B SA Limited was incorporated in South Africa 9 May 1924. C plc is the controlling shareholder of the company.
On 24 October 1979 B SA Limited amended paragraph 1 of its memorandum of association by adding the following to it:
The corporate name “B SA Limited” is adopted and used by permission of (C) Limited. On withdrawal of that permission B SA Limited will cease to use such name and will immediately change its corporate name and trading name so that neither includes the mark (B) or any trade mark, trade name, name or other mark of ownership belonging to (C) Company Limited, or any other trade mark, trade name, name or other mark of ownership likely to be confused therewith.
During 1996 C plc decided that users of its licensed marks and the licensed marketing indicia should be required to pay a royalty. To this end it commissioned an independent company to determine the value of its licensed marks and licensed marketing indicia. This study identified the role played by the brand in the various business segments in which B SA Limited was involved. Based on this information calculation was made in respect of the profit actually generated by each segment which could be attributable to the licensed marks.
Consequent upon the above B SA Limited made the following royalty payments during the relevant years of assessment: 1997 1998 1999 : : : R 40.190.000; R 45.150 000; and R 42.519.000. B SA Limited then claimed a deduction of the above amounts in calculating its taxable income in its Income Tax Returns for the years 1997, 1998 and 1999.
The Revenue Service issued an assessment disallowing the deduction of the royalties in calculating the taxable income. B SA Limited objected and appealed against the disallowance of the deduction.
The Court ruled as follows:
The consideration paid in terms of the Trademark Licence Agreement enabled the Respondent to trade in its economic sphere with a valuable brand. The
payments made were made with the purpose of maintaining and growing market share. The agreement was crucial as it is the foundation and pre-requisite of
any entitlement to conduct the Appellant’s business in the manner and form that it conducts its business. The payments in issue are thus in substance a purchase price for a business which gave a substantial market share in the defined area, similar to a franchise agreement. The payments made to obtain these rights must therefore by its very nature be a capital expense.
In the statement of agreed facts it is recorded that the price of (the products in which Appellant trades) are fixed. As a result, the only way that
the Appellant can distinguish its products from its competitors is by its brand. Brand is thus the nucleus to secure and guarantee the Appellant a market share.
Having regard to what I have said above I am satisfied that the expenditure incurred by the Appellant in paying for the licensed marks and the licensed
marketing indicia are expenses which are capital in nature and the Respondent was thus entitled to disallow such expense as it properly did.
B SA Limited’s appeal against the assessment was dismissed.
Case 11454 24 aug 2005 THE TAX COURT OF SOUTH AFRICA CAPE TOWN royalty offshore