The new film tax incentive system of Hungary

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The new system is intended to increase the number of films produced - partly or entirely - in Hungary, therefore to strengthen the Hungarian audiovisual industry, to increase the production capacity of the country and the number of experts employed in this sector, thus to generate a positive impact on the entire economy.

Introduction

In 2003, Hungary launched fundamental reforms in the areas of motion picture industry and motion picture culture. It was recognised that Hungarian motion picture culture and the motion picture profession could only be boosted by a simultaneous development of the motion picture industry. The Act on Motion Picture adopted in 2003 (Act II of 2004) provided a specific regulatory framework for the reform measures to revive the motion picture industry as a branch of the economy and to cater for its prosperity.

The reforms formulated in the Act have a dual objective: on the one hand, to turn Hungary into one of the most attractive and most competitive motion picture locations in Central Europe; and on the other hand, to generate new funding resources for the Hungarian motion picture sector. Hungary intends to realise this dual objective simultaneously, providing exceptionally favourable conditions for all those deciding to shoot films on location in Hungary.

From the 1980s on, Hungary gradually opened up towards international motion picture relations. Low production costs, highly qualified professionals, proper infrastructure, attractive locations - at that time, those were the primary factors driving motion picture producers to come to Hungary within the region to shoot and produce films.

By the time of the Millennium, we had to recognise that these advantages had become relatively small as compared to other countries involved in such a keen Central Eastern European competition. Therefore, new means and new strategies were required to improve our position and to become again one of the most attractive and most motion picture friendly environments. The most important component of this new strategy is the novel motion picture tax incentive system offered by Hungary.

What does this tax incentive system offer to motion picture producers?

The new system is intended to increase the number of films produced - partly or entirely - in Hungary, therefore to strengthen the Hungarian audiovisual industry, to increase the production capacity of the country and the number of experts employed in this sector, thus to generate a positive impact on the entire economy.

The tax incentive system achieves this by

· offering financial refund and investment opportunities to encourage foreign film producers to come to Hungary to make films as they may reduce their film production costs this way;

· generating additional resources for co-productions and national films by encouraging Hungarian enterprises to make investments for motion picture production.

Through the tax incentive system, the amount of contribution / investment available in Hungary is 20% of local film production costs (in Hungary).

Contributions and investments come from the pre-tax profits of business associations in Hungary which intend to reduce the amount of tax they would be required to pay by way of offering contribution / investments for the purposes of motion picture production in Hungary.

Why do corporate taxpayers have an interest in making investments into film production?

Such corporate taxpayers

· can reduce their tax base by the amount (or 50 per cent of the amount) of their contribution / investment;

· can also reduce the amount of tax payable by the amount of their contribution / investment;

thereby they can make considerable tax savings.

The table below illustrates the benefits of contribution / investment for tax savings purposes, providing two examples of imaginary enterprises. Both companies in the examples have produced 1000 units of profit before tax, but the first offers a contribution for film production purposes while the second does not.


Taxpayer providing contribution for film production purposes

Taxpayer not providing contribution for film production purposes

Taxpayer's profit before tax

1,000

1,000

Amount of contribution for film production purposes

100

0

Tax base

900

1,000

Tax payable

(900 x 0.16) - 100 = 44

1,000 x 0.16 = 160

Amount of payments made

144

160

Savings

16


(If the taxpayer also receives some share of the revenues from the film in return for the investment, the tax base may be reduced by 50% of the amount invested.)

What productions may receive contribution under this tax incentive?

The Act on Motion Picture makes a distinction between two types of production from the viewpoint of the tax incentive:

1. films produced to order (production services): productions made in Hungary by foreign filmmakers with the participation of a commissioned Hungarian film production company.

2. films not produced to order (co-productions or Hungarian films): productions made by a Hungarian film production company alone or in co-production, with the financial involvement of domestic investors.

The first model is intended to support films where the budget of the film is fully available (typically by a foreign filmmaker or studio), but the objective is that the foreign filmmaker reduce production costs in Hungary by the refund.

In this case, the contribution (refund) is directly received by the foreign filmmaker, to be provided by the domestic corporate taxpayer. The taxpayer provides such refund for the film producer exclusively for tax reduction purposes.

The second model is intended to support films where the producers cannot provide the total budget of the film, therefore they intend to involve external private sponsors as well.

In this case the funding (investment) is received by the Hungarian production company (co-producer) of the film from the domestic corporate taxpayer. In return for the investment, the taxpayer not only receives a tax incentive but it will have a share of the revenues from the film as well (the minimum thereof is not specified).

How is the contribution / investment made available for the film producer?

1. Production service model (films produced to order)



The parties are mutually bound by contractual relations.

The Hungarian film producer company undertakes:
• to register itself and the production at the National Film Office;
• to order and provide the services and goods required for producing the film according to the contract concluded with the foreign filmmaker;
• to use the services undertaken in Hungary.

The Hungarian taxpayer enterprise undertakes:
• to pay 20% of film production costs in Hungary to the foreign filmmaker having completed production in Hungary (or a phase thereof) and having received the respective tax certificate issued by the National Film Office.
The Hungarian taxpayer providing such contribution may be involved in the scheme by both the Hungarian production company and the foreign filmmaker.

2. Co-production model (films not produced to order)



Procedure for the issuance of a tax certificate (to effect such contribution / investment)

National Film Office

• is a government body responsible for the performance of the authority tasks specified in the Act on Motion Pictures and for the operation of the tax incentive system related to films;
• registers the film productions applying for support under tax incentive;
• registers the Hungarian film production companies;
• examines and certifies film production costs in Hungary;
• issues certificates evidencing eligibility for tax incentive.

Procedure

1. Application period - the Hungarian film production company applies to the National Film Office for registration of the production 45 days before the start of shooting on location in Hungary (the application should contain, as an enclosure, the documents set forth in the Act on Motion Picture and the applicable ministerial decree).
2. Registration - the film production is registered by the National Film Office.
3. Production period - completion of production works in Hungary.
4. Audit period - after the completion of production in Hungary (or a phase thereof), the National Film Office reviews the books of the production on request by the film producer (30 days).
5. Issuance of certificate - as a closure of the review phase, the Film Office specifies the amount of film production costs in Hungary and issues the certificate of entitling for tax incentive for up to 20% of such amount.
6. Payment of contribution / investment - following receipt of the certificate, the Hungarian corporate taxpayer provides its contribution / investment as undertaken by virtue of its contract concluded with a foreign or Hungarian filmmaker.

When does the film producer receive the funding?

• supporters / investors effect payment only when they are sure that they will receive a tax incentive after the contribution / investment provided by them, which is guaranteed by the support / investment certificate issued by the Film Office;
• therefore delivery based on production costs as verified by the Film Office is the only guarantee for tax savings;
• film producers must seek ways for pre-financing in order to finance the gap which may occur in the status of the project before and after production;
• at the same time, the system does not rule out the possibility that the supporter / investor may provide contribution / investment in advance, at their own risk.

Financing is facilitated by the following:
• production in Hungary can be divided into several phases;
• after the completion of each phase, certificates may also be requested to be issued with reference to the costs incurred in the phase concerned.

What is considered to be direct film production costs in Hungary?

Payments made for Hungarian taxpayers as included in the budget of the film concerned (excluding the mark-up charged by the film production company).

Tax incentives for development purposes

1. The new system also encourages investments into infrastructure for film production purposes by tax incentive. Companies making such investments of at least HUF 100 million will receive a tax incentive of 35 to 50% of the amount invested depending on the region of the country where the investment is made. (Budapest: 35 %, Pest County: 40 %, Western Transdanubia: 45 %, the rest of Hungary: 50 %).

2. The applicable tax law makes it possible to apply favourable depreciation rules to buildings (studios, sound-stages etc.) and machinery (equipment) for film production purposes. In case of machinery and equipment solely for film production purposes, the rate of depreciation is 50%, while in the case of buildings it is 15%.

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