German_Film_Financing - Tax-Motivated German Financing of...

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Tax-Motivated German Financing of the U.S. Film Industry William T. Bardeen MBA ’04 Claude Shaw MBA ’04 © 2004 by The Trustees of Columbia University in the City of New York. All rights reserved. CHAZEN WEB JOURNAL OF INTERNATIONAL BUSINESS SPRING 2004
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SPRING 2004 CHAZEN WEB JOURNAL OF INTERNATIONAL BUSINESS 1 1. Introduction 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 movies as Mission: Impossible 2, The Lord of the Rings trilogy and Shallow Hal (Gorman 2002, 1). According to Variety (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 industry. 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. 1 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
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This note was uploaded on 10/05/2010 for the course ARTM 360 taught by Professor Wentworth during the Spring '09 term at CofC.

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German_Film_Financing - Tax-Motivated German Financing of...

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