CO-PRODUCING WITH BRAZIL: MAIN FINANCING SOURCES

Transcription

1 CO-PRODUCING WITH BRAZIL: MAIN FINANCING SOURCES FEDERAL FILM SUPPORT Brazil supports film production, distribution and exhibition with an array of mechanisms. More than US$ 200 million are made available annually through these mechanisms. These are generally divided into 4 main groups which can be used individually or combined (though some caps apply) in a given film project: The Investment mechanisms (referred to as Article 1, and the Funcines ); The Sponsoring mechanism (referred to as Article 1-A ); The Co-Production mechanisms (referred to as Article 3, Article 3-A and Article 39 ); and Direct Public Support, via the Fundo Setorial do Audiovisual (referred to as FSA ) A) TAX BREAKS and CO-PRODUCTION MECHANISMS (Articles 1, 1-A, 3, 3-A, 39, and Funcines) Mechanisms 1, 2 and 3 above consist fundamentally of TAX-BREAKS which offer taxpayers (companies and/or individuals) the possibility to deduct their investment in or their sponsorship of a film directly from their tax bill. These incentives are neither tax-rebates nor tax-refunds for foreign producers; and are not linked to a certain amount of Brazilian Spend. They are grants given by taxpayers to the Brazilian production company, to finance the making of the film. Brazilian taxpayers (companies and/or individuals) can use part of their tax liability to finance a Brazilian film or an official co-production, provided that the project has previously been submitted to and approved for fund-raising by ANCINE. Each tax-break mechanism has its specific rules and caps (see details below) but, with the sole exception of the Funcines, these are all non-recoupable, non-reimbursable subsidies and need no be repaid. Projects can apply for all the tax-break mechanisms on an on-going basis. Applications are submitted to ANCINE and take in average 2 months to process. In the specific case of Article 1 mechanism, an additional application at CVM (Brazil s Securities and Exchange Commission) is required after the ANCINE approval, adding an extra month to the timeline. But having a project approved by ANCINE is no guarantee of having the funds. This is merely an authorization for the Brazilian producer to go out and seek to raise the funds from taxpayers. Thus, a Brazilian producer must convince taxpayers to use their tax breaks in his/her film.

2 The principal tax-breaks are: Article 1 Authorizes any Brazilian firm that pay corporate tax via the so-called Lucro Real method (mostly large corporations), as well as any Brazilian resident individual that pays income tax, to use up to 3% of their tax liability (individuals: 6%) in a film project duly registered at and authorized by ANCINE and CVM All the money invested in the film is deducted directly from the tax bill, there is no real cost for the money-giver. Cap per film project is R$ 3m (approx. US$ 1.7m). The funds received by the producer need not to be repaid (eg: they are neither recoupable nor reimbursable), even if the film is profitable. The money-giver, also called investor, retains a backend participation in the film s net income during a certain period of time. The percentage of backend participation and its duration are set by the producer at the time of filing the project application at CVM. Money-givers also have their logos and/or brands featured on the film s main credits, posters, websites, etc, among other marketing and promotional tie-ins. Most common money-givers of Article 1 funds are large (both state-owned and private) corporations such as utilities, oil companies, telecom firms and banks. Article 1-A Similar to Article 1, but without CVM participation. The percentage of tax deduction for corporations is 4% (6% for individuals) Cap per project is R$ 4m (approx. US$ 2.3m) Money-givers, also called sponsors, have no backend participation in the film s net proceeds; but have their logos and/or brands featured on the film s main credits, posters, websites, etc, among other marketing and promotional tie-ins. All the money invested in the film is deducted directly from the tax bill, there is no real cost for the money-givers. The funds received by the producer need not to be repaid (eg: they are neither recoupable nor reimbursable), even if the film is profitable. Most common money-givers of Article 1-A funds are large (both state-owned and private corporations) such as utilities, oil companies, telecom firms and banks.

3 A film project can receive funds from both Articles 1 and 1-A. The overall cap for BOTH mechanisms combined is R$ 4m, though. Thus, for example, a project can receive R$ 2m from each mechanism. But a project which has received R$ 4m from Article 1-A sources cannot receive any Article 1 funds. Article 3 Authorizes national and international film distributors operating in Brazil to use up to 70% of their withholding-tax liability (levied on payments for rights acquisitions, and on royalties remittances from the theatrical, home video and TV commercial exploitation of their non-brazilian films) in a local film project or in an international coproduction. Cap per project is R$ 3m (approx. US$ 1.7m) All the money invested in the film is deducted directly from the tax bill, there is no real cost for the money-givers. The funds received by the producer need not to be repaid (eg: they are neither recoupable nor reimbursable), even if the film is profitable. Money-givers, so-called co-producers, normally retain a backend participation in the film s net revenues and also acquire against zero advance its Latin American distribution rights. The backend percentage and the terms of the distribution agreement (including distribution commissions, duration of license, etc) are negotiable between the producer and the money-giver. Common money-givers of Article 3 funds are the Hollywood Studios and the big Brazilian national distributors. Article 3-A Equal to Article 3 in almost all aspects (including the backend participation), created mainly for Brazilian Free TV broadcasters and Brazilian Pay TV channels. Cap per film project is R$ 3m (approx. US$ 1.7m) Principal money-givers, also called co-producers, are the big Brazilian Free TV broadcasters and Brazilian Pay TV channels A film project can receive funds from both Articles 3 and 3-A. The overall cap for BOTH mechanisms together is R$ 3m, though. Thus, for example, a project can receive R$ 1.5m from each mechanism, but a project having received R$ 3m from Article 3 sources cannot receive any Article 3-A funds.

4 Article 39 Was created mainly to foster TV co-productions between foreign Pay TV channels and Brazilian independent producers, but can also be used for feature film production. This mechanism grants an exemption from the Condecine tax to foreign-owned Pay TV channels that invest in a Brazilian film (including official co-productions). Money-givers (usually called co-producers ) acquire a backend participation and exhibition license rights. The terms are negotiable between money-givers and producers. Cap per film project is R$ 7m (Approx US$ 4.1m) Common money-givers of Article 39 funds are the foreign-owned Pay TV channels, and the TV divisions of the Hollywood Studios. Funcines These are, broadly defined, media investment funds (similar to a French Sofica ) that raise money from a combination of both Article 1 and private equity sources. The money is invested as full equity in the film and is mostly 100% recoupable from the film s net proceeds (though not reimbursable in the case of the film s commercial failure). The rules for recoupment must be previously approved by Ancine. After recoupment, the money-giver (also called investor ) retains a (usually small) backend participation in the film s net revenues. Cap per film project is R$ 7m (Approx US$ 4.1m). Common money-givers are brokerage and securities firms which manage Funcines. All the above mechanisms can be combined and used jointly in a film project. However, The overall cap for ALL mechanisms combined is R$ 7m (approx US$ 4.1m). B) DIRECT PUBLIC SUPPORT (The FSA) The FSA is, in turn, no tax-incentive but a direct public support funding. The FSA is operated jointly by two public bodies: Ancine and Finep (Financiadora de Estudos Privados). The FSA has 4 lines of public support, of which two are for film production (lines A and C) and one for P&A financing (Line D). Line B is for TV productions. The FSA has one call per entries per year, usually in the first quarter of each year. Subject to Ancine/Finep s discretion, and to budget availability, a second call in the second half of the year may be opened.

5 The funds received from the FSA are partially recoupable from the film s net proceeds. The percentage of recoupment from each film project depends on various factors, including the total budget, the total amount received and the percentage participation of FSA in total film s budget. But as a rule of thumb, one can expect that 15% to 20% of the funds received from FSA must be repaid if the project is profitable. After repayment, the FSA retains a usually small - backend participation in the film s net revenues. There is officially no cap to the amount of money that the FSA can give to a film project. However, the results from the calls have shown a non-official cap approx. US$ 1m per project. The funds received from the FSA are not subject to the R$ 7m (approx US$ 4.1m) limitation which applies to the combined use of the tax-break/co-production mechanisms. There are other, smaller federal supports granted directly by ANCINE or by the Ministry of Culture (for example: PAR, PAQ, Art 18, Art 25/26 and others) but the above-mentioned mechanisms are the most important ones. STATE AND MUNICIPAL SUPPORT In addition to the federal sources, several Brazilian States and Municipalities offer tax-break mechanisms that emulate at local tax level (ICMS or ISS, as the case may be) the federal Sponsoring mechanisms. Examples are the states of Rio Grande do Sul, São Paulo, Bahia, Pernambuco, Rio de Janeiro, Minas Gerais and the cities of Paulínia, Rio de Janeiro and São Paulo. FQA Frequently Asked Questions Eligibility Is it possible to raise the Brazilian financial mechanisms for co-productions with non-treaty countries? Yes, all the mechanisms are equally available for official co-productionns with bith Treaty and non-treaty countries, though the eligibility rules are stricter in the latter case Is it possible to raise the Brazilian financial mechanisms for 100% foreign films which are shoot in Brazil? No, with the exception of Rio de Janeiro s Rio Global, all the Brazilian mechanisms (including the FSA) are available exclusively for 100% national films or for official Brazilian coproductions. Does Brazil has a so-called Points System to define what co-production projects are ultimately eligible? No, projects are perused and analysed by Ancine officials on an individual basis, based on a number of eligibility criteria which include legal, technical, financial and artistic aspects. However, I points-system for co-productions has been talked about for some time and might be introduced soon.

6 May I submit a project directly to Ancine? No, only Brazilian independent production companies duly registered at Ancine are eligible to submit projects and to raise the Brazilian financial mechanisms. Spend and Language Do I have to spend the money of the Brazilian financial mechanisms in Brazil? No, but Brazil taxes heavily any remittance to pay for services abroad (including to Mercosur and to Treaty-countries), raising the total cost of each transaction by approx. 18% to 43%, depending on the type of service being contracted. So, a US$ 10, service rendered outside of Brazil and being settled with Brazilian money can cost the film s budget a hefty US$ 14,300.00! Thus, there is a compelling economic reason to spend this money in Brazil. Does the film have to be in Portuguese-language? Not necessarily. For co-productions with Treaty-countries, the film can be in any of the official languages covered by the governing Treaty. For co-productions with non-treaty countries, a previous authorization from Ancine is required for any language other than Portuguese (normally the application for the language is done together with the project submission to Ancine). Timeline & Paperwork How long does it take Ancine to process an application for a co-production? Two months, in average. Is there any specific time to submit a project to Ancine? No, applications are received by Ancine on a on-going basis throughout the year. Producers are advised to avoid whenever possible the congested period from November 15th thru December 30th. Shall I expect a lot of red tape? Yes, of course. After all, you are dealing with taxpayers money. What are the main documents we have to submit to Ancine for a project s application? Ancine requires several documents to process a project application. These include but are not limited to a valid co-production agreement signed by the parties, the Companies Bylaws, the film s Budget, the Script and its chain of title, a Financial Plan and a Production Schedule. A detailed list can be obtained from the Ancine Website ( or from Your Brazilian co-producer. Raising and Releasing the Funds

7 Our co-production project has been approved by Ancine. Does it mean we will have the funds? No, it doesn t. It merely means that the Brazilian producer is authorized to go out and seek to raise the funds among taxpayers. Ultimately, it is the taxpayers decision to use their taxbreaks in a film. The only funds that Ancine controls directly are those from the FSA. We did raise the funds and they are beginning to be deposited in the film s escrow account held by Ancine. When can I expect to release these funds? To release the funds Ancine requires evidence (eg: contracts) showing that at least 50% of the total amount to be raised in Brazil has already been secured contractually and, in addition, that at least 25% of the total amount to be raised be already deposited in the escrow account. The FSA (Fundo Setorial do Audiovisual The Audiovisual Fund) Is this a tax-incentive mechanism as well? No, the FSA is a direct public support fund jointly administered by Ancine and Finep How many calls are there per year and when? One for all lines of support (Film production, TV Production and P&A funds), usually in the first quarter. Production Services Are there any specific incentives for Production Services? No, except for Rio Global (for more information about Rio Global incentives please visit and Am I legally required to hire a local Brazilian Producer for my shooting in Brazil? Yes. TV Projects Can Brazilian financial mechanisms be used for TV co-productions as well? Yes, a number of Tax-break mechanisms (though not all) and the FSA can be used for TV coproductions as well. For more information, please visit Public Audit and Rendering of Accounts Do we need to render accounts of how the Brazilian financial mechanisms was spent? Yes, a detailed account (the so-called final cost report ) of every payment made, and copies of all invoices, receipts and transactions (including copies of the bank account statements in

8 which the funds were deposited) must be presented by the Brazilian production company to Ancine auditors upon project s completion. Sanctions and Penalties Are there sanctions and/or penalties for the abuse or the misuse of Brazilian mechanisms? Yes. Penalties can include administrative sanctions as well as civil and criminal charges. Disclaimer: All effort has been done to display the most accurate info available as of April 2011 but Cinema do Brasil assumes no responsibility for the correctness of the information herein provided. Also, the information portrayed here might be outdated or no longer valid due to changes in legislation, norms and/or business practices. Hence, foreign producers are herewith advised to consult previously with Ancine and to seek proper legal advice regarding the use of the mechanisms portrayed here. The mechanisms caps are fixed by Law in Brazilian reais. An average rate of BRL 1.70 per US$ 1.00 was used for the currency conversions.