Intellectual Property License Holders Score Major Victory Against SARS
In an unprecedented and unanimous decision by the South African Supreme Court of Appeal (“SCA”) on 13 March 2007, licensees of intellectual property have been granted tax relief with regard to royalty payments made to their licensors.
The SCA held that royalty payments made by licensees to licensors was revenue and not capital in nature and therefore, tax deductible in the hands of the licensee tax payer. In this case, the court held that the annual royalty payment was ‘in consideration for the use of the licensed marks and the licensed marketing indicia’. Its purpose was to procure for the licensee the use - not ownership – of the intellectual property of another from its sole and rightful owner for the duration of the licence agreement. Therefore, the ownership of the intellectual property remained with the licensor throughout and, upon termination of the license agreement, whether by virtue of non-renewal after a period of time or of the termination thereof on notice by either party, the licencee would automatically cease to have the right to use the intellectual property in question.
The SCA then went on to reason that the anticipated and actual recurrent nature of the disputed payments is a strong indicator that they are related to revenue rather than capital. The recurrent cost of obtaining the use of something which belongs to another is usually recognized as being of a revenue nature. The court paralleled the royalty payment with that of rent payments for use of premises and stated that both were in the production of income and of a non-capital nature; thus being deductible for the purposes of determining taxable income. The royalty expenditure was so closely linked to the income-earning operations of the tax payer that it was held to be revenue in nature and thus tax deductible.
Despite the decision dealing primarily with trade marks, it is probable that all intellectual property (including patents, designs and copyright, etc.) licence or royalty payments will continue to be tax deductible under section 11 of the Income Tax Act 58 of 1962.