How Films are Financed

Before discussing specific film incentive programs, it’s useful to also have an understanding of how films are financed – and therefore how the incentives you develop fit into the bigger picture.

If you offer a small tax incentive such as a sales tax exemption, you are likely to encounter studio movies that are unmoved by your incentive offerings. In this case, it is much more likely that you’ll be dealing with independent filmmakers who are cobbling their budgets together from a number of sources: pre-sales, tax incentives, co-productions, equity investment, gap financing and below the line investment. (Small incentives may, however, attract commercial production or documentary filmmakers, if the incentive is applicable, since these types of production are often excluded from many film tax incentive programs.)

Pre-sales is the sale of a movie for distribution in a specific territory (before the movie has actually been made) based on predictions of how well the film will perform commercially in that territory. However, even if a film looks like it will be a commercial success “on paper”, there is still no accurate method of determining the levels of revenue the film will generate; there is always a whole slate of interrelated factors that impact on a film’s potential – from competition presented by other films released at the same time, to the quality of the script or cast to the track record of the director.

In spite of the uncertainties, pre-sales agreements essentially offer filmmakers specific financial guarantees of future income. Producers are then able to use these agreements as leverage to secure financing from sources such as banks.

Although North America pre-sales can be very difficult to put in place, they provide an important part of the total budget, AND they can help stimulate sales in other territories; an American pre-sales agreement therefore gives the banks more confidence in the estimates received for other territories. And incidentally, the reliance on pre-sales as the central means of film financing explains the Hollywood dependence on movie stars and the mega-salaries they are paid – movie stars generate pre-sales, pre-sales generate movie budgets.

Equity Investment
Equity investment is essentially private funding raised from individuals or groups of investors seeking to make a healthy return from film production. These funds pool money from investors that can then be invested into a slate of films in order to spread the risk. There is a growing market for formally structured equity products in the film industry. Equity investment can generate around 33% of the production budget.

Gap Financing
Gap financing literally bridges any gap that remains between the amounts of finance that the producer has been able to raise and the production costs of the film. This finance is generally based on the potential value of the film in any territories that have not yet been pre-sold. Gap financing is a small and highly specialized market which is not likely to fund more than 20% of any total budget.

Co-production refers to a situation in which two or more companies from different countries jointly undertake a television or film project. This can be a simple arrangement where one partner provides the funding while the other does the actual production, or it can be more complex, involving joint creative control over productions. In both cases, the allocation of the rights of distribution is a standard element of the negotiation. Since the 1980s, there’s been a surge in the use of co-production as a means of financing television productions in particular.
Whether or not two countries co-produce a film together can be complicated. Here, Franck Priot from Film France talks about treaties that France has in place with other countries and why or why not they might co-produce a film with another country.

Below-the-Line Investment
In some territories, the costs of production that would otherwise have been paid for by the producers may be provided by facilities houses or other service providers in return for a stake in the profits of the film. Deferrals by cast and crew also fall into the category of below-the- line investment because they reduce the cost of the production to the level for which financing can be found.

Ancillary Rights
Funds can also be raised by factoring in likely income flows from ancillary rights, most notably music and publishing deals, DVD sales, merchandising, and product placement deals.

Sale and Leaseback
Sale and leaseback was a very popular and successful British program where investors were allowed to reclaim tax that has been previously paid, and to then repay it to the Revenue Department over a 15-year period. To qualify for this, the films have to be certified under the 1985 Films Act as British or be an official co-production. The benefit to the producer was around 12% to 15% of the budget for films costing up to £15 million and 9% to 10% for films budgeted at over £15 million.

Negative Pickup Deal
A negative pickup deal is a contract entered into by a producer with a movie studio, in which the studio agrees to purchase the finished movie (the negative) from the producer at a given date and for a fixed sum. Until that point, however, the financing is up to the producer, who must also pay any additional costs if the film goes over-budget.

Crowd Funding/Sourcing
A practice often employed by smaller independent films for raising film funds is through Crowd Funding, also known as crowd financing, equity crowdfunding, crowd-sourced fundraising.) Wikipedia’s definition of this phenomenon is the “collective effort of individuals who network and pool their money, usually via the Internet, to support efforts initiated by other people or organizations. Crowdfunding is used in support of a wide variety of activities, including disaster relief, citizen journalism, support of artists by fans, political campaigns, startup company funding, motion picture promotion, free software development, inventions development, scientific research, and civic projects.

Crowdfunding has its origins in the concept of crowdsourcing, which is the broader concept of an individual reaching a goal by receiving and leveraging small contributions from many parties. Crowdfunding is the application of this concept to the collection of funds through small contributions from many parties in order to finance a particular project or venture.

Crowdfunding models involve a variety of participants. They include the people or organizations that propose the ideas and/or projects to be funded and the crowd of people who support the proposals. Crowdfunding is then supported by an organization (the “Platform”) which brings together the project initiator and the crowd.”

A simpler and very common form of Crowd Funding begins with friends and family, who then send to other friends and family, with the hopes that the efforts will go viral.

Given the range of incentive models available, it’s perhaps unsurprising that many different kinds of incentive programs have sprung up for filmmakers – they range from tax credits to sales and usage tax rebates to skills development programs. However, every incentive program has the basic intention of saving the producer money. If the value offered by these savings is sufficiently enticing to make the producer spend revenue and create jobs in your destination, then your incentive is on its way to being successful. Here are some of your options.

Tax Credits
With tax credits, the production company receives a percentage of its production budget back in tax relief. There are a few different types of tax credits: refundable, non-refundable and transferable.

Refundable Tax Credits
These credits are very desirable for film/TV productions in any jurisdiction. If the amount of credit based on production expenditures in a particular jurisdiction is in excess of the production company’s tax liability in that jurisdiction, the amount is refunded directly to the taxpayer.

Non-refundable Tax Credits
These credits provide a percentage of the production costs to be taken as a credit against your taxes for that jurisdiction (corporate/franchise or individual taxes). These credits usually include provisions to allow taxpayers to carry them forward to subsequent tax years if they have don’t have enough tax liability in the year in which the productions occurred. Most out of state production company taxpayers will not be able to access these credits because they have little or no tax liability.

Transferable Tax Credits
These favorable credits are earned by productions in connection with film/TV productions. If the amount of credit based on production expenditures in a particular jurisdiction is in excess of the production company’s tax liability, the production company can sell its credits to a local taxpayer and thereby will be able to get the benefit of the production incentive, even though the production company itself may have no tax liability.

It’s important to note that when selling a tax credit to a taxpayer, the production company will often go through a “tax broker” who will find the proper company with sufficient tax liability and handle the transaction – for a fee. A broker’s cut of the tax credit may vary greatly dependent upon various factors:

• the availability of taxpayers wanting tax credits. When harder to place tax credits, the broker’s cut will often increase.
• the size of a production and thus its tax credit. Smaller indie films will at times mean a higher risk to the tax broker and thus the broker takes a larger cut.
• If the jurisdiction offering the tax credit also offers to purchase the tax credit from the production. For example, in Massachusetts, the government will guarantee the purchase a production company’s tax credit for .90 cents on the dollar. With this high benchmark, it is harder for a broker to offer the production much less than .90 cents since they know the production has this option.

Additionally, production incentives come in the form of rebates/grants, loans, discount programs, etc.


The production company receives money in the amount of a percentage of either wages paid to local residents, the cost of local goods and services or both. Ideally, rebates should be free of caps on a per project basis, or annual cap. Roll-over provisions are also a new concept, whereby those productions shut out of the production rebate funds in one year are the first in line to receive the rebate in the subsequent year.

Caps: This term refers to a set amount that a production or series of productions can gain in tax incentives. There are a variety of “caps”:
• Annual Cap: a set amount allocated for all productions collectively in a given fiscal or calendar year. In this scenario, productions have to “line up” or “queue up” for the available funding.
• Per Project Cap: an amount of a tax rebate or credit that cannot be exceeded for each production. In this scenario, there may or may not also be an annual cap. Without the existence of an annual cap, a production whose estimated tax incentive is below the project cap amount will be safe to assume that they will be eligible for the incentive.
• Per Individual/Category Cap: a set amount of a tax incentive that cannot be exceeded by an individual, or at times, by a category of individual. For instance, a $5 million incentive cap for actors on a given production.
• Crew Cap: a minimum number of local crew that must be hired on a given production in order to qualify for the tax incentive.
• In some jurisdictions, notably California, a set amount of tax incentives are given away per year and as there are many more productions than tax incentives available, a lottery system is set up at the beginning of each fiscal year.

Sales and Use Tax Exemption
The production company does not pay sales and use tax on goods and services purchased in the course of filming. Some states will offer a rebate of sales and use taxes paid in connection with productions, but the up-front, point of sale exemption is the preferred incentive as it is significantly less of an administrative nightmare for the production companies as well as the Department of Revenue or film commission. In some jurisdictions, a sales tax exemption is offered in lieu of a film production tax incentive (for short, small productions like commercials that do not want to go through the extensive procedures for filing for tax incentives; or a sales tax exemption may be offered in addition to a film production tax credit.

Other variables
It is safe to say that the less complicated and the more certain a tax incentive is, the more popular it will be with the film industry. There are times when a jurisdiction offers a high tax credit, but the certainty of receiving this credit is questioned due to political shifts or controversies, when a production or studio will choose to go to a place with lower but more secure tax incentives.

It is also true that it is preferable to offer a tax incentive that is easy to use. The large companies and studios will often choose a higher yield but more complex incentive jurisdiction, but smaller, less experienced filmmakers will often gravitate towards a simpler, less intimidating incentive program.

Here are some variables within the models discussed above:

• An additional incentive offered if specific marketing is agreed upon. For example, in Georgia, a production can get an additional 10% (on top of their 20% tax credit) if they place Georgia’s “peach” – their state logo – on the end credits of the film. Georgia now offers alternatives to the use of the “peach” to gain the same 10% additional credit.
• Minimum spend: many jurisdictions offer a production tax credit to productions with a spend over a specific amount. This could be $50,000 or $1 million. The significance of this is felt by small, indie filmmakers who often have budgets that don’t meet a low threshold.
• Residency requirements:
o Some jurisdictions allow out-of-jurisdiction crew, cast, producers and directors (or some subset of these) to qualify for their tax incentive while those individuals are on-the-ground and working in the jurisdiction.
o Other jurisdictions only qualify “resident hires” (in which case there must be a definition of residency and a process for verifying residency) and out-of-jurisdiction hires do not qualify.
o And some jurisdictions have differing percentages of a tax incentive for resident and non-resident hire, in which case an additional percentage is offered on the resident hires. For example: a 30% incentives on non-resident crew with an additional 5% (or 35%) on local crew.
o Sunset dates: This refers to the legislation that enacted the film production tax program and when (if in existence) that program is set to end. If a sunset provision exists, it generally means that the program will end in that stated year and new legislation would have to be enacted to give the program a new life. In jurisdictions where there is funding tied specifically to each given year (fiscal or calendar) which has to be allocated year to year, it can be very difficult for a production or studio to know in advance if the incentive will be available to them or not. Given the advance schedule of most films and television series, this scenario can cause a lack of certainty for the filmmakers and cause them to look elsewhere.

There are many other provisions that may be in place in specific jurisdictions in order to access an incentive.

Here are a few:
• Qualification for an incentive based on content – ensuring that the production is not in any way derogatory towards the jurisdiction. Generally, this approval is made by the government offering the incentive.
• The viability of a project based on its inherent benefit to the jurisdiction:
o This is often accomplished through a point system on a Cultural Test:

** Take a look at the British Film Commission’s Cultural Test as an example: **

Here, Franck Priot of Film France talks about the points system that has been developed in France in order to qualify a film as “French”
• Use of stage space. In some jurisdictions, a tax incentive for film and television is only granted if a certain percentage or number of days of production take place on a “qualified” stage (generally “qualified” could mean a purpose-built stage or an official film warehouse-type stage) within the jurisdiction.
Individuals or companies receive tax credits when they invest in filmmaking business ventures such as soundstage construction as well as in film or video production.

Loan Programs
Some jurisdictions will offer financing for production companies using either a loan guarantee program or direct loans for film production.

Free or discounted goods or services
Examples include free use of government buildings, free or discounted fees for police, military or transportation staff, discount on purchases offered by selected merchants, free office space etc. All of these add up to incentives that you can use to sell your destination to prospective clients.

Tax-Free Jurisdictions
Of course, some lucky jurisdictions are tax-free zones. However, given the understanding that tax credits help productions to finance themselves, the absence of any tax structure is not an automatic benefit. (The best thing to do in this kind of environment is either to calculate the cost savings of actually working in your jurisdiction compared to other taxed destinations, or focus on building a loan program).

Regardless of the type of program you choose, from a producer’s perspective, there are a few things you should keep in mind when designing the perfect incentive for your jurisdiction.
• The incentive should be simple, straightforward and easy to understand and access.
• It is better if the certification process does not include numerous exceptions and detailed or complicated qualification criteria.
• The program should allow for easy and clear lines of administration and, if any interagency cooperation is needed, it should be swift and unencumbered so the approval process is seamless.

However, what the producer wants is not always the best move for your jurisdiction – which brings us to the Law of Unintended Consequences.