Exchange Control Ruling on Assignments of Trade Marks
A South African High Court decision handed down on 17 February 2010 has ruled that a trade mark assignment entered into without prior exchange control approval from the South African Treasury does not constitute a contravention of South African Exchange Control Regulations.
The South African Reserve Bank has in recent times required that South African exchange control residents who assign trade marks and other forms of intellectual property to a foreign entity require prior approval for such a transaction from the Treasury. This practice is based on an interpretation of Regulation 10(1)(c) of the South African Exchange Control Regulations:
“10(1)(c) No person shall, except with permission granted by the Treasury and in accordance with such conditions as the Treasury may impose –
(a) …. (b) …. (c) enter into any transaction whereby capital or any right to capital is directly or indirectly exported from the Republic.”
A High Court decision during 2004 Couve and another versus Reddot International (Pty) Limited and others 2004 (6) SA 425 (W) (“the Reddot case”) ruled that assignments of patent rights from South African exchange control residents to foreign entities are subject to regulation 10(1)(c). In consequence they require prior approval from the Treasury under exchange control regulations, failing which they are null and void.
The Reddot judgment has been interpreted by the tax and exchange control authorities in South Africa to apply to the assignment of all forms of intellectual property, not only patent rights. This interpretation has come under scrutiny in a recent case in the High Court in South Africa. The case in question is Oilwell (Pty) Limited v Protec International Limited and Others (unreported as yet) (“the Protec case”).
In the Protec Case the Court has ruled that the assignment of a trade mark to a foreign entity without prior approval from the South African Treasury does not constitute a contravention of Regulation 10(1)(c) of the Exchange Control Regulations. In addition it has ruled that even if such an assignment were a contravention of Regulation 10(1)(c) the assignment agreement would not be rendered null and void, ab initio.
The Court considered the judgment in the Reddot case and came to the view that the Protec case and the Reddot case could be distinguished both on their facts and the nature of the asset being transferred. Reddot involved a share transaction and a change in ownership of a patent application. The Protec case considered whether the assignment of a trade mark from a South African resident company to a foreign company was a contravention of Regulation 10(1)(c). Based on principles of interpretation of legislation, the Court was of the view that it would be wrong to interpret Regulation 10(1)(c) as applying to assignments of trade marks.
On the issue of assignments of trade marks without prior approval rendering the assignments null and void, the Court found that an assignment should not be rendered invalid in instances where there had been non-compliance with the Regulations.
There are four key conclusions to be drawn from this decision:
- The Protec decision applies only to assignments of trade marks and does not overturn the Reddot decision on assignments of patent rights requiring Exchange Control approval.
- Only time will tell if this decision will be taken on appeal or challenged by the tax and exchange control authorities.
- Only time will tell how widely this decision will be applied or if it will be interpreted in a narrow way. Other cases dealing with assignments of trade marks may distinguish themselves on their facts.
- The decision was confined to exchange control issues and does not deal with many challenging tax issues arising from assignments of trade marks from South African exchange control residents to foreign entities.
Our cautious advice at this stage is to continue to secure exchange control approval for foreign assignments of trade marks until such time as there is greater clarity on these issues.
(For any enquiries about exchange control and tax issues arising from assignments of intellectual property please contact Spoor & Fisher at firstname.lastname@example.org or 012 676 1111.)