On tax benefits

Subcontractor commissions – competition and standards

In the past years, even Romania, Slovakia and Bulgaria got ahead of Hungary: subcontracting film production to these countries is cheaper than here. In spite of its better infrastructure and service industry, Hungary has been unable to compete with prices lower by 20% in neighbouring countries – ranging from wages to restaurants.

The tax and investment benefits of the Film Law entering into force on April 1 are meant to counter this disadvantage. Productions arriving to the country will receive a roughly 20% tax benefit after their film production costs in Hungary, which can compensate for the lower prices of the neighbouring countries.

At the same time, the law does not offer this benefit directly, but through a Hungarian tax subject that provides direct financial support for the production and can write off this support from both its tax base and its tax. Experts created the construction to be financially beneficial for both the taxpayer and the state budget.

The largest subcontract base of the region is the Czech Republic, where the standards of equipment, professional attitude and infrastructure are very high. While Hungary won’t be able to compete with the different conditions of the Czechs, the two countries have enough room on the market: the Czech are already overburdened with subcontractor commissions, their professionals and studios are reserved six months ahead.

Co-production, domestic investors – an opportunity for profit

The other type of benefits is meant for those who invest in local co-productions and Hungarian films. The creators of the new system expect substantial changes from this new incentive. Tax must be paid by all means, and for certain companies, the opportunity to receive advertising space and rights by film production beside the chance to write off taxes can be attractive. The system has been set up in such a way that it won’t be automatically profitable for the taxpaying investor, but by making use of this benefit and as an owner of rights, he can already expect profits from local and international cinema distribution.

This type of financial support can make up maximum 20% of the budget of Hungarian films. The rest of the expenses can be covered from the usual channels (tenders, sponsorship). The size of this 20% will depend on the size of the additional resources.

For foreign filmmakers, the system can be alluring: if they spend about 40% of their own investment in the production (the rest are the so-called above-the-line costs spent outside Hungary: wages, post-production, etc.), they will receive a benefit via a Hungarian tax subject after 7 to 10% of their total budget. That appears to be a good opportunity, especially if foreign investors also have access to cheap and good locations here.

Investments – improving, constructing

The tax legislation of 2004 has introduced a host of benefits related to film production. These include amortization and tax base reducing incentives after the purchase of film production equipment and the construction of buildings related to film production. The aim of these is to open the way before professional investors and to make investments in the film industry more attractive.

The law provides an opportunity to improve the portfolio of state-owned Mafilm, which provides subcontract services for locals and foreigners, and to build larger studios. At the Fót outlet of Mafilm – which also provides set construction, costumes, props and pirotechnics services – currently, there are 23,000 square meters of outdoor space and two 1,000-square-meter studios available for shooting. At the moment, these are the largest studios in Hungary.

Mafilm is able serve clients on a certain standard, but due to the adverse trends of the past years and scarce funding, its service base is quite run-down. The owner will reveal its decision about the  fate of the company within the first six months of 2004. The fate of the Film Laboratory will also be settled.

Movie professionals – new training opportunities

The growing number of subcontract commissions will provide work for more film professionals than the current number. According to experts, various programs should be launched to train professional crews to work with foreigners. These professionals will speak languages, be familiar with international standards and computer systems. The film industry is also looking for EU funding opportunities in this area.

Spectacular results by 2005

The international press has already written about the new Hungarian motion picture law and the system of incentives related to it. Officials of the Culture Ministry and the crew of the Hungarian Film Union, which organizes the festival appearances of Hungarian films, are in charge of providing information about the legislation. They will also be present at this year’s key film events (Berlin, Cannes, etc.)

Most agree that 2004 is already going to be a better year in terms of subcontract commissions and investments in the Hungarian film industry than last year was, but the new system will in fact launch in 2005. As a result, the standard of Hungarian films can improve, too, and it will be easier to shoot a movie in Hungary than it is currently. And perhaps more players will recognize the opportnities for potential alliances witin the media industry, too.