The doctrine of substance over form empowers our courts to ignore the form of a transaction and give effect to its proper substance. Accordingly, when faced with a "sale", despite any "licence" labels, our courts will apply the tax consequences that normally attach to a sale ‐ the receipt by the "seller" may be regarded as capital in nature and therefore subject to CGT and not Income Tax; and the expenditure by the "purchaser" may only be claimed in terms of s11(gC) or s11(e) instead of s11(a) or s11(f).
Having said this, irrespective of the capital nature of the receipt, if the consideration may still be included into the gross income of the "seller" if the consideration is "an amount received or accrued from another person, as a premium or like consideration … for the use or right of use of any patent as defined in the Patents Act …, or any design as defined in the Designs Act …, or any trade mark as defined in the Trade Marks Act …, or any copyright as defined in the Copyright Act …, or any model, pattern, plan, formula or process or any other property or right of a similar nature" (see paragraph (g)(iii) of the Gross Income definition).
Furthermore, a sale incorrectly labelled as a licence may not entitle the purchaser to s11(gC) allowances as ownership in the underlying IP would probably not have been acquired by assignment.
In a nutshell, where a "licensor" completely and permanently divests himself of all rights in IP, one should consider treating the consideration as a capital receipt and further consider whether the provisions of paragraph (g)(iii) of the Gross Income definition are satisfied. However, in order to qualify, the "licence" must endure for the remaining life of the IP, and be absent of any voluntary termination provisions. Furthermore, the "licensor" should not receive the benefit, or suffer the loss from any appreciation or depreciation of the IP, respectively.
A word of caution: Royalties are typically calculated as a percentage of profits (and translated to a percentage of turnover in order to guard against artificial manipulation of profits by the licensee). Where the "sale" does not set a "fixed price" or cap on "royalties" payable, irrespective of the true substance of the agreement, the case of Deary v Deputy CIR may apply to tax the "licensor" on the "royalty" receipts.
On the other hand, let's assume that X "sells" various IP to Y and immediately secures itself a perpetual exclusive licence in respect of the IP. Is the first transaction in fact a sale? These types of transactions have been subject to much judicial consideration in the US, where such a transaction would not be regarded as a "sale" for tax purposes. It is arguable that similar principles apply in our law. For instance, in the case of Zandberg v van Zyl 1910 AD 302, Solomon, JA held:
"The object which a purchaser of anything has in view is to acquire the dominium in that thing. Conditions of this nature attached to a contract of sale would have the effect of depriving the owner of nearly all the benefits that attach to ownership and they are of so extraordinary a nature as to raise the most serious doubt whether in fact it was ever intended that the property should pass."