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Ministry of Trade and Industry Proposes Important Change in R&D Law

One of the thorniest problems for foreign investors in Israeli high-tech concerns has been the strict limitations on technology transfer and overseas production imposed upon recipients of government research and development incentives under the Encouragement of Research & Development Law, 5744- 1984, administered by the Office of Chief Scientist ("OCS") within the Ministry of Trade and Industry. Given the widespread use of such incentives, many foreign investors in Israeli technology firms find it difficult if not impossible to relocate manufacturing operations and proprietary technology outside of Israel. Under a proposed amendment to the law to be submitted shortly by the Ministry to the Knesset, Israel's parliament, these restrictions may be eased or eliminated.

The law will be submitted to the Knesset as part of the Economic Arrangements Law which will be presented together with the Government's budget proposal for Fiscal Year 2002.

According to Chief Scientist, Carmel Vernia, the proposed law would balance out the new economy and its needs with the ministry's right to protect its investments. "A firm receiving funding from us, wishing to export its technological know how will have to pay a certain fee and as part of its transparency, it will be required by law to inform its investors of this obligation," the Chief Scientist noted.

The new R&D law will also allow for government investment in Israeli companies with overseas operations. However, a firm applying for R&D funds will have to state from the beginning where it plans to keep its manufacturing. A company who receives OCS grant funds and fails to abide by in-country manufacturing commitments will be required to repay all grant funds and a premium on equity investment or 150% of the original grant, whichever is greater.

**Footnote: Note that while the amendment was eventually passed, the final text did not reflect all the initial intentions, due to inability to reach agreement on certain issues.  The fundamental restrictions on transfer of OCS-funded technology overseas accordingly remain in place.

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