Assistance
for Research and Development in Israel
Prepared by L. Marc Zell, Adv. and Keith Shaw, Adv., Zell & Co., Jerusalem and Tel Aviv, An Affiliate of the Feith &
Zell International Law Group.
Introduction
This note deals with the various methods of assistance that are available
for the carrying out of research and development work (“R&D”)
in Israel, primarily under the Encouragement of Industrial Research and
Development Law 1984 (“the Law”), and also under a number of
bilateral agreements.
The administration of the incentives available is dealt with by the Industrial
Research and Development Administration, the Director of which is the
Chief Scientist of the Ministry of Industry and Trade. He is also chairman
of the Research Committee, one of the governing bodies of the Administration,
which is responsible for deciding on the approval of programs for the
receipt of assistance (“the Committee”).
In general, the incentive offered is in the form of a cash grant, of
up to 66% of approved expenditure. In return, if the R&D is successful
and leads to commercial production, a sales royalty becomes payable to
the Office of the Chief Scientist (“OCS”).
Conditions of eligibility
Application is made to the Committee for the approval of a “program”.
This is defined in the Law as “a program of research and development
for one or more years, the result of which will be the know-how, processes
or methods for the production of a new product or for the substantial
improvement of an existing one, or for the development of a new process
or for the substantial improvement of an existing one.”
The applicant, which should generally be an Israeli company, must submit
a detailed application to the Committee, specifying such matters as sources
of finance, existing know-how and persons with rights thereto, proposed
methods of production and marketing, and in particular the innovative
features of the product to be developed and its advantages over other
products.
As a general rule, approval will only be given to programs where it has
been shown that the manufacturing will take place in Israel. However,
where the program is to be carried out within the framework of an international
R&D agreement to which Israel is a party, the program will be approved
even if some manufacturing occurs outside Israel. In addition, and only
in respect of programs which have already been approved, the Committee
may, in special cases, permit part of the production rights to be transferred
abroad, on such conditions as it may prescribe. In such cases, increased
royalties may be payable.
Expenditure supported by other government-run incentive programs is ineligible
for support under this Law.
Types of benefit
Anyone who receives an approval pursuant to the Law is entitled to a
benefit, provided that all the conditions of the approval are met. A benefit
is paid only once for any program.
By far the most common form of benefit awarded is in the form of a grant,
which is calculated as a proportion of R&D expenses. It is paid no
later than 30 days after which the relevant part of the approved program
has been carried out and the expenses to which the application referred
have been incurred.
There are a broad range of alternative grant packages, as follows:
a) Regular grant. Grants of 50% of approved expenditure are available
for R&D “programs”, as defined above.
b) Start-up businesses. A grant of 66% of R&D expenses, up to an
annual maximum of $250,000, for one or two years, is available to a start-up
company. This is defined as one in which an R&D program is the initial
or only activity, and which has no source of finance other than the equity
capital provided by those carrying out the R&D.
c) Product improvement. Grants of 30% of approved expenditure may be
given for improvement of a civilian product, or 20% for a military product.
d) Foreign contractor. Grants of 20% of approved expenditure are available
for R&D projects conducted by an Israeli company as a subcontractor
of a foreign party, and various particular conditions apply.
e) R&D with third party support. Grants of 5% of approved expenditure
are available for projects supported by a non-shareholder third party
which deducts its participation as an expense for income tax purposes,
and where the company’s annual sales for the previous year exceeded
$1 million.
f) National Priority Region A. Grants of 60% of approved expenditure
are available for R&D projects mostly carried out in Region A.
g) Military development. Grants of 30% of approved expenditure (40% in
Region A) are available for the development of products for military use.
As an alternative to a grant, the Committee may decide to make a loan
to the applicant or to whoever invests in his program. The loan is made
by a bank approved by the Minister of Finance, in proportion to the R&D
expenses of the program, provided that the applicant shows that at lease
10% of the R&D expenses come from his own equity capital and not from
loans, and that money raised to finance the program was obtained in a
proper manner and on the basis of proper disclosure of the risks and prospects.
If the holder of an approval fails to comply with the provisions of the
Law or with any conditions set, the benefit may be suspended or cancelled
and the return of amounts already given demanded.
Payment of royalties
Anyone who receives an approval must pay royalties to the Treasury, on
all income derived from the product which was developed according to the
program, including services associated with the product. It is in this
way that the OCS obtains a return on its investment.
New royalty rates, calculated as percentages of the sale price, came
into force on 1 January 1996. Accordingly, 3% is payable for each of the
first 3 years after commercial sales begin, 4% for each of the next three
years, and 5% for the seventh year onward. In certain cases, such as products
identical with or similar to products which have already received approval,
or products with a limited market life, the rates are 4, 5 and 6% respectively.
Start-up companies may be allowed to postpone the payments for two years.
In all cases, the amount payable will be limited to 100% of the US dollar
value of the amount received.
In addition, as mentioned earlier, if the transfer abroad of production
rights was approved, the Committee may demand the payment of increased
royalties up to a maximum of 300% of the grant.
In order that the Committee can be sure that the correct royalties are
being received, there is an obligation on holders of approvals to report
semi-annually to the Committee on sales volumes.
Other programs in Israel
In addition to the system regulated by the Law, a number of other programs
have been set up to encourage R&D, as follows:
a) The Generic Technological R&D (GTRD) Program
This program is also operated by the OCS, and promotes cooperation between
industrial firms by incorporating them as a consortium and setting up
joint work groups which deal in the development of pre-competitive technologies.
To encourage participation, incentives offered include a 66% development
grant, a wider recognition of expenses entitled to the grant, and a full
exemption from the payment of royalties to the OCS. Any sale of know-how
will require authorization from the GTRD committee.
b) Technology incubators
These are specialized locations, jointly established by industry, the
Government and universities. The OCS subsidizes the operating costs of
approved projects carried out in these centres under the conditions set
by the Ministry of Industry and Trade, and the principal participants
in the R&D are immigrant scientists.
The principal criterion for receiving support is that a project be directed
towards the development of projects based on technological innovations.
At least 50% of the company’s capital should be held by the project’s
promoter and 10% to the employees. Outside investors may hold up to 20%
and the technology centre similarly. At lease 50% of the project’s
employees must be new immigrants.
The assistance provided is up to approximately $160,000 to the
centre,
to cover administration costs, and up to approximately $130,000 annually
to the project, for up to two years.
Bilateral schemes
a) The Israel-United States Binational Industrial Research and Development
Foundation (BIRD)
This is a joint fund between Israel and the US, the aim of which is to
encourage and support industrial cooperation between Israeli and US companies.
It has an independent status and its head office is located in Israel.
To qualify for funding, the proposed project must be jointly implemented
by a temporary or permanent partnership between an Israeli and a US company,
with the two companies having complementary abilities. The resulting products
may be sold anywhere in the world, but the manufacturing must take place
in either Israel or the US.
BIRD provides up to 50% of the R&D costs in the form of “conditional
grants” for up to three years, up to a maximum of $200,000 for a
mini-project and $2.5 million for a full-scale project. These are repayable
in the form of royalties on sales revenues, which continue until a prescribed
percentage of the grant (greater than 100%) has been repaid.
b) The Canada-Israel Industrial Research and Development Fund (CIIRDF)
This is a similar fund established by the governments of Israel and Canada,
to promote the development or realization and transfer of new and advanced
technology by collaboration between Israeli and Canadian companies.
Support is granted for up to 50% of approved expenditure, to a maximum
of $750,000 over a period of three years. Again, repayment will be by
way of royalties until full repayment of the grant.
Similar bilateral commercial R&D and parallel support agreements
also exist with a number of other countries.
Taxation benefits
In addition to the grants to which an investor may be entitled, he may
also deduct from his taxable income R&D expenses, including capital
expenditure, if approved by the OCS or other authority, and if they meet
one of the following requirements:
a) the research was carried out by or on behalf of the owner of the enterprise
for the purpose of the development and advancement of that enterprise
b) the Israeli Government participates in an expense incurred by one
carrying out the research who is not an owner of the enterprise
c) the expense was incurred by an outside party who is entitled to a
certain percentage of the fruits of the research.
Capital expenditure for R&D incurred by a taxpayer which is for the
development of his enterprise and which does not fall into one of the
above categories is tax deductible in three equal instalments, excluding
expenditure on depreciable fixed assets.
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