Regulations introduced in Italy regarding tax benefits for the film industry
Structure of the regulations
The package of regulatory provisions governing tax benefits in Article 1 of Italian Law No. 244 of December 24, 2007 (the Financial Law for 2008 (see the textbox “Text of the 2008 Financial Law”, p. 55) provides for two kinds of measures: a credit for taxes (hereinafter also referred to as the “tax credit”), and a tax abatement for profits (hereinafter also referred to as the “tax shelter”). The central body of the regulations strongly favors the tax credit, to which paragraphs 325 to 337 are devoted, while the tax shelter is specified in paragraphs 338-341.
The regulations concerning tax credits outline a well-articulated framework of benefits. They provide for measures regarding production, as well as specific measures for distribution and movie theater owners. Those regarding production are distinguished primarily between external and internal tax credits with respect to the film sector.
The external tax credit (paragraph 325) is directed at companies that are not a part of the film or audiovisual sector; therefore, neither companies within the sector (in a sense that must certainly be explicitly established upon implementation) nor physical persons may benefit from this.
The internal tax credit is for those operating within the film chain of production. Benefits are provided for production companies (paragraph 327, section a), distribution companies (paragraph 327, section b), movie theater companies (paragraph 327, section c), and technical industries (paragraph 335).
Tax benefits in favor of subjects not operating within the sector are granted with regard to investments in the production of national film projects. These investments may not be a majority share, such that the film producer always maintains the role of project owner and manager.
On the other hand, as far as companies operating within the sector are concerned, however, production companies will be able to obtain tax credits in connection with the cost of the film produced, which in any case is required to be of Italian nationality.
Distribution companies and movie theater companies will be entitled to the benefit only with regard to contributions made in favor of film productions of Italian nationality, filmed originally in the Italian language, and declared to be of cultural interest. Technical industries and production companies will receive a tax credit for the production of foreign films commissioned by foreign production companies.
Structure of the Regulations
The benefit for producers is commensurate with the film’s total production cost. For external investors and distribution companies and movie theater companies, the benefit is graduated according to the cash contribution paid relative to profit participation agreements and profit-sharing contracts (see the textbox “Participation Agreement and Profit-Sharing”, p. 58) concluded with the producer in order to make the film.
The credit for technical industries is commensurate with the production costs sustained within Italian territory for the film or for the parts of a film made on behalf of foreign companies.
The regulations provide for certain limits on the use of the benefit. First of all, they provide for a binding territorialization of expenses within Italy which the producer must respect; this limit amounts to 80% of the tax credit that the producer may claim directly, and 80% of the contributions made available to the producer by external investors (including distributors and movie theater owners that may invest in productions).
The limit does not apply to technical industries, as the tax credit is in and of itself already commensurate with 100% of the costs sustained within Italian territory. In this case as well, the producer shall be allowed to spend 20% of the budget in another foreign country.
As for contributions from other subjects, the regulations prescribe that the share of capital coming to the producer from investments made by non-film companies, distributors, and movie theater owners must in any case be a minority participation; furthermore, the total profit participation by associates for each film may not exceed the threshold of 70% of the profits derived from the utilization of the work. Finally, the obtainment of the tax benefit is subject to three conditions being respected:
1) The fulfillment of the territorial requirements, pursuant to which the production company must invest a share (80%) of the “additional” resources within national territory: a cash contribution received from third parties or else a tax credit due automatically to the producer;
2) The total cash contributions received by the producer from both external and internal subjects shall in no case exceed the limit of 49% of the work’s production cost;
3) The total participation by all associates (whether internal or external) in the film’s earnings shall not exceed 70% of the profits.
In addition to the tax credit for production, lawmakers have allotted a tax credit for distribution companies for expenses arising from the distribution of films of Italian nationality, originally expressed in the Italian language, and/or films of cultural interest, as well as a tax credit for movie theater owners for costs sustained regarding the introduction of digital technology.
Finally, the tax shelter provisions provide for two specific measures: one directed at production and film distribution companies and the other designed for companies outside the sector. Both categories of companies (internal and external) may enjoy a tax abatement on profits invested in the production and distribution of cinematic works of Italian nationality. In this case, the requirements for the tax credit do not seem to apply.
All prescribed measures, whether in the form of a tax credit, or as a tax abatement on profits, are subject to the EU requirements on the rate of aid at the national level.
With respect to EU provisions, it is in fact prescribed (paragraph 332) that the sum of contributions that may enjoy the tax credit or the tax shelter, and those arising from the Fondo Unico per lo Spettacolo [the Italian Consolidated Performing Arts Fund] – together with all other contributions and all other forms of public benefits – may not exceed 50% of the film’s total budget. According to EU principles, this limit may be waived in the case of films that are “difficult and with modest financial resources.”
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