Quick Answer: The Israel Innovation Authority (Reshut HaHadshana) administers non-dilutive R&D grants worth 20% to 50% of approved R&D expenses under the Encouragement of Industrial R&D Law 5744-1984. Foreign-owned Israeli startups are fully eligible. The grants are repaid as royalties on product revenues, not as cash loans. The critical constraint that every investor must understand before funding an Israeli tech company is Section 19B of that law: any transfer of Innovation Authority-funded intellectual property outside Israel requires prior Authority approval and payment of a buyout formula that can run to multiples of the original grant. Overlooking this provision has derailed Israeli M&A transactions worth hundreds of millions of dollars.

Israel ranks near the top of the global R&D intensity charts, and the Innovation Authority is a large part of the reason. Through a revolving fund seeded by the government, the Authority has distributed billions of shekels in grants to Israeli tech companies since 1984, subsidising a material share of the country's software, hardware, life-sciences, and clean-tech development. The grants are non-dilutive: no equity changes hands, and repayment runs only as the company generates revenue from the funded technology.

For foreign VC funds and corporate investors backing Israeli startups, the Innovation Authority's programmes carry two faces. A startup that uses grants well can stretch its runway without diluting founders or investors. The flip side is Section 19B, a statutory IP restriction that can surface as a material liability in due diligence if it was never properly mapped or disclosed.

1. What the Israel Innovation Authority Is and What It Does

The Innovation Authority replaced the Office of the Chief Scientist (Misrad HaMadaan HaRashi, OCS) in 2016, though many practitioners still use the old name informally. Both names refer to the same statutory body established under the Encouragement of Industrial R&D Law 5744-1984 (the "R&D Law"). The Authority operates as an independent government agency under the Ministry of Economy and Industry.

Its core mandate is to fund industrial R&D in Israel through a variety of grant programmes, attract multinational R&D centres, and promote collaboration between universities and industry. Budget allocations come from the state budget and from royalty income recycled from previous grant recipients. The Authority has the status of a public body, and its decisions are subject to administrative law review before the Tel Aviv District Court.

Unlike a venture fund or a bank, the Authority does not take equity or security. It evaluates applications on the scientific and commercial merits of the proposed R&D plan. Approved plans receive annual grant disbursements, typically in quarterly instalments, against documented R&D expenditure reports.

In Practice: The Authority's budget for the R&D Fund programme was approximately NIS 1.6 billion in fiscal year 2025. Applications are submitted through the Authority's digital portal at innovationisrael.org.il (Hebrew interface). The Authority has five regional offices: Jerusalem (62 Kanfei Nesharim Street), Tel Aviv (5 Bank of Israel Street), Haifa (14 HaAtzmaut Avenue), Beer Sheva (2 Ben Gurion Boulevard), and Kiryat Shmona (12 HaPalmach Street). Applications are evaluated by specialist committees comprising industry representatives and academic reviewers. Standard committee review cycles run every two to three months, so the timing of submission relative to the committee calendar affects when you receive an approval decision.

2. Main Grant Programs Available to Israeli Tech Companies

The Authority runs roughly a dozen distinct programmes at any given time. The following are the most relevant for foreign-backed startups:

The R&D Fund (Keren Hameyuchedet)

The flagship programme. Open to any Israeli company with a viable R&D plan and a realistic path to commercialisation. The company submits an annual R&D plan covering specific work packages, a budget, timelines, and key personnel. If approved, the Authority covers 20% to 50% of that budget. This is the programme most Israeli startups use first.

Magnet (Collaborative R&D)

Funds consortia of two or more Israeli companies, sometimes with academic partners, working on pre-competitive technology. Grant rates can reach 66% in approved National Priority Areas. Magnet projects must be genuinely collaborative; the Authority rejects applications where one participant is clearly driving the work.

Binational Programmes (BIRD, KORIL, ISERD)

Joint programmes with the US (BIRD Foundation), South Korea (KORIL), and the EU (ISERD/Horizon). These programmes fund collaborative projects between an Israeli company and a partner in the relevant country. The Israeli share of the project cost is funded by the Innovation Authority; the foreign partner's share is funded by the partner country. Royalty repayment structures vary by programme.

Nofar (Academic-Industry Bridge)

Funds feasibility studies for technology originating in Israeli universities or research hospitals, typically before a spinout is formed. Applicable to life-sciences and deep-tech with a university IP component.

Multinationals R&D Centre Programme

Specifically designed for foreign corporations that want to establish or expand an R&D centre in Israel. Unlike the R&D Fund, this programme has no royalty repayment obligation. It functions as a straight subsidy for job creation in the Israeli R&D sector. Grant rates are negotiated individually but typically run 10% to 20% of the approved R&D budget. The IP created belongs to the foreign corporation under this programme, with no transfer restriction.

In Practice: The distinction between the R&D Fund (which imposes Section 19B restrictions) and the Multinationals Programme (which does not) is one that many foreign corporations miss when they first approach the Authority. A US technology company setting up an Israeli development centre should evaluate both options before submitting any application. Once a company has accepted R&D Fund grants, the Section 19B restrictions attach to the funded technology permanently, regardless of how the company structure later changes. A multinationals programme grant avoids that legacy obligation entirely, though the grant rates are lower. An Israeli attorney experienced in Authority matters should be involved in the programme selection decision, not just the application itself.

3. Grant Rates and Royalty Repayment: How the Economics Work

The headline grant rates — 20% to 50% of approved R&D expenses — are meaningful subsidies. A startup spending NIS 4 million per year on R&D salaries, cloud infrastructure, and materials can realistically receive NIS 1.6 million to NIS 2 million per year in approved R&D fund grants, with no equity given up and no fixed repayment schedule.

The economics of repayment through royalties work as follows:

  • Once the company generates revenues from products or services that incorporate the funded technology, it pays annual royalties to the Authority at a rate set in the approval letter — typically 3% of revenues for software and 3.5% to 5% for other sectors.
  • The royalty clock starts in the first year the company books revenues attributable to the funded technology. There is no fixed repayment deadline, and no cash payment is required before revenues exist.
  • Repayment continues until the company has paid back 100% of the total grants received, plus interest calculated at the annual LIBOR rate prevailing at the time of each grant disbursement. That interest rate adjustment means the effective repayment target is somewhat higher than the nominal grant amount.
  • Once the cumulative royalties reach the cap, the obligation terminates — even if the technology continues to generate revenue.

For most startups, this structure means royalty payments begin only after the company has achieved meaningful product traction. At 3% of revenues on, say, NIS 20 million in annual SaaS revenues, the annual royalty payment is NIS 600,000. That is a manageable cost of growth.

In Practice: The Authority tracks royalty obligations through annual self-reporting by the company, backed by signed audited financial statements. Companies are required to submit a royalty report and payment by December 31 of each year for revenues earned in that calendar year. Late payments attract 0.5% monthly interest under the terms of the grant approval letter. The Authority's enforcement arm — the Financial Department at 5 Bank of Israel Street, Tel Aviv — can initiate audit proceedings if submitted revenues appear inconsistent with the company's published financial data. The most common audit trigger is a company that reports rising revenues in general but claims nil royalty-bearing revenues, implying the funded technology contributed nothing to growth. Auditors look at product literature, sales contracts, and development records to assess which revenues derive from the grant-funded work plan.

4. The Section 18 Tax Deduction for R&D Expenses

Separate from the cash grants, Israeli tax law provides a generous deduction for R&D expenditure under Section 18 of the Income Tax Ordinance (Pekudat Mas Hachnasa) 1961. This provision allows qualifying R&D expenses to be deducted immediately in the year they are incurred, rather than capitalised and depreciated over the useful life of the resulting asset.

For a company that is generating taxable profits, the immediate deduction generates real cash tax savings at the standard Israeli corporate rate of 23%. For a loss-making startup, the deduction deepens the net operating loss, which can be carried forward indefinitely under Israeli tax law and used to shelter future profits.

The Section 18 deduction works as follows:

  • The expenditure must be on industrial R&D — it applies to companies engaged in manufacturing or the production of technology products, broadly defined to include software development.
  • Expenses must be for R&D carried out in Israel, by employees or contractors working in Israel.
  • The deduction covers salaries, materials, outsourced testing, and directly attributable overheads. General and administrative costs cannot be allocated to the R&D deduction without a clear nexus to specific R&D projects.
  • The deduction is separate from and complementary to Innovation Authority grants. A company can receive a 40% grant on its approved R&D budget AND deduct the remaining 60% (the non-grant-covered portion) as a current expense under Section 18.
In Practice: An Israeli tech company spending NIS 10 million per year on R&D, of which NIS 4 million is covered by an Innovation Authority grant, can deduct the remaining NIS 6 million as a current expense under Section 18 ITO. At the 23% corporate tax rate, that yields a NIS 1.38 million tax benefit — on top of the NIS 4 million grant already received. Taken together, the effective government contribution to the company's R&D budget is NIS 5.38 million out of NIS 10 million, or 53.8%. The Israel Tax Authority requires that the Section 18 deduction be reported separately in the annual corporate tax return (Form 1214, line 31 of the R&D appendix). If the company has also received grants in the same year, only the unreimbursed portion qualifies for the deduction — the grant-covered amount cannot be double-counted.

5. Section 19B: The IP Transfer Restriction That Every Investor Must Understand

This is the provision that catches foreign investors off guard. Section 19B of the Encouragement of R&D Law prohibits the transfer of know-how developed with Innovation Authority funding outside Israel without prior written approval from the Authority.

The term "know-how" covers more than patents. It includes source code, technical specifications, manufacturing processes, algorithms, and any other technical information that embodies the funded innovation. In practice, if the company's core product technology received Innovation Authority funding, Section 19B likely applies to that technology.

What constitutes a prohibited transfer under Section 19B:

  • Assignment of IP title from the Israeli company to a foreign entity — including to the foreign parent in the same corporate group.
  • An exclusive licence of funded know-how to a foreign entity, where the Israeli company retains no meaningful rights to use the technology independently.
  • A change of the place of development or production of the funded technology from Israel to a foreign country, if that change is effectively a functional transfer of the IP.

What does not constitute a prohibited transfer:

  • Selling products or services built on the funded technology to customers outside Israel.
  • Sharing source code or technical documentation with foreign employees or contractors who perform work for the benefit of the Israeli company under an employment or services agreement.
  • A non-exclusive licence on arm's-length commercial terms.
  • Acquiring shares in the Israeli company (a share purchase does not move the IP).
In Practice: The Section 19B restriction does not expire when royalties are fully repaid. Even a company that has repaid 100% of its grants plus interest remains subject to the IP transfer restriction unless it obtains explicit Authority approval. This surprises many founders who assume that completing their royalty obligation "clears" all Authority ties. The Authority's legal department at 5 Bank of Israel Street, Tel Aviv, handles Section 19B applications. Processing a formal IP transfer approval typically takes three to six months from the date of a complete application. The Authority may condition approval on commitments to maintain a minimum level of R&D employment in Israel, ongoing royalty payments on revenues from the transferred technology (at a higher rate), and other structural conditions. Budget for NIS 30,000 to 80,000 in legal fees to prepare the Section 19B application package, depending on how complex the IP structure is.

6. Calculating the Buyout Payment for an Approved IP Transfer

When the Innovation Authority approves a Section 19B transfer, it sets a buyout payment that the applicant must make in exchange for the right to move the IP abroad. The buyout formula is prescribed in the R&D Law regulations and typically produces a payment in the range of 1.5 to 3 times the total grants received.

The formula has three components:

  1. Unrepaid grants: The total grants received minus royalties already paid. If a company received NIS 10 million in grants and paid NIS 4 million in royalties, the unrepaid balance is NIS 6 million.
  2. Interest adjustment: The unrepaid balance is adjusted upward for the LIBOR interest that has accrued since disbursement. This can add 15% to 40% depending on how many years have passed.
  3. Technology premium: The Authority has discretion to add a premium if the technology being transferred is unusually valuable relative to the original grant or if the proposed transfer price is below fair market value. This premium can be substantial in successful technology companies.

In practice, the buyout payment for a company that received NIS 20 million in cumulative grants, has repaid NIS 5 million in royalties, and is now seeking to transfer the IP in an M&A context could be NIS 20 million to NIS 40 million or more, depending on the age of the grants and the technology premium the Authority applies.

In Practice: M&A transactions involving Israeli tech companies routinely identify unrepaid Innovation Authority grants as a contingent liability in due diligence. The standard practice in Israeli M&A transactions is to request the company's full grant history from the Authority (the "OCS summary letter") during the due diligence phase, calculate the theoretical buyout exposure, and then negotiate how that liability is allocated between buyer and seller in the purchase price adjustment mechanism or representations and warranties. In transactions where the acquirer intends to leave the IP in the Israeli entity post-closing (the most common approach for foreign strategic acquirers), Section 19B is not triggered and no buyout is needed. The issue arises when the deal structure involves merging the Israeli entity into a foreign parent, transferring the IP to a foreign IP-holding company, or establishing a royalty arrangement between the Israeli entity and a foreign affiliate at a non-arm's-length rate.

7. What Foreign Investors Specifically Need to Know Before Investing

Foreign VC funds and corporate investors backing Israeli startups should work through the following checklist before closing any investment round:

  • Grant history disclosure: Request a complete list of all Innovation Authority approvals, grant amounts received, royalties paid to date, and current unrepaid balance. Companies are legally required to maintain this record and disclose it to material investors.
  • IP ownership confirmation: Verify that all funded know-how is owned by the Israeli entity, not assigned to or licensed exclusively to any affiliate, predecessor, or founder holding company.
  • Exit structure planning: If the investment thesis depends on an eventual acquisition by a foreign strategic buyer who might want to relocate the IP, model the Section 19B buyout cost as part of the exit scenario analysis.
  • Ongoing grant applications: Assess whether the company plans to apply for additional grants post-investment. New grants add to the future buyout liability. Some foreign investors include a covenant in the investment agreement requiring investor consent before the company applies for new Authority grants above a specified amount.
  • Programme type: Confirm whether grants were received under the R&D Fund (Section 19B applies) or the Multinationals Programme (no transfer restriction). Companies occasionally receive grants under both programmes across different business units.
In Practice: The most tax-efficient exit structure for a foreign acquirer buying an Israeli tech company with outstanding Innovation Authority obligations is almost always a share purchase with the IP remaining in Israel, followed by intercompany licensing on arm's-length terms from the Israeli entity to the foreign parent. This structure avoids Section 19B entirely, the Israeli company continues paying royalties on its revenues at the applicable rate (3–5%), and the foreign parent receives royalty deductions in its home jurisdiction. The transfer pricing arrangement between the Israeli company and the foreign parent must satisfy arm's-length standards under Section 85A of the Income Tax Ordinance and the corresponding provisions in any applicable tax treaty, to avoid the ITA recharacterising the royalty as a disguised profit distribution subject to withholding tax.

8. How to Apply for an Innovation Authority Grant

The application process for the R&D Fund follows a structured path:

  1. Pre-application assessment: Consult with the relevant Authority regional office to confirm eligibility and identify the right programme. First-time applicants often benefit from a preliminary meeting with an Authority advisor. These meetings are free and available in English through the Authority's Foreign Investment Division.
  2. R&D plan preparation: Prepare a detailed annual R&D plan covering: the technological challenge being addressed, the specific work packages and milestones, the R&D team (CVs required for key personnel), the budget line by line (salaries, materials, subcontractors, overhead allocation), and the commercialisation potential. Plans must be submitted in Hebrew, though supporting technical documents can be provided in English.
  3. Online submission: Submit through the innovationisrael.org.il portal. The system assigns a file number and generates a receipt. Incomplete applications are returned within 10 business days.
  4. Technical committee review: The Authority assigns the application to a specialist committee that meets every two to three months. The committee may request clarifications or a presentation from the company's R&D leadership. Most first-time applicants attend at least one committee meeting.
  5. Approval letter and grant agreement: If approved, the company receives an approval letter specifying the approved budget, grant rate, conditions, and royalty rate. The company must sign a grant agreement before any disbursement. Read the agreement carefully. It contains the Section 19B commitment, the reporting schedule, and the audit rights the Authority retains.
  6. Disbursement and reporting: Grants are paid quarterly against approved expense reports. Each quarter, the company submits a report documenting actual R&D expenditure against the approved budget. Unexpended portions of the quarterly allocation are not paid; they can be carried forward to the next quarter with Authority approval.

Processing time from submission to grant agreement signing is typically four to six months for first-time applicants. Renewal applications from established grant recipients are processed faster, sometimes within two to three months.

Frequently Asked Questions

Yes. The Innovation Authority funds Israeli companies regardless of who owns them abroad. A US-owned, UK-owned, or French-owned Israeli subsidiary can apply for and receive R&D grants on the same terms as Israeli-owned companies, provided the R&D work is performed in Israel and the resulting intellectual property is owned by the Israeli entity. What the foreign parent cannot do is receive the funded IP by way of a free or underpriced assignment. Section 19B of the Encouragement of R&D Law requires prior Authority approval and payment of a buyout formula whenever funded know-how is transferred outside Israel.

The R&D Fund covers 20% to 50% of approved R&D expenses, depending on company size and geography. A startup classified as a small company typically receives 40% of its approved R&D budget. Companies in National Priority Areas — the Galilee, Negev, and Hadera-Zichron corridor — qualify for up to 50%, and in some programmes, 66%. Large companies with over NIS 400 million in revenues generally receive 20 to 25%. Grants are awarded per approved annual R&D plan, and the budget must be submitted in advance.

Not as a cash loan. Repayment runs through royalties: once the company generates revenues from products or services derived from the funded technology, it pays the Innovation Authority 3% to 5% of those revenues annually until the full grant amount plus LIBOR interest has been recovered. If the technology never generates revenue, the repayment obligation lapses. The royalty clock starts in the first revenue year and has no fixed repayment deadline.

A share acquisition of the Israeli company does not by itself trigger Section 19B — the IP stays in Israel under the same Israeli legal entity. After an acquisition, the new foreign parent inherits the royalty obligation and the IP transfer restrictions. If the acquirer then wants to merge the Israeli entity into a foreign group structure and move the IP out of Israel, that triggers Section 19B and requires Authority approval and payment of the buyout formula. Any M&A due diligence on an Israeli tech company should begin with mapping all outstanding Innovation Authority grants and calculating the theoretical buyout exposure.

Yes, fully. The IP restrictions under Section 19B apply to transferring or assigning the IP itself, not to selling products or services based on it internationally. An Israeli company can sell its software to customers anywhere in the world, and those revenues generate the royalty obligation back to the Authority. What the company cannot do is licence the underlying IP exclusively to a foreign affiliate at below-market rates, or assign title to the technology to a foreign entity, without prior Authority approval.