Tax Relief to Licensee Under IP Law - South Africa
In a law decision, the South African Supreme Court of Appeal (SCA) on March 13, 2007 granted tax relief to licensees of intellectual property with regard to royalty payments made to their licensors. The court held that the royalty payments made to licensors by the licensees were revenue and not capital in nature and therefore were tax-deductible by the licensee taxpayer.
The court reasoned that the anticipated and actual recurrent nature of the disputed payments was a strong indicator that they were related to revenue rather than capital. The recurrent cost of obtaining the use of something that belongs to another is usually recognized as being of a revenue nature. The court compared the royalty payment with that of rent payments for use of premises, stating that both were in the production of income and of a noncapital nature, and thus were deductible for the purposes of determining taxable income as royalty expenditure and taxpayer income earning are co-related.
Despite the fact that the decision dealt primarily with trademarks, it is hoped that all intellectual property (patents, designs, copyright, etc.) license or royalty payments will continue to be tax-deductible under Section 11 of the Income Tax ACT 58 of 1962.
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