The Israeli Innovation Authority's New Special Licensing Rules for Multinational Corporations
The Israeli Innovation Authority (IIA), formerly known as the OCS, has published important new rules for multinational corporations regarding licensing of knowhow that was developed with IIA funding.
The new rules enable Israeli and non-Israeli multinational corporations to license their IIAfunded knowhow within their group entities outside of Israel ("MNC Group License"), subject to IIA approval with lower payments to the IIA compared to the standard IIA license fees that apply to other licensing of IIA-funded knowhow outside of Israel.
The new rules are meant to incentivize foreign corporations that acquire or invest in IIA-funded companies to maintain the technology of the Israeli companies in Israel, while being able to share the technology globally, within the group, at a reasonable cost and in a simplified manner. The new rules are also meant to make IIA funding a realistic and attractive opportunity for multinational corporations, in particular for the development of high-risk future technologies.
The new rules affect mergers and acquisitions, investments and commercial transactions which involve multinational corporations and IIA-funded companies or companies that hold IIA-funded know-how. The new rules also provide an opportunity for IIA-funded companies to reexamine the structure of their operations in order to share their know-how with non-Israeli group companies.
It is therefore highly recommended to consider the implications of the new rules, both regarding future transactions as well as regarding restructuring possibilities of on-going operations of IIA-funded multinational corporations
In a Nutshell
Scope of the MNC regime - the MNC Group License regime applies to:
➢ MNC - Israeli or non-Israeli multinational corporations whose consolidated annual turnover in the calendar year prior to the license was more than US$2billion.
➢ License IN: IIA-funded knowhow of a multinational corporation or of a corporation that is wholly owned (directly or indirectly) by a multinational corporation.
➢ License BY: the group entity that owns the IIA-funded knowhow.
➢ License TO: the multinational corporation or to corporations that are wholly owned (directly or indirectly) by the multinational corporation.
➢ The license: (i) must be limited to the needs of the multinational corporation and the other group licensees, and (ii) must not limit the activity of the licensor (the IIA-funded company).
IIA Approval and conditions – the MNC Group License requires the IIA approval, which will be granted only if: (i) the license is limited to the MNC's group entities; (ii) the license does not harm or limit the activity of the IIA-funded company; (iii) the license will result in a greater economic benefit to the Israeli economy than would have been achieved without the license; (iv) any new knowhow that will be developed by the IIA-funded group entity in connection with the IIA-funded knowhow will be owned this entity; and (v) the IIA may require the MNC to meet additional conditions.
Supporting Documents - to establish these criteria and receive IIA's approval of the MNC Group License, the MNC should submit the following documents: (i) a business plan of the MNC and the IIA-funded group entity regarding the license of the IIA-funded knowhow; (ii) a transfer pricing study or an economic valuation regarding the consideration to be paid to the IIA-funded group entity for the MNC Group License; and (iii) an undertaking of the MNC and of the IIA-funded group entity regarding the ownership of new knowhow to be developed by the IIA-funded group entity.
Special IIA license fee for the MNC Group License – for the MNC Group License, the relevant IIA-funded group entity will be required to pay to the IIA a special MNC license fee equal to 5% royalties from its income deriving from the MNC Group License (on an arm's length basis), up to a total amount of 1.5x the IIA funding (plus accrued interest) received by the IIA-funded group entity in connection with the licensed knowhow. At the same time, the new rules do not limit the power of the IIA to approve exchange of licenses without any payment to the IIA.
Reporting AND Compliance
* At the end of each calendar year during the IIA's approval period, the MNC and the IIA-funded group entity will file a report to the IIA regarding their compliance with the business plan that was approved by the IIA.
* If the IIA determines that any of the conditions for the IIA's approval of the MNC Group License was not met, the IIA may change or cancel the approval and require that the IIA-funded group entity pays to the IIA full transfer fees (up to 6 times the amount to the IIA funding plus accrued interest) as if the IIA-funded knowhow was fully transferred outside of Israel.
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Should you require any further information or clarification regarding the issues discussed in this circular, please do not hesitate to contact Adv. Ofer Granot, Partner, Tax & Government Incentives Department, Herzog Fox & Neeman - email@example.com, +972 3 692 2817; or Adv. Roni Alfassi Goldberger, Committees Manager, IATI - firstname.lastname@example.org, +972 524 200200