This document discusses intellectual property (IP) structuring and its tax implications. It provides an overview of IP, how it is defined for tax purposes, and considerations for transferring, funding, and commercializing IP both within South Africa and offshore. Key points covered include using a company structure to hold IP assets, qualifying for R&D tax incentives, the implications of thin capitalization and transfer pricing rules, and navigating exchange control when moving IP across borders. The goal is to maximize value from IP while managing tax obligations and protecting the IP assets.

1. LES South Africa Afternoon Discussion
IP Structuring and its implications
Andre Visser

2. What are we talking about?
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•
•
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What is Intellectual Property (IP)?
What must be done with it when created?
Does it have value?
How can further development or commercialisation be
funded?
• Can it be taken offshore?

3. Focus
•
•
•
•
Some of my own practical experiences
Loose thoughts
Not intended as a whitepaper on international tax structuring
Some recent tax changes highlighted

4. The concept IP for this discussion
• Very wide concept
• Registered IP: Trade Marks, Patents, Designs
• Also unregistered: client lists, formulas, know-how
• It is an asset
• It has value (in most instances more than is appreciated)
• Valuation difficult (reason for strict control)

5. Tax definition
• Section 25I of the Income Tax Act (ITA)
“means any
(a) patent as defined in the Patents Act, 1978, including
any applications for a patent in terms of that Act;
(b) design as defined in the Designs Act, 1993;
(c) trade mark as defined in the Trade Marks Act, 1993;

6. Tax definition
(d) copyright as defined in the Copyright Act, 1978;
(e) patent, design, trade mark or copyright defined or
described in any similar law or that in paragraph (a),
(b), (c) or (d) of a country other than the Republic;
(f) property or right of a similar nature to that in
paragraph (a), (b), (c), (d) or (e); and
(g) knowledge connected to the use of such patent,
design, trade mark, copyright, property or right”

7. Exchange Control
• Always relevant in any discussion on South African tax or
structuring
• No specific definition of IP, but it is accepted that the
same approach is followed as SARS
• Accordingly wide meaning
• Knowledge of Reserve Bank on nature of IP however
problematic

8. Where does it begin?
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•
•
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Invention, idea, concept, design
Usually an individual/s
Also in a corporate environment e.g. researchers
The individual quite often takes no further steps – leaves
IP where it is
• Cost often the determining factor as well as the unknown
factor – will it work?

9. Employee / Contractor
• Employment agreement NB
• Even if legislation and common law may provide
assistance, better to address IP and ownership in a proper
agreement
• Contractors / consultants: more often than not, no
arrangement. IP accrues to contractor
• To transfer later, becomes a difficult process, together
with tax and other costs

10. Transfer of IP
• IP is an asset
• There is always a cost involved in transferring an asset
• On disposal: CGT
Natural person 0 – 13.3%
Companies 18.65%
Trusts 26.64%
• Donation: donations tax 20%

11. The individual
• Separate IP into a vehicle
• Risk
• Structuring
• Raising of finance
• Commercialisation and disposal
• Tax advantages
• Problem: transfer will incur CGT or donations tax
• However, Section 41 to 47 of the ITA provides for rollover
relief

12. Mr A
Receives shares
Company
• No CGT, donations tax or other taxes
• No money has to flow
Transfer IP

13. In the Company
• IP may be further developed, commercialised and utilised
• Various options to consider
• Where is the IP owned?
• Should it be sold or licensed?
• What funding opportunities exist?
• Should we go offshore?

14. Research and Development
• R + D comes at significant cost
• Realisation that some incentives required to stimulate R +
D growth in South Africa
• Section 11D of the ITA (introduced in 2006)
• Basic principle: Deduction of up to 150% of expenditure
incurred
• General principle: expenditure (costs) may be deducted
for tax purposes
• Section 11D allows additional 50% deduction

15. • Recent changes to tighten control and requirements
• Tax payer must
• Be carrying on trade
• Have actually incurred the expenditure
• R + D in South Africa
• Directly and solely for R + D
• “trade” – pre-production expenses may be deducted once
trade commences
• Activity must be
• Discovery of novel, practical and non-obvious
information
• Creation of patent, design or computer program
• Creation of knowledge essential to the above

16. • Not eligible
•
oil, gas or mineral exploration or prospecting;
•
administration, financing, compliance or similar
expenditure;
•
the creation or enhancement of trade marks or goodwill;
•
development of internal business processes;
•
market research, market testing or sales or promotion;
or
•
social research, including arts and humanities.

17. Funding
• To develop IP, funding is essential
• In broader terms * loan funding
* equity
• Equity is provided by investors or owners. Usually
evidenced by a share certificate
• If an offshore investor involved, share certificate must be
endorsed for exchange control purposes (often forgotten)
• Capital is fixed and investors earn dividends
• Dividends are subject to 15% dividends tax. SA Companies
excluded
• To repay requires a process (usually share repurchase)

18. • Some flexibility if an instrument such as preference share
is utilised
• Loan funding: could be from shareholders, financial
institutions or government
• From shareholders – capital is advanced subject to
repayment. Usually no, or limited interest
• From financiers – interest will be payable. Security?
• IP could be provided as security, deed of security
registered in appropriate registry.
• Interest payment will be deductable by the company,
reduces taxable income
• If offshore funder – exchange control approval required

19. Thin Capitalisation
• Recent changes to Section 31 of ITA
• One single anti-avoidance provision under the ITA
• The principle is that transactions between residents and
non-residents must be on an arms-length basis
• If not, SARS may impose arms-length provisions and tax
accordingly
• For instance, if capital is regarded as insufficient, portion
of loan funding interest, may not be deductable for tax
purposes

20. Transfer Pricing
• “affected transaction”
• Transaction,
operation,
scheme,
agreement
understanding between connected resident and nonresident parties
• Any term or condition different to that which would
have existed between arms-length parties
• Accordingly, loan transactions may be adjusted to armslength terms
• Previous safe harbour rules no longer applicable

21. Exchange Control
• Thin capitalisation also relevant for exchange control. If
75% or more of shares held by non-resident, then local
borrowing restrictions may apply
• Reserve Bank will also scrutinise loan arrangements
• repayment terms
• Interest payable (excessive interest not allowed)

22. Government Funding
• Number of government research grants and facilities are
available
• However, in terms of Intellectual Property Rights from
Publicly Financed Research and Development (IPR Act),
such IP must be commercialised for the benefit of people
of South Africa
• Description of IP very wide (excludes copyright)
• Cannot deal with such IP without consent
• National IP Management Offices (NIPMO) established for
this purpose

23. • NIPMO operates in a similar manner to the Reserve Bank
insofar as control of IP is concerned
• Also strict requirements for transfer of IP (especially
offshore)
• In our experience, stricter than Reserve Bank

24. Should IP be separated from the business?
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•
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Creates planning flexibility
Isolates the risk of the business from the IP
Assists with international planning and expansion
Creates tax efficiencies through licensing arrangements
within the group
• Properly manage IP
• Can spin of business and retain IP
• Separates income from IP from business income
• Assists with franchising
• Capital raising (e.g. through a bond issue)

25. • However, there may also be certain disadvantages
• Enforcement of IP in certain jurisdictions
• Certain accounting difficulties
• Proving damages

26. Public funding
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If IP portfolio is strong
IP may be securitised. Not common in South Africa
Require separate vehicle for this
IP is packaged into a bond, listed on the bond exchange
and traded
• Cheaper than bank financing
• Essentially a loan from the public in return for a return

27. Should we move offshore?
• Considerations
• Low tax jurisdiction to minimise tax costs
• Maximise royalties to move income to IP holding
entity
• Maximise tax deduction for local entity
• Minimise royalty withholding taxes through double
tax treaties

28. Difference between tax objectives and
IP objectives
• Tax:
•
Create optimal tax structure
•
Reducing tax liability
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Minimise value to minimise taxes
d
• IP:
• Protect IP (i.e. Not in risky jusidictions)
• Maximise value for enforcement, and defendable
royalty rates

29. Basic conditions
• House IP in low tax jurisdiction
• Maximise royalty flows to that jurisdiction
• Ensure proper protection of IP rights and enforceability of
IP rights
d
• Avoid liquidation issues
• Ensure strong corporate law environment (e.g. Piercing
corporate veil)
• “Kangaroo countries”
• International treaties to enforce IP

30. Transfer of IP : Exchange Control
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•
•
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Must obtain exchange control approval
Difficult
Must value the IP (arms-length principle)
If approved, IP may be transferred on receipt of proceeds
in South Africa
• Oilwell decision seemed to create a possibility, but this
was changed by amendment on 8 June 2012

31. Transfer of IP: Tax
• Transfer pricing provisions relevant
• Both SARS and Reserve Bank cautions of no-tax or low tax
jurisdictions
• Mauritius: Popular destination from South Africa
• Low Tax (0 – 3%) and double tax treaty within South Africa
and various other countries
• Close to South Africa
• CGT will apply on transfer

32. How to set up entity
• Subsidiary – with approval of Reserve Bank
• Individuals – use R4 million foreign investment
allowance
• Trust – cannot invest offshore

33. Tainted IP
• Section 23 of ITA
• Tainted IP
• IP owned by connected person
• Was utilised in the business of taxpayer
• Transferred ownership to non-resident
• South African person, who retains use of IP, not entitled to
deduction in South Africa

34. Controlled Foreign Company
• Income earned by CFC is taxed in South Africa (Section 9D
of ITA)
• Foreign company in which South Africa residents hold
more than 50% of participation or voting rights (excluding
headquarter company)
• Certain exclusions, e.g. DTA or CFC pays 75% or more of
tax in South Africa, in other jurisdiction

35. Break the link
• Connected person or South Africans should not own the IP
/ foreign company
• Most popular solution: foreign trust
• Trust will hold the shares in the foreign company.
Beneficiaries under the trust will receive eventual benefits
• Significant planning required to totally break the link due
to imputation rules
• Must be set up by non-resident
• Funding of the trust must be at arms-length (transfer
pricing)

36. • Donations will impute income to South African donors
• Section 25B of the ITA:
if income accrues to an ascertainable beneficiary of a trust, income
will be taxed in the hands of the beneficiary in South Africa

37. Royalty tax withholding
• Foreign company will enter into licence agreement/s with worldwide
entities
• If to South Africa, be careful of tainted IP provisions and royalty
withholding tax (RWT)
• 15% fo the amount of any royalty paid to non-resident
• Royalty = right of use or permission to use IP (as defined), as well as
imparting scientific, technical, industrial or commercial knowledge or
information

38. Management and Control
• If effective management and control is in South Africa, the
entity will be regarded, from a South African tax
perspective as a South African resident
• All income and capital gains will be taxed in South Africa
• Practically: appoint foreign director/s
• Hold board meetings in the specific country
• Day to day management must take place in that country

39. Loop structure
• Holding of an equity interest in South African company or
assets, via an offshore structure
Offshore
entity
Mr A
SA
Company
• Prohibited by exchange control authorities
• Could obtain approval, however, very rare and difficult

40. Conclusion
• Proper structuring requires careful upfront planning
• Tax and exchange control issues are quite often a
significant challenge
• Structuring should not be to the detriment of IP
protection, or create an unnecessary administrative
burden

41. THANK YOU
QUESTIONS?
Andrè Visser
Partner
PHONE
FAX
EMAIL
WEBSITE
+27 (0) 12 432 6206
+27 (0) 12 432 6544
andre.visser@adamsadams.com
www.adamsadams.co.za
PHYSICAL ADDRESS
Lynnwood Bridge
4 Daventry Street
Lynnwood Manor
Pretoria
South Africa
POSTAL ADDRESS
PO Box 1014
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0001
South Africa