Compiled by Ulrika Lomas in Brussels

Introduction

Many tax shelters attempt to turn (highly-taxed) income into (less highly-taxed) capital by allowing deductible investment of current expenses to contribute to the eventual capital value of the asset concerned. Trees are the classical example of this. Film finance can operate in that way, if the rights to a film which ate up development cost over a number of years are eventually sold for a capital sum, but the main attractions of film financing from a tax perspective are those of deferral. Thus, the early production costs of a film are deductible, helping someone who has high current taxable income, and the returns, while still taxable, are deferred until a period when lower income is expected.

The balance between 'income into capital' and 'deferral' is different in each country according to its particular tax structure, and to some extent the financing structure of the film industry varies from country to country depending on history and current commercial and governmental influences.

Production of Feature Films

The producer of a movie acquires or commissions a screenplay which may be original but is more often based on some other form of intellectual property asset: a book, play, or whatever. The development phase of production can last for years, while the screenplay is refined, the cast and technical staff are engaged, and production schedules and budgets are prepared.

If a feature film is not being financed by a major studio or media company (which is unusual outside the US) then financing the production and marketing of a feature film is a complex process, which is often strongly influenced by the tax regime in place in the locations concerned.

Characteristically the producer pre-licenses rights in geographical areas and in different media either to raise cash as such or to provide collateral against which banks or other investors may advance money for production and distribution. This process in itself may provide a considerable part of the finance needed, but often the producer will have to go to other sources as well, and in some countries those sources may include individuals or funds who are using local tax breaks offered either to venture capital in general or to film production in particular.

Investors in film production, whether individuals, funds or banks, will normally want to know that the movie has completion insurance. This is a very specialised activity, and there are just a few companies that have developed the necessary expertise, including IFG, Film Finance, and Cinema Completions.

Once sufficient financing has been secured, shooting can take place, normally covering a period of a few months. Post production, which includes editing, special effects and sound, has become a more significant part of the process as technology has advanced, and can take up to a year.

Box office receipts from theatrical exhibition nowadays form a declining proportion of total revenues due to the emergence of new distribution opportunities such a video-cassettes, DVD and television, but still plays a vital or even dominant role in establishing the commercial success and reputation of a movie. Successful movies especially may have an extremely long forward revenue stream, and an investor can normally find a movie to match any required revenue profile by searching for the right combination of rights revenue and exhibition revenue.

The problem of choice is of course complicated by the fact that film investment is highly risky, or rather, erratic, due to the element of artistic worth or just plain old luck that's involved in a success. Thus investors who have limited resources available for movie production are more likely to choose a fund in preference to backing individual movies.

The French Film Industry

Birthplace of the "seventh art", France has traditionally been a known haven for foreign directors and actors from all over the world. From Carl Dreyer to Roman Polanski, Robert Altman, Nagisa Oshima or Wim Wenders, these cinematic luminaries chose to shoot or produce their films within the framework of French laws and regulations, not least because of the unique French system of subsidies and co-productions.

The first important group of foreign filmmakers came to France after WWI, including a good number of Russian immigrants. Among these, Ladislav Starevitch, a pioneer of animation and Victor Tourjanski, who was to lead a successful career in Germany and in Italy well into the sixties. Actors, such as Ivan Mosjoukine, his wife Nathalie Lissenko, Nathalie Kovenko or Nadia Sibirskaïa were famous before the talkies.

During the de Gaulle era, France played an important part in presenting and popularizing third-world ideologies. It attracted several Latin-American film-makers such as Raul Ruiz or Edgardo Cozarinsky. In the seventies, a few Polish directors: Roman Polanski, Andrzej Zulawski, Walerian Borowczyck, began working in France.

When asked about the reasons that made them choose France, foreign film-makers most often point out that directors are considered as full-fledged authors, the existence of creative freedom and the crews' professionalism. The French film industry is the largest in Europe, and is [Image] protected by a complex web of subsidy, television finance, state-sponsored institutional investment, tax-shelter schemes and television quotas.

Although the bulk of the films produced in France are low-budget, frequently by first-time directors, the growth in the average budget reflects the trend in France towards bigger films, a development intended partly to counter the continuing growth of the US share of the French box-office.

Because of the size of the film industry in France, and the continuing (though declining) popularity of French films at the box-office, French producers can afford to invest significant amounts of their own money in feature films, and are also able to raise finance from big business and the banking sector.

Industry experts predict that public demand for American films will continue to grow despite significant French market barriers. The general sentiment within the French government appears set against the massive influx of foreign films, mainly American. As a defensive measure, the government has created special funds to finance production of French movies and television films.

The 1989 EU Broadcast Directive requiring a "majority proportion" of TV programming to be of European origin was incorporated into French legislation in 1992. France, however, specifies a percentage of European programming (60 percent) and French programming (40 percent). These broadcast quotas were less stringent than France's previous quota provisions, which required that 60 percent of all broadcasts be of EU origin and that 50 percent be originally produced in France. The 60 percent European/40 percent French television quotas are applicable throughout the day, as well as during prime times slots. The prime time rules go beyond the requirements of the EU Broadcast Directive and limit access of U.S. programs to the French market. Nevertheless, the market share of U.S. films remains high. Major industry players in France emphasize that the development of the business side of films & videos will do more to revive the industry than any system of quotas.

Despite a recent push for tighter television quotas, the situation has not changed much since 1992. In June 1995, France shelved its demand for more restrictive quotas for the time being. Instead, recent campaigns have focused on new financial incentives and other subsidies for film makers.

French film remains popular at the domestic box-office, accounting for about a third of all revenues. US films now take about 60 per cent of the box office, a reversal of the position in the 1970s and 1980s, when French films took the greater share.

It is the growing US share that has been the principal bone of contention in the French industry for some time, with arguments raging over whether producers should be making more commercial films, which are less dependent on subsidy and have wider audience appeal. The growth in bigger-budget films seems to confirm that producers are responding to such arguments.

France produces the largest number of short films in Europe. This major national production of approximately 400 films per year is made possible by numerous sources of funding and production companies that produce nothing but short films. France has the advantage of assistance with writing, production and screening. Moreover, the film schools and workshops help to increase the number of short films made. As in all other European countries, however, it is not easy for short films to find distribution networks, and they are not well known by the general public.

After production company investments, television finance is the biggest source of money for French film producers. Under French law, the five free-television channels - TF1, France 2 (formerly Antenne 2), France 3 (formerly FR3), M6 and the new Franco-German channel Arte (incorporating the former La Sept channel) - are each obliged to operate a film-production subsidiary. The channels must provide the subsidiary with an annual subsidy and cannot take profits from it.

The subsidiaries act as co-producers on films (the law does not allow them to produce films on their own). The parent company is obliged to buy the first-run French television rights to films co-produced by the subsidiary.

A separate feature-film investment law applies to Canal Plus, France's successful pay-television channel. Canal Plus must invest 20 per cent of its turnover in film acquisition, half of it for French films. This means that a pre-buy from Canal Plus is one of the most common financing components of French feature films.

French Subsidies And Incentives For The Film Industry

The French subsidy system is supervised by the culture ministry, which controls the Centre National de la Cinématographie (CNC). Apart from the extensive subsidies provided by the CNC itself, the country's banking and broadcasting sectors are required by law, or encouraged by incentive, to invest in film.

Central government aid for cinema and television exceeds FFr4 billion. The CNC's funds include direct grants from the ministry, and grants from the 'compte de soutien' which include payments funded from hypothecated taxes on cinema tickets and videos and on the turnover of French broadcasters.

There are both automatic and discretionary aid programmes. Automatic aid is calculated on box-office performance and is to be used for production or distribution of subsequent films. A film becomes eligible to apply for the automatic support at the development stage. To be eligible the producers must meet the following criteria:

• The cast and crew must be resident in an EU state.
• The film must be filmed in France or a French territory.
• Any co-production must be part of a formal treaty.
• The film must be directed by EU nationals, or those who have lived in France for more than five years.
  

Discretionary subsidies for production include the 'advance on takings' or 'avance sur recettes' scheme, under which interest-free loans are made to films ready to go into pre-production. In the past, this money has usually been made available only to films which either had a specifically "`artistic'' nature or were being made by first-time directors. Loans did not often rise above FFr500,000. Increasingly, however, the tendency is to award loans of up to FFr5 million and to select films which have already secured some backing and have a strong chance of getting made and distributed.

The money is awarded only to those films shot in French. The applicant (either the producer or director) must also have received a licence from the CNC. This effectively means that he or she must be a French national. Loans are allocated through two separate funds, one for new directors and one for established directors. The new-directors fund gives about 20 loans a year, the experienced-directors fund about 30. The loans are conditionally repayable. In practice, only 10 per cent or so of projects return all the money.

Other discretionary aids include co-production subsidies according to individual co-production treaties and the Fonds Eco scheme for co-productions with Eastern Europe. International co-productions can benefit from the subsidy if they are covered by one of the co-production treaties between France and various other countries. If a film qualifies, it gathers automatic aid at the box-office in the same way as if it were a totally French film.

The CNC operates two other important central-support systems. The first, a development scheme, is available only for films which are to be shot in French. The money is repayable only if the film receives support under the avance sur recettes system or if the film is not made at all.

The second scheme provides finance for script re-writing on films rejected by the avances sur recettes commission, enabling them to be polished up for a second attempt.

Money for the production of features also come from several regional organisations: either Directions regionales des affairs culturelles (DRACs), which are the regional branches of the culture ministry, or les conseils regionaux, which are the local authorities.

The regions which provide subsidies, under differing regulations according to the authority, are: Champagne Ardennes (DRAC), Franche Comte (Conseil Regional), Languedoc Roussillon (Conseil Regional), Lorraine (Conseil Regional), Midi Pyrenees (Conseil Regional), Nord Pas-de-Calais (Conseil Regional);

Basse Normandie (DRAC and Conseil Regional), Haute Normadie (Conseil Regional, administered by the Association Regionale du Cinema et de l'Audiovisuel), Pays de Loire (Conseil Regional) and Rhine Alpes (Conseil Regional, in partnership with the Centre Europeen Cinematographique (CEC) Rhine Alpes, which administers the money by co-producing).
France's mix of production-aid schemes is similar to that of other European countries, particularly the twinning of automatic aid with specific production subsidy. However, France also operates the unique tax-sheltering scheme of Societes de financement du cinema et de l'audiovisuel (Soficas), see below.

French banks, like those in the UK, play a marginal role in film production, occasionally providing long-term loans to respected clients but otherwise performing standard banking services such as discounting pre-sales contracts and organising production overdrafts. Most of the contract discounting business in France is handled by three specialist film-credit organisations: Sodete-UFCA, Cofiloisirs and Coficine.

One organisation designed to increase the banks' role in production is the Institut pour le Financement du Cinema et des Industries Culturelles (IFCIC), in which the government has a 20-per-cent stake. The central function of the institute is to guarantee loans to cultural companies, covering up to 80 per cent of the loan.

For film production in particular, IFCIC will itself provide short-term loans alongside, but only alongside one of the three specialist film-credit bodies. IFCIC also guarantees bank loans to producers for feature film production, and will guarantee amounts up to 70 per cent of the estimated future receipts from French distribution and 80 per cent of the sales estimates for international distribution.

A number of non-state bodies also offer subsidies for feature development or production:

• La Maison des Ecrivains is a support group for writers, and offers scriptwriting subsidies to writers and producers of between FFr20,000 and FFr60,000;
• L'association Beaumarchais gives subsidies to non-French francophone directors. It awards small amounts, for instance only FFr20,000 to FFr40,000 to a feature;
• Procirep, the revenue-collection agency for creative talent working in film, primarily awards development subsidies to production companies registered with the CNC. The amounts awarded range from FFr100,000 to FFr500,000, and are repayable only if the rights to the projects are ceded to another company, or if the finished project is not in the French language.
• La Fondation Hachette was founded to promote ``culture'' in the fields of writing and audiovisual production. In the film field, it awards sums of up to FFr300,000 to young producers, primarily for the creation of production companies or for increases in companies' capital.
• La Fondation Gan was set up by the Gan insurance company to support the film sector. It awards subsidies to the producer (up to FFr300,000) and the director (up to FFr30,000) for the development of projects.

Support for short films

Among a large number of organisation which support short film-making, the CNC is probably the most important.

The CNC supports the writing and preparation of projects by encouraging the production of films and their showing by the television channels. The assistance given ranges from FFr 10,000 to 20,000 for writing, and an additional grant of FFr 50,000 is made if a producer or broadcaster makes a commitment to the writing and making of a film. Production assistance from CNC can be broken down into two funds: the Financial Contributions Committee (which makes grants to projects using the medium of film) and the Film and Television Industry Support Fund (COSIP).

The CNC makes grants both before a film is made (production grants) and afterwards (quality awards):

Production grants are made by a committee of 10 film professionals and 4 people from the television companies (only 1 vote for those 4). The committee meets 9 times a year and examines between 25 and 30 filmscripts per session (which have been selected in advance by a reading group). At each meeting, 4 or 5 films are picked to receive financial support. In 1995, over 1600 filmscripts were submitted to the CNC, and 54 films received grants. These generally range from FFr 100,000 to 250,000, with an average of FFr 168,000 per film. All genres are eligible (fiction, documentaries and animation). Animated films are considered 3 meetings a year, while fiction and documentaries are examined at 9 meetings. In 1995, FFr 9.3 million were disbursed, and only 13% of the grants were given to documentaries.

Quality awards are made by a second committee of 10 people, who view about 300 films per year. Out of these 300 films, which have received a viewing certificate and have been made in accordance with CNC conditions, 60 short films receive assistance. In 1995, a total of FFr 3.5 million was distributed, with a different award for each film. The grants range from FFr 20,000 to 180,000. These awards are given, and need not be reinvested in a new production. Unless there is an agreement to the contrary, 80% of the amount goes to the producer, and 20% to the director.

The French Tax Regime For Film Finance

Tax breaks are offered through film financing companies that operate under SOCIETES DE FINANCEMENT DU CINEMA AT DE L'AUDIOVISUEL (SOFICA). The SOFICA is the dominant structure for tax-efficient film financing in France. These are companies which raise money by offering substantial tax write-offs to investors and use the money to invest in film and television projects by providing interest-bearing loans.

Companies investing in SOFICAs can write-off up to 50% of tax on their investment. Individuals can invest up to 25% of their income with a 100% tax write-off. Any tax relief given must be used by the individual or company within a maximum of five years after its acquisition.

SOFICAs are treated as private companies for economic purposes, but they may invest only in those films and television projects which have been approved by the CNC for such support. The SOFICA itself decides the size of each particular investment.

For repayment, the SOFICA does not take an equity stake at first, but negotiates a repayment corridor which can be different for each film. Typically, a SOFICA will demand a large percentage of the returns on a film from day one, until its investment has been repaid. At that point, its share of the profits will decrease, sometimes to zero, sometimes to a point at which the SOFICA assumes a small equity investment to enable it to share in the long-term revenues of the film. The SOFICAs are also given production credits on the films in which they invest.

The main SOFICA companies include media groups such as Gaumont, Caisse des Depots and Le Studio Canal Plus.