Before the new facilities at Budapest's Korda Studios opened for business in 2007, Hungary was attracting more international footloose productions than the country's crews could handle. Thanks largely to its lauded 20% tax rebate on productions shooting in the country, the annual spend by film productions in Hungary has multiplied more than tenfold from $33.4m (huf5.8bn) in 2004 to $340m (huf59bn) in 2007.

"The last two years we've been busy as hell," says Adam Goodman, whose Budapest-based Mid Atlantic Films serviced Universal Pictures' $72m Hellboy II: The Golden Army during its shoot at Korda last year.

Such large-scale productions account for the huge growth in Hungary's film industry. The territory recently hosted European projects including Andrei Konchalovsky's privately financed $65m Nutcracker: The Untold Story, Robert Young's $8m Eichmann and Vicente Amorim's $16m UK production Good.

While the rebate continues to benefit local productions, as witnessed by the wealth of films premiering at next week's Hungarian Film Week (see sidebar), recent developments are threatening Hungary's ambition to become the pre-eminent film hub in Eastern Europe. In addition to the US writers' strike (and possible industrial action from US actors), which has put many 2008 US projects on hold, a threat to the rebate itself is looming.

At present, any project, regardless of its origin or subject matter, can claim a 20% return on its Hungarian spend. It is a straightforward scheme well-liked by international producers. But, according to Laszlo Hegedus, executive assistant of the Hungarian Film Commission, when the commission sought approval for renewal of its Film Law, including the tax rebate, from the European Union (EU) late last year, the EU raised some questions. "(The EU) wants all the film support to go (only) to films with cultural content," Hegedus explains. However, temporary approval of the Film Law, including the rebate, has been extended for a year to the end of 2008.

Hegedus says the EU is also concerned that the 20% tax rebate gives Hungary an unfair advantage over other European film hubs, particularly in Eastern Europe, which do not have similar financing mechanisms in place. Negotiations between Hungary and the EU could continue until the middle of the year. If they drag on longer, says Hegedus, the current programme could receive another year-long extension for 2009.

Hungary has made two proposals to the EU: one for a European cultural test, and one for a Hungarian cultural test. It is understood the Hungarian industry favours the former, similar to the one in place in Germany. Under the German scheme, projects receive points for the 'European-ness' of their subject matter, source material, locations, cast and crew (in the UK, for example, a project accrues points based on its 'Britishness').

A threat to international business

Any cultural test will threaten international business. "There will obviously be those that won't or can't meet such requirements," says Hegedus. A narrow cultural test would be challenging for projects such as Hellboy II, an English-language production with a Mexican director and DoP and no Hungarian heads of department.

Chris Symes, the executive director of Hellboy II as well as Eragon, which shot in Hungary in 2006, and AVP: Alien Vs Predator, which shot in Prague in 2003, says it will be a challenge if a cultural test requires projects to have a Hungarian subject matter or be majority-based in Europe. "Films like AVP and Hellboy II predominantly don't take place in Europe or in any one place in Europe," he says. He suggests engineering films to pass a cultural test would be a "creative straitjacket" and bad news for Hungary. "Inevitably, the amount of production going into Hungary is going to drop."

What would it mean for Hungary if international business was threatened'

Amy Szabados, a Canadian-Hungarian production executive based at Stern Film Studio, suggests Stern is not reliant on Hollywood, as it services mainly big European productions. That said, a complete lack of international projects would hurt business. "Hungarian films generally don't require stages of our size, if they need a stage at all," she says.

But Szabados believes even if the 20% tax rebate were completely off-limits for foreign productions, Hungary would still be in demand as a low-cost location. "We started building Stern before the tax law came into effect," Szabados adds. "There was a need for studios, even then."

A slowdown in Budapest production would halt the on-the-job training of Hungarian crews, exposed to the workings of an international production. The demand for skilled, English-speaking crews has outpaced supply in recent years. Because of this, Stern trains film-makers at the Stern Media Center, and Korda has plans to launch a training programme once it completes construction of its facilities. But there remains a shortage of qualified crews. "It only takes two or three films for the best crew to be taken up," says Mid Atlantic Films' Goodman.

"In the last two or three years, Hungary has got on what I'd call the 'Prague track', where you have enough international productions to keep the community busy and that expands the skills base," Goodman explains. "The trick is to keep the community busy so the cycle isn't broken."

In addition, Hungarian film professionals believe international producers' awareness of the Hungarian tax rebate benefits the region's industry beyond Budapest. Officials at Korda and Stern argue they are not competing against each other or even with Prague; rather they say all of Eastern Europe is pulling together to lure projects that might otherwise go to Australia or the UK.

Low-cost locations such as the Baltic states, Bulgaria, Czech Republic and Romania, however, continue to vie with Hungary for footloose productions. Prices for film services in Prague are higher than in Budapest, but the Czechs capitalise on the quality of their crews, their abundant facilities and the high quality of life in the city. Other locations, such as Romania, say costs such as construction are lower than in Budapest even after Hungary's 20% tax rebate.

With the weakness of the US dollar, international producers will look for as many savings as possible. But Goodman believes Hungary's reputation for quality crews and state-of-the-art facilities, with or without a tax rebate, will keep the country in the game. "You can chip away the edge with currency rates or other factors but, relatively speaking, it's continuing to be competitive."