16 January 2021 The Irish Film & Television Network
     
A Legal Profile on Co-Production and Sale and Leaseback
25 Nov 2002 :
A & L Goodbody's Geraldine East Provides us with a run-down on the topical subject of co-production agreements and sale and leaseback opportunities with UK.

CO-PRODUCTION

General
Co-Productions are the topical item of the moment. The increasingly harsh climate for film financing has made it almost impossible to fund films out of one territory, with a few pre-sales. The expression “the bottom has fallen out of the pre-sale market” is a constant refrain and even when pre-sales are made, they are not generally achieving the levels of estimates provided by the sales agents.

The European Convention on Cinematographic Co-Production
As everybody will now be aware, Ireland ratified the Convention about two years ago. The Convention is intended to encourage co-productions with a European identity involving three or more producers who are established in Convention countries. Non-Convention country parties may be involved but their aggregate contribution should not exceed 30% of the cost of the film.

To qualify under the Convention, it is necessary to satisfy 14 out of 19 creative points. The writer, director and principal actor each get 3 points, the second actor gets 2 points and the third actor 1 point, then the composer, editor, art director, director of photography and sound recordist get 1 point each and the location and post-production location each get 1 point. There is a discretion with the competent authority to waive a reduction below 14 points if the film clearly has a European identity.

Bilateral Treaties
Ireland already had two bilateral treaties; with Australia and Canada and the Department is looking at negotiating more bilateral treaties. The UK has seven bilateral treaties (with Australia, Canada, France, Germany, Italy, New Zealand and Norway) as well as having ratified the Convention.

Convention/Bilateral Treaties
In the absence of a bilateral treaty, the Convention applies to bilateral co-productions.

Although there is not a bilateral treaty between Ireland and the UK, the Department is, we believe, looking at that. It would be beneficial to have one because the Convention only covers theatrical films. Additionally, there are some benefits in bilateral treaties which the Convention does not always give, for instance, commonwealth countries can come under some UK bilateral treaties but are not included under the Convention.

It can be difficult to make a Hollywood style film under the Convention because of the points system, but it is quite possible to make one under a bilateral treaty. On the other hand, a co-production with Canada is impossible if the writer is American whilst it is quite possible to make a film under the Convention with an American writer, so long as the points are satisfied.

Benefits of Co-Production Status
A film which qualifies as a co-production under a bilateral treaty or under the Convention will be eligible for all of the benefits available to national films in the countries of each or all of the co-producing partners. This can be hugely beneficial, especially when the partner(s) countries are well chosen and constitute good matches.

Funding Sources - Ireland
In Ireland, two major sources of funding are the Irish Film Board and Section 481 financing. The Irish Film Board has a cultural remit but Section 481 is purely financial. To get the full benefit of Section 481, a film has to, essentially, be shot mainly in Ireland. This is because the legislation is not based on a film’s nationality but is based on expenditure in the State. Canada works on the same basis; state and federal tax credits are based on spend in the state and in Canada.

Funding Services – UK
Conversely, in the UK, all of the tax legislation is applicable to a film which qualifies as a “British film”. Because, as an official co-production, a film qualifies as a British film, it is then entitled to all of the benefits which would normally only be available under the far stricter qualification criteria (that 70% of the cost of production has to be spent in the UK etc) required for qualifying as a British film, including tax write offs on 100% of the cost of production.

Therefore a co-production with the UK will entitle the film to sale and leaseback funding (currently rates of 13 to 14% are available, which is the highest percentage which has ever been available in the history of sale and leaseback), other tax based funding which can provide between 20 and 35% of the cost of production of a film and Film Council funding (previously National Lottery funding). Some of the lower percentage tax funds are not good value (especially if they prevent a sale and leaseback being done) because the funders usually want a fee in the budget, they recoup the investment fully (while sale and leaseback funding is not recoupable) and they also want a profit share attaching to the full amount of their investment (while sale and leaseback providers usually ask only for 2.5% of the producer’s share of the net profits, after the producer has paid the shares payable to talent, etc). Monies available from Film Council can be significant. The largest investment made by Film Council to date is for the film currently in production about Ted Hughes and Sylvia Plath “Ted and Sylvia”; where Film Council awarded £2.5m.

Ireland/UK Co-Productions
This makes the UK an ideal co-production partner for Ireland, given that, because of the border, the island of Ireland constitutes two territories for co-production purposes and the distance between the two islands is very small in any event. A film can be shot in Ireland and post-produced in the UK and can get maximum benefits from both territories.

Balance
There is supposed to be a balance between countries under the Convention and under the bilateral treaties. Article 10 of the Convention provides:


Article 10 General Balance
1. “A general balance must be maintained in the cinematographic relations of the Parties, with regard both to the total amount invested and the artistic and technical participation in co-production cinematographic works.

2. A Party which, over a reasonable period, observes a deficit in its co-production relations with one or more other Parties may, with a view to maintaining its cultural identity, withhold its approval of a subsequent co-production until balanced cinematographic relations with that or those Parties have been restored.”

The DCMS has brought to the attention of the industry that an imbalance has occurred in the UK between the UK and Canada in particular under its bilateral treaty with Canada but also with France and Italy. The guidance note is intended for discussion with the industry and, specifically, although it has caused some panic, the DCMS have said that it is only for discussion and nothing has been decided. The concern relates to the number and value of co-productions with these territories, where the UK producer is a minority partner (but the production will benefit on sale and leaseback and other tax benefits on a 100% basis).

Producers in Ireland need to be aware that Ireland is likely to have a balance problem with other co-production countries in due course. This is because of the Section 481 requirement for the gross Section 481 amount to be spent in the State. As a result, Ireland will be the majority co-producer (even though, in reality, the net 481 benefit is quite small in terms of national benefits).

It would benefit Ireland in the long term for Irish producers to structure as co-productions with the UK and other territories, those films which they are producing mainly outside Ireland and where Section 481 financing is not being used or used significantly. This would keep the balance correct and compensate for the potential lack of balance which may arise from long term use of Section 481 funding on co-productions involving Irish producers.

Geraldine East
A&L Goodbody www.algoodbody.ie

Geraldine East is admitted to practice as a solicitor in Ireland and in England





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