INTRODUCTION The Canary Islands has one of Europe s most attractive tax incentives for film and audio visual production. With a special tax system of their own, validated by Spanish national and EU regulations, the Canary Islands offer the following advantages to film production: International films with production services made in the Canary Islands could apply for a tax rebate calculated as the 40% of the eligible costs spent in the Canary Islands, subject to a limit of 5,400,000 for production. For Spanish films or Spanish coproduction, the tax regulation allows a transferrable tax credit (tax shelter model) to Spanish companies of up to 45% for the first million invested in the production, and the 40% of the remaining amount invested, subject to a maximum deduction of 5,400,000 for film. The low tax regime namely the Zona Especial Canaria (ZEC- Canary Islands Special Zone: http://www.zec.org), authorised by the European Commission, allows companies to pay a corporate tax rate of 4%, one of the lowest in Europe. In recent years there has been a boom of tax incentives for the audiovisual sector in other European countries that have implemented a range of public grants to production services, but the Canary Islands could offer one of the most powerful incentives. This guide seeks to provide to producers and private investors a practical explanation of the tax incentives that can be generated with the production of audiovisual works in Canary Islands and how these can be used, with a view to develop the Island s potential as a natural set and as the birthplace of a powerful film industry. 1
40% TAX REBATE FOR INTERNATIONAL PRODUCTIONS From 1st of January 2015, a new deduction for international productions (what it means, not qualified as Spanish films) is regulated by section 36.2 of the Corporation Tax Act. That said, international productions services could generate a maximum tax rebate of 4,500,000, calculated as the 40% of the eligible costs spent in the Canary Islands, having to invest a minimum of 1,000,000 in eligible costs. a. What productions qualify for the film tax rebates? - Feature films: animated or live action feature films released in cinemas. - Audiovisual work: any other production not released in cinemas but broadcasted by television operators or other platforms, such as series of fiction, animation or documentary episodes. - The foreign producer must contract the production services through a Spanish/Canarian line producer company. - This deduction can be only applied if the film is not qualified as Spanish film. - The productions that qualify for this deduction must have a minimun budget of 2 million euros. - The production must spend a minimum of 1,000,000 in eligible costs. b. Eligible expenses The basis for calculation of the allowance will include the following production costs: - Expenses related to the creative staff: exclusively applicable to the director, the scriptwriter, the director of photography, the music composer, actors and other artistes taking part in the production, editor, production designer, sound director, costume designer and head of prosthetics, provided they have their tax domicile in Spain or in a European Economic Area Member country. These expenses are capped at 100,000 Euros per person. - Other expenses incurred for hiring technical companies and other providers of services. In this regard, it is relevant to point that according to the ruling question number V1746-15 issued by the Spanish Tax Administration (hereafter DGT), dated June 2, 2015 the basis of deduction will be compound by the following expenses: Expenses related to technical industries and other suppliers. The following expenses are included: 2
- Those related to the executive producer, producer and production assistant. - Those related to the director crew: director, assistant director, property master, script supervisor, casting staff and extras or cast controllers. - Expenses incurred into related to the set design crew that have not been included in the expenses of the creative staff. These expenses involve the set designer, set decorators, florists, decorator assistant, set dresser, property assistant, carpenters, etc. and the material needed to build the set (construction material, carpentry, paint, fabrics, etc.) - Expenses of the wardrobe and make-up crews which cannot be included in those of the creative staff. These include expenditure on dressmakers, hairdressers, make-up artists, etc. It would also include expenses on wardrobe, make-up, wigs, etc. - Expenditure related to special effects, including special effects technician, scale model makers, etc., as well as pyrotechnic material, smoke-producing materials, combustion accelerants, detonators, extinguishers, etc. - Camera crew expenses (camera operators, assistants, etc.), lighting and sound. - Expenditure on the technical crew, including, on the one hand, the crew (telecommunication technical engineer, electronic maintenance technician, image control technician), and on the other hand, related expenditure (mobile telephones, internet, satellite lines, data lines for routers, etc). - Expenses related to secondary cast which cannot be included in the creative staff, such as extras in general, special extras, stunt doubles, doubles and stand-ins. - Expenses on additional staff: choreographers, armorers, army advisors, dialogue coaches, animal wranglers, drivers, cleaning staff, security staff, medical staff and ambulances, work risks supervisor at the set, labourers to help unload trucks and move technical equipment or props. - Maintenance and accommodation expenses for the crew, both during pre-production (for example, while scouting for exterior locations) or during production (while shooting). - Maintenance and accommodation expenses for the crew working in places other than the set (such as the crew in charge of property, locations, production, drivers on the road, etc.) who cannot enjoy the catering at the set or stay at accommodation near the shooting area. - Travelling expenses, within Spain, due to the shooting taking place in different locations, including pre-production work for location scouting and / or journeys to select the cast. - Expenses incurred in the hiring and / or purchasing of furniture and machinery directly related to the production of the series, such as pop-up gazebos, umbrellas, portable toilets, fences, chairs, tables, make-up mirrors, generators, cranes, etc. 3
- Hiring shooting premises and locations (castles, bullrings, factories, etc.), including fees and taxes paid to Town Councils for certain exterior locations. Hiring other premises directly involved in the production (premises or caravans for wardrobe or make-up, managerial meetings, security huts, storage huts etc.). - Expenses for hiring animals, weapons and ambulances for the shoot. - Public liability insurance covering the film production specifically. The following expenses related to administration tasks cannot be included in the deduction base: - Expenses incurred into for the air, sea and / or road transportation of shooting equipment, property and / or machinery to be used in the shoot from other countries into Spain as these expenses are not made in Spanish territory. - Expenses on labour and legal advice. - Expenses related to the administration staff, including hiring the premises (administration office), staff expenses (head accountant, accountant, paymaster and assistant accountant), hiring office machinery and furniture (photocopiers, printers, office furniture, etc.) purchasing stationery, and courier expenses. - The costs of the tax depreciation of those assets directly involved in the executive production of the series, proportionate to their allocation in the series, will not be part of the deduction base when these are in no case expenses incurred into in Spanish territory, but investments abroad which are later allocated to make the series. In this sense, the DGT stated in the query above referenced that those costs form part of the deduction when the service is actually provided in Spain or in the case of delivery of goods, when it is made in this country, regardless of the nationality of the goods supplier or service provider. If a service is partially offered in Spain, the deduction base will include the part of the service carried out in Spain. NEW: Eligible expenses for Animation Directing, Production, Photography, Visual development, Preproduction, Dialogues, Soundtrack, 2D/3D and Postproduction departments. Hardware, Software and Laboratory costs. Insurances. Travelling expenses, within Spain. 4
c. The amount of this deduction, together with other aid received by the Spanish producer shall not exceed 50 percent of the production cost. d. Period in which the tax credit goes into effect: The Tax Administration was concluded in the above mentioned ruling question that the incentive will be applied in the tax period in which the foreign production is completed. This moment will be set when the inquirer finishes their executive production in Spain. Therefore, later administration tasks will not be part of the deduction base and will not imply delaying the time when the deduction can be applied. e. Procedure to apply for the tax rebate The rebate will be paid by the Spanish Tax Authorities to a Spanish production service company, which could transfer the rebate to the foreign producer. In order to apply for and obtain the mentioned tax rebate, payment of the relief may be claimed against the producer company s corporation tax liabilities. In the event the relief due is greater than any tax due by the Spanish producer company, then a payment of the excess will be made by Revenue. No certificates or audits shall be filed. Source: Section 36.2 Corporate Income Tax Act. https://www.boe.es/diario_boe/txt.php?id=boe- A-2014-12328 5
40% - 45% TAX CREDIT FOR NATIONAL PRODUCTIONS & CO-PRODUCTIONS The allowance for Spanish film-production investments, generates a tax credit equivalent to 45% for the first million invested in the audiovisual work, and 40% of the remaining amount, subject to a maximum deduction up to 5,400,000. This allowance is regulated by section 36.1 of the Corporation Tax Act which establishes that investments directly made by Canarian producers themselves in Canary Islands works classified as Spanish feature films or audiovisual fiction, animation or documentary series that allow the preparation of a preliminary physical medium prior to their industrial mass-production, will generate a 45%/40% allowance over the investment made a. Basis for calculation of the allowance The Spanish Tax Administration has confirmed in its replies to a number of rulings consultations that the basis for calculation of the allowance must be considered equal to the «production cost», i.e., the whole amount used for acquisition of goods and services required for production of the work which may be accounted for as production costs. Thus, investments that form part of the allowance assessment base include production expenses: i.e. artists fees, technical staff, dubbing, film developing, accommodation and maintenance costs, and costs for obtaining copies and advertising costs incurred by the producer to the limit of 45% for both plant production cos (excluding other grants). It is necessary to point out that the maximum deduction generated by the investment in a film production ups to 5,400,000 and that the basis for assessment of the tax incentive is the aggregate of the costs incurred in Gran Canaria and the costs incurred outside the island, taking into account that at least 50% of the production cost must be done within Spain. On the other hand, the allowance rate for producers is 45% for the first million invested and 40% of the remaining amount. The profitability for private investors is thus maximized, since, although they only finance a part of the total film budget, the basis for calculation of the allowance is the total investment in the feature film. b. What productions qualify for the film tax credit? Additionally to the following requirements, the audiovisual work has to be classified as feature films or TV Series (fiction, documentary and animation): The work must fulfil the requirements needed to obtain the Spanish nationality and obtain the Canary Islands Audiovisual Work Certificate*. 6
The Cinema Act considers as a Spanish nationality works those made by Spanish producers, by producers of another EU member-country or by foreign companies under a co-production system, which have been granted by the Spanish nationality certificate. In this connection, for a work to be considered a Canary Islands work, requires the production to be made by Canary Islands audiovisual companies or by co-producer companies acting jointly with at least one Canary Islands audiovisual company registered with the Register of Audiovisual Works and Companies, include at least a Canary Islands technical or artistic participant (team leader, leading actor or actress and/or supporting actor or actress residing at the Canary Islands). The production must include at least two week s filming (11 days) in interiors or exteriors in the Canary Islands, except where, for duly justified reasons, the filming cannot be carried out at the Archipelago. NEW: For animation artworks, accreditation of fulfilment of minimum production time requirements at the Autonomous Community of the Canary Islands must be presented, i.e: -10% in the case of artworks with an associated budget over five million euros. -15% in the case of artworks with an associated budget under five million euros. -For the calculation of production times in the Canary Islands, the work of rendering may not exceed the 40% of the total production time. Cultural test must be passed given by Institute of Cinematography and Audiovisual Arts, Ministry of Education, Culture and Sport. Government of Spain. (ICAA) *Regional Decree from December 5th, 2016, modifying May 22th Decree,that regulates the procedure to obtain the classification of an audiovisual production as a Canary Island work: http://www.gobiernodecanarias.org/boc/2016/241/001.html 7
APPLICATION OF THE TAX CREDIT Economic Interest Group (EIG) This tax rebate could work as a transferable tax credit to Spanish companies by setting up a EIG. Their special tax regime allows to their members to impute directly in their Corporation Tax returns the tax allowances, tax rebates, positive and negative tax bases, financial expenses and withholdings generated by the EIG through the production. Financial cost could be generated in this structure. CANARY ISLANDS SPECIAL ZONE - ZEC Canary Islands counts with a low tax regime namely the Zona Especial Canaria (ZEC Canary Islands Special Zone). This fiscal incentive was authorised by the European Commission in the year 2000, in order to promote the social and economic development of the archipelago. The most attractive advantage is the low corporate tax rate of 4%, instead of the 25%, applied in the rest of Spain. There are other benefits and exemptions in the Canary Islands General Indirect Tax (IGIC the local equivalent of the Value Added Tax), in the Transfer Tax and Stamp Duty and in the Income Tax on Nonresident (IRNR). The requirements to join the ZEC in Gran Canaria are: Create a new company in Gran Canaria. Minimum investment of 100,000 in fixed assets related to the activity, within the first two years from the time of its registration in the ZEC. Create at least five jobs (three in the non capital islands) within the six months following the time of the registration, and maintain this average during the time that the benefits are enjoyed. At least one of the directors must reside in the Canary Islands. Operate in any one of the sectors listed in the authorized activities (the audiovisual sector is included). For more information about ZEC, please visit the website: http://www.zec.org Legal references: - Artículos 36.1 y 36.2 Ley 27/2014, de 27 de Noviembre, del Impuesto sobre Sociedades. https://www.boe.es/diario_boe/txt.php?id=boe-a-2014-12328 - RD-Ley 15/2014 de 19 de Diciembre, de modificación del Régimen Económico y Fiscal de Canarias. https://www.boe.es/diario_boe/txt.php?id=boe-a-2014-13248 8
CONTACT Gran Canaria Film Commission Nuria Guinnot Coordinator Las Palmas de Gran Canaria Tel: (+34) 928 410 674 grancanariafilm@spegc.org US Representative Office Carmen Díaz Beverly Hills, CA +1 323 331 5470 +34 928 400 900 cadiazm@grancanaria.com This presentation contains only general information and does not constitute a professional opinion, or tax and legal advise of any kind. This information is not intended to provide and should not be relied upon for accounting, legal or tax advice or investment recommendations. You should consult your tax, legal, accounting or other advisors about the issues discussed herein. 9