Regulations Governing Tax Credit for Businesses Investing in Motion Picture Production Enterprises for Production of Domestically Produced Motion Pictures Q&A
1. What is the tax credit for motion picture investment?
A: The Regulations Governing Tax Credit for Businesses Investing in Motion Picture Production Enterprises for Production of Domestically Produced Motion Pictures are part of a government initiative to stimulate investment in the domestic motion picture industry. Simply speaking, the policy allows for a 20% tax deduction on paid-in capital investment of NT$30 million or more in newly established motion picture companies. That is, after investors have invested the requisite capital and held the stock for three years, beginning in the fourth year, 20% of the initial NT$30 million investment (e.g., NT$6 million) can be credited against business income taxes over the next five years. Of course, the tax credit rate is not determined arbitrarily; it is determined according to existing tax legislation.
2. How does one apply for the tax credit?
A: The aforementioned Regulations are new and, to date, no company has applied for the tax credit. However, the application procedure will generally follow the existing model for high-tech and newly emerging industry tax credit procedures.
The procedure will basically be divided into two stages. The first stage is the application by the motion picture production company to the Government Information Office (GIO). Application materials to be submitted include licenses, investment plans, credentials, time frames, etc. For newly established companies, applications must be submitted within six months of company registration. Expanded companies must submit applications within six months of company registration amendment. After these documents have been prepared, they will be reviewed by a committee established by the GIO and comprised of experts and academic consultants. If approved, the GIO will issue an approval letter, a copy of which must be given to the Taxation Agency of the Ministry of Finance. The Taxation Agency will use this letter as the basis for verifying tax credit eligibility.
The second stage begins when the NT$30 million capital has been spent to produce the motion picture(s). After completion of filming, the company can then apply to the GIO for certification. The certification process is the same as the process for the initial approval: applications will be reviewed by a committee, and, if approved, a certification letter will be issued. Again, a copy of the certification letter must be given to the Taxation Agency. From the Taxation Agency’s perspective, as long as a company holds the requisite approval letter, the company is eligible for the tax credit. If the motion picture is not completed, the Taxation Agency will seek to recover any tax credits previously given to the production company. One point worth noting is that despite the NT$30 million minimum, a production company is not limited in the number of motion pictures it produces with it. In other words, a production company can produce more than one film with the investment and not affect its tax credit eligibility status.
3. What if NT$30 million is not enough to complete a film? If the NT$30 million initial paid-in capital investment is exceeded and additional investment is required, will the additional portion also be eligible for the tax credit?
A: Yes. Expanded investment is also eligible for the tax credit.
4. Could you explain more about the Regulations?
A: Investors’ questions can generally be divided into three categories. First, investor tax credit: investors who make this kind of investment can calculate eligibility for the tax credit according to their investment ratio, that is, the ratio of investment can be used to calculate the rate of eligibility for the income tax credit. Second, tax credit for corporate shareholders: large corporations have to pay considerable taxes. Investing in a motion picture production not only helps to support local culture and the arts, it also provides a way for companies to enhance their reputation and enjoy tax deductions. Therefore, the policy provides a win-win opportunity for corporate investors.
Shareholders can deduct 25% of business income tax and 10% of pending tax on undistributed earnings. Third, investors must place investments in motion picture production. These three points are the core spirit and essence of the Regulations Governing Tax Credit for Businesses Investing in Motion Picture Production Enterprises for Production of Domestically Produced Motion Pictures.
5. Is investment from China eligible for the tax credit?
A: Currently, the government has not liberalized any industry for investment from China. Therefore, investment from China in the local motion picture industry is prohibited.
6. What is the deadline for participation in the tax credit plan under the Regulations?
A: The tax credit under the Regulations will be available from January 9, 2004 to January 8, 2009, after which the chance for this tax credit ends. Many investors may be hesitant, wishing to wait and see how the plan works out. However, investors that wait too long will miss this great opportunity. Therefore, we would like to recommend that interested investors should take note of the eligibility period.
7. If the director or some of the actors and production crew are foreign nationals, will the film still be eligible for the tax credit?
A:According to the Criteria for Differentiating Domestically Produced Motion Pictures, Domestic Motion Pictures, and Foreign Motion Pictures, standards generally apply to actors and post-production personnel only, and do not specifically address directors, etc. The rationale behind this is to protect job opportunities for domestic actors and post-production personnel. As long as the production conforms to the Criteria, the motion picture can be considered a domestically produced motion picture and, therefore, eligible for the tax credit. These criteria include: a motion picture in which at least 50% of the major actors (lead actor and supporting actors) are ROC citizens; or a motion picture in which at least 33% of scenes are filmed in Taiwan and in which at least 33% of the major actors (lead actor and supporting actors) are ROC citizens; or a motion picture in which the entire post-production process is carried out in Taiwan (i.e., sound recording, editing, special effects, sound effects, film developing and other post-production work) and at least 33% of the major actors (lead and supporting actors) are ROC citizens.
8. What are the restrictions on directors, actors and technicians with regard to eligibility for the investment tax credit?
A:According to the Criteria for Differentiating Domestically Produced Motion Pictures, Domestic Motion Pictures, and Foreign Motion Pictures:
9. When does eligibility for the tax credit begin? Is the tax credit applicable as soon as the investment is made?
A: Actually, there is a time limit in order to avoid uncertainty in investment structure. Some investors might invest in a domestically produced motion picture but decide to immediately sell off their stock. In this event, new investors may be unfamiliar with the situation, which may lead to further production complications. To avoid this situation and to encourage commitment to the completion of the project, corporate investors are required to hold stock in the production company for three years before receiving the tax credit. The tax credit will become available to them in the fourth year. The concept is similar to a fixed deposit at a bank—no credit will be given for early withdrawal.
10. Is there a minimum investment for corporate shareholders?
A: Generally speaking, although corporate shareholders may be apprehensive about risking NT$30 million for a single investment, they are also concerned about the minimum investment for tax credit eligibility. Basically, no minimum limit exists for individual investors, as long as the total combined capital investment from all investors meets the NT$30 million minimum and the entirety is used solely for the production of one or more domestically produced motion pictures. Therefore, when the value of multiple smaller investments from many individuals or institutions reaches the NT$30 million threshold, each investor will be eligible for the tax credit. In this way, the tax credit provides a way for individual investors to enjoy tax credit benefits, while investing collectively in a motion picture. It also alleviates large shareholders’ apprehension about investing such a large sum in a single investment.
11. How does one go about deducting the tax credit?
A: The stock must be held by shareholders for three years and cannot be arbitrarily bought and sold during this period of time. In other words, shareholders must hold the stock continuously for three years from the stock purchase payment date. Beginning in the fourth year of stock ownership, shareholders may begin deducting from business income tax.
12. How much can be deducted?
A: Shareholders can deduct 20% of the invested amount from business income taxes.
13. How does one deduct the tax credit?
A: Beginning in the fourth year, investors can deduct the tax credit from business income tax. Due to government tax collection considerations, shareholders will not be completely exempt from taxes after investing in a motion picture. Although everyone still has to pay taxes, the Ministry of Finance has decided that business income tax can be deducted up to a maximum of 50% of the total tax due for the year, for a maximum of five consecutive years. Any portion of the tax credit that remains unused can be carried over to the next year, and the 50% requirement does not apply in the final (the fifth) year. Based on the experience of professional accountants, this covers all investors.
14. Investors may be concerned about the difficulty in applying for this tax credit. Will the procedures be overly complex?
A: The procedures are not complicated for investors, as the motion picture production company is solely responsible for applying with the GIO and the National Tax Administration for the three-year tax credit on behalf of the investors. To be eligible for the tax credit, investors need only to hold the stock for three years.
15. After the approval letter has been issued, will the National Tax Administration issue proof of tax credit to the production company?
A:After the company has received the tax credit certification, the legally permitted tax deduction begins. In other words, as such investments are in accordance with government regulations, the tax authorities will respect the tax credit.
16. Please explain the risks involved in motion picture investment tax credits. Why does the motion picture industry seem to believe that it would risk losing NT$8 million on an NT$10 million investment, for example, as it enjoys an NT$2 million tax credit?
A: This manner of thinking is incorrect. Of course, motion picture production companies want to make money on their films rather than lose money. As for investment risk, NT$20 in taxes can be deducted for every NT$100 invested. Thus, even if only NT$80 is recovered from an investment, it would produce a return of NT$100 (NT$80 + 20). Should an investment lose money (within the range of NT$20 or less), it would result in neither a profit nor a loss. In this light, the risk is minimal. Of course, should an investment of NT$100 enjoy an NT$200 return, the NT$20 tax credit can still be deducted, thereby earning a total of NT$120 (NT$200-100+20).
17.Please explain the term “one-film company.”
A:Based on the experience of foreign motion picture industries, such as those in Japan and the US, film productions typically take the form of an association that holds responsibility for the filming. Investors rely on the professionalism of the director, rather than a company structure. As to which model is better, in fact both have positive and negative aspects. For those interested in investing in a new motion picture, it is easier to establish a new company for each film because accounting records are clearer as to whether the picture itself made a profit. If a company continuously invests in order to film and release motion pictures, tracking the flow of capital and settling accounts can be difficult. Currently, the GIO is working with the Ministry of Finance on drafting “one-film company” legislation that, if passed, may encourage shareholder investment in motion pictures.
18. What do venture capital companies think about the tax credit?
A: When corporate investors put their money in a new company, they expect to recover their investments. When the film is finished, investors can enjoy tax credits, and the production company can settle accounts and close down. Investors hope to see clean and clear exit strategies for their investments. In other words, venture capitalists are generally apt to risk capital when they know the time and manner their funds will become liquid, rather than when their capital is locked into an investment. Independent movie producers often establish a new company for the production of a new movie. If the production is not finished successfully, the company might close down. This business model is difficult to understand for the tax authorities, leaving them wondering why production companies close down after producing one film and cannot cease producing films after the first one. These issues still require time and further discussion to clarify.
19. Isn’t the minimum requirement for this tax credit too high?
A: Originally, the minimum investment to qualify for the tax credit was set at NT$60 million. The GIO’s Department of Motion Picture Affairs, however, managed to have the minimum investment lowered to NT$30 million. This was not an easy task. Though the NT$30 million entry price may be too high for some documentary filmmakers, who may complete a film for around NT$10 million, the NT$30 minimum could be adjusted in the future. This question warrants further discussion and consideration.
20. The local motion picture industry is facing major challenges with Taiwan’s entry into the WTO. What is the Department of Motion Picture Affairs’ view on investment in the movie industry?
A:In addition to providing financial assistance, the government’s most direct policy for assisting the domestic industry is through the provision of tax incentives. It encourages corporate investment in the domestic movie industry, while abolishing the preferential tax advantages that foreign films enjoyed when imported to Taiwan. This gives domestic films the opportunity to compete on a level playing field with foreign films. A number of companies—especially technology companies—have already expressed an interest in investing in motion picture productions, which is a good start.
21. In which industries have tax credit policies been successful? Will promoting tax incentives work in the motion picture industry?
A:The revision of Article 39-1 of the Motion Picture Act provides the legal basis for the tax credit for investing in motion pictures. As long as a film has a good director and investment plan, and pays enough attention to issues such as quality, marketing, personnel, and technology, the film should be able to attract investors. Investment tax credits have been successful in a number of industries, such as the high tech, venture capital, and biotech industries. These incentives have helped to establish some of today’s major corporations, and the tax credit system provides a very good model for industry incubation. If the motion picture industry works together to promote the project, the potential outcome could be very beneficial to the industry.
22. What other guidance measures will be provided by the Department of Motion Picture Affairs in the future to encourage investment and provide financing in film production?
A: Guidance measures of the Department of Motion Picture Affairs to the motion picture industry can be divided into five major categories, as follows:
In the future, the GIO will cooperate with the Ministry of Economic Affairs and the Executive Yuan Development Fund to establish a Motion Picture Venture Capital Fund. The GIO aims to earmark NT$3 billion for the Fund and seek out seed banks to provide financing, including favorable loans for motion picture production projects. Finally, the GIO will work to establish a motion picture “incubation center” and a system for managing investment and financing for the motion picture industry.
