Israel's R&D Grants and Tax Benefits for Foreign Investors

Israel spends roughly 6% of its GDP on research and development — one of the highest ratios in the world, and roughly double the OECD average. A significant portion of that spending flows through the Israel Innovation Authority as non-dilutive grants to private companies conducting R&D activity in Israel. Foreign investors building Israeli technology companies can access these grants. Most of them do not, either because they are unaware the programs exist or because they encounter the IP restriction — the condition that governs what happens to the funded technology if the company is ever sold — and back away without understanding how it actually works in practice.

This guide covers the grant programs available to foreign-connected Israeli companies, the tax incentives for investors putting capital into Israeli startups, the bilateral programs that let US and European companies co-fund R&D with Israeli partners, and the specific IP and royalty obligations that every investor needs to model before committing.

The Legal Framework: The R&D Law 1984

Everything in this area traces back to one statute: the Law for the Encouragement of Industrial Research and Development 5744-1984, known universally as the R&D Law. It established the Office of the Chief Scientist — now reorganised and rebranded as the Israel Innovation Authority following a 2016 amendment — as the agency responsible for managing the grant system, setting eligibility criteria, and enforcing the IP conditions that attach to every grant.

The R&D Law is not optional background. Its provisions determine the rights and obligations of every company that accepts IIA funding, including the right of the state to claw back funding if the funded IP is transferred abroad without approval, and the calculation formula that determines what that clawback costs. Understanding the statute is not an academic exercise — it is a prerequisite for structuring an Israeli R&D operation intelligently.

The Innovation Authority itself operates as an independent government agency under the Ministry of Economy and Industry. It publishes annual calls for proposals across multiple tracks, manages the application review process, and monitors grantees' ongoing compliance with grant conditions throughout the funding period and for years afterward.

IIA Grant Programs: What Is Actually Available

The Innovation Authority runs several distinct grant tracks, each targeting a different company stage and R&D budget size. Foreign-owned Israeli companies are eligible for all of them, subject to the condition that the company is incorporated in Israel and that the funded R&D activity takes place in Israel.

Tnufa — the ideation program. This is the entry-level track, designed for individual entrepreneurs and very early-stage concepts that have not yet reached company formation. The total approved budget is NIS 250,000, with the IIA funding 80% — a grant of NIS 200,000. Approval takes 2 to 4 months. For a foreign entrepreneur testing whether an Israeli R&D operation makes sense before committing to full incorporation, this track offers a low-cost proof-of-concept window.

Startup Fund — Pre-Seed. Once a company is incorporated, the Pre-Seed track provides a grant equal to 60% of the qualifying investment round, up to a maximum of NIS 1.5 million. The funding is tied to an external investment round — the IIA's contribution is conditional on the company having secured private capital. Approval runs 3 to 6 months from a complete application.

Startup Fund — Seed. At the Seed stage, the IIA grant is 50% of the qualifying investment round, capped at NIS 5 million. The same round-linkage requirement applies. For a foreign-owned Israeli startup raising a seed round from international VCs, the IIA contribution effectively reduces the round's dilution burden — the company gets more capital without issuing more equity.

Startup Fund — Round A. The most substantial startup track: 30% of the qualifying Round A, up to NIS 15 million. These are competitive grants reviewed against both technical and commercial criteria. The review committee includes external industry experts, and the business plan must demonstrate a credible path to international market revenue.

Standard R&D Fund. Established companies with ongoing R&D programmes apply through the Standard R&D Fund, which provides 20% to 50% of an approved R&D budget for programmes of up to 24 months. Minimum budget requirements apply and vary by industry sector. Approval takes 4 to 8 months including committee review.

In Practice: Under the Law for the Encouragement of Industrial Research and Development 5744-1984, all IIA grants carry a royalty repayment obligation: the grantee company pays 3% to 5% of revenues generated from the funded technology annually to the Israel Innovation Authority until cumulative repayments reach 100% to 150% of the original grant amount. On a Seed-stage grant of NIS 5 million and a product generating NIS 20 million in first-year revenues, the annual royalty at 3% is NIS 600,000 — a cash flow obligation that must be modelled in the company's financial projections before accepting the grant. Companies that fail to report revenues accurately to the IIA face audit by the Israel Tax Authority and potentially accelerated repayment of the full grant plus interest.

The IP Restriction: The Condition That Changes Everything

The most important — and most frequently misunderstood — aspect of IIA funding is not the grant amount. It is what happens to the intellectual property if the company is ever sold, merged, or if its technology is licensed or transferred outside Israel.

Under the R&D Law, IP developed using IIA grant funding must remain in Israel. It cannot be transferred to a foreign entity without IIA approval. This restriction applies not only to the specific patents or software covered by the grant but to technology that builds on the funded research. In a technology company where each product generation builds on the last, that scope can be broad.

What does transfer without approval cost? The IIA can demand repayment of up to six times the original grant amount. On a NIS 10 million cumulative grant, that exposure is NIS 60 million. This is not theoretical — the IIA actively monitors M&A activity involving grantee companies, and foreign acquirers regularly encounter this issue in due diligence.

The IIA does approve transfers. The process involves applying to the IIA, demonstrating that the transfer is in the national interest or paying an agreed transfer fee. Many major Israeli tech acquisitions have gone through this process successfully. The mistake is not receiving IIA funding — it is failing to account for this approval requirement in the deal structure and timeline of a future exit.

For foreign investors considering acquiring an Israeli company that has received IIA grants, the due diligence checklist must include: what grants were received, what IP is subject to restriction, and what the transfer fee formula produces given the historical grant amounts and cumulative royalties repaid to date.

The Angels Law: Tax Benefits for Investors in Israeli Startups

Beyond the grant system, Israel enacted a separate incentive aimed at the private capital side: the Law for the Encouragement of High-Tech Industry (Temporary Order) 5723-2023, enacted by the Knesset on July 26, 2023. In Israeli tax practice this is called the Angels Law.

The Angels Law provides two benefits to investors who put capital into qualifying Israeli R&D companies.

Income tax deduction. An investor may deduct up to NIS 5 million per year from their taxable income in the year the investment is made. For a non-resident investor with Israeli-source income — from an Israeli salary, a directorship fee, rental income from Israeli property, or business income — this deduction offsets Israeli tax liability directly. The deduction applies in the year of investment, not spread over multiple years.

Capital gains credit. On a future exit, the investor receives a credit against capital gains tax equal to their applicable capital gains tax rate applied to the original investment amount, capped at NIS 4 million. For an investor who put in NIS 8 million and exits at a gain, the credit reduces the capital gains tax by the credit amount.

The qualifying company must be an Israeli R&D company meeting the IIA's definition — technology-focused, incorporated in Israel, with R&D expenditure as a significant portion of its budget. The Israel Tax Authority published a circular in February 2025 clarifying the eligibility criteria following questions that arose in the first eighteen months of the law's operation. Investors should verify that a target company qualifies before structuring a transaction around the Angels Law benefits.

One practical limitation: non-residents with no Israeli-source income cannot use the income deduction. The deduction requires Israeli taxable income to offset. However, the capital gains credit on a future exit is available regardless of the investor's tax residency status, provided the company qualifies and the investment terms are correctly documented.

For the tax treatment of the Israeli company's own income — including the reduced corporate tax rates available to Preferred Technological Enterprises — see our guide to Israel's Preferred Enterprise tax benefits for foreign investors.

Bilateral R&D Programs: Grants Without the Full IIA Conditions

For foreign companies that want R&D collaboration in Israel but are concerned about the R&D Law's IP restrictions, bilateral programs offer an alternative route: funding for a joint project between an Israeli company and a foreign partner, where the IP framework is negotiated between the two companies rather than imposed unilaterally by the IIA.

BIRD Foundation (Israel–US). The Binational Industrial Research and Development Foundation co-funds collaborative R&D projects between Israeli and US companies. Both partners must be incorporated in their respective countries. Grants cover up to 50% of the total project budget, shared between the Israeli and US partners. Repayment runs through sales royalties once the co-developed product generates revenue. Projects typically range from USD 1 million to USD 4 million in total approved budget, with an annual competitive application cycle.

Horizon Europe. Israeli companies can participate in European Union research framework programs through the ISERD mechanism — the Israel-Europe R&D Directorate. Israel's participation allows Israeli companies to join EU-funded consortia on equivalent terms to EU members, with funding flowing through the European Commission rather than the IIA.

Other bilateral programs. The IIA maintains active bilateral programs with Canada, the United Kingdom, South Korea, Singapore, Germany, and several other countries. The terms vary by agreement. Some are grant-based; others operate as equity co-investment or loan guarantees. The structure and eligibility criteria for each programme are published by the IIA and change as bilateral agreements are updated.

What Often Goes Wrong

Accepting a grant without modelling the royalty. The grant is the headline figure; the royalty obligation is the ongoing cost. A company that accepts a NIS 5 million grant and generates NIS 50 million in first-year revenues pays NIS 1.5 to 2.5 million annually in royalties until the grant is repaid. This is real cash leaving the company. The royalty structure must be built into the financial model before the grant is accepted, not discovered after the first revenue quarter.

Failing to disclose IIA grants in M&A due diligence. Foreign acquirers of Israeli technology companies routinely encounter undisclosed IIA grant histories in the middle of a deal — after term sheets have been signed and exclusivity granted. The discovery triggers a mandatory IIA approval process that typically adds 3 to 6 months to the transaction timeline. Sellers who were unaware of their own grant conditions create legal exposure for themselves and significantly complicate the deal.

Non-residents assuming the Angels Law deduction applies to them. The NIS 5 million income deduction requires Israeli taxable income. A non-resident investor who has no Israeli-source income invests on the assumption they will receive the deduction, and discovers at tax filing time that it is unavailable to them. The capital gains credit on exit may still apply, but the near-term tax benefit was never there. Verify Israeli tax exposure before structuring the investment.

Common Mistake: Foreign investors who acquire Israeli companies holding IIA grants frequently close the transaction without obtaining prior IIA approval for the IP transfer — either because the grant history was not discovered in due diligence or because the parties assumed approval was a formality and could be obtained post-closing. Under the R&D Law, an unconsented transfer of IIA-funded IP triggers a clawback demand from the Israel Innovation Authority of up to six times the cumulative grant amount. On a company that received NIS 8 million in total IIA grants, that exposure is NIS 48 million — a liability that must be resolved before the transaction can proceed and that can be difficult to negotiate down once the transfer has already occurred.

Practical Checklist

• Confirm the Israeli company is incorporated in Israel and conducts R&D activity in Israel before applying to any IIA program
• Identify which IIA grant track matches the company's stage: Tnufa, Startup Fund (Pre-Seed, Seed, or Round A), or Standard R&D Fund
• Model the royalty repayment obligation (3%–5% of revenues) in the company's financial projections before accepting any grant
• Before any M&A transaction involving an IIA-grantee company, request a full history of grants received, royalties paid, and the outstanding repayment balance
• Apply to the IIA for IP transfer approval before any acquisition closes — not after
• Verify whether the Angels Law income deduction is available to you based on your Israeli-source income position
• For US-Israel collaborations, evaluate the BIRD Foundation as an alternative to direct IIA grants — different royalty structure and IP terms apply
• Engage an Israeli attorney and Israeli CPA jointly for IIA grant applications — the legal and tax dimensions interact

Speak With an Israeli Attorney

Israel's innovation grant system genuinely offers foreign investors access to non-dilutive capital that most comparable jurisdictions do not provide. The conditions that attach to that capital are specific and enforceable — and they follow the IP through every subsequent transaction. Adv. Eli Shimony advises foreign investors and technology companies on IIA grant structuring, M&A due diligence for IIA-grantee targets, and the Angels Law investment deduction. Consultations are conducted by phone, WhatsApp, or video call.

Contact us for a confidential initial consultation.