New legal framework for tax shelter investments in the audiovisual sector
Once upon a time…
Since 2003, Belgian tax law includes an attractive tax incentive to stimulate investments of Belgian companies or branches in Belgian audiovisual productions. The past years, the tax incentive indeed generated a significant source of funding for numerous projects, from movies to television productions, from local projects to productions that won international prizes.
Voices from the sector have been heard…
The tax shelter incentive became booming business, being offered by production companies directly, but also by financial institutions and third party commissioners. Based on questions raised by the sector itself about the high returns being proposed to investors, as well as the wide range of non-transparent structures offered in the market, in January of this year, the Minister of Finance met with the representatives of the sector which finally resulted in a proposal to amend the existing legal framework significantly.
And have been transformed into a new legal framework…
These changes have now been included in the Law of 12 May 2014, which was published last week.
Existing tax shelters will not be affected by the new law as it will only apply for framework contracts being signed after the date on which the law enters into force (being as of the second month after the approval of the European Commission, the request for which is still pending).
In a nutshell, the new tax shelter incentive will require a “tax shelter certificate” which:
- guarantees that the invested amounts will flow to the production company to a maximum extent;
- confirms that the production company complies with all legal conditions;
- guarantees the tax exemption on behalf of the investor; and
- determines the “tax value” of the project (see below).
As in the current law, the investing company will receive a temporary tax exemption at the moment the framework contract is being signed (the amounts have to be paid within a period of 3 months following the signing of the contract). The invested amounts will however no longer represent rights in or a loan to the production itself, but will be a mere (non tax-deductible) cost for the investing company. On the other hand, the exemption will now amount to 310% of the invested amounts (instead of 150% under the old regime), resulting in a tax cost saving of approximately 105,4%. Just like under the current regime, the invested amount qualifying for the exemption is limited to a maximum of EUR 750,000 or 50% of the increase of the taxable reserves.
In order to ascertain that the production company would use the funds received from the investor for qualifying production costs in the European Economic Area (with a minimum percentage to be spent in Belgium), the total amount of the tax exemption will also be limited to 150% of the “tax value”. This tax value should be estimated at the time of claiming the initial exemption and the exemption will only be final upon receipt of the tax shelter certificate (which mentions the tax value) to be delivered by the tax authorities as a result of a specific tax audit in the hands of the production company.
Based on this calculation method, it is the objective of the new law to provide the investor with a final return on investment (mainly determined by the tax exemption), quite equal to a “normal” return of a tax shelter investment today, i.e. without the existing excesses. However, the return will no longer be dependent on the commercial success of the production.
Other interesting changes to the law include:
- Production companies and third party commissioners that want to step into tax shelter arrangements, have to obtain an upfront recognition of the regional authorities.
- Framework contracts have to be notified to the tax authorities.
- Funding through tax shelter investments is limited to EUR 15 million (tax value) per production.
- Late payment interest becomes due in case the tax shelter investment was claimed incorrectly (in case no certificate is delivered or the temporary exemption was claimed for an amount being too high).
- The tax audits resulting in the issuance of the tax certificates, will be performed by a specialized team within the central tax authorities (instead of the local tax inspector under the old regime).
Furthermore, except for commercial gifts with limited value (under reference of VAT legislation), no other economic or financial benefit can be granted to a tax shelter investor.
But many questions remain and new uncertainties have arisen…
Although the new law is an important step forward in increasing transparency and effectiveness of the tax shelter incentive, some of the questions remain and new uncertainties have arisen.
One of the questions which exist under the current legislation and which are withheld in the new framework relates to how to deal with the limitation of the exemption based on the “increase of taxable reserves” in case of a dividend distribution (which due to the references in the tax return limits the tax-shelter investment capacity).
Under the new framework, the possible impact of the uncertainties about the final amount of the exemption at the moment the exemption is being claimed based on the amounts to be invested, combined with the introduction of late payment interest in case the temporary exemption was too high, leaves investors with uncertainties. This is even more the case given that the formula for determining the tax value seems to be rather complex. The reaction of the tax shelter market is to be awaited as to how to deal with this.
We welcome the new tax law for its aim to avoid abusive or excessive use of the tax shelter incentive and its simplicity/transparency towards the investor. Also the fact that under the new law, the funding should actually flow to the production itself will be very much appreciated by the production companies. We regret however that the legislator has not taken this opportunity to provide clarity on existing discussions, e.g. the combination of tax shelter investments in years in which a dividend is distributed.
From an investment perspective, the disconnection between the financial return and the commercial success of the production is a positive element for an investor seeking a guaranteed return, but will decrease the “affinity” of the investor with the production to a certain extent.
At EY we have a team of tax specialists that have been following this attractive tax incentive closely. Do not hesitate to reach out to them or to your tax contact for further questions or assistance.