Soft Money - The Netherlands

There is still money to be had by canny international producers, but new government restrictions have taken the sheen off The Netherlands as a hub for tax-sheltered productions. Patrick Frater reportsThe Netherlands has been one of the world's hot locations for film producers. In the space of just a couple of years, the Dutch fiscal authorities watched as more than $100m (Euros 101.5m) of potential tax revenue passed them by and was instead invested into film.

Today the Dutch government still helps film-making through the public purse, but the tax system is so confused that a number of fund-raising issues have been suspended and several productions have simply stopped.

The problem was that the tax breaks over-stimulated the number of productions and the size of budget. But they did little to improve the quality or the popularity of Dutch films with their local public. They also distorted both the film and the financial markets: there was huge demand from financial institutions to place new tax-driven product with investors. Having raised large amounts of money, a lot of films were produced that were either under-developed or were very old projects that had previously been rejected.

Equally, the tax breaks were seen as too generous - or open to abuse - by foreign productions with no requirement to spend any of the Dutch investment in the country. The Little Vampire and Enigma raised $10m and $38m respectively from Dutch investors but neither shot a single scene in The Netherlands. (However, MeesPierson Film CV, the fund used by Enigma, did simultaneously help the local critical and commercial success The Discovery Of Heaven.)

The government hastily rewrote the rules and has now done so three times in as many years. The last revision took place in July, with a promise that the new regulations would stay in place until the end of 2003. But the ceilings that have been imposed on the total amount of tax allowances ensure that there will be no return to the heady days of 2001. For the current July to end December period, the government has fixed the amount it is willing to forego in tax at $10.2m and, for 2003, $22.5m.

The reformed scheme refines the terms under which limited liability partnerships, known as CVs, can be set up to invest in cinema, usually done so on a film-by-film basis. The equity investments are managed initially by banks or portfolio managers and shares in the partnerships are sold to private individuals or companies seeking to reduce their tax bills. Money raised through limited partnerships is not subject to capital tax.

There are two more film-specific advantages of CVs for investors. First, development and production costs, instead of being capitalised and treated as an asset on the company's balance sheet in the normal way, can be taken as depreciation as soon as they occur. This sets up a loss, which can be deducted from the CV investors' tax bills. Second, under the Film Investment Allowance (FIA), participants in a CV can each charge 47% of their investment in a film as profit in the year the investment was made.

There are disadvantages as well, which seem to fall mostly on the shoulders of the production sector. Producers blame the huge complications of the CV system, which requires new layers of tax lawyers, advisors and brokers, for pushing several production companies to the brink of bankruptcy. Stienette Bosklopper of the Dutch Association of Film Producers says: "Just dealing with the many private investors is very time-consuming. A sizeable chunk of the budget goes to the middlemen, the brokers who set up the financial structure."

Both the accelerated depreciation scheme and the FIA advantage apply only to films pre-approved by a vetting agency called Senter, which is run by the economics ministry. Senter certification will now be given only if the film can be shown to:

* Be intended for theatrical exhibition
* Strengthen the film infrastructure in The Netherlands
* Not have a budget of more than $14.6m
* Have at least half its production budget spent in The Netherlands - before the end of 2003.

After Senter's go-ahead, a film needs to secure finance ministry approval. "Unfortunately you have to get cast and crew committed while still waiting for a ruling on tax approval," says Gamila Ylstra, general manager of specialist financier Film Investors Netherlands (Fine). "Dutch producers are used to that, but it does not help."

The ministry is also the target of bitter complaints from producers. There is only one tax officer who deals with all the applications and he is not bound by clear policy or regulations.

Earlier regulatory changes also made film a less attractive investment for wealthy individuals seeking a home for their money. Investors are now prevented from 'double dipping' whereby they claim for allowances once as an entrepreneur and again as an investor.

Another change introduced in January this year made it necessary for 50% of the film's budget to be in place through a producer's own equity, pre-sales and other guarantees, before he or she can seek private investors with a CV scheme. If start-up costs and financiers' fees are included, the figure may be closer to 70%, according to some producers. Previously the figure was only 30%.

The new post-July system has the effect of making concrete some previously unwritten rules, such as the requirement to spend half the budget in The Netherlands. Dutch producers had lobbied particularly hard for this. Bosklopper says: "In the early days of the tax scheme there were some US companies and front-end constructions that managed to secure tax funding. This is much harder now."

The ministry says foreign film producers, particularly those from EU countries, can still make use of the new tax breaks in the same way as Dutch companies. But to take full advantage of them they need to have taxable income in the country or share the benefits with a Dutch co-production partner.

A large degree of patience would also help. In July, Senter and the ministry were deluged with new applications from local producers, but the first ones are only now emerging from the bottleneck. In late October, Senter approved 20 of the 40 projects submitted to it in July. But it seems unlikely that more than a fraction of these will be made as they need to start production before the end of the year to qualify for the tax break.

Whether this jam was deliberate is hard to tell, but the government has clearly moved to cool the system. A side-effect of its changes has been to further lessen the attractions of the CVs to investors. They can still expect profits - the tax reductions combined with subsidies and some pre-sales can quickly take a CV investor to a return more than equalling their initial investment - but these are typically in the 3%-6% range. And the prospect of large windfall profits, in cases where a film performs well at the box office or on the international sales market, has also been considerably reduced.

"Returns for investors have been reduced to levels such that there is no longer any assurance a project will get all the finance it needs," says Claudia Landsberger, managing director of Dutch promotional body Holland Film.

Even before the July amendment, the trend of rule changes was to make small- and mid-budget films less viable. To counter this new distortion to the system, the government has had to increase its direct subsidy funding through the Dutch Film Fund by $6.7m to help this category of picture. Fine's Ylstra says: "The net result has been to make the Dutch production sector more subsidy-dependent than it was before."

Project Funding
If a project shoots at least half in The Netherlands and has a Dutch co-producer on-board, a CV scheme is a rational choice. But the practice has become far removed from the theory. The system requires scripts and financing plans to be submitted for approval first by Senter, a government-backed filter, then approved by the tax authorities before it can go to the financiers and the private investors. This means a producer must get a cast and a crew committed while waiting for a ruling on tax approvals. There are additional rules about the location of production and how much money a producer needs to have raised - some 50%-70% - before approval will be granted.