Director Suha Arraf is an Arab who considers herself Palestinian, like 20% of Israel’s citizens. She pays Israeli taxes, and carries an Israeli identity card. Her directorial debut, “Villa Touma,” was partially financed by the Israel Film Fund. Her sector of the Israeli population is routinely touted as an example of Israel’s democratic nature and progressive society.

So when Arraf, one of Variety’s 2014 Screenwriters to Watch, took the picture to the Venice Film Fest and listed it as a Palestinian film, she set off a firestorm. The Israeli government — which helps bankroll the fund — demanded it repay its 1.4 million shekel ($356,000) grant.

Late last month Israel’s Yehoshua Rabinovich Foundation for the Arts took steps to avoid the occurrence of a similar fallout, amending the contract it requires all fund recipients to sign to include a declaration that they represent themselves as Israeli on those projects.

“We asked our legal counsel to protect us against what happened at the Israel Film Fund,” Giora Einy, Rabinovich Foundation director general, told Israeli newspaper Haaretz. “We provide about 2 million shekels in support per film, and I am not prepared (for) some idiot whose film we supported to declare that he has no nationality.”

Almost all Israeli directors depend on film funds to finance their movies, and the Rabinovich Fund is one of the largest. The addendum has earned the nickname the Suha Arraf Law, and many local directors say it points to a troubling political shift among Israeli film funds.

“It’s racist to force you to sign something about your identity,” Arraf says. “I define myself as a Palestinian. But even if they wanted me to sign something that said that I’m Palestinian instead of Israeli, I wouldn’t agree. Identity is a very private thing, and nobody can tell me who I am.”

Director Guy Davidi, who along with Palestinian director Emad Burnat earned a 2013 Oscar nomination for the documentary “5 Broken Cameras,” a firsthand look at one man’s life in a Palestinian village under the watchful eye of the Israeli army, wasn’t surprised by the Rabinovich Fund’s decision. Perhaps more than any other Israeli director, he has openly condemned the recent politicizing of Israeli cinema.

“This (Rabinovich declaration) exposes Israeli film to boycotts, because it automatically excludes an entire part of the population of Israeli society,” he says. “Political ideas or ideologies should never interfere with the film funds’ decision-making. Many people abroad think that the Israeli film industry is liberal and open, but this is changing.”

Oscar nominations for “5 Broken Cameras” and Dror Moreh’s “The Gatekeepers,” which features troubling interviews with some of the nation’s most notorious spy masters, raised the hackles of Israel’s right wing. Limor Livnat, Israel’s minister of culture and sport, went so far as to call on Israeli filmmakers to practice “self-censorship.”

When Davidi applied for funding for his next project, a documentary about Israeli theater legend and free-thinker Amir Orian, called “Mixed Feelings,” he collected rejections from all four major film funds, as well as five smaller ones.

Davidi did eventually convince the Gesher Multicultural Film Fund to back his movie, but he says there is no doubt that the those who hold the purse strings in Israeli cinema are spooked by political pressure to toe a certain line.

Dorit Inbar, executive director of Israel’s New Fund for Cinema and Television, which supported “5 Broken Cameras,” insists the government will never impact her fund’s selection process. “It’s ridiculous to say Davidi’s film was rejected because of politics,” she says. She notes that although NFCT rejected “Mixed Feelings” and didn’t fund it, the org recently agreed to fund a separate project, titled “The Boy Without a Voice.”

Nadav Lapid, helmer of Jerusalem Film Festival prize winners “Policeman” and “The Kindergarten Teacher,” says that there has never been a more important time for the film funds in Israel to stand up to political pressure.

“If expression and individual freedoms are checked, it’s eventually going to affect the cinema,” he says. “Jews have always had to deal with questions of dual identity and double loyalty. … This total lack of sensitivity toward Arab directors (who suffer from the same issue) in Israel is a declaration of weakness.”