In our last Newsletter, we introduced the new tax measures applicable to the production of theatrical and audiovisual works as of January 1<sup>st</sup>, 2016.
These measures concerned both the domestic tax credit, applicable to the French producers, and the international tax credit (aka TRIP), which benefits foreign producers.
The French 2016 Finance Act aims at strengthening the domestic tax credit, principally applicable to theatrical motion pictures, mainly due to the impulse of Luc Besson who threatened to produce his motion picture “Valerian” outside of France because of the current legal framework.
“Valerian” is an English-language theatrical motion picture produced by a French producer with the highest budget ever seen for a French film. As a French producer, the only tax credit available to EuropaCorp was the domestic one with the overall result being that EuropaCorp was in a less favorable position that a foreign producer. In the first instance, the English language simply disqualifies the film from being eligible for the domestic tax credit.
Further, assuming that the film was even eligible, the domestic tax credit is limited to 20 % for such works, while, as of January 1, 2016, 30% is available for the same works under the TRIP with funding caps being higher than those applicable for the domestic tax credit.
In light of the current structure, the various subsidies and tax schemes proposed by other European countries became more attractive than those proposed when filming in France.
The internationalization of French productions in terms of the use of English as a shooting language, as well as the level of the production budgets for these types of films, necessitated certain changes to the domestic tax credit system in order to keep the French market competitive and avoid delocalization.
The fact that “Valerian”’s budget approximates 170 Million Euros Illustrates the importance for the French film industry and economy to prevent the delocalization of these types of productions. The 2016 Finance Act therefore provides for two sets of modifications: the expansion of the eligibility criteria and the increase of the amounts of the tax credit available.
The following changes apply in respect of drama and animation works: – With respect to the eligibility criteria: <ul> <li>The language criterion no longer applies to theatrical animation pictures.</li> <li>Live action theatrical motion pictures shot in a foreign language are eligible when (i) at least 15% of the shots are processed digitally for certain specific purposes set by the Act (such theatrical works are assimilated to theatrical animation productions), or (ii) the use of a foreign language is justified by artistic reasons resulting from the screenplay.
</li> </ul> – With respect to the amount of tax credit available: <ul> <li>The tax credit percentages applicable to production companies are modified as follows:</li> </ul> <table> <tbody> <tr> <td></td> <td><strong>Animation</strong></td> <td><strong>Drama</strong></td> </tr> <tr> <td><strong>Audiovisual productions</strong></td> <td> 25%</td> <td>25%</td> </tr> <tr> <td><strong>Theatrical productions</strong></td> <td> 30%</td> <td>20%, or 30% when: (i) the picture is shot in French or in a French regional language; or (ii) at least 15% of the shots are processed digitally for certain specific purposes set by the Act</td> </tr> </tbody> </table> <ul> <li>The tax credit cap has been increased to 30 Millions Euros for theatrical productions.
</li> <li>Although the overall cap remains at 4 Million Euros, the per minute tax credit cap applicable to television drama programming has also been increased. The ceiling, originally set at 1,250 Euros per minute delivered, now fluctuates between 1,250 Euros and 10,000 Euros per minute delivered, based on the production costs per minute actually produced.
These new limits also apply to international television drama co-productions satisfying certain conditions regarding the budget and financing plan.</li> </ul> These new measures must be approved by the European Commission for the purpose of determining their compliance with the European Union legislation applicable to state aids. If so approved, such measures will apply to tax years beginning as of January 1, 2016.