Quick Answer: The Israel Innovation Authority (IIA) provides non-dilutive grants covering 20–40% of approved R&D expenses to eligible technology companies — including foreign-owned companies with Israeli operations. Grants are repaid as royalties on future revenues rather than through equity. The critical restriction that every foreign investor must understand: any know-how developed using IIA funding cannot be transferred outside Israel without IIA approval and the payment of a substantial transfer fee. This obligation survives acquisition and can significantly affect M&A transactions.

Israel has built one of the world's most sophisticated technology ecosystems partly because of a unique government innovation-funding mechanism. The Israel Innovation Authority — known until its 2016 rebrand as the Office of the Chief Scientist — has been channelling state money into private R&D since the 1970s. Its grants have helped launch hundreds of companies that have since become global players, and its programs remain one of the most compelling reasons for foreign multinationals to establish Israeli R&D centres.

For foreign companies and investors, IIA grants offer genuine financial upside. But the program comes with legal strings that are poorly understood outside Israel — particularly the intellectual property restrictions that can create serious complications in acquisitions, joint ventures, and technology licensing arrangements. This guide explains how the IIA grant system works, who qualifies, and what foreign investors must know before engaging with the program or acquiring a company that has benefited from it.

1. What Is the Israel Innovation Authority?

The Israel Innovation Authority is an independent government body established under the Encouragement of Research, Development and Technological Innovation in Industry Law 5744-1984 . This law, commonly called the R&D Law, remains the primary legal framework governing IIA grants and the obligations they create.

The IIA's mandate is to strengthen Israel's industrial technology base by co-funding private-sector R&D. The underlying policy logic is straightforward: by reducing the cost and risk of early-stage technology development, the state encourages companies — both Israeli and foreign — to invest in R&D activity in Israel, creating jobs, intellectual property, and long-term economic value.

The IIA is governed by a research committee comprising academic, industrial, and government representatives. It operates programs across multiple sectors including software, life sciences, agri-tech, clean tech, and defence-related dual-use technologies.

A key distinction from venture capital or government equity investment: IIA grants are non-dilutive. The IIA takes no shares in the company. Instead, the grant is repaid (at 100–150% of the original amount, depending on the program) through royalties on the company's revenues, with no repayment obligation if the product never generates revenues. There is no deadline for repayment; royalties are paid as revenues arrive.

2. IIA Grant Programs Available to Foreign Companies

The IIA operates a range of programs. The most relevant for foreign companies and investors are:

Standard Industrial R&D Program

The core IIA program. Open to Israeli companies (including foreign-owned ones) that develop a specific product or process. Covers 20–30% of approved R&D budget for established companies (up to 40% for early-stage or smaller companies, and higher for companies in national priority geographic zones). Applications are submitted through the IIA's online portal with a detailed technological and commercial plan.

Tnufa Program

A seed-stage program for individual entrepreneurs and pre-company teams. Grants of up to NIS 200,000–300,000 (approximate — amounts updated periodically) to validate a concept. The Tnufa grant can precede and complement a subsequent standard application once a company is incorporated.

Magnet Program

A consortium-based program that funds joint R&D between companies and academic institutions. Very relevant for foreign multinationals who want to collaborate with Israeli universities or research hospitals. Covers a higher proportion of costs due to the academic partnership component.

Binational R&D Programs

Israel has bilateral innovation fund agreements with numerous countries. The most significant are:

  • BIRD Foundation (Israel-United States): Co-funds joint R&D projects between Israeli and US companies, with each side funded by their respective government. No royalties on the US side; Israeli side repays through the standard IIA royalty mechanism
  • BRIDGE (Israel-Germany), KORIL (Israel-South Korea), ITCI (Israel-Canada), ISERD/Horizon Europe: Various bilateral programs with European Union member states and other countries
  • These bilateral programs are particularly attractive for foreign multinationals because the partnership structure can reduce the effective cost of R&D while keeping development in Israel

Innovation Lab Programs

The IIA supports Israeli corporations in establishing internal innovation labs and pilot programs with startups. Some large multinationals with Israeli operations have accessed IIA support through this track.

3. Eligibility Requirements

Foreign-owned companies are eligible for IIA grants, but the eligibility rules contain several important conditions that do not apply to purely Israeli companies:

Israeli legal presence: The applicant must be an Israeli company — meaning incorporated under Israeli law and registered with the Israeli Companies Registrar. A foreign company cannot apply directly; it must operate through an Israeli subsidiary, branch, or joint venture entity. Incorporating an Israeli subsidiary specifically to access IIA funding is a common and accepted structure.

R&D activity must be in Israel: The funded research and development must be carried out by employees working in Israel. Grant funds cannot be used to pay for work done outside Israel. This requirement reflects the IIA's core purpose: keeping technology work and jobs in Israel.

Know-how must stay in Israel: The intellectual property developed with IIA funding must remain registered and owned in Israel. This is the most important restriction for foreign companies and is discussed in detail in Section 5.

The foreign parent's commitment: Where the applicant is a subsidiary of a foreign company, the IIA will assess whether the parent company is genuinely committed to developing and commercialising the technology in Israel. A subsidiary set up purely to extract a grant, with no real R&D intention, will not be approved. The IIA has become more sophisticated in identifying such structures over the years.

Sector requirements: The project must relate to an industrial product or industrial process — pure financial services, real estate development, and certain other sectors are excluded. Software, hardware, medical devices, agri-tech, clean energy, and most other technology sectors qualify.

Grant size and budget: The approved R&D budget is negotiated with the IIA. Budgets that appear inflated relative to comparable industry projects will be reduced. The IIA scrutinises salaries (capped at market rates) and overhead allocations carefully.

4. The Application Process Step by Step

IIA applications are submitted through the IIA's online portal . The process for a standard industrial R&D program application runs as follows:

  1. Registration on the IIA portal. The company creates an account and registers its details — company number, directors, ownership structure. Foreign ownership must be disclosed, including the full corporate ownership chain up to the ultimate beneficial owner.
  2. Preparation of the R&D plan. This is the core of the application. The plan describes:
    • The technology being developed and the innovation it represents (why existing solutions are insufficient)
    • The commercial market opportunity and competitive landscape
    • The R&D team — names, CVs, roles, and salary information
    • A detailed budget for the grant period (typically 12–24 months)
    • Milestones and success criteria
    The plan must be submitted in Hebrew. Foreign companies invariably engage a local consultant (* IIA*) to prepare and manage the application.
  3. IIA technical assessment. The application is reviewed by a technical committee that includes scientists and industry experts relevant to the technology sector. The committee assesses technological novelty, team capability, and commercial feasibility. Companies may be called for an oral presentation before the committee.
  4. IIA research committee decision. The research committee makes the final approval decision. Approved applications receive a decision letter specifying the approved budget, grant rate, and conditions. Partial approvals (lower budget than requested) are common.
  5. Signing the support agreement. Approved companies sign a support agreement with the IIA that sets out the full terms of the grant, the IP restrictions, and the royalty repayment obligations. This is a legally binding document and should be reviewed by an Israeli attorney before signing.
  6. Quarterly reporting and disbursements. Grant funds are disbursed quarterly against certified expenditure reports. The company reports actual R&D spending and the IIA reimburses the grant proportion. An Israeli CPA must certify each expenditure report.
  7. Project closure report. At the end of the grant period, the company submits a final report demonstrating progress against milestones. If milestones are not met without adequate justification, the IIA may seek repayment of some disbursed funds.

Timeline: From submission to decision, standard applications typically take three to five months. Tnufa and some binational program applications can move faster. Companies should not rely on IIA approval when making hiring or R&D commitment decisions — approval is not guaranteed.

5. The IP Transfer Restriction — The Critical Warning for Foreign Investors

This section is the most important in this guide for any foreign company considering either applying for IIA grants or acquiring an Israeli company that has received them.

Under the R&D Law, any know-how developed using IIA grant funding is subject to a restriction on transfer outside Israel. The restriction works as follows:

  • Transfer requires IIA approval: The company cannot transfer, assign, or license IIA-funded know-how to an entity outside Israel without first obtaining written IIA approval. This applies whether the transfer is a direct IP assignment, an exclusive licence, or a transfer through a corporate restructuring or acquisition
  • Transfer fee payable to the IIA: If IIA approval is granted, the company must pay a transfer fee. The fee is calculated as a percentage of the value of the transferred know-how and can range from 100% to 300% of the cumulative grant amount received, depending on the circumstances — the company's development stage at the time of transfer, whether revenues have already been generated, and the commercial value of the know-how
  • Change of control triggers review: A change of control of the Israeli company — such as an acquisition by a foreign buyer — does not in itself require prior IIA approval, but it triggers a mandatory notification and the new owner assumes all existing IIA obligations including the restriction. If the acquirer subsequently wants to move IP outside Israel, the transfer fee applies
  • Manufacturing can also be restricted: Beyond IP, companies that committed to maintaining certain manufacturing in Israel as a condition of their grant may face restrictions on moving production outside Israel, subject to similar approval and payment requirements

Why this matters enormously in M&A: Many acquisitions of Israeli tech companies have been complicated or re-priced because the target had accumulated significant IIA grant obligations that the buyer had not adequately investigated. A foreign acquirer planning to consolidate IP into a non-Israeli entity post-acquisition may face a transfer fee running into millions of dollars. This is not a theoretical risk — it arises regularly in practice.

What acquirers must do: In any acquisition of an Israeli tech company, due diligence must include a full IIA audit: how much has been received in grants, over how many programs and years, what IP was developed under those programs, whether any prior transfers have been approved, and what the estimated transfer fee would be under different post-acquisition scenarios. This analysis requires an Israeli attorney experienced in IIA matters and typically also an IIA consultant.

Practical mitigation options: In some cases, the transfer fee can be negotiated down or restructured with the IIA — particularly where the acquirer commits to maintaining significant R&D activity in Israel post-acquisition. The IIA's stated preference is to keep R&D in Israel rather than simply collect a fee, and it has shown flexibility in deals where genuine Israeli activity continues.

An American cybersecurity company acquiring an Israeli startup discovered during due diligence that the target had received NIS 3.2 million in IIA grants across three programs over six years. The acquirer's post-closing integration plan involved consolidating the target's core IP into a US holding entity — a transaction that would trigger the R&D Law's transfer fee mechanism. An IIA consultant estimated the transfer fee at between NIS 4.8 million and NIS 9.6 million depending on the valuation methodology applied. Rather than absorbing this as a deal cost, the acquirer negotiated directly with the IIA before signing, committing to maintain an Israeli R&D center with at least 25 employees for five years post-closing. The IIA accepted this commitment and capped the transfer fee at NIS 2.1 million — a saving of at least NIS 2.7 million against the lower estimate. The lesson: engage the IIA before closing, not after.

6. Repayment: How the Royalty Mechanism Works

IIA grants are not a free gift — they are conditional funding that is repaid through royalties on revenues. The royalty obligation is set out in the support agreement and continues until the full repayment amount is reached. Key parameters:

  • Royalty rate: Typically 3–5% of annual revenues from the product (or family of products) developed using the grant. The exact rate is specified in the support agreement and may vary based on company type and program
  • Repayment cap: The total royalties paid must reach 100% of the original grant amount (for most programs) before the obligation terminates. Some programs require repayment of up to 150% — effectively the grant plus modest interest
  • No time limit: There is no deadline to complete repayment. If revenues are slow to materialise, royalties simply continue for longer. If the product never generates revenues, there is no repayment obligation — this is the fundamental non-dilutive feature of the program
  • Annual reporting: Companies with outstanding royalty obligations must file annual royalty reports with the IIA, even in years of zero revenue. Failure to report is taken seriously by the IIA and can result in enforcement action
  • Foreign sales: Royalties are calculated on worldwide revenues from the supported product, not just Israeli sales. A company that develops a product in Israel and sells it globally pays royalties on global revenue

7. Related Tax Incentives: Preferred Technological Enterprise

IIA grants are one component of Israel's broader technology incentive framework. The most significant complementary incentive is the Preferred Technological Enterprise status under the Capital Investment Encouragement Law 5719-1959 .

A company that qualifies as a Preferred Technological Enterprise is entitled to a reduced corporate income tax rate of 12% (compared to the standard rate of 23%) on income derived from intellectual property developed in Israel. For companies located in the national priority development zone (primarily in the north and south of the country), the rate is further reduced to 7.5%.

Qualification requirements include:

  • The company must be engaged in a "preferred technological enterprise" — meaning it earns income from IP it developed and owns, and that IP-related income exceeds a threshold proportion of total revenues
  • The company must have minimum annual revenues (the threshold is set by regulation and updated periodically)
  • The IP must be registered in Israel (or certain approved offshore jurisdictions under Israel's BEPS-compliant territorial participation exemption rules)
  • A minimum portion of the company's R&D expenditure must occur in Israel

Foreign multinationals that establish Israeli R&D operations and commercialise the resulting IP can combine IIA R&D grants with Preferred Technological Enterprise tax status to create a highly cost-efficient Israeli technology structure. This combination is one of the reasons Israel attracts so many multinational R&D centres.

Note that the interaction between Preferred Technological Enterprise status and IIA grants involves complex tax structuring questions that require specialist Israeli tax counsel.

8. IIA Grants in M&A Due Diligence: A Practical Checklist

For any buyer of an Israeli technology company, a dedicated IIA due diligence track is essential. This is distinct from standard IP due diligence and requires specific expertise. The checklist below covers the key items:

  • Grant history: Request a complete list of all IIA programs in which the target has participated, with grant amounts received and repayment status. The target's IIA portal account history is the authoritative source
  • Royalty obligations: Calculate the outstanding royalty obligation — total grants received less royalties paid to date. This is a contingent liability that survives acquisition
  • Know-how scope: Identify which products, platforms, or technology components were developed under IIA grants. This determines the scope of IP subject to transfer restrictions
  • Prior transfer approvals: Check whether any prior know-how transfers or licensing arrangements have been approved by the IIA, and whether the associated fees were paid
  • Manufacturing commitments: Identify any production commitments made to the IIA as grant conditions, and assess whether post-acquisition operational plans are consistent with those commitments
  • Estimated transfer fee: If the acquisition structure involves transferring IP to a non-Israeli entity (a common integration step), obtain an estimate of the transfer fee from an IIA consultant. Factor this into the deal price or structure
  • IIA notification: Plan for the mandatory post-closing notification to the IIA of the change of control. This is typically a formality, but it must be done promptly
  • Post-acquisition commitments: Consider whether making voluntary commitments to maintain or expand Israeli R&D activity could support a negotiated reduction in any required transfer fee
In Practice: The IIA defines "know-how" broadly under the R&D Law — it covers not just registered patents but also algorithms, source code, trade secrets, and documented technical processes developed with grant funds. Before any corporate transaction involving a grant-encumbered company, get a written opinion from an IIA consultant on exactly which IP elements are encumbered. Buyers regularly underestimate the scope because the target's engineers built on top of IIA-funded foundations without tracking the boundary carefully.
In Practice: The royalty reporting obligation continues even as products evolve. If a company takes IIA-funded core technology and builds a substantially new product on top of it, the IIA takes the position that royalties apply to the derived product as well. Companies sometimes discover — during a tax audit or M&A due diligence — that they stopped reporting royalties after a product pivot, believing the obligation ended. It did not. Track which revenue streams have IIA-encumbered elements before any transaction or restructuring, and get IIA counsel confirmation that reporting obligations have been properly discharged.