Mind the Tax: Watch Out for Taxes

An indispensable element of film production is securing financing, as well as skillfully spreading it out over time during production and planning the related cash flows. In the planning process, it is important to remember the tax implications of certain actions, which—if unforeseen—can disrupt the production process, but if well planned, can significantly improve it.

Receiving external financing may, as a rule, generate income for income tax purposes, which in turn—depending on when this income needs to be recognized—may lead to the need to pay tax already during the production process.

Importantly, income tax revenue may arise at different times, depending on the method/type of financing, the time of receipt, the conditions for granting and receiving it, as analyzed on a case-by-case basis, as well as depending on reciprocal benefits from the producer. This, in turn, may have a significant impact on the cash flow of the entire project, which is why it is worth tracing the tax consequences and the moment they arise, both at the stage of financial planning of film production and at the next stage – creating and concluding agreements on various methods of financing production – in order to counteract potential fluctuations in financial liquidity during production.

Pursuant to the provisions of the Corporate Income Tax Act (CIT), revenue includes, in particular, money received, monetary values, the value of items or rights received, as well as the value of other benefits in kind, including the value of items and rights received free of charge or partially against payment, as well as the value of other benefits received free of charge or partially against payment.

In simple terms, it can be said that corporate income tax covers all financial inflows arising from business activities, as well as those received from other sources.

In turn, the issue of income from gratuitous benefits must always be addressed when a taxpayer receives, without any obligation of reciprocal performance, goods or rights or other benefits, or the possibility of using goods or rights (in particular cash).

PISF Grant

The Polish Film Institute (PISF) provides funding for projects in the form of grants, and for initiatives related to film project development and film production also in the form of loans or guarantees.

Under the general rule, grants or subsidies received are subject to income tax at the moment they are actually obtained.

Market practice shows that accounting for PISF grants for income tax purposes may be challenging—particularly in situations where film production is spread out over time, and the moments of (a) receiving the grant and (b) incurring expenses are far apart. According to the tax authorities’ position, this may lead to the need to recognise grant income (and, consequently, often to pay income tax) in reporting periods different from those in which the expenses treated as tax-deductible costs are incurred.

Cash Rebate

Support from PISF in the form of a cash rebate also constitutes income for CIT purposes. However, due to the different method of awarding, transferring, and using these funds compared to PISF grants, this type of support appears to give taxpayers somewhat more room—within the boundaries of the law—to “manage” the moment when taxable income arises. This can undoubtedly make it easier to manage the tax position of a film production.

Non-cash Benefits and Donations Provided to Producers

When receiving a donation (in monetary form) or any other benefit free of charge (non-monetary, such as free use of an image, filming location, etc.), the producer—provided they are not required to provide any reciprocal performance—will, as a rule, be obliged to recognise the resulting income and pay income tax.

The value of such a donation or non-cash benefit must be determined at market value (and in the case of a monetary donation, at the amount of the donation).

Co-production

A situation in which a co-producer contributes financial or in-kind capital in exchange for acquiring a share in the rights to a film is treated as a reciprocal performance between the parties to the co-production agreement, i.e., the producer and the co-producer. In other words, such a situation may be regarded as a paid service consisting of transferring to the co-producer a co-ownership share in the economic copyrights, where the remuneration for this service will be:

1. he financial contribution received by the producer from the co-producer (the amount of the financial contribution constituting the purchase price for a specified share in the rights), or
2. the value of the in-kind contribution provided in exchange for the rights (resulting in the mutual obligations being offset).

Upon the contribution of financial or in-kind capital, the co-producer acquires a co-ownership share in the economic copyrights to the film, and this event gives rise to taxable income for the producer for CIT purposes, in a manner analogous to the transfer of a share in rights.

It should be remembered, however, that depending on the parties’ arrangements, the moment at which the share in the rights is transferred may be crucial for correctly determining the moment when taxable income is recognised.

Investment in Film Production

Another common form of securing financing is the investment model, which involves committing a specified amount of funds in exchange for the return of the contribution and the right to participate in profits generated from the exploitation of the film (without acquiring copyright to the film).

The parties have considerable flexibility in defining the commercial terms relating to the investment contribution, its repayment, and participation in profits (and the risks arising from these arrangements).

Income tax regulations do not explicitly address this type of arrangement, which may lead to uncertainties regarding the moment when taxable income arises for the producer in connection with the investment funds received.

The moment the producer receives funds as an investment contribution should not, in principle, be regarded as a definitive economic gain on their part (at least until the investment is settled, the contributed funds are either returned or not returned, and any profits are paid). Consequently, this should not give rise to taxable income at the moment of receipt under income tax rules.

Nevertheless, we are aware of tax authority positions suggesting that taxable income arises already upon receipt of such a contribution by the producer. As a result, caution is advisable when entering into investment agreements, and each agreement’s provisions—as well as the potential tax implications—should be carefully analysed.

What’s the takeaway?

Taxes… are not simple. Moreover, as practice shows, the same tax provision may be interpreted differently by the authorities over time. To limit and minimize these uncertainties and doubts, it can sometimes be worthwhile to submit a request for an individual interpretation of tax law provisions to confirm the correctness of the tax treatment of a particular transaction (bearing in mind that the protection provided by such an interpretation applies only to the applicant).