Israel’s Innovation Authority (the IIA, formerly the Office of the Chief Scientist) has issued new rules regarding the licensing of IIA-funded know-how for use by multinational corporations outside of Israel. These rules supplement the rules published in May 2017, which enabled licensing of IIA-funded know-how to entities outside of Israel under particular conditions, while concurrently continuing to develop the know-how in Israel with IIA support.
As is well-known, the IIA imposes several restrictions on companies with regard to the know-how developed under IIA funding. These restrictions serve to ensure that this know-how remains in Israel and continues to be developed in Israel. Pursuant to the provisions of the Encouragement of Industrial Research, Development and Innovation Law, 5744 – 1984, any Israeli company desiring to sell know-how developed under IAA funding outside of Israel is obligated to receive the IIA’s approval prior to executing the sale transaction. It must also pay an additional transfer fee to the IIA that could reach up to six times the sum of the initial IIA funding.
Since the term “sale” was defined very broadly in the law, even the granting of limited licenses to entities outside of Israel to use the know-how is deemed as such. This raises difficulties for international corporations with development centers throughout the world that wanted to create cooperative efforts between their various R&D centers, but do not want to pay substantial sums in respect of the sale of know-how.
The new rules issued by the IIA aim to address this issue. They prescribe that subject to certain conditions, the granting of a license to a related multinational corporation outside of Israel to use know-how will be subject to the payment of royalties at a rate of 5% of the licensing fee customarily received from a multinational corporation, without being deemed as “sale”.
According to the new rules, any company that receives IIA support may file an application to grant a license to a multinational corporation to use know-how developed under IIA funding, provided that the license does not prevent the company receiving IIA support from carrying out its business plan, and provided that the grant of such license generates a greater economic benefit to the Israeli economy than could have been achieved had the license not been granted.
Pursuant to new rules a multinational company is defined as a company whose consolidated turnover during the year prior to the filing of the application exceeded USD 2 billion. An application may only be submitted if the multinational company controls the company receiving IIA support, or if the company receiving IIA support heads the group and the license is to one of its subsidiaries. In both instances, the rules emphasize that the know-how being used must be limited to the multinational corporation’s needs and that the license granted must not restrict the activities of the licensor receiving IIA support. In other words, it must not be an exclusive license.
It should be noted that one of the conditions to be imposed as part of an approval is that both the licensor and the multinational licensee submit an annual report to the IIA regarding the Israeli company’s compliance with its business plan, which was used as the foundation for the license application.
Since the implementation of the new rule is entirely at the discretion of the IIA’s Research Committee, it is important to keep abreast of the developments and to ascertain how the new rules will be implemented in individual cases, and specifically, how “greater economic benefit to the Israeli economy” (which serves to justify the granting of a know-how sharing license) requirement will be implemented. Despite the uncertainty, this could be an interesting alternative for multinational corporations with subsidiaries receiving support or that received support in the past from the IIA, as well as for future transactions involving companies being supported by the IIA.