We are once again entering the final month of the year, and for most companies that also means the last month of the financial year. This is when there is still enough time to optimise numerous issues before the financial year effectively concludes. In this series we will shed light on a number of potential techniques for tax optimisation.
The film industry is booming in Belgium, not in the least thanks to the Belgian Tax Shelter regime. Many years ago Belgian filmmakers were doomed to working on tiny budgets because their sales market was equally tiny. A Dutch-language film only has a few million Dutch speakers as its target audience, and while the French-language market is somewhat larger, it’s nothing when compared to the market that Hollywood reaches with its English-language films.
But in order to give the Belgian film world a helping hand the authorities created a ‘Tax Shelter’ regime for audiovisual works some years back. This regime boiled down to an indirect subsidy for the industry. The regime stipulates that companies must initially invest in the industry, and the recipient will not have to repay the full sum. But it is still an appealing avenue for investors because the authorities subsidise the investing companies themselves in the form of a tax exemption. This tax exemption ensures that the investment will still be profitable.
Because there were suddenly a great many investors in the film industry, Belgium has found itself firmly on the cinematic map. The attentive movie aficionado will have regularly seen mention of Belgian companies in the opening or closing credits of American blockbusters.
2. Tax Shelter
Is the Tax Shelter regime an attractive one? In absolute figures, yes. Just don’t overestimate its affect on the company, because the sum of the investment itself is limited by law.
Under the new legislation, if a company decides to invest in a Tax Shelter for audiovisual works, that company will not recover its investment. That means that whatever you pay to the investment company, you won’t receive the capital back.
3. Tax benefits
So what are the tax benefits? The idea is that the tax authorities will exempt your profit on the investment to the amount of 310 percent. For every 100 euros you invest, 310 euros of the returns will be exempted. An exemption of 310 euros multiplied by the corporation tax of 33.99 percent means a benefit amounting 105.37 euros – a return of 5.37 percent. If you can combine that Tax Shelter investment with advance payments, such as investing in December and simultaneously deducting the expected savings from your advance payments in December, then you will immediately see your return. Can you think of any other investment scheme with a yield of 5.37 percent where your capital is only tied up for a few days?
Is it an entirely risk-free investment? No, the tax benefit you receive is only a temporary one. You will only receive a definitive exemption at the time that the production company provides you with a Tax Shelter certificate. A value is stated on that certificate that directly influences the value of the definitive exemption, and this value depends on a number of conditions that the production company must meet. Under normal circumstances they will comply with them, but in exceptional cases the certificate value is not sufficient for retaining your full exemption. At that point you will lose a part of the return.
In order to cover that risk, production companies are legally permitted to offer insurance against the loss of exemption, and most production companies automatically issue such insurance to their investors. In the event of a tax benefit being lost, and consequently the loss of your return on the investment, the insurance will cover the difference.
4. Financial benefit
The authorities have also permitted the production companies to pay out a ‘benefit for financial resources made available’. What this really means is interest compensation that the production company can award to you for the money you made available to them for the period between the payment and the receipt of the Tax Shelter certificate. This period of interest payment is however limited to 18 months.
The sum of that interest compensation that can be paid out by the production company is also determined by the law, and is set at the 12 month average EURIBOR for the last six months (either the first six months of the present year or the last six months of the previous year) plus 450 base points. This means that currently we must take into account the 12 month average EURIBOR for the period from 1 January 2016 to 30 June 2016, being -0.015 percent. The benefit for financial resources made available that can be paid out by the production companies is thus 4.485 percent per annum. This would amount to 6.727 percent over 18 months.
5. Total benefit
The total benefit from a Tax Shelter investment is thus a tax benefit of 5.37 percent, which in principle can be enjoyed immediately and is completely tax-free because it is a tax benefit. The financial resources made available amount to 6.727 percent over 18 months (4.485 percent per annum), but this payment is naturally taxable.
For an investment of, let’s say, €20,000 you will thus receive an immediate tax benefit of €1,073.80 and an interest payment of €1,345.40 spread over 18 months. The interest must still be taxed, which means a net return of €888.10 remains. The total return from our €20,000.00 is thus €1,961.90, or 9.81 percent – where else would you get such a return these days?
6. Limited investment sums
Unfortunately the total permitted investment sum is limited. In highly technical terms, this means that the exemption (3.1 x your investment) can only constitute half of the movement of the reserves prior to exemption being applicable, but for which the exemption can already be taken into account when calculating taxes. Please contact us if you would like us to perform such a calculation, but a rule of the thumb is that you can invest approximately ten percent of your pre-tax profits in a Tax Shelter. So to invest €20,000.00 you need to make a pre-tax profit of €200,000.00 and it may not be distributed as dividends or profit-sharing bonuses. The maximum exemption is €750,000.00, of which (divided by 3.1) no more than €241,935.48 can be invested per year, and this is of course if your pre-tax profit would exceed €2.4 million.
So it is a great investment, but unfortunately the permitted investment sums are limited.