Quick Answer: A foreign-owned Israeli company can receive IIA R&D grants under the Encouragement of Research, Development and Technological Innovation Law 5744-1984. Grants cover 30% to 50% of approved R&D budgets (85% for early-stage Tnufa grants), repaid through royalties of 3% of revenue from the funded product until the grant principal is returned. The catch is a hard restriction on transferring the funded technology out of Israel without IIA approval. That restriction becomes a major negotiating point in any M&A transaction involving an Israeli company with IIA history.

Israel funds a remarkably high proportion of its private-sector R&D through government grants. The Israel Innovation Authority (IIA) distributes roughly NIS 1.8 billion per year to Israeli companies across all industries and stages, from first-idea feasibility checks to large-scale industrial consortia. For a foreign investor setting up or acquiring an Israeli tech subsidiary, IIA grants are often available and genuinely valuable, but they come with strings that need to be read before signing anything.

The two strings that matter most are: a royalty repayment obligation on revenue from the funded product, and a restriction on moving the funded technology out of Israel. Neither is fatal. Many multinationals run Israeli R&D centers that have received IIA funding for years without issue. But the restrictions need to be structured into the corporate setup from the beginning, and they need to be disclosed and negotiated carefully in any acquisition.

This guide covers the IIA's grant tracks, how a foreign-owned company applies, the royalty mechanics, and what happens when a company with IIA funding history is acquired or when the parent wants to pull developed technology into a non-Israeli group entity.

1. What the IIA is and how it works

The Israel Innovation Authority was established in 2016 by the Israeli Innovation Authority Law 5776-2016, replacing the Office of Chief Scientist (OCS) that had operated under the Ministry of Economy since the 1960s. The IIA is now an independent statutory body (not a government ministry department), with its own board, budget, and operational autonomy. Its legal mandate derives from the Encouragement of Research, Development and Technological Innovation Law 5744-1984 (the R&D Law), which is the primary statute governing all grant obligations.

The IIA operates through a network of sector-specific divisions: Startups Division, Industrial R&D Division, International Collaboration Division, and others. Each has its own committee process, evaluation criteria, and grant tracks. Applications, annual reports, and all IIA correspondence now go through the IIA's online portal at go.iia.org.il. The portal operates in Hebrew, which is one of the practical reasons most foreign companies work with a local Israeli attorney or IIA consultant throughout the process.

The IIA's grants are not equity investments and not loans in the ordinary sense. They are conditional grants: the government funds a defined R&D project, and the company repays through royalties on revenue from commercial products derived from that project. If the project fails and produces no revenue, there is nothing to repay (though the IIA retains certain rights over the technology). If the project succeeds, royalties flow back to the IIA's revolving fund, which then funds the next generation of applicants.

2. Who qualifies, including foreign-owned companies

The R&D Law and the IIA's internal procedures do not disqualify a company based on foreign ownership of its shares. An Israeli company incorporated under the Companies Law 5759-1999, conducting R&D activity in Israel, with employees working in Israel on the funded project, qualifies on the same terms as a company with entirely Israeli shareholders.

The eligibility criteria the IIA does scrutinise are:

  • Israeli incorporation: The applicant must be a company registered with the Israeli Registrar of Companies. A foreign company applying through its Israeli branch is generally not eligible for most grant tracks; the IIA strongly prefers a separately incorporated Israeli subsidiary.
  • R&D conducted in Israel: The funded project's R&D activity must actually take place in Israel. Offshoring the development to the parent's overseas engineers while the Israeli entity provides only management or sales does not qualify.
  • Israeli employees: The funded project must employ people in Israel. The IIA evaluates the proposed team, their qualifications, and the Israeli payroll budget as part of any application.
  • Technological innovation: The project must involve genuine technological innovation, not product enhancement or marketing. The IIA's scientific committee evaluates novelty.
  • Commercial potential: The IIA expects to see a credible commercialisation plan: a market, customers, a revenue model. Pure academic research without a commercial product roadmap is better suited to other funding channels.

Many large multinationals operate Israeli R&D centers that receive IIA funding. Intel, Google, Microsoft, and dozens of other global companies have received IIA grants for projects conducted through their Israeli subsidiaries. The IIA is aware that foreign ownership is the norm in large parts of Israel's tech sector and does not treat it as a disqualifying factor.

In Practice — Foreign Subsidiary Setup: A US-based software company sets up an Israeli subsidiary (registered with the Israeli Registrar of Companies, with a local Israeli director and bank account) to develop a cybersecurity product. The subsidiary employs 12 engineers in Tel Aviv and applies for an IIA Regular Track grant for a NIS 4,000,000 annual R&D budget. The IIA approves 40%, giving the subsidiary NIS 1,600,000 in grant funding for that year. The parent's US ownership of 100% of the Israeli subsidiary's shares does not disqualify the application. The royalty obligation runs against the Israeli subsidiary's revenues from the funded product — not the parent's global revenues — and the parent company is not itself a party to the grant agreement. The restriction on technology transfer applies if the parent later wants to move the funded IP from the Israeli subsidiary to a US holding entity.

3. The main grant tracks

The IIA offers multiple tracks, each calibrated to a different company stage and project size. The most relevant for foreign investors are:

Tnufa (Feasibility): The entry-level grant, covering up to 85% of approved project costs to a ceiling of NIS 85,000 per project. Tnufa is for very early-stage companies or entrepreneurs testing a technology concept before committing to a full product plan. The application is short, the review cycle is 4 to 6 weeks, and no prior IIA history is required. Foreign entrepreneurs who have recently incorporated an Israeli entity often use Tnufa as their first IIA interaction.

Regular R&D Program: The core track, covering 30% to 50% of approved annual R&D budgets with no hard cap on the total (though practical ceilings apply through committee discretion). Applications require a full technical and commercial proposal, a presentation before a scientific committee, and an annual report thereafter. Processing takes 3 to 6 months. Most Israeli tech companies that have received IIA funding have done so through this track.

Magnet Program: An industrial-academic consortium program, designed for multi-company research groups working with universities on pre-competitive technologies. Funding covers up to 66% of consortium costs. Less relevant for a foreign company with a single Israeli subsidiary but important to understand if the Israeli subsidiary wants to participate in shared R&D projects with Israeli universities or other companies.

IIA Incubator Program: A network of technology incubators spread across Israel, including several in the periphery (Negev, Galilee). An incubator accepts early-stage companies and provides working space, mentorship, and access to IIA funding (covering up to 85% of R&D costs during the incubation period). Foreign entrepreneurs who want to build an Israeli company from scratch, with government funding and local support network, sometimes enter through an incubator rather than applying directly.

NOFAR: Grants supporting academic spinouts at their earliest stage, bridging university research to commercial product development. Less directly relevant for foreign companies without a university relationship.

International Collaboration Programs: The IIA has bilateral R&D cooperation agreements with over 40 countries through BIRD (with the US), ISERD (EU Horizon programs), KORIL (Korea), and others. A foreign company whose home country has a bilateral agreement with Israel can apply jointly with an Israeli partner for co-funded projects. These programs are among the most efficient grant channels for foreign companies that can find a credible Israeli R&D partner.

4. How to apply

All IIA applications go through the portal at go.iia.org.il. The portal requires the applicant company to register with a digital signature certificate. The application itself is in Hebrew, which is a practical barrier for foreign-owned companies whose management team does not speak Hebrew.

For the Regular R&D track, the application package includes: a technical section (the technology being developed, the state of the art, the innovation claimed, the technical work plan), a commercial section (market size, target customers, revenue model, competitive landscape), a team section (CVs and Israeli employment contracts), a budget section (detailed R&D cost breakdown), and a corporate section (company registration documents, cap table, financial statements).

Most foreign companies engage an IIA application consultant or a local Israeli attorney to prepare the package. Consultant fees for a Regular Track application typically run NIS 15,000 to NIS 30,000, depending on project complexity. The fee is not recoverable from the grant itself (though it can be included in the approved R&D budget in future applications if ongoing work justifies it).

After submission, the application goes to a scientific committee, typically 3 to 5 reviewers with domain expertise in the relevant technology. The committee may request a presentation (usually in person or by video conference, in Hebrew or English depending on the committee). After approval, the IIA issues a formal grant decision letter setting out the approved budget, the grant percentage, the royalty rate, and the special conditions.

In Practice — Application Timeline and Costs: An Israeli subsidiary of a UK company wants to apply for a Regular Track IIA grant for a NIS 3,000,000 annual R&D budget (expecting 40% approval, i.e., NIS 1,200,000 in grant funding). The company engages an IIA consultant (NIS 20,000 fee) and an Israeli attorney to review the legal documents (NIS 8,000). Application submitted in January. Committee presentation in March. Approval letter received in April — grant approved at NIS 1,080,000 (36% of the approved budget of NIS 3,000,000). The company submits its first quarterly expenditure report in June. The IIA releases the first grant tranche upon receipt of the approved expenditure report, typically within 4 to 6 weeks of submission. From application to first payment: approximately 7 months.

5. Royalty repayment obligations

An IIA grant is not a gift. The company repays it through royalties on revenues from products that incorporate the funded technology. The royalty obligation is one of the most misunderstood aspects of IIA funding, particularly for foreign investors who assume "grant" means non-repayable.

The standard royalty rate for companies in the Regular R&D track is 3% of revenues from products incorporating the funded technology (the rate can be lower for micro-companies and for certain industries). Revenues include sales, service fees, licence fees, and royalties received from sub-licensees: any commercial income derived from the funded product. Revenues earned in a foreign currency are converted to shekels at the exchange rate on the date of the transaction.

Royalties continue until the company has repaid the total grant amount plus annual interest. Interest accrues at the LIBOR/SOFR-linked rate set by the IIA for each grant year. Once the repayment ceiling is reached, the royalty obligation ends entirely and the IIA has no further claim on the company's revenues, though the technology transfer restriction survives independently until formally released.

Companies that never generate revenue from the funded product (because the project failed commercially or because they pivoted to a different product) owe no royalties. There is no obligation to repay the grant out of other revenues. The government absorbs the loss. This is what makes IIA grants genuinely valuable: the downside for a failed project is zero financial repayment. If the product succeeds, the upside is a 3% royalty that extinguishes once the principal is repaid.

Annual royalty reports are filed through the IIA portal. Israeli companies with IIA obligations must disclose their relevant revenues, calculate the royalty owed, and pay it within the timeframe set in the grant agreement. Failure to report or pay triggers penalties and can expose the company and its directors to personal liability under Section 31 of the R&D Law.

6. The technology transfer restriction

Section 19b of the R&D Law is the provision that catches foreign investors by surprise. It prohibits transferring IIA-supported know-how, technology, or IP outside Israel without the IIA's prior written approval. The restriction covers:

  • Assigning or licensing patents covering IIA-funded technology to a non-Israeli entity
  • Transferring source code, trade secrets, technical documentation, or any other know-how developed using IIA funds to a non-Israeli entity
  • Moving development activity outside Israel in a way that effectively transfers control of the funded technology

The restriction applies regardless of whether the company still owes outstanding royalties. Even if all grants have been fully repaid, the Section 19b restriction survives until the IIA formally releases it. This surprises some companies that assume repayment clears all IIA obligations.

IIA approval for a technology transfer is available but comes at a cost. The approval process requires filing an application with the IIA setting out the terms of the proposed transfer, the consideration, and the reasons. The IIA typically conditions approval on one of two outcomes: a lump-sum payment equal to the outstanding grant balance (accelerated repayment), or a royalty arrangement that continues after the transfer, binding the foreign recipient. Where the total grant balance is large or the technology is considered strategically important to Israel's economy, the IIA may impose both conditions.

In Practice — Technology Transfer to Parent Company: A German parent company wants to consolidate all IP in a Luxembourg holding company. Its Israeli subsidiary received IIA grants totalling NIS 6,000,000 over three years and has repaid NIS 1,800,000 in royalties so far. The outstanding balance is NIS 4,200,000 plus accrued interest of approximately NIS 380,000. The subsidiary applies for IIA approval to transfer the funded technology to the Luxembourg entity. The IIA conditions approval on a lump-sum payment of NIS 4,580,000 (the full outstanding balance) plus a royalty-sharing agreement requiring the Luxembourg entity to continue reporting and paying royalties at 1.5% of revenues from the technology until that amount is also repaid. The German parent had not budgeted for this payment when structuring the IP consolidation. Build the IIA clearing cost into any group restructuring involving an Israeli subsidiary with grant history.

7. M&A and change of control

Acquisitions of Israeli companies with IIA funding history are one of the most common situations where the R&D Law's restrictions become a deal issue. Section 19b applies to changes of control, not just direct technology transfers. When an acquirer buys more than 50% of the shares of an Israeli company with IIA grants, the transaction is a change of control requiring IIA notification and, in most cases, IIA approval.

The IIA's approval process for a change of control involves reviewing the acquirer's identity, the proposed post-acquisition plans for the Israeli R&D activity, and the acquirer's commitments to maintain R&D employment in Israel. The IIA generally approves acquisitions where the acquirer commits to keeping the Israeli R&D operation running. Where the acquirer intends to scale down or relocate the R&D activity after closing, the IIA will extract a lump-sum payment as the price of approval.

For buyers, the practical implications are:

  • Due diligence: Request a full IIA grant history from the target — every approved grant, every royalty payment to date, every outstanding balance. The IIA portal allows companies to download their complete grant ledger.
  • Representations and warranties: Include specific reps covering IIA compliance, outstanding balances, and absence of unreported violations of Section 19b.
  • Escrow or holdback: In acquisitions where the IIA approval and any resulting lump-sum payment have not been agreed before closing, structure an escrow or holdback to cover the potential IIA clearing cost.
  • Pre-signing engagement: For large acquisitions, many buyers engage with the IIA informally before signing the purchase agreement to gauge the likely approval conditions and cost. The IIA is not required to give binding pre-approval before signing, but informal engagement significantly reduces post-signing surprises.

Acquisitions that close without IIA approval where approval was required are void under Section 19b. In practice, major acquisitions always obtain IIA approval because the target's Israeli attorneys will not allow closing without it and the deal's representations would be false. The risk of closing without approval is not a realistic scenario in a properly advised transaction, but it illustrates why the IIA review needs to be built into the deal timeline, not treated as a formality at the last moment.

For sellers, the IIA approval process adds 4 to 12 weeks to the deal timeline. Build this into the LOI from the outset. Buyers who discover the IIA requirement for the first time during due diligence will often re-price the deal or require the seller to pre-clear the IIA before signing, which the seller cannot always do unilaterally without disclosing deal terms the seller prefers to keep confidential. Managing the IIA disclosure timeline is as much a negotiation issue as a legal one.