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Do you pay royalties to a foreign licensor? If so, then you have these two important obligations

by , 29 September 2015
SARS has recently taken a lot of interest in the taxation of intellectual property. And now, every day, many taxpayers who had been floating under the radar are being caught out.

So it is very important for you to ensure that your intellectual property licenses are in order so as to avoid trouble with Mr. Taxman.

International Intellectual Property (IP) licenses are no exception! If you are a South African who pays royalties to a foreign licensor, you have the following two obligations:

Obligation#1:
 
You must pay a withholding tax of 15% on the licensor's behalf. This can be done by eFiling.
 
It is worth noting that this tax rate can be reduced by a Double Taxation Agreement (DTA).
 
If an intermediary licensee exists between you and the foreign licensor, you must consider issues relating to beneficial ownership of royalty payments as it'll have an effect on the DTA.

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You should consider the following points when determining the beneficial owner of the royalty receipts:
 
·         Legal rights of ownership. In other words, rights to possess, use, manage, alienate, liberate, waste, consume or destroy the receipts;

·         Economic indicators of ownership and control. In other words, who controls the receipts; who participates in capital gains and related profits; who holds the rights of liquidation; etc.
 
Obligation#2:
 
Make sure you receive exchange control approval for the license from the Department of Trade and Industry.
 
Note that, whilst it is required to receive approval to effect payment of royalties, not getting approval shouldn't impact the deductibility of royalties incurred.
 
 
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