Hollywood's Golden Goose

First published here.

Who would have guessed the taxpayers of Germany are actually among the biggest contributors to Hollywood's bottom line?

Investigative journalist Edward Jay Epstein recently exposed the enormous tax shelter that allows Hollywood studios (or any other movie maker, for that matter) to reap multi-million dollar tax windfalls through a series of clever on-paper transactions.

This is how it's done:

A section in the German tax law allows German corporations to get an immediate tax deduction on any cash they invest in films, including borrowed money. It doesn't have to be a German film either - no filming in Germany, no German actors or crew - just a film that's produced by a German company. The film doesn't even have to be in production, so long as the German company owns the copyright and is included as a recipient of the film's earnings (when it's actually released) it counts as "produced in Germany" for tax purposes.

Along comes a Hollywood studio which sells the copyright and production rights to the German company. The German company then leases those rights straight back to the Hollywood studio ('cause that stuff is "property" and if you can own it, you can lease it out). The German company also gives out a Production Service Agreement and a Distribution Service Agreement that allows the Hollywood studio to produce and distribute the film.

Now the tricky part: the Hollywood studio give the German corporation an "advance" on the film's earnings instead of any kind of percentage. As far as the German taxman is concerned, this meets the requirement of the German company to get some of the "profit" from the film. The Hollywood studio then buys back the rights to the film for less than what it sold them to the German corporation for, meaning the German corporation makes a tax deductible loss on the deal which can be defered to whenever it wants to claim it.

In selling the rights back to the Hollywood studio the German connection is severed, leaving the German taxpayer to make up for the German company's "loss".

Epstein gives a great example of this little scheme in action:

Consider the case of The Lord of the Rings: The Return of the King.

A Munich-based tax-shelter fund, Hannover Leasing, had a corporate shell pay $150 million to New Line Cinemas for the movie's copyright, which it simultaneously leased back to a New Line affiliate. It also entered into agreements for New Line to produce and distribute the movie.

At the end of filming, New Line Cinemas paid the German company the agreed-upon minimum advance (which approximately equaled the interest on the initial investment) to honour the pretence that the Germans had participated in the profits. For engaging in these strictly paper transactions, New Line "earned" $16 million, a tidy "money-for-nothing" sum.

One Paramount executive admitted that his studio made between $70 and $90 million from these tax shelters in 2003 - more than it actually made from the movies themselves!

Fortunately for the good people of Germany, their government is in the process of shutting down the huge hole that's allowed the American studios to get away with this, but only after years of hundreds of millions of dollars being pulled out of the German economy.

In some ways, it's comforting to know the film industry can screw an entire country as easily as it screws individuals. It's simply another demonstration of how a corporation is designed to care about one thing and one thing only - money. As far as the studios are concerned, it's just business.

So if you've ever wondered why there are so many crap movies out there (like anything that Uwe Boll has ever made), just remember the German government was paying people to make those movies suck.

Further reading on Uwe Boll's exploitation of the loophole can be found here.