Client Update | The Israeli Innovation Authority’s New Special Licensing Rules for Multinational Corporations
6 September 2018
The Israeli Innovation Authority (IIA), formerly known as the OCS, has published important new rules for multinational corporations regarding licensing of knowhow that was developed with IIA funding.
In a Nutshell
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- MNC -Israeli or non-Israeli multinational corporations whose consolidated annual turnover in the calendar year prior to the license was more than US$2billion.
- License IN: IIA-funded knowhow of a multinational corporation or of a corporation that is wholly-owned (directly or indirectly) by a multinational corporation.
- License BY: the group entity that owns the IIA-funded knowhow.
- License TO: the multinational corporation or to corporations that are wholly-owned (directly or indirectly) by the multinational corporation.
- The license: (i) must be limited to the needs of the multinational corporation and the other group licensees, and (ii) must not limit the activity of the licensor (the IIA-funded company).
IIA Approval and conditions – the MNC Group License requires the IIA approval, which will be granted only if: (i) the license is limited to the MNC’s group entities; (ii) the license does not harm or limit the activity of the IIA-funded company; (iii) the license will result in a greater economic benefit to the Israeli economy than would have been achieved without the license; (iv) any new knowhow that will be developed by the IIA-funded group entity in connection with the IIA-funded knowhow will be owned this entity; and (v) the IIA may require the MNC to meet additional conditions.Supporting Documents – to establish these criteria and receive IIA’s approval of the MNC Group License, the MNC should submit the following documents: (i) a business plan of the MNC and the IIA-funded group entity regarding the license of the IIA-funded knowhow; (ii) a transfer pricing study or an economic valuation regarding the consideration to be paid to the IIA-funded group entity for the MNC Group License; and (iii) an undertaking of the MNC and of the IIA-funded group entity regarding the ownership of new knowhow to be developed by the IIA-funded group entity.
Special IIA license fee for the MNC Group License –for the MNC Group License, the relevant IIA-funded group entity will be required to pay to the IIA a special MNC license fee equal to 5% royalties from its income deriving from the MNC Group License (on an arm’s length basis), up to a total amount of 1.5x the IIA funding (plus accrued interest) received by the IIA-funded group entity in connection with the licensed knowhow. At the same time, the new rules do not limit the power of the IIA to approve exchange of licenses without any payment to the IIA.Reporting AND Compliance –
- At the end of each calendar year during the IIA’s approval period, the MNC and the IIA-funded group entity will file a report to the IIA regarding their compliance with the business plan that was approved by the IIA.
- If the IIA determines that any of the conditions for the IIA’s approval of the MNC Group License was not met, the IIA may change or cancel the approval and require that the IIA-funded group entity pays to the IIA full transfer fees (up to 6 times the amount to the IIA funding plus accrued interest) as if the IIA-funded knowhow was fully transferred outside of Israel.
