What is a royalty agreement?
Is a royalty agreement legally binding in South Africa?
“Section 49A defines a “royalty” as any amount received or accrued in respect of the use, right of use or permission to use any intellectual property as defined in section 23I, or the imparting of any scientific, technical, industrial or commercial knowledge or information. Section 49B(1) levies a final withholding tax at 15% on royalties paid to or for the benefit of a foreign person from a South African source; sections 49D–49E provide for exemptions and reduced double-tax-agreement rates where the recipient submits the prescribed declaration to the payer before payment.”
“Section 90(1) provides that any condition in a contract relating to the sale of a patented article or to a licence under a patent of which the effect will be “(a) to prohibit or restrict the purchaser or licensee from purchasing or using any article or class of articles, whether patented or not, supplied or owned by any person other than the seller or licensor or his nominee; (b) to prohibit or restrict the licensee from using any article or process not protected by the patent; (c) to require the purchaser or licensee to acquire from the seller, licensor or his nominee any article or class of articles not protected by the patent; (d) to require or induce the purchaser to observe a specified minimum resale price … or (e) to prohibit or restrict the making, using, exercising or disposing of the invention concerned in any country in which the invention is not patented, shall be null and void”, subject to the exceptions in s 90(2). A royalty licence for a patent must be drafted so it does not fall foul of these prohibitions.”
“The Supreme Court of Appeal held that an assignment of intellectual property (a trade mark) to a non-resident was not, on the regulation then in force, an export of “capital” requiring Treasury consent, and — importantly for licensing — that non-compliance with an exchange-control regulation does not, of itself, render the underlying IP transaction void. (The exchange-control regulations were later amended in 2012 to bring IP back within “capital”.)”
“Section 22(3): “No assignment of copyright and no exclusive licence to do an act which is subject to copyright shall have effect unless it is in writing signed by or on behalf of the assignor, the licenser or, in the case of an exclusive sublicence, the exclusive sublicenser, as the case may be.” A royalty-bearing exclusive copyright licence therefore has no effect unless reduced to a signed writing.”
When you need a Royalty
- When you own a patent, brand, copyright work, registered design or valuable know-how and want to be paid a running royalty — a percentage of sales or a per-unit fee — every time a manufacturer, distributor, publisher or technology partner exploits it, rather than selling it for a once-off lump sum.
- When you are the licensee who will pay royalties to use someone else’s IP, and you need certainty on the royalty base, what counts as “net sales”, minimum royalties, audit exposure and — if you pay offshore — who bears the 15% withholding tax under the Income Tax Act.
- When the royalty flows across the border: a South African company paying a foreign IP owner (or a local owner licensing to a foreign user) must handle the 15% withholding tax on royalties, set an arm’s-length rate with transfer-pricing support, repatriate funds within 30 days, and meet the exchange-control reporting rules.
- When royalties form part of a franchise, technology-transfer, manufacturing, music, publishing or merchandising arrangement and you need the payment mechanics (base, rate, minimums, reporting, audit) to sit cleanly alongside the underlying licence.
- When you are buying, selling or raising investment in a business whose value depends on royalty income or royalty obligations, and a buyer, investor or auditor needs a clean written record of what is owed, on what base, and for how long.
What a Royalty should contain
Grant of rights and the licensed intellectual property
Identify the exact IP being licensed — patent and application numbers, registered trade marks, the specific copyright works, designs, or defined know-how — and the precise rights granted (manufacture, sell, distribute, sub-licence), the field of use, the territory, and whether the licence is exclusive, sole or non-exclusive. This is the licence that the royalty is the price for; an exclusive copyright licence here must be in signed writing under section 22(3) of the Copyright Act.
Royalty base and rate (the heart of the deal)
Define exactly what the royalty is charged on. Spell out “net sales” and every permitted deduction (returns, trade discounts, freight, VAT), or set a per-unit rate, a percentage of sub-licence income, or a hybrid of an upfront fee plus a running royalty. Ambiguity in the base is the single biggest source of royalty disputes, so worked examples and definitions matter more than the headline percentage.
Minimum (guaranteed) royalties and milestones
Where the licence is exclusive, set a minimum or guaranteed annual royalty so the licensor still earns even if the licensee under-exploits the right — and state the consequence of a shortfall: either the licensee tops up to the minimum, or the licensor may convert the licence to non-exclusive or terminate. Tie any upfront, milestone or signing payments to clear triggers.
Reporting, payment timing, currency and VAT
Require periodic royalty statements (typically quarterly) showing units, sales, deductions and the royalty due, with fixed payment dates, the payment currency, and how exchange-rate conversion is handled for cross-border deals. Address VAT, and — critically for offshore payments — which party bears the 15% withholding tax on royalties and whether royalties are quoted gross or net of it.
Audit and inspection rights
Give the licensor the right to appoint an auditor to inspect the licensee’s books and records to verify royalties, on reasonable notice. Include a “shortfall shifts the cost” mechanism — a common formula makes the licensee pay the audit cost (plus interest on the underpayment) where the audit reveals an under-reporting above a set threshold, e.g. 5%. Without an audit right, royalty figures rest entirely on the licensee’s say-so.
Withholding tax and exchange-control compliance
For cross-border royalties, address the 15% withholding tax under sections 49A–49H of the Income Tax Act (who withholds, gross-up or not, and the DTA reduction process requiring the recipient’s declaration before payment); confirm the rate is arm’s length with transfer-pricing support; and provide for the exchange-control repatriation-within-30-days and Authorised-Dealer reporting obligations on the South African party.
Term, post-expiry royalties and termination
Fix the duration and link it sensibly to the life of the underlying right. For a patent, mind section 90 of the Patents Act, which voids anti-competitive tie-in conditions in a patent licence; and remember that once the patent expires the monopoly falls away, so royalties cannot simply keep running for the patent itself (though continued payment for separate, still-secret know-how can be legitimate). Set termination triggers (breach, insolvency, non-payment, loss of the IP) and what happens to accrued and future royalties on termination.
Improvements, sub-licensing, warranties and indemnities
State who owns improvements the licensee makes, whether the licensee may sub-licence (and how sub-licence royalties are shared), and give warranties on ownership and the right to grant the licence. Allocate indemnities for third-party infringement claims and product liability, and confirm the IP owner keeps ownership of the underlying right throughout.
Royalty agreement vs outright IP assignment in South Africa
| Feature | Royalty agreement (licence) | Assignment (sale of the IP) |
|---|---|---|
| What the owner gets | Ongoing royalties tied to use/sales | A once-off purchase price |
| Ownership of the IP | Stays with the licensor | Transfers to the buyer |
| Payment model | Running royalty, per-unit or minimums | Lump sum (or instalments) |
| Ongoing relationship | Reporting, audits, quality control | Clean break once transferred |
| Cross-border tax | 15% withholding on royalties to non-residents (s 49B) | Capital gains / no royalty withholding |
| Risk and reward | Owner shares upside and downside of exploitation | Owner is paid up front, keeps no upside |
| Typical use | Patents, brands, music, software, franchising | Selling a business, group restructure, exit |
Common South African pitfalls
- Forgetting the 15% withholding tax on offshore royalties: where royalties are paid to or for a non-resident from a South African source, sections 49A–49H of the Income Tax Act impose a 15% final withholding tax that the payer must deduct and pay to SARS by the last day of the following month. A reduced double-tax-agreement rate only applies if the recipient gives the payer the prescribed declaration before payment — leave this out and the licensee can be left short or non-compliant.
- A vague or undefined royalty base: stating “5% of sales” without defining net sales, permitted deductions, returns, bundled products, related-party sales and currency conversion is the classic royalty dispute. The base, with worked examples, matters far more than the headline rate.
- No audit or reporting machinery: without a right to inspect the licensee’s books and a shortfall-shifts-the-cost clause, the licensor must simply trust the licensee’s self-reported figures and has no way to recover systematic under-reporting.
- Patent royalties that ignore section 90 and the patent’s life: under section 90 of the Patents Act, anti-competitive tie-ins (forcing the licensee to buy unpatented goods, or banning competing products) are null and void; and because the patent monopoly ends on expiry, royalties cannot simply run on indefinitely for an expired patent unless they are genuinely tied to separate, still-confidential know-how.
- No minimum royalty on an exclusive licence: granting exclusivity without a guaranteed minimum lets a licensee “sit” on the right, blocking the owner from licensing anyone else while paying little or nothing. Pair exclusivity with minimums and a conversion-or-termination remedy for shortfalls.
- Treating exchange control as “no longer relevant”: although routine related-party royalties no longer need prior Financial Surveillance Department approval since November 2024, the rate must still be arm’s length with transfer-pricing support, funds must be repatriated within 30 days, the flow must be reported through an Authorised Dealer, and non-standard structures (such as offsets) still require approval.
Frequently asked questions
Is a royalty agreement legally binding in South Africa?
Yes. A royalty agreement is enforceable as an ordinary contract under South African common law, overlaid by the IP statute governing the right being licensed (Copyright Act, Patents Act, Trade Marks Act or Designs Act) and by tax and exchange-control rules on the payments. There is no separate “Royalty Agreement Act” — but the underlying licence must meet its own formalities, such as the signed-writing requirement for an exclusive copyright licence under section 22(3) of the Copyright Act.
How are royalties paid to a foreign company taxed in South Africa?
Royalties paid to, or for the benefit of, a non-resident from a South African source attract a final withholding tax of 15% under sections 49A–49H of the Income Tax Act 58 of 1962. The South African payer must deduct it and pay it to SARS by the last day of the month following payment. A double-tax agreement can reduce the rate, but only if the foreign recipient gives the payer the prescribed declaration before the royalty is paid.
Do I still need Reserve Bank approval to pay royalties offshore?
For routine royalties and fees payable to related non-resident parties, prior approval from the SARB Financial Surveillance Department is no longer required as of November 2024. However, the rate must be fair, market-related and at arm’s length with supporting transfer-pricing documentation, the funds must be repatriated to South Africa within 30 days, and the payment must be reported through an Authorised Dealer. Non-standard arrangements, such as offset structures, still need prior approval.
What is the difference between a royalty agreement and selling the IP outright?
A royalty agreement is a licence: the owner keeps ownership of the patent, brand, copyright or design and is paid ongoing royalties tied to how the licensee uses or sells it. An assignment is an outright sale that transfers ownership for a once-off price, with no continuing royalty. You license for royalties when you want to keep the asset and share in its upside; you assign when you want a clean exit and a single payment.
How should the royalty be calculated?
Most royalties are a percentage of the licensee’s net sales, a fixed amount per unit manufactured or sold, a share of sub-licence income, or a hybrid of an upfront fee plus a running royalty. The crucial part is defining the base precisely — what “net sales” means, which deductions are allowed, how returns and bundled or related-party sales are treated, and how foreign currency is converted — because a vague base, not the headline rate, is what causes most royalty disputes.
What is a minimum royalty and do I need one?
A minimum (or guaranteed) royalty is a floor the licensee must pay regardless of actual sales. It is most important on an exclusive licence, where it stops a licensee from tying up the right while exploiting it poorly. A well-drafted clause makes the licensee top up to the minimum, or gives the licensor the right to make the licence non-exclusive or terminate if minimums are repeatedly missed.
Can royalties continue after a patent expires?
Generally not for the patent itself. Once a patent expires the statutory monopoly falls away and anyone is free to use the invention, so charging a royalty purely for the now-public patent has no real basis. Section 90 of the Patents Act 57 of 1978 also renders null and void certain anti-competitive conditions in patent licences (such as tie-ins forcing the licensee to buy unpatented goods or barring competing products). Royalties can legitimately continue after expiry only where they are genuinely attributable to separate, still-confidential know-how rather than the lapsed patent monopoly — which is why patent and know-how royalties are often split and drafted carefully.
Why do I need audit rights in a royalty agreement?
Because royalties depend entirely on the licensee’s own reporting of sales and deductions. An audit clause lets the licensor appoint an auditor to inspect the licensee’s books and verify the figures, usually on reasonable notice. A “shortfall shifts the cost” mechanism — where the licensee pays the audit cost and interest if the audit reveals under-reporting above a set threshold — gives the licensee a real incentive to report honestly.
Sources & authority
- Income Tax Act 58 of 1962 — LawLibrary consolidated version (ss 49A–49H withholding tax on royalties; s 49A definition; s 49B 15% rate; s 49D exemptions; s 23I “intellectual property”)
- Patents Act 57 of 1978, s 90 (certain conditions excluded from contracts relating to patent licences) — LawLibrary consolidated
- Patents Act 57 of 1978 — LawLibrary consolidated version (patent licences and recordal; s 90 “Certain conditions excluded from contracts”)
- Oilwell (Pty) Ltd v Protec International Ltd & Others [2011] ZASCA 29; 2011 (4) SA 394 (SCA) (exchange control and the validity of cross-border IP transactions)
- Copyright Act 98 of 1978, s 22(3) (exclusive copyright licence must be in writing and signed) — LawLibrary consolidated
This guide is general information, not legal advice. It reflects the law as at June 2026.