Additionally, many entrepreneurs believe that the greatest benefit will come when their venture is acquired by a multinational corporation. IP holding companies that are well-structured and located in countries with low corporate taxes and no exchange controls are particularly appealing to buyers, as they often pay a premium for these operations.
Malta and Cyprus are two countries that offer particularly attractive options for IP holding and development. Malta provides a tax exemption on income derived from patents, copyrights, and trademarks, as well as relief from double taxation through its extensive double tax treaty network. Cyprus, on the other hand, offers an efficient tax rate and legal protection as an EU Member State and signatory of major IP treaties and protocols. Under the Cyprus IP regime, up to 80% of qualifying profits generated from qualifying assets are deemed tax-deductible, resulting in an effective tax rate as low as 2.5%.
In addition to tax advantages, both Malta and Cyprus have strong legal systems and infrastructure, making them ideal locations for IP holding companies. However, it’s important to note that in order to register an offshore IP company, business owners must comply with economic substance requirements, including detailed business plans, evidence of decision-making taking place in the chosen jurisdiction, and information on employees and their qualifications.
While both Malta and Cyprus offer a range of benefits for IP holding companies, Cyprus may be the more attractive option due to its lower effective tax rate and EU membership. Regardless of the chosen location, establishing an offshore IP holding company can help businesses reduce or avoid unnecessary layering of fiscal and regulatory obligations, as well as take advantage of reduced withholding tax rates on royalties and dividends.
Contact us to find out more.
Foreign Residency
Many South Africans are also looking to obtain residency through investment in countries such as the UK, Guernsey, Spain, and the United Arab Emirates, as well as more affordable options like Cyprus, Malta, Mauritius, and Portugal.
In Cyprus, foreign nationals can obtain Permanent Resident Permits for €300,000 within two months, with no language requirements and only the requirement to visit Cyprus every two years to maintain their status.
Mauritius has reduced the minimum investment required for an occupation permit to $50,000 and extended the validity of such a permit from three to ten years. Holders are allowed to bring their spouses, parents and dependents under 24 to work or live in Mauritius.
Portugal offers both a Golden Visa and a Passive Income Visa for non-EU citizens, as well as a special tax regime for Non-Habitual Residents.
Singapore has also recently launched its Overseas Networks and Expertise pass to attract talent.
