1. THE HUNGARIAN PRODUCTION INCENTIVE N EGOTIATIONS WITH THE EU Karoly Radnai, OrienTax Consulting Ltd. Mons, 4-6 July 2010

2. B ACKGROUND / M ECHANISM Hungary introduced a tax rebate driven film incentive regime in 2004 to attract foreign film productions and to promote Hungarian culture. As a result, Hungarian film productions can recover 20% of ‘qualifying budget’. Due to the tax rebate, the volume of Hungarian production activities has increased by ten times. ‘Qualifying budget’ was originally defined as an expense generating Hungarian taxable income at the supplier The original law expired on 31 December 2007 and negotiations had to be started with the EU to extend the period of validity Mons, 4-6 July 2010 Karoly Radnai, OrienTax Budapest

3. T AX R EBATE F LOW C HART Hungarian producer Sponsor (e.g. a corporation or an agent) Sponsorship Agreement Foreign Producer National Film Office Contract for production with 20% discount Registration / qualification / audit Tax certificate Payment of tax rebate (20%) Mons, 4-6 July 2010 Karoly Radnai, OrienTax Budapest

4. I SSUES COMMENTED BY THE EU Need for a cultural test Intensity of state aids / allowed maximum budget of difficult and low budget films Basis of eligible expenses The negotiation process started in April 2007 and lasted until July 2008. In the first 6 months the Hungarian administration did not really understand how serious this process was and actual work started only at the end of 2007 when they realized that the regime were about to expire without agreement. 4-6 July 2010 Karoly Radnai – OrienTax Conculting Ltd.

5. C ULTURAL TEST Hungary claimed that every film was a piece of cultural product, so there was no need for a ‘test’ The Hungarian rules excluded only certain categories, such as TV-shows, reality shows, events broadcasting, news programmes, soap operas, hate / violent / pornographic films. Everything else was regarded as a cultural product. The Commission (DG Competition), however, insisted to formulate a standard cultural test in order to allow the extension of the regime. 4-6 July 2010 Karoly Radnai – OrienTax Conculting Ltd.

6. C ULTURAL TEST (2) When drafting the test, Hungary had the proposal to assume European co-productions automatically eligible, as well as foreign films that successfully qualified for the test of another EU member state. The EU finally agreed to accept European coproductions qualifying without a test. The final version of the test was designed on the basis of the German and English cultural tests. 4-6 July 2010 Karoly Radnai – OrienTax Conculting Ltd.

7. Q UALIFYING : C ULTURAL T EST Two sections: Section A: Cultural Criteria - 8 points Section B: Industrial Criteria - 24 points In order to qualify, the production must reach minimum 16 points (out of 32) where minimum 2 points must come from the Cultural section Mons, 4-6 July 2010 Karoly Radnai, OrienTax Budapest

8. a)The storyline / underlying material of the motion picture is based on an event, which is part of the Hungarian or the European culture / history / mythology / religions 1 point b)The motion picture is based on a character / personality belonging to the Hungarian / European culture / history / society / religions 1 point c)The motion picture is centered on Hungarian / European traditions/customs1 point d)The story of the motion picture is set in European scene/landmark/location/architectural or cultural environment 1 point e)The storyline or underlying material is based on a literary work or on an adaption of other art work (products of fine or applied arts, music etc.) with cultural value. 1 point f)The storyline or underlying material of the motion picture is centered on a current actual cultural, sociological, or political issue for Hungarian or European society 1 point g)The motion picture reflects an important Hungarian or European value such as cultural diversity / solidarity / equality / protection of minorities or human rights / tolerance / environmental protection / respect for traditions of culture or family 1 point h)The motion picture reflects the Hungarian and European culture and identity.1 point C ULTURAL C RITERIA Mons, 4-6 July 2010 Karoly Radnai, OrienTax Budapest

9. i)The film product is a motion picture product that creates value as a result of its genre 4 points j)The creators of the motion picture include Hungarian citizens or citizens of another EEA country, or those non-EEA citizens who have received an international film festival award: 1 point for every two scores (max. 6 points) Director / Producer / Director of photography / Script writer / Leading or secondary actor or actress / Composer / Art director or production designer / Costume designer / Editor / Make up designer / Line producer (production manager) / Post production supervisor (either audio / VFX / DI) k)final version of the film in any official EEA language4 points l)At least 51% of the contributors to the motion picture - not falling under the scope of point j)- are the citizens of an EEA country, or the motion picture is a co-production that does not qualify as an European co-production. 4 points m)The location of the shooting is in Hungary3 points n)use of Hungary’s cultural resources (i.e. pre or post-production in Hungary)3 points I NDUSTRIAL C RITERIA Mons, 4-6 July 2010 Karoly Radnai, OrienTax Budapest

10. L OW BUDGET / D IFFICULT FILMS The debate was about the allowed maximum budget of low budget films and whether or not a Hungarian language film may be considered a difficult film. The issue was critical due to normal films can only be subsidized up to 50%, whereas low budget / difficult films up to 90%. For low budget films, Hungary wanted to have at least EUR 1.2 million limit whereas the Commission insisted only EUR 0.6 million Compromised figure was 0.9 million finally. 4-6 July 2010 Karoly Radnai – OrienTax Conculting Ltd.

11. L OW BUDGET / D IFFICULT FILMS (2) For international low budget coproduction Hungary wanted EUR 2.7 million maximum budget, whereas the EU only EUR 1.9 million. Final figure was EUR 1.9 million. The Commission howerver agreed that Hungarian language films can be considered difficult if they cannot recover their budget from tickets / box office sales. This is practically true for all films produced for Hungarian audience due to the relatively small population. 4-6 July 2010 Karoly Radnai – OrienTax Conculting Ltd.

12. E LIGIBLE EXPENSES FOR TAX REBATE Original version practically did not allow non-Hungarian subcontractors’ fees to be eligible due to not realising Hungarian tax liability as a result of payment The EU considered this as a restriction of free movement of goods and services within the community Hungary did not want to fully allow foreign expenditures due to not generating tax income on foreign expenses and it would be an uncontollable leak in the state budget. Hungary’s argument against the eligibility of foreign spend was that this would positively discriminate international productions against fully Hungarian films. The compromised solution was to have min. 80% Hungarian expense and max. 20% foreign expense in the eligible basis. 4-6 July 2010 Karoly Radnai – OrienTax Conculting Ltd.

13. Hungarian spend Foreign spend Basis of tax rebate Amount of tax rebate Effective rate Example 110000 20020% Example 2900100100020022% Example 3800200100020025% Example 460040075015025% E XAMPLES F OR T AX R EBATE C ALCULATIONS Mons, 4-6 July 2010 Karoly Radnai, OrienTax Budapest

14. Karoly Radnai OrienTax Consulting Ltd. 1133 Budapest Capital Square, Váci út 76. Tel: 00 36 1 883 0374 Fax: 00 36 1 883 0496 Cell: 00 36 30 9021 450 karoly.radnai@orientax.hu www.orientax.hu karoly.radnai@orientax.hu www.orientax.hu