Quick Answer: Foreign companies can license technology into Israel without government approval under the Patents Law 5727-1967 and Copyright Law 5768-2007. Two rules catch most foreign licensors off guard: if the Israeli licensee received Innovation Authority (IIA) grants to develop related IP, they cannot sublicense or transfer that funded IP to a foreign entity without separate IIA approval, and royalty repayment obligations to the IIA (at 3-5% of annual revenues) run in parallel with what they pay you. Royalty payments from an Israeli company to a foreign licensor are subject to 25% withholding tax by default, reduced by tax treaty to 10-15% under common treaties. Exclusive patent licenses must be recorded at the Israel Patent Office within 30 days of signing to bind third parties.

If your company is licensing technology to an Israeli partner, receiving royalties from an Israeli subsidiary, or acquiring rights to Israeli-developed IP, you are dealing with a legal environment that looks familiar from the outside but has a few mechanisms that do not exist in the US, UK, or EU. The standard clauses you use in cross-border licenses work here. The surprises come from Israeli tax rules, the IIA's grant conditions, and Patent Office registration formalities that operate differently than you may expect.

This guide covers the full picture: the statutory framework, what exclusive versus non-exclusive licenses actually mean under Israeli patent law, how IIA grant obligations interact with a commercial license, the withholding tax rates and how to get the treaty rate without a 12-month refund process, transfer pricing rules for parent-subsidiary royalty arrangements, and dispute resolution options when things go wrong. It is written for foreign companies, so it explains the things an Israeli lawyer would consider obvious.

1. The governing framework

Two statutes cover nearly all technology licenses in Israel.

The Patents Law 5727-1967 governs all patent licenses. Section 49 allows a patent holder to grant a written license to exploit an invention for a defined term and territory. Section 53 requires an exclusive patent license to be recorded at the Israel Patent Office within 30 days of execution to take effect against third parties. Section 54 gives an exclusive licensee the right to bring infringement proceedings without joining the patent holder, which is broader than the default position in many other jurisdictions.

The Copyright Law 5768-2007 covers software, source code, technical documentation, databases, and any other copyrightable work. Software licenses in Israel are copyright licenses. Registration is not required for enforceability between the parties. An unregistered software license is fully valid and enforceable from the moment it is executed.

For trade secrets and proprietary know-how, the Commercial Wrongs Law 5759-1999 applies. It prohibits misappropriation and provides for damages and injunctions. NDAs are standard in Israeli commercial practice and courts enforce them. An ex parte injunction for urgent misappropriation cases can be obtained within 24 to 48 hours of filing.

One structural point worth noting: if you are licensing both patented technology and the software that runs it, you are licensing under two different statutes with different formality requirements. Most attorneys draft a single commercial agreement but include two separate license grant clauses, one for patents and one for copyright works.

In Practice: A US company licensing a patented algorithm together with the software implementing it should include two separate license grants: (1) a patent license under Section 49 of the Patents Law 5727-1967, referencing the Israeli patent numbers by registration number; and (2) a copyright license for the software under Section 11 of the Copyright Law 5768-2007. Combining them into one clause creates ambiguity about which regime governs which right, which matters when the patent term expires (20 years from filing) but software distribution continues under the copyright license for the full author's-life-plus-70-years term.

2. Exclusive versus non-exclusive licenses

Section 49 of the Patents Law gives licensors a choice between exclusive and non-exclusive. The distinction has real force in Israel.

An exclusive patent license, once granted, removes even the patent holder's right to practice the patent in Israel during the license term. This is different from US practice, where "exclusive" sometimes refers to a licensee's exclusive right in a field of use while the patent holder retains other fields. Under Israeli law, unless the license carves out specific fields or territories, the licensor genuinely cannot practice the patent in Israel once an exclusive license is in force. Sublicensing a competitor, even accidentally through a corporate restructuring, constitutes breach of the exclusive license.

A non-exclusive license gives the Israeli licensee the right to practice the patent alongside other licensees and the patent holder. Most enterprise software licenses, SaaS arrangements, and OEM agreements in Israel are non-exclusive by structure.

Compulsory licenses exist under Section 52. The Controller of Patents can grant a compulsory license if the patent holder fails to adequately exploit the invention in Israel within three years of patent grant and public interest demands it. In practice, compulsory license applications are rare and are almost always resolved commercially before a formal order issues. Foreign companies that hold Israeli patents but do not sell or manufacture in Israel carry some theoretical exposure. Having an active local licensee provides a practical defense against a Section 52 application.

In Practice: The Israel Patent Office (ILPO), under the Ministry of Justice at 10 Agudat Sport Hapoel St., Jerusalem, processes patent license recordals within approximately 45 working days. The fee for recording a patent license is NIS 526 (2026 fee schedule). Filing after the 30-day window does not void the license between the parties, but the license will not bind a subsequent purchaser or secured creditor of the patent until recordal is complete. In IP-backed financing transactions, lenders will flag an unrecorded exclusive license as a title gap during due diligence.

3. Israel Innovation Authority grant restrictions

This is the mechanism that most often catches foreign companies off guard, and it warrants careful attention.

The Israel Innovation Authority (IIA), formerly the Office of the Chief Scientist, funds Israeli R&D companies through conditional grants under the Research, Development and Technological Innovation in Industry Law 5744-1984, commonly called the R&D Law. These grants are not equity investments and not loans. They are conditional grants with obligations attached to whatever IP is developed with the funding.

If your Israeli licensee, or any predecessor in their IP chain, received IIA grants to develop the technology in question, two obligations affect your arrangement.

Royalty repayment to the IIA. The Israeli company must repay the grant amount through royalties paid to the IIA, typically at 3% of annual revenues from products incorporating the funded know-how, rising to 5% for companies above certain revenue thresholds, until the full grant amount plus SOFR-based interest is repaid. These IIA royalties are separate from what they pay you. An Israeli company paying you a 5% commercial royalty on revenues may simultaneously be paying another 3-5% to the IIA on the same revenue base. Understanding this is important for setting a royalty rate that the Israeli company can realistically sustain.

The outbound transfer restriction. Under Section 19 of the R&D Law, an Israeli grantee cannot transfer or license IIA-funded know-how to a foreign entity without IIA approval. This restriction covers sublicenses. If your Israeli licensee developed improvements to your technology using IIA funding and your agreement includes a grant-back clause, that grant-back may require IIA approval. The IIA also scrutinizes M&A transactions where an Israeli IIA grantee is acquired by a foreign company, since the acquisition effectively transfers the funded IP outside Israel.

In Practice: IIA approval for an outbound licensing or transfer transaction typically takes 60 to 90 days. The application goes to the IIA's Transfer of Know-How desk at the IIA's main office, 30 Agron Street, Jerusalem. Approval often comes with conditions: accelerated royalty repayment at 5-6% instead of the standard 3%, a requirement that the licensee maintain R&D activity in Israel at a specified headcount, or a royalty cap rather than an open-ended percentage. Before signing a technology license with an Israeli company, ask directly whether any of the technology they work with carries IIA grant history. A clean IIA certificate confirming no outstanding obligations is obtainable and worth requesting for any significant transaction.

One subtlety that matters for structuring: the IIA's restrictions follow the IP, not the company. If an Israeli company sells its IIA-encumbered IP portfolio to a clean-sheet Israeli entity and that entity then licenses to a foreign company, the IIA restrictions still apply. The IIA tracks funded IP by chain of title, not by the identity of the current owner.

4. Withholding tax on royalties paid to a foreign licensor

When an Israeli company pays royalties to a non-resident licensor, Israeli law requires the Israeli payer to withhold tax from the payment and remit it to the Israel Tax Authority (ITA). The payer is the collection agent. This is the same mechanism used by most countries for cross-border royalties, but the default rate in Israel is higher than many foreign licensors expect.

The default withholding rate is 25% under Section 170 of the Income Tax Ordinance 5721-1961 (New Version). Without a tax treaty or an advance ruling, an Israeli company paying you NIS 1,000,000 in royalties will send you NIS 750,000 and remit NIS 250,000 to the ITA. Most US and European licensors discover this rate only when they receive their first payment, having assumed they would receive the full royalty and handle tax in their home country.

Tax treaties reduce this rate significantly. Israel has double taxation treaties with most major economies. The withholding rates on royalties under the most common treaties:

Country Treaty rate on royalties Notes
United States 15% / 10% 15% for industrial patents; 10% for software and copyright
United Kingdom 15% All royalty types
Germany 10% All royalty types
Canada 15% All royalty types
France 10% All royalty types
Netherlands 10% All royalty types
No treaty 25% Default statutory rate under Section 170

Getting the treaty rate is not automatic. The Israeli payer cannot simply apply the treaty rate to each payment. They must first obtain a reduced withholding certificate from the ITA. Without the certificate, they are legally required to withhold at 25% even where a treaty clearly applies. The foreign licensor can then file for a refund of the excess, but that process takes 12 to 18 months and requires navigating the ITA's international tax department in Hebrew.

In Practice: The ITA issues reduced withholding certificates (in Hebrew: ptor mnikouy mas bemakor) within approximately 90 days of a complete application. The application goes to the Withholding at Source unit (nikouy bemakor) at the local ITA office serving the Israeli payer's registered address. Required documents: a certificate of tax residence from the foreign licensor's home-country tax authority (apostilled), a copy of the executed license agreement, and ITA Form 2513. For licensors expecting recurring quarterly royalties, request an annual certificate rather than a transaction-by-transaction ruling. The certificate specifies the approved rate and the Israeli payer applies it to all payments during the calendar year it covers. Applying before the first royalty payment date saves 12 to 18 months of refund processing time.
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5. Transfer pricing on related-party technology licenses

If the foreign licensor and Israeli licensee are related parties, such as a parent licensing to its Israeli subsidiary or two companies under common control, the royalty rate is subject to Israeli transfer pricing rules, and the ITA examines these arrangements closely.

Israel adopted the OECD transfer pricing guidelines through the Income Tax Regulations (Determination of Market Conditions) 5766-2006. An Israeli company paying royalties to a foreign parent must set the rate at arm's length, meaning what an independent third party would pay for comparable rights in comparable circumstances. If the rate is too low compared to arm's length, the ITA may reallocate income to Israel and tax it there. If the rate is too high, the excess may be recharacterized as a constructive dividend subject to dividend withholding tax, currently 25% for companies (or the applicable treaty rate).

For Israeli technology companies that hold IIA-funded IP, the IIA has its own transfer pricing requirement alongside the ITA's. The IIA expects royalties paid on IIA-funded know-how between related parties to reflect what an independent party would pay, and it requires a transfer pricing study before approving any cross-border licensing of funded IP. This means an intercompany arrangement that passes ITA scrutiny may still face IIA review if the royalty structure does not match market rates for the specific type of technology involved.

In Practice: Israeli companies above NIS 30 million in annual related-party transactions must include a transfer pricing disclosure on their annual tax return (ITA Form 1385). Companies above NIS 150 million in annual related-party transactions must file a comprehensive transfer pricing report in the Seder Yom format, prepared by a qualified transfer pricing specialist. Both thresholds are measured per the instructions accompanying ITA Form 150. The ITA's International Tax Division, based at 12 Hameria St., Tel Aviv, maintains dedicated staff for auditing Israeli subsidiaries of multinational groups, and intercompany royalty arrangements are among the most frequently audited line items.

One complication that arises in Israel more than elsewhere: many Israeli tech companies have IP developed across multiple funding rounds, some from IIA grants and some from venture capital without IIA involvement. Tracking which specific IP is IIA-encumbered requires the Israeli company to maintain records showing which R&D project was funded by which source. This is worth verifying in due diligence before entering a license, particularly if you plan to include improvements or derivative works in the licensed rights.

6. Governing law and dispute resolution

Israeli courts respect governing law clauses in commercial contracts under the Contracts (General Part) Law 5733-1973. A technology license choosing New York law or English law will generally be interpreted under that law by an Israeli court, provided the choice is not contrary to Israeli public policy. That said, certain rules apply to Israeli-market activity regardless of what the contract says: Israel's Economic Competition Law 5748-1988 covers any arrangement affecting Israeli markets, and IIA grant conditions follow the IP regardless of contractual governing law.

For dispute resolution, the realistic options are:

  • Israeli District Court. Proceedings in Hebrew, typically three to five years from filing to judgment. Patent infringement cases go to the Jerusalem District Court; copyright and software disputes go to the Tel Aviv District Court. Enforcement of judgments against Israeli companies runs through the Execution Office (Lishkat Hotzaa Lapoal). Not recommended for time-sensitive IP matters.
  • Israel Centre for Commercial Arbitration (ICCA). The main Israeli arbitral institution. Proceedings can be conducted in English. The ICCA's Rules of Arbitration 2022 follow international norms closely. Average time from filing to award for commercial IP disputes is 12 to 18 months.
  • International arbitration (ICC, LCIA, AAA/ICDR). Common in cross-border licenses where the foreign party wants a neutral forum. Israeli parties are experienced with international arbitration. Israeli courts enforce foreign arbitral awards under the New York Convention, which Israel ratified in 1959.
In Practice: For a technology license with royalties in the NIS 1 million to NIS 5 million range (approximately $280,000 to $1.4 million), ICCA arbitration is usually the most practical choice. Administrative fees on a NIS 1 million dispute run approximately NIS 8,000 to NIS 12,000 depending on the number of arbitrators. A three-arbitrator panel increases costs: the ICCA fee schedule sets arbitrator fees on a sliding scale starting at NIS 1,100 per hour for disputes below NIS 5 million. For disputes above $5 million, ICC arbitration seated in Tel Aviv or a neutral city (Geneva, London) is more common. Israeli courts grant interim injunctions pending arbitration with relative speed; a well-drafted clause with an emergency arbitrator mechanism can produce a temporary restraining order within 48 to 72 hours of application through the District Court.

One clause worth adding to every technology license in Israel: a specific provision on what happens to sublicenses if the master license terminates. Under Israeli contract law, sublicenses granted by a licensee do not automatically survive termination of the head license unless the agreement says so. This creates risk for Israeli companies that build products using a foreign technology license and then distribute those products to Israeli end users. The master license should include either a "licensee non-disturbance" clause — a commitment from the foreign licensor not to disturb existing sublicensees on termination — or the end-user agreements should be structured as direct licenses from the licensor from the start.