Taxpayers, especially startups, need to be aware of the tax implications of transferring intellectual property ("IP") abroad. Such transferral may result in unexpected tax bills, and it is advisable to seek tax advice before engaging on cross-border ventures.
In terms of section 49A of the Income Tax Act 58 of 1962, a “royalty” means any amount that is received by or accrues in respect of-
a) the use or right of use of or permission to use any intellectual property as defined in section 23I [of the Act], or
b) the imparting of or the undertaking to impart any scientific, technical, industrial or commercial knowledge or information, or the rendering of or the undertaking to render any assistance or service in connection with the application or utilisation of such knowledge or information.
Section 49B pf the Act levies a withholding tax on royalties, at 15%, where any amount in connection with a royalty is paid by a resident to a foreign person, and such royalty is in accordance with section 9(2)(c ), (d), (e ) or (f) of the Act deemed to be from a source within South Africa. There are in some instances exemptions to this.
In terms of section 9(1) of the Act, a royalty is means “any amount that is received or accrues in respect of the use, right of use or permission to use any intellectual property as defined in section 23I. An amount, in terms of section 9(2) with reference to royalties, is received by or accrues to a person from a source within the Republic if that amount:
c) constitutes a royalty that is attributable to an amount incurred by a person that is a resident, unless that royalty is attributable to a permanent establishment which is situated outside the Republic;
d) constitutes a royalty that is received or accrues in respect of the use or right of use of or permission to use in the Republic any intellectual property as defined in section 23I.”
(e) is attributable to an amount incurred by a person that is a resident and is received or accrues in respect of the imparting of or the undertaking to impart any scientific, technical, industrial or commercial knowledge or information, or the rendering of or the undertaking to render, any assistance or service in connection with the application or utilisation of such knowledge or information, unless the amount so received or accrued is attributable to a permanent establishment which is situated outside the Republic;
( f ) is received or accrues in respect of the imparting of or the undertaking to impart any scientific, technical, industrial or commercial knowledge or information for use in the Republic, or the rendering of or the undertaking to render, any assistance or service in connection with the application or utilisation of such knowledge or information.
Accordingly, where a resident pays the royalties to a foreign person, then such royalties are sourced in South Africa, as well as in respect of the use or right of use or of permission to use intellectual property in South Africa.
Article 12(1) of the OECD MTC defines a “royalty” as “payments of any kind received as consideration for the use of, or the right to use, any copyright of literary, artistic, scientific work including ….any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience.” Article 12(4) also provides that royalties arising in a Contracting State and paid to a resident of the other Contracting State shall be taxable only in that other state. Article 12(4) of the OECD also contains transfer pricing provisions, which serves to adjust the royalties taxable, in that the excess (than what would have been payable at arms’ length) will be taxable according to the laws of each Contracting State.
The meaning of “arising” of a royalty in the some double taxation agreements ("DTA's"), for example, is not always clear. It should be noted that where a taxpayer imparts knowledge (of a commercial or scientific experience) or relating to intellectual property outside of South Africa, and receives payment for such imparting of intellectual property, it may be taxable in the country in which it imparts the intellectual property. In the absence of a DTA between South Africa and that other country, it is possible that the income may be subject to double taxation.
Taxpayers also need to be wary of disposing of/ assigning intellectual property, to a connected party (as defined in the Act) as that would trigger the transfer pricing provisions of section 31 of the Act. Accordingly, the transfer of any rights or intellectual property would need to be adjusted if the disposal price was not marketed related and SARS may impose a value that would have been payable had it been conducted on an arms-length basis. The South African Reserve Bank or an authorised dealer of the Reserve Bank would also need to approve of the cross-border assignment of the rights, and a fair market related price would need to be paid for the rights.[1]
There are exemptions in some instances. To enquire whether you qualify for such exemption, contact Spence Attorneys at info@spencelaw.co.za
This article is for information purposes only and should not be construed or substituted for legal advice. Always obtain independent legal advice.
[1] Exchange Control Circular No 7/2017 (IP Circular)