CHAZEN WEB JOURNAL OF INTERNATIONAL BUSINESS
Film production companies have long looked for creative ways to finance their projects.
Most recently, international tax policies have emerged as a significant consideration in U.S.
film financing. Nowhere has this trend been more clear than in Germany. In fact, Merrill
Lynch estimates that German film funds cofinanced 15 to 20 percent of all major
Hollywood movies in 2001. Twenty-two large German film funds closed or were in the
process of closing in 2000 and 2001, raising nearly $3 billion in capital to finance
approximately 150 projects (Tubeileh and Seip 2001, 5). Studios, including Paramount,
Universal, Fox and New Line, have used German funds to help produce such blockbuster
Mission: Impossible 2, The Lord of the Rings
2002, 1). According to
(2003), this trend continued in 2002, with Germans investing
more than $2.3 billion in U.S. films. An analysis of the tax benefits, financing structures,
German requirements and U.S. issues associated with this film financing technique
demonstrates why international tax factors have become so important to the U.S. film
2. The History: Film Financing Goes International
At the most basic level, studios can finance films either with the retained earnings from
previous films or with capital from external sources. External sources range from pure debt
provided by banks and insurance companies to pure equity provided by individuals,
private funds and the public markets. In order to mitigate risk, financing structures have
evolved to include presales, securitization, step deals, coproductions and limited
partnerships rather than just straight debt, private placements or common stock offerings.
Through the 1940s, Hollywood studios controlled exhibition and talent, which helped
limit production costs and provided some financial stability. Even after the 1948 Paramount
consent decree that separated film production and distribution from exhibition and marked
the end of the old studio system, the financial situation changed little for most studios. In
this environment, retained earnings and bank debt were the most common financing
sources. However, changes in the industry, including increasing costs and higher interest
rates, put financial pressure on studios, forcing them to look elsewhere for external capital.
The first wave of change occurred in the early 1970s when the U.S. government