Dear Clients and Friends,

The Israeli Innovation Authority (previously known as the Office of the Chief Scientist of the Israeli Ministry of Economy) (“IIA” / “OCS”) has published important new rules regarding use of knowhow that was funded by the IIA.

The new rules enable IIA-funded companies to license IIA-funded knowhow to foreign corporations subject to IIA approval, payment of a reduced fee and certain reporting obligations. Until now, any license concerning IIA-funded knowhow (which was broader than a license to market, distribute or sell products) required payment of a lump sum transfer fee to the IIA that could reach up to six times the amount of the IIA funding of the company – as much as the fees to transfer the knowhow abroad.

The new licensing rules relieve the restrictions on global business activity of IIA-funded companies, enabling more technological and commercial cooperation. The purpose of the new rules is to make it easier for IIA-funded companies to exploit their knowhow on a global basis, to share it with foreign corporations (including their foreign affiliates), and to create new business opportunities.

The new rules are also meant to incentivize foreign corporations that acquire or invest in IIA-funded companies to maintain the technology of the Israeli companies in Israel, while being able to share the technology globally (within the group or with other parties) at a reasonable cost.

The new rules affect M&A, investment and commercial transactions which involve IIA-funded companies or companies that hold IIA-funded know-how. The new rules also provide an opportunity for IIA-funded companies to reexamine the structure of their operations in order to share their know-how with non-Israeli partners or group companies.

The new rules are not easy to implement, in particular if the transaction is between related parties, or if the consideration is not monetary or fixed. However, the new rules are just a starting point, and not a bad one. The IIA already stated it will adjust the new rules along the way if necessary, either by amending them or agreeing to practical arrangements. Herzog Fox & Neeman is working with the IIA to create a special IIA licensing regime for multinational corporations that will relieve MNCs even further in order to incentivize them to maintain their technology in Israel.

It is therefore highly recommended to consider the implications of the new rules, both regarding future transactions as well as regarding restructuring possibilities of on-going operation of IIA-funded companies. Also note that the new rules may bear various tax implications that need to be carefully considered.

For the full update >> click here

Should you require any further information or clarification regarding the issues discussed in this circular, please do not hesitate to contact us.

Herzog Fox Neeman