Shooting in this tiny country can shave 15% from budgets as tax relief is available on everything spent there. Patrick Frater reportsIt may have interesting locations, two studio complexes and a pool of government cash, but it is Luxembourg's tax breaks that are making it such a magnet for foreign productions right now. This small country (technically a 'duchy'), nestling between Belgium, the Netherlands and Germany, is well-known in financial circles as a low-tax haven, where, protected by banking secrecy codes, wealthy individuals hide some of their assets from their local tax authorities. But its involvement in film is wholly above board and generous.

Luxembourg's ministry of finance operates a system of tax credits, the Audiovisual Investment Certificate Programme. Large amounts of a film's production spend in the country generate rebates which can be used to set against local income tax. Foreign films can benefit because the certificates can be sold to or traded with local companies that incur Luxembourg income tax. A foreign production house can set up its own Luxembourg subsidiary to use the credit. In practice, however, most partner with an experienced local film production company and let it handle the detail of applying the credit or turning it into cash.

The Film Fund Luxembourg, which has been around for over a decade and which was restructured in 1999, is the first port of call for a foreign picture considering using the country. Headed by Guy Daleiden, it administers the certificate programme and co-operates closely with the Union of Luxembourg Audiovisual Producers (Ulpa), meaning that it can steer a production to an appropriate partner.

The value of the credits last year hit $50m (e51m), spread across 31 features, documentaries and television movies. That was up 35% on 2000, when the total was $36m.

"The growing popularity of the certificates scheme with foreign film-makers has allowed us to become more selective about which projects will get certification," says Daleiden. "We can better reward those projects that help build the Luxembourg film infrastructure and train our workforce. The proof that it works is that in 2002 five features have been made by Luxembourg directors. That is completely unheard of."

The Film Fund also administers discretionary state programme Fonspa. This makes investment decisions (both loans and outright grants) on cultural grounds and counterbalances the much larger tax credit scheme whose objectives are firmly economic. Fonspa was set up in response to Luxembourg producers who claimed they were not getting much benefit from the country's pro-film stance. In 2001, 13 films shared the $2.2m pot. In the case of films with local creative input, it is possible to combine the Fonspa investment (for development, production and distribution) with the tax certificates.

The restrictions attached to the certificate scheme are not onerous. Tax credits are earned by original fiction, documentaries and multimedia productions, but not sport, advertising, current affairs or pornography. Arguably the toughest condition is the requirement that a film be set up as a Luxembourg-foreign co-production.

While up to 30% of production spend can be discounted, just how much the foreign producer can save through the tax credit scheme depends on how a film is structured and what elements count.

"By setting up Moonlight with local outfit Delux Productions, we could save 12% of the budget," says Dutch producer Emjay Rechsteiner of Staccato Films. "Delux did everything for us on that side. It was like getting into a warm, foaming bath. All of Delux's money comes from [broadcaster] CLT, so they are very solid. They take a recoupment position and Luxembourg rights."

"All we went for on Octane was the labour tax credit, which worked out around 13.5% of the budget," says British producer Alistair MacLean-Clark, of UK tax-based production and financing house Random Harvest. "We were able to use lots of local labour, but the availability of local crews can be an issue. You still have to abide by the points systems, which would mean an all-US cast is not possible, but it all depends on how many days you use them."

Fellow UK producer Chris Curling, who shot Ademir Kenovic's $22m (£14.4m) period piece Secret Passage in Luxembourg last year, is even more enthusiastic. "Would I do it again with Luxembourg' Goodness, yes. You get the relief on everything you spend there. You can take in film stock, US actors and can charge that if they are paid there. The rule of thumb I use is a 15% reduction. And hotels are cheap compared with the rest of Europe."

But in addition to local labour shortages, which may be overcome by the influx of foreign technicians currently taking up residence to take advantage of the production boom, Luxembourg's other drawback is knowing in advance the exact value of the tax credits. Unlike a fund which writes a cheque for a known sum, the tax credit system pays out against receipts or contracts, so until a production is fully crewed the precise figure cannot be determined. But most foreign producers who have worked with Luxembourg find this a minor handicap. "Working with Luxembourg is like starting up a well-oiled machine," says Rechsteiner.

Luxembourg's recent credits

In production/current projects:
Girl With A Pearl Earring (UK-Lux) Archer Street, Pathe Films, Delux Productions
The Emperor's Wife (NL-UK-Lux) Staccato, Fu Works, Spice Factory, Delux Productions
Hurensohn (Lux) Tarantula
Les Immortels (Port-Lux) Fado Filmes, Samsa Film2002 (selected)
Octane (UK-Lux) High Octane Productions, Delux Productions
Secret Passage (UK-Lux) Zephyr Films, Delux Productions
Tango Rashevski (Bel-Fr-Lux) Entre Chien et Loup, Archipel 35-Samsa Film
J'ai Toujours Voulu Etre Une Sainte (Lux-Bel) Samsa Film, Artemis Productions, Media Services
Fado Blues (Port-Lux) Fado Filmes, Samsa Film
She, Me And Her (Ger-Aust-Lux) Globe Movie KG Gamma III, Star Film, Delux Productions
Moonlight (Neth-UK-Ger-Lux) Staccato, Spice Factory-Peppermint, Delux Productions
Nha Fala (aka My Voice) (Port-Fr-Lux) Fado Filmes, Les Films Du Mai, Samsa Films
The Point Men (US-Lux) Columbia TriStar, Carousel Picture Co

Case study: Octane
UK producer Alistair MacLean-Clark of Random Harvest opted to shoot Marcus Adams' US-set teen horror film Octane in Luxembourg earlier this year to access its tax credits.

Locations in the US, the UK and the Isle of Man were disregarded when MacLean-Clark met with Jimmy De Brabant of Luxembourg production outfit Delux Productions. De Brabant showed MacLean-Clark a stretch of unused motorway, perfect for shooting the long, night-time driving sequences the film required, and its own studios for interiors.

The $10m-$12m Octane, which stars Madeleine Stowe as a mother who loses her daughter to a cult, was set up as a UK-Luxembourg co-production between Delux, which can claim back tax on production costs, and a specially-created UK company. The latter allows parent firm Random Harvest to arrange a sale-and-leaseback deal for the project in the UK.

In addition, Random Harvest, which is setting up its own production equity fund, accessed a small sum of money via the Enterprise Investment Scheme (EIS). Octane is the first picture to go through Random Harvest's three-year European distribution pact with Buena Vista International via Random Harvest's genre label Four Horseman Films. About 30 US vehicles and a mixed US-UK cast were imported for the shoot. The film obtained a 13.5% reduction in budget thanks to Luxembourg tax credits.