The Israel Innovation Authority (IIA) announced last week that it issued new directives regarding royalty payments and know-how transfer. These are the first significant directives to be issued by the IIA since it was established in January 2016 and the activities of the Chief Scientist were transferred to it.

The new directives concern a number of key issues for companies receiving IIA support. The first is the annual rate of support repayments: pursuant to the new directive, the annual repayment rate for small companies (companies with a turnover of less than USD 70 million) will be reduced from 3.5% per annum to 3%, while the annual repayment rate for large companies will remain at 5%.

Another key change relates to the prohibition of transferring IIA funded know-how outside of Israel. Up until now, the sale of know-how developed with the support of the IIA to a buyer outside of Israel obligated the seller to obtain prior written approval from the IIA, and, in respect of the know-how transfer, the recipient of the IIA funding was required to pay an additional sum to the IIA of up to six times the sum of the IIA’s support, thereby severing all ties with the IIA. In this context, the term “sale” is defined very broadly and therefore, the granting of limited know-how usage licenses to entities outside of Israel had also been considered a “sale”, which severely limited the companies’ flexibility to trade their know-how.

The new directive enables companies, under particular circumstances, to grant know-how usage licenses to entities outside of Israel in respect of know-how accumulated with the support of the IIA and, concurrently, to continue developing the know-how in Israel, with the IIA’s support. The directive defines the royalties’ repayment mechanisms that would apply in such a case. Such mechanisms include a repayment schedule in lieu of a bullet repayment of the sums of the support with respect to the know-how being transferred by way of a limited license. The directive also sets out the considerations which should guide the IIA’s discretion when considering an application of this type and the repayment mechanism. We expect that companies whose know-how can be utilized in multiple fields will be the ones to enjoy the new regime.

These new directives constitute another step towards fulfilling the key objectives of the amendment to the Research & Development Law, which are: to increase the IIA’s flexibility in its activities promoting innovation, enable it to adjust the rules to the changing circumstances in the technology sector, and this, through administrative directives, instead of legislative acts as had been the case up until the amendment.