Silver Screen, Gold Disc

Silver Screen, Gold Disc
Uwe Boll and the German Tax Code

Allen Varney | 23 Jan 2007 11:00
Silver Screen, Gold Disc - RSS 2.0

Nein, your accountant tells you, that deduction only applies to films made by German companies. But fear not! I, the producer, advise you to set up a shell corporation in Munich that "owns" my film, wink-wink nudge-nudge. The shell will lease back to my studio all rights for 15 years, in a "production service agreement" and a "distribution service agreement." After the lease expires, I'll buy back the film, cheap. With only 10 million left after you take the loss, you pay tax of only 4.5 million euros, leaving you 5.5 million.

Ach du lieber! You've lost nearly 95 million, right? No, we're not done yet. Follow me closely here: Under the German tax code, you can take the full 90-million deduction, then have your Munich shell company charge me (the American producer) 80 million to lease back the rights to my movie. Because you just took a 90-million loss, you don't have to pay taxes on the 80 million you recouped.

You're only out 10 million, plus the 4.5 million you paid in taxes. You still have over 85 million left! And after you paid me 90 million, and I paid you 80 million back (most of which I got by pre-selling foreign and cable rights to my film), I'm 10 million up on the deal, and I'm not taxed in Germany. Sweet.

OK, so you've invested 90 million in my film and taken a loss. Now, you may ask, what happens if my film makes money? Under our contract, I pay you the profit between seven and 20 years from now. You'll pay taxes on the profit then. All seems well.

But wait! Your accountant has just noticed that, effective January 2006, the German government tightened the German Tax Fund to apply solely to native German filmmakers and production companies. You and I stare in dismay. Oh no! What shall we do?

If only we knew a native German film director with his own German production company ...

Of course, this example oversimplifies a lot. These complicated deals can involve nonrecourse loans (the investor borrows money to put into the shelter, then writes off the loan fees); equity in the film; distinctions between "tangible" and "nontangible" assets; and lots of middlemen - usually German banks and leasing companies. (The middlemen's hefty fees are also deductible.) And though German tax shelters funded major hits like The Lord of the Rings and Mission: Impossible 2, Hollywood usually reserves this method for its second-string films, the ones with low profit expectations. As Movie City News editor David Poland pointed out, if a studio expects big profits, it wants to keep the film for itself.

The point is, this shelter is entirely legal, as long as a German production company makes the film. Because film investment is a capital transaction, investors could normally deduct only depreciation; this arrangement gives an immediate 100 percent write-off in order to pump funds into the film industry. In 2004, such targeted relief schemes sheltered $750 million that investors would otherwise have paid as taxes. The film funding arrangement is just one of many kinds of "cross-border leasing" between Germany and America, documented in February 2004 by the PBS investigative series Frontline. Frontline offers a tax shelter FAQ.

Comments on