Deductibility of Royalties: A Recent Case that Ruffled Feathers

• Jurisdiction: South Africa
• Pages: 190-201
• Author: I Du Plessis
• Published date: 05 September 2019
• Citation: (2006) 17 Stell LR 190
• Date: 05 September 2019

DEDUCTIBILITY OF ROYALTIES: A RECENT

CASE THAT RUFFLED FEATHERS

[DISCUSSION OF THE JUDGMENT OF WAGLAY J IN

CASE NUMBER 11454 IN THE TAX COURT]

*

I du Plessis

BCom LLB LLM

Lecturer, University of Stellenbosch

1 Introduction

The Tax Court, sitting in Cape Town, recently had occasion to

consider the deductibility of royalty payments.

1

In general it may be said

that royalties are payments for the use of another’s intellectual property,

such as patents or trade marks. As such, royalty payments are made on a

daily basis in the commercial world. It has always been widely accepted

that royalty payments are deductible from income in terms of the general

deduction formula

2

and taxpayers have for years claimed this deduction

without objection from the South African Revenue Service. In the case

under discussion, the Commissioner for the South African Revenue

Service (the ‘‘Commissioner’’) successfully challenged this accepted view

regarding the deductibility of royalties, the court finding that the

payments were of a capital nature and therefore not deductible.

2 The Facts

The taxpayer manufactures supplies and markets certain products in

South Africa. Together with a number of other companies, the taxpayer

dominates the market in South Africa. Each of these companies conducts

its operations under a brand name, which it either owns or is licensed to

use. In terms of the taxpayer’s memorandum it is obliged to use a certain

corporate name by permission of its holding company with the

stipulation that on withdrawal of such permission, it would cease to

use this name or trade mark.

The taxpayer’s holding company, which is incorporated in England

and Wales, is the owner of the trade mark and other licensed marking

indicia (collectively referred to as the trade mark) used by the taxpayer.

Until 1997, the taxpayer used this trade mark free of charge. In 1997 an

agreement was entered into between the taxpayer and its holding

company in terms of which the taxpayer obtained the non-exclusive and

non-assignable authorisation to use this trade mark, whilst the holding

* I would like to thank Chemus Taljaard and Pieter Oosthuizen for reading an earlier draft of this paper.

1

Case no 11454.

2

Emslie, Davis, Hutton & Oliver Cases and Materials 350; De Koker Silke on South African Income Tax

(2005) par 7.25.

190

(2006) 17 Stell LR 190

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