Tax breaks for the film industry

Not everything in the world of taxes is tax hikes and new taxes following this morning’s publication in the Official Gazette of the Spanish State of Royal Decree-Law 17/2020 of May 5, approving measures to support the cultural industry and tax measures to address the economic and social impact of COVID-19.

This Decree-Law, in addition to lowering taxes, establishes a series of specific measures to support a cultural sector that has been particularly affected by the health crisis.

The following measures apply to the cultural industry as a whole:

• To facilitate and encourage financing, two subsidies have been granted to the mutual guarantee fund Audiovisual Fianzas SGR to increase its technical provisions and subsidize the cost of opening fees for loan guarantees.
  
  The scope of application of this measure includes not only the more traditional cultural sectors, but also others directly linked to digital culture such as the video game industry.

• The Decree also grants special access to unemployment benefits for workers in the cultural sector who have not been protected by other mechanisms established to date.

In the specific field of performing arts and music, a special aid scheme has been approved to mitigate the damages caused by the health crisis.

Performances contracted by the public sector for less than €50,000 will be subject to an advance payment and compensation procedure if they are postponed or canceled, respectively.

The following measures have been adopted for the film and audiovisual industry

• The requirements and deadlines to apply for public funding for full-length feature film and short film production have been relaxed.

• The beneficiaries of funding for full-length feature films for production of 2019 projects can apply for 50% of the funding granted without having to give notice of the start of filming.

• The Decree also confirms that any eligible expenses that cannot be fully or partially applied to the project receiving the subsidy for the COVID-19 epidemic or the measures established to combat its effects are recognized as production costs.

• The definition of commercial premiere has been temporarily adjusted. Until August 31 (with the possibility of future extensions), it will include premieres via audiovisual television services, electronic communications services broadcasting television channels and on-demand services.

• It also establishes subsidies for owners of movie theaters to cover incidental expenses arising from the health measures adopted (e.g., risk prevention, purchase of hand gel and protective masks) along with the necessary promotion of the return to activity.

Finally, from a fiscal viewpoint and (as indicated in the preamble) to “promote and facilitate private financing” and “foster greater competitiveness of the Spanish film and audiovisual sector at a national and international level,” significant amendments have been made to benefit taxpayers to sections 36(1) and 36(2) of the Spanish Company Tax Act, governing deductions for investments in Spanish productions and deductions for foreign productions carried out in Spanish territory.

Specifically, in relation to investments in Spanish productions (section 36(1)):

• Investments in short films are expressly included as eligible for deduction by the producer.

• The deduction percentage has been increased to 30% for the first €1 million of the deductible amount and 25% for the remainder.

• The maximum deduction has been increased to €10 million. As a consequence, all productions with a deductible base (production cost + P&A expenses – subsidies) below €39,800,000 can apply for the full amount of this tax incentive.

• New percentages of the maximum general limit of the deductible amount and subsidies to the production cost have been established, taking into account the specific circumstances of each production. The new limits are:
  
  • 85% for short films.
    
  • 80% for (i) productions by persons who have not directed or co-directed more than two full-length feature films with a production budget below €1,500,000; (ii) productions filmed wholly in one of the co-official languages other than Spanish that are shown in Spain in that language or with subtitles; and (iii) productions directed solely by persons with a degree of disability of 33% or above.
    
  
  
  • 75% for (i) productions solely by women directors; (ii) productions with special cultural and artistic value; (iii) documentaries; and (iv) animated works with a production budget below €2,500,000.
    
  
  
  • 60% for cross-border productions financed by more than one EU Member State, involving producers from more than one Member State and international co-productions with Ibero-American States.
    
  • 50% in general.

As regards deductions for foreign productions in Spanish territory (section 36(2)):

• As in the case of section 36(1), (i) the deduction percentage has been increased to 30% for the first €1 million of the deductible base and 25% of the remainder, and (ii) the maximum limit of the deduction has been increased to €10 million.

• It also specifies that the deduction will be applied to pre- and post-production costs of animation and visual effects created in Spanish territory, provided that such costs total less than €200,000.

This amendment, which according to the preamble will “attract international productions and filming activity and increase the economic activity of the audiovisual sector in Spain, thereby generating employment and a consequent increase in tax revenue, as well as positively contributing to promoting Spain,” clearly shows again that law makers support and encourage investments that are eligible for tax deductions.

Consequently, in a tax context likely to be characterized by a general increase in existing taxes and the creation of new ones, this tax incentive is particularly important because it is currently the only relevant tax break approved or likely to be approved in the short term.

However, it seems odd  that the lawmaker has only “improved” the deduction for film productions and not amended the deduction for performing arts and live music regulated in subsection 3 of the same article when, a priori, these activities have suffered, at least, the same negative consequences of the health crisis. We would like to see these measures extended to this part of the industry as well.