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Assessing State Aid for Films and Other Audiovisual Works

June 24, 2011

On 20 June 2011, the European Commission (the “Commission”) issued a consultation with a view to updating its 2001 Cinema Communication. This 2001 Cinema Communication sets out the criteria for assessing whether aid given by EU member states for the production of films and audiovisual works could be found by the Commission to be legal.

 

In this alert, we outline the main changes proposed by the Commission in its consultation and the implications that this could have for future aid in this sector granted by EU Member States.

 

Background 
 

The EU has become one of the largest producers of films in the world with 1,168 feature films produced in the in EU in 2009 compared with 677 produced in the US and 456 produced in China.[1] Most films produced in the EU have received some public funding. EU Member States provide an estimated €2.3 billion per year in film support (€1.3 billion in grants and software loans and €1 billion in tax incentives).  Around 80% of this is for film production.  France, the UK, Germany, Italy and Spain offer the majority of this financial support.[2]

 

In the EU, any State aid that is provided by a Member State which distorts or threatens to distort competition and trade between Member States is prohibited.[3] However, the Commission may exempt certain types of State aid, including aid to promote culture on the condition that such aid does not affect competition and trading conditions to an extent contrary to the common interest.

 

In 2001, the European Commission adopted a Communication which set out the State aid assessment criteria for support for producing films and audiovisual works (the “2001 Cinema Communication”).  The validity of these criteria was extended in 2004, 2007 and 2009. The current criteria are the following:

  • The aid is directed to a “cultural product”: Member States must ensure that the content of the aided production is cultural according to verifiable national criteria.
  • The producer must be free to spend at least 20% of the film budget in other Member States: a condition may thereby be imposed on aid grant, requiring the beneficiary to spend up to 80% of the production budget of an aided film or TV work in the granting Member State.
  • Aid intensity must in principle be limited to 50% of the production budget (although difficult and low budget films are excluded from this limit).
  • Aid for film production must not be earmarked by a Member State for specific filmmaking activities (e.g. post-production) in order to ensure that the aid has a neutral incentive effect and does not protect just those specific activities in the granting Member State.

 

However, ten years following the adoption of its Communication, the Commission, having conducted a review of the State aid notifications received under the Communication, considers that the rules governing the provision of aid for European films should be overhauled. This is particularly the case given the evolution of technology and consumer behaviour over the last ten years. In addition, the Commission is concerned that the aid given is not achieving its goal of promoting culture in a way that leads to European integration. Moreover, the difficult global economic circumstances have resulted in significant cut-backs to film funding and entire film funding bodies are threatened with closure.

  

Consultation

 

The Commission has published an “Issues Paper” and has launched a three-month public consultation on the future direction of conditions of future aid for films and audiovisual works. The specific issues on which the Commission is consulting are the following:

 

  • What should be the objective of State aid for films and audiovisual works? 

    While subsidies appear to be very important for European films, data suggests that the vast majority of funded films are never aired outside their country of origin. The Commission considers that  clarifying the objectives that Member States pursue in supporting European films would help in assessing whether support is delivering demonstrable results.

 

  • What would be the most effective way for the Commission to control the “subsidy race”? 

    The Commission is concerned that Member States use the State aid “exemption” so as to  attract investment from large (mostly US) studios, typically by providing tax incentives and other measures to facilitate the production of international feature films and television programmes in certain territories. The Commission is concerned that the potentially major subsidies provided to major US-financed films distort competition among European production locations and that this use of public subsidies in effect leads to competition with other Member States. The Commission is concerned that the avoidance of subsidy races was one of the objectives of the State aid provisions of the Treaty so it seems counterintuitive that the 2001 Cinema Communication is used precisely for that purpose.

    One way the Commission is considering in order to address its concerns would be to emphasise the criterion that the film has to be a “cultural product” so as to limit films where aid is provided. However, the Commission itself acknowledges that this is not an appropriate way to attempt to limit subsidy races. Two alternative proposals raised by the Commission are (a) to limit aid for a single production to a certain amount; and/or (b) to insist that such aid is granted on condition that it is reinvested or reimbursed in case the production makes a profit.

    It is clear, however, that the whatever rules the Commission will seek to apply in this instance will need to ensure that there is sufficient incentive for investors to actually fund European films.

 

  • What factors should be taken into account by State aid assessment criteria for activities other than production?

    The Commission is considering whether it is appropriate to extend the scope of the Cinema Communication to include aspects other than “production”. In particular, the Commission is considering inclusion of all aspects of film-making from story concept to delivery to audience, such as film development and distribution. In addition, the Communication could also cover support for promotion and distribution platforms, like film festivals, video-on-demand, digital projection and rural cinemas. This could help “match” the conditions of supply and demand and ensure that the film can actually reach as wide an audience as possible.

 

  • How should the switch of cinemas to digital projection be covered by future rules on aid to cinema?

    In September 2010, the Commission adopted a Communication on opportunities and challenges for European cinema in the digital era, which made the point that subsidies to cinemas showing a certain share of European or arthouse films have already been approved under the current European Commission policy on State aid for the digitisation of cinemas. The Commission also makes clear that public support schemes for digital projection equipment should follow the principle of technological neutrality.

    To the extent that the switch to digital projection could lead to additional subsidies, these would be of interest to the Commission.

 

  • Should the scope of the Communication extend beyond films and TV productions to other types of audiovisual projects? If so, what definition of 'audiovisual project' should be used?

    The Commission considers that the definition of 'audiovisual project' may need to be updated and, potentially be extended beyond film and TV production to include “cross media” works such as interactive video games.

    However, the Commission is also concerned that these “cross-media” sectors, which have different characteristics to those of films and television productions, may in fact require other State aid assessment criteria than audiovisual productions.

 

  • What should the maximum aid intensities be?

    The Commission sets out a number of considerations as to what percentage of the production budget of a film should be covered by aid. Firstly, it queries whether the current maximum overall aid intensity should remain at 50% of the production budget but with higher aid intensities for difficult and low budget films. Secondly, it questions the implications of extending to the scope of the Communication to activities other than production and whether  it would still be appropriate to set the maximum overall aid intensity at 50% of the total project budget if this were to also include covering script-writing, development, pre-production, principal photography, post-production, distribution, promotion and marketing costs). Thirdly, the Commission is considering whether it would be appropriate to encourage cross-border cooperation by allowing a higher overall aid intensity (of perhaps 60%) for film projects which involve activities in more than one Member State, including co-productions. Lastly, if other types of audiovisual projects are to be covered by the Communication, the Commission asks what the appropriate maximum overall aid intensity should be.

 

  • Should Member States be allowed to impose territorial conditions on aid for audiovisual projects? If so, would it be fair to limit this to 100% of the aid amount or is there a more appropriate benchmark?

    The existing current Communication allows Member States to insist that up to 80% of the production budget of a subsidised film production is spent in the Member State offering the aid. The Commission considers that this is inconsistent with the fundamental principles of the Internal Market, which guarantee the free movement of goods, persons and services, as well as causing difficulties with how this limit should be applied to co-productions.

    The Commission suggests that limiting the scope of territorial conditions that Member States can impose to 100% of the aid amount would be sufficient to incentivise Member States to invest in the film industry while simultaneously encouraging cross-border film productions.

 

  • Does the digital revolution affect the State aid rules?

    The Commission is also consulting on whether the State aid rules in the audiovisual sector should be adjusted as a result of the broader digital revolution. In particular, the Commission queries whether conditions on production should be imposed to encourage a smooth digital transition, and whether ‘distribution support’ should cover distribution on all platforms (ie not just for cinema release).

 

Implications for the film industry

 

Perhaps the most far-reaching implication for the film industry resulting out of the Commission’s proposals, is the fact that it proposes limitations on funding so as to avoid “races to subsidies”. While it is not yet clear how this will be applied, it seems that limiting aid to non-EU firm studios will be one of the main outcomes of the consultation.

 

However, the Commission is also conscious of the digital revolution in the audiovisual industry and appears to be seeking ways to facilitate it, which again could lead to investment incentives in Europe. 

 

Consultation schedule

 

The European Commission’s Press Release and the “Issues Paper” on the Cinema Communication can be accessed here. The public consultation in respect of the Issues Paper closes on 20 September 2011. The Commission is planning to issue a draft Communication in December 2011 (for consultation until February 2012) and to adopt a new Cinema Communication by the second half of 2012. The 2001 Cinema Communication will expire on 31 December 2012 and it is expected that the new Communication will come into effect before this date.

 

If you would like to receive further information on the Cinema Communication, please contact Riccardo Celli (RCelli@omm.com / +322 642 4134) or Sophia Stephanou (SStephanou@omm.com / +322 642 4124).

 



[1] European Commission Issues Paper Assessing State aid for films and other audiovisual works para 12.

[2] European Commission Issues Paper Assessing State aid for films and other audiovisual works para 11.

[3] Article 107 Treaty on Functioning of EU.