IN 120: Deduction in respect of intellectual property

Background:

The use of intellectual property normally carries a charge in the form of a royalty. Such payment will typically fall within the recipient’s gross income and the payor will be allowed to claim a deduction under section 11(a) for the expenditure incurred in paying the royalty.

Section 23I, enacted in 2009, prohibits, subject to certain exceptions, a deduction of any expenditure incurred for the right or permission to use intellectual property qualifying as “tainted intellectual property" and other expenditure which is directly or indirectly related to such expenditure.

Intellectual property will be regarded as “tainted” intellectual property if it was the property of a taxable person or an end user.

The term “taxable person” as defined in section 23I(1) is broadly defined to mean any person other than those persons specifically excluded by the definition of that term - it typically refers to a South African resident person.

The term “end user” is defined as a taxable person or a person with a permanent establishment within South Africa that uses intellectual property or any corresponding invention during a year of assessment to derive income. Therefore, exempt taxpayers and non-residents will not fall into the definition of end user and section 23I will not apply to these classes of persons.

Find a copy of IN 120 here.

30/05/2022