Section 481 Overview
|'Camelot' filmed on location in Ireland|
Section 481 of the Taxes Consolidation Act 1997 as amended (“Section 481”) was introduced to promote the Irish film industry by encouraging investment in Irish made films which make a significant contribution to the national economy and the Exchequer. The scheme is a fiscal incentive to taxpayers as it allows tax relief in film projects certified under the Act. Further provisions are included in Regulations made by the Revenue Commissioners, with the consent of the Ministers for Finance and Arts, Sport and Tourism on 12/09/2008.
Historically, investors could invest up to 66% of the production cost for films up to IR£4 million (€5,078,950) and 55% of production in excess of IR£5 million (€6,348,690) with a maximum investment of €15 million. The Finance Act 2006 provided that the amount that could be invested in any one film was raised to 80% of the cost of production, capped at €35 million.
In 2008 however, the Irish government introduced new welcomed measures to strengthen this tax incentive even further. The amount which can be invested depends on “qualifying expenditure” ie. total spend by the production on Irish goods, services and facilities including the cost of EU cast and crew working in the State. The new improvements mean the ceiling on qualifying expenditure for any one film is increased from €35 million to €50 million. By virtue of SI No 97 of 2009 [Finance (No 2) Act 2008 (Commencement of Section 28(1) ) Order 2009], individuals buying shares in a special purpose film or television production company may now individually invest up to €50,000 under the scheme in any year of assessment, an increase of €18,250 over the previous cap of €31,750. More importantly these investors may now claim 100% tax relief on their investment as opposed to the previous 80%. This means that for each investor the available tax relief in cash terms has nearly doubled from €10,414 to €20,500. These changes result is a large increase in the producers net benefit available to each Section 481 project as projects may now derive a benefit of up to 28% of their qualifying expenditure.
The process for Section 481 Investment has not differed:
Section 481 Company
Firstly, the producer is required to establish a special purpose company (the Section 481 Company) specifically for producing each film project. This is known as a Qualifying Company. The Qualifying Company does not have to be an Irish Company, but the Section 481 legislation requires that it has to be tax resident and carrying on a trade in the State, and so in practice it always is an Irish Company. Guidelines from the Revenue Commissioners require details of the track records of the directors of the Section 481 company (who must both be resident in Ireland) in terms of their experience in Irish film and television production. The Company must exist solely for the purposes of production and distribution of only one film ensuring that the funding is clearly targeted for same.
A Certificate from the Revenue must be applied for and obtained. The application for a Section 481 Certificate is normally made at the early stages of pre-production for a live action feature film or live action drama TV series or approximately 8 weeks to 3 months prior to the commencement of full animation drawings in relation to animation TV series. The Certificate will only be granted when the Revenue is satisfied that the film is a Qualifying Film and that the production satisfies the necessary criteria. The Department of Arts, Sport and Tourism have an input into the procedure in that they validate the cultural content of film projects submitted for certification. The contribution it will make to the development of the film industry and the promotion and expression of Irish culture are key parts in this certification process.
The film must be a feature film or a television drama, animation production or creative documentary. It cannot be a commercial, game show, reality show or soap etc. A detailed form, showing the financial and other arrangements, and in particular showing the identities and nationalities of the personnel, the level of qualifying expenditure and the proportion which this forms of the total budget, must be completed and submitted, together with a diagram showing the financing structure, deal memos for the non-Section 481 funding, the agreement commissioning the Section 481 Company to carry out the Irish production work on the film and a distribution agreement which provides that, in return for the grant of rights by the Section 481 Company, it will be paid an advance which is payable to the investors under the defeasance method below. If the film is a co-production, the draft Co-Production Agreement, must also be submitted.
Section 481 Fundraising
Once the letter of full application issues the Irish producers usually approach one or more of the local service providers in relation to fundraising for Section 481. The role of which is to be satisfied that the feature film or television series is properly financed and that the amount they need placed in the bank's defeasance account to secure the return to the Section 481 investors is available. Completion guarantees are normally required for feature films and where feature films or television series are backed by Hollywood studios or other substantial entities some comfort is sought from them that the film or television series will be completed and delivered.
The Section 481 funding is invested in the Section 481 Company in return for an allotment of shares to the Section 481 investors nominee company. Approximately 12 months after the initial investment of the Section 481 monies into the Section 481 Company’s bank account and provided delivery and acceptance of the film has taken place, the money in the defeasance bank account is paid over to the Section 481 company as the return for the investors either by way of redemption of their shares out of a fresh issue or by a liquidation of the company. Either way the investors obtain a return on their investment which is usually slightly more than the cost of their investment after you take into account the tax break they receive from the government. This results in a small profit for them thus the reason they invest.
The legislation requires that the investment be made at the risk of the investors. This turns on the fact that delivery of the film is vital to the investor as otherwise the tax relief is lost (the “Delivery Risk”) and also their concern that their return is not adversely affected as a result of unpaid creditors in the Section 481 Company (the “Credit Risk”).
This transaction whereby the Section 481 investors invest their funding in return for the lodgement in the defeasance account has to happen before principal photography / principal animation drawings commences or 25% of the cost of production of the film is incurred. Usually it takes place shortly after the Section 481 Certificate issues and all documents are usually completed and signed at that stage.
It is important to note that the Section 481 Company does not own any rights in any projects they are involved in the production of nor do they own the materials created arising from the relevant production. All rights belong to the relevant commissioning company. Also the investor service providers normally insist that no charges or security are taken over the Section 481 Company apart from charges in favour of completion guarantors as these are for the benefit of both the other financiers of the film or television series and also the investors themselves.
After the film or television series has been delivered the Section 481 Company has to prepare very detailed audited accounts and is required to make a detailed report to the Revenue Commissioners in relation to compliance with the Section 481 Certificate. The Revenue Commissioners have been known to raise detailed queries of Section 481 production companies in relation to compliance and are currently auditing a number of companies in relation to same.
There is no doubt the amendments are to be warmly welcomed. As aforementioned, projects may now enhance their Section 481 net benefit by a substantial margin, an increase somewhere in the order of 8% of eligible expenditure.
By way of example, a project with a budget of €6,250,000 and with qualifying expenditure of 80% of that figure would result in maximum fundraising of €5,000,000. Based on the assumption that the Section 481 investors now receive the same return on their net cash funding as under the previous scheme, a project which generated a net benefit of 21% under the old regime shall now generate an enhanced net benefit of 29%. These percentages vary on different projects based upon the overall scale (on larger projects where fixed transaction costs will reduce in proportion to funds raised, higher returns should sustainable) however the general enhancement should be visible on all projects.Producers Net Benefit Under the Old Regime
|Section 481 Investment||5,000,000|
|Less defeasance fee and costs (eg. 79%)||3,950,000|
|Net benefit||1,050,000 (i.e 21% of funds raised)|
Producers Net Benefit Under the New Regime
|Section 481 Investment||5,000,000|
|Less defeasance fee and costs (eg. 71%)||3,550,000|
|Net benefit||1,450,000 (i.e 29% of funds raised)|
Another benefit from the producer’s perspective its that in order to secure, e.g. €5,000,000 of the Section 481 investment the amount of upfront cash needed to be sourced from other financiers in order to fund the bank defeasance requirement will reduce quite substantially. This is particularly beneficial to lower-budget projects.
Since 1992 the numbers in the Irish film and television industry have grown from 1000 directly employed to 6000 by 2008. The benefits of high levels of film and television production in Ireland include increased international investment in the economy, increased employment in the sector, positive spin-off effects for promoting Ireland as a tourist location and the improvement of Ireland as an industrial location for all aspects of creative endeavours. The current Section 481 incentive extends to 2012 and these recent amendments serve to restore Ireland’s stance as one of the most attractive global locations for international producers.
James Hickey, Ruth Hunter and Johanna Hogan, Matheson Ormsby Prentice.
For further information on investment visit www.mop.ie
Section 481 Documents