There are four main ways for South African individuals and companies to internationalise their intellectual property (IP) and or expand their businesses into international markets, law firm Cliffe Dekker Hofmeyr director Stephan Spamer noted during the Isle of Man investment indaba on November 2, hosted by investment promotion agency Finance Isle of Man.

Speaking to investment management companies and investment advisers, he illustrated the thought process the law firm applies to externalise IP that has been built in South Africa by using an example of a local engineer and inventor who developed software and hardware products, but needed more investment to complete the process of developing them into a business.

"One cannot easily find investment funding in South Africa currently and the engineer's attempts to source funding from the US were unsuccessful, as the US investors were not planning to invest in South Africa," he said.

The first way to take IP out of the country is also the simplest route, which is to license its use and let the international company pay for the use. One problem is that ownership remains in South Africa and not all seed funders are prepared to fund such a structure.

This approach, however, did work well if an individual or company wanted to expand a business and did not need funding and only sought access to another market, noted Spamer.

The second way to internationalise a business or IP is to set up a sales agreement to offshore services or products. The South African Reserve Bank (SARB) encourages this, but requires that the processes be done at arm's length, and an independent evaluator must appraise the value of the IP and this evaluation also enables the business to raise funding offshore.

This approach did have tax implications, as there would be taxes due on money brought back to South Africa and/or capital gains tax on the sale of the IP. However, seed funders were often happy to take this approach as it was a quick and easy means to internationalise IP, he said.

A core consideration in this approach is determining the value of the IP, as the value can often vary considerably between evalutators, he added.

The third approach is to develop new IP and build a new business in an international market.

"The SARB considers the ownership of IP developed within the country to be vested in the country.

"However, if software developers, for example, in South Africa enter into a contract with an offshore company and are remunerated at arm's length for their services and are continuously assigned to work for the offshore company, then the IP would be vested with the offshore entity."

In this approach, it was important for the company to inform the SARB about this, otherwise it could be deemed to not have proof of regulatory approval. Seed investors wanted confirmation of who owned the IP and it was important to understand that even paying money into South Africa to develop IP needed Reserve Bank notification, Spamer said.

Meanwhile, the fourth way to internationalise a business or IP, and which is a new concept in terms of international transfer pricing, is through a co-development agreement. In this case, a South African company and an international company provide funding to develop the first version of a service or product, with both companies holding rights to this version.

A second version developed separately by one of the companies would then be owned by that company and it would have the right to free use of this version.

"Further, in terms of transfer pricing, an international company in this scenario would always be affiliated with the South African company that it developed the IP with and there may be considerable cross-pollination between the companies, ongoing support, development and/or services. These would be governed by transfer pricing rules and require the fair allocation of profits.

"Therefore, it is important for companies taking this route to always benchmark their interactions with their international partners on an ongoing basis to ensure that each gets a fair share of the profits," Spamer said.

Through this approach, a South African company could continue to develop services or products and have some of the profits shifed to South Africa through the transfer pricing rules, he added.

Further, in some cases, more substance is built up in the international market than locally, with the South African company becoming a cost centre that derives service costs.

"This is one approach to commercialising industrial IP in international markets, with most of the substance of a company ending up in the international market with the South African company serving as a cost and support centre. However, this process would take no less than two to three years," he advised.

The SARB's policies, similar to those of other central banks, were aimed at retaining IP in the country and discouraging the movement of IP out of the country or, if the IP was taken out, that the country was compensated for it in the form of taxes, he added.