Law allows big return on film investments

“Hungary’s Parliament passed the Film Act on Dec. 22, 2003, with a rare consensus of all parliamentary parties,” said Edit Kohári, co-managing director of Kohári & Alföldi Consulting Kft. “The legislation took effect on April 1, 2004, and is aimed at attracting capital from the film industry into financing Hungarian, co-produced or foreign films shot in Hungary.”
According to Csaba Alföldi, the other co-managing director of Kohári & Alföldi, the tax relief offered by the new law guarantees a 16% low-risk return on any forints invested in a foreign film made in Hungary, and an 8% yield on participating in financing a co-production or domestic movie.
Before starting his company in 2003, Alföldi worked as a tax partner at the former Big Five firm Arthur Andersen, and practised as a tax director at what is now Deloitte.
He also helped the Finance Ministry hammer out new legislation to support the Hungarian film industry. That Film Act, which includes the hefty investment incentives, took effect on April 1.

Lots of extras

Under the new Film Act, if a foreign movie is made at least partly in Hungary, 20% of the total amount spent in Hungary can be deducted from both the corporate tax base and corporate tax of the local entity investing in the production.
This eventually means that foreign film producing companies can shoot films 20% cheaper by teaming up with a Hungarian investor, who, in any case, gets a 16% return on his investment from tax relief – without the need to recover the invested sum at all. That 16% net income is generated via tax savings, regardless of the success or failure of the movie.
In the case of foreign movies – those where the local investor gets no royalty or copyright entitlement – this in practice means that the local share of the sum spent on production can be entirely deducted from the corporate tax of the Hungarian investor in the given tax year, or in installments in three consecutive years.
In addition, 16% of the local investment is also “collected” in the form of unpaid corporate tax, because the investment amount also lowers the tax base of the company in the given year.
In the case of co-produced and local films, the investment can also be entirely deducted from the company’s tax. However, in such cases, only 50% of it can be used to lower the tax base of the investor. This means that investments in all-Hungarian or co-produced movies result in an extra return of 8% – half of the current corporate tax rate.
These benefits all come on top of the money actually collected from the movie.
According to Alföldi, the legislation is aimed at luring away foreign filmmakers from countries where local investors cannot deduct their investments from their company tax or tax base.
If filmmakers spend at least €1 million in Hungary, €32,000 tax can be saved, he said.
For the government, it is also reasonably good business, Alföldi maintained. Only one-fifth of the money spent in Hungary receives a reduction in company tax, while a substantial sum is spent in Hungary, he explained.

Editing out risks

To minimize their risk, it is important for investors to make sure they are the last investor, Alföldi advised. By that time, all the other money the production needs is already raised, he said. This guarantees that the production will go ahead, and the sum will be spent on the movie.
The investor also should make sure that money will, in fact, be spent in Hungary, and that the National Film Office – a new institution supervising state subsidies for the film industry – will recognize and approve those costs as domestic spending, Alföldi added. This is where careful advice is needed, he said.
Co-production partners should also give a guarantee to Hungarian investors that the film will be completed on time, Alföldi said. In countries with more developed film industries, like the U.S. or the U.K., banks give such guarantees for a fee, he noted.
If the film is Hungarian or a co-production with Hungarian participation, the yield is only 8% of the money invested in the movie by a Hungarian company. That is because only 50% of the investment can be deducted from the firm’s corporate tax base. In these cases, the investor also receives some kind of royalties paid for the movie, for example DVD, video and television rights of the production.
In the case of art-house movies, the value of these rights is usually low, because such films generate hardly enough box office revenue and royalties to pay back the investment. Commercial hits, like local movie “Valami Amerika,” usually pay back the original investment.
Nevertheless, in the case of Hungarian films, revenue at the box office is not what the investor should aim for, Alföldi said.
A Hollywood blockbuster, such as the latest “Terminator,” will earn back production costs in weeks, while a B-category movie can produce a return in one to three years, said József Czirkó, producer of the popular Hungarian movie “Mix.” He is owner and managing director of Happy Crew Production Company Kft.
In Hungary, even successful movies can only hope for profit in several years, when all the video, DVD, and television rights of the movie have been sold, Czirkó said.
In the case of co-productions, if the film can reach West European or U.S. markets, there is a better chance of at least recovering the original investment. Local tax incentives decide where the largest chunks of the money are best spent.
“Similar tax advantages support the film industry in several countries, for example in Britain, where even private investors can reduce their tax base if they invest in film productions,” Czirkó said.
“Many investors are worried whether the Hungarian tax authorities really allow movie investors to lower their tax bases,” Alföldi said. “I think they shouldn’t be anxious.”

Let the cameras roll

Robert Heinczinger, partner and manager of tax advisory practice at Ernst & Young Kft, said the new legislation opens up wider perspectives for the industry.
“I’m convinced that the tax savings system supporting the Hungarian film industry will work,” said Heinczinger.
“One of the last obstacles was eliminated on May 1, 2004, when the Finance Ministry modified the VAT rules,” he added. “Changes came into effect on Jan. 1, 2004. From that day, VAT on state subsidies given to the project cannot be reclaimed.”
Formerly, state subsidies could actually end up increasing the company tax base, he noted.
“It might seem that the bottleneck will be the lack of productions to invest in,” commented Kohári. “But I already know about several foreign films planned to be shot in Hungary.”
Kohári & Alföldi bases its business mostly on making contacts between investors and film producers, and helping the investors through the process, she said. Spending on film productions might amount to about Ft 7 billion in Hungary this year, and about Ft 5 billion of that might be spent by foreign productions, she added.


by Katalin Tóth

Click here for Budapest Business Journal subscription offers!