Hollywood Immortal

[Chapter 373: The Generous Germans]

"Last month, Germany's new tax law completed all its procedures and officially came into effect. At the beginning of this month, the German Ministry of Culture established a Film Project Tax Rebate Approval Committee," Lou Wasserman continued.

"And the German market has also set up a film company called TCG specializing in handling tax rebate approvals. They can help us process the rebate quickly and get the funds approved," he added.

"That fast? How does it work?" Linton asked.

"According to the new rebate policy, after the film project passes the committee's approval, investors can receive an advance tax rebate before shooting even starts. The law doesn't require the movie to be shot in Germany or to involve German filmmakers. The only condition is that a German film company must hold the movie rights and corresponding revenue shares," Lou Wasserman explained.

"Specifically, we sell the film rights to TCG, a German shell company, at the production cost price. Then, TCG leases all the film rights for 70 years (the copyright term in the U.S.) back to us at the original price. Of course, we can also wait until the project finishes and then buy the rights back from TCG for a symbolic amount.

Afterwards, TCG takes the project to the Film Project Tax Rebate Approval Committee to get approval for a rebate. The rebate is 10% of the projected film income, which usually isn't overestimated -- it's typically around 1.2 to 1.3 times the production costs."

"So, our Mission: Impossible film doesn't need to shoot in Germany or cast German actors, yet we can still get up to $11.7 million in rebates?" Linton asked in surprise.

"Not $11.7 million, actually $13 million. Our actual production cost is $90 million, but we publicly state our budget as $100 million, so we can claim up to $13 million in rebates," Lou Wasserman corrected.

"Okay, with a $100 million investment, how much do we have to pay TCG in fees?"

"Not a dime. All the rebate money goes to us."

"That can't be. Are those Germans just generously giving us free money? What about their costs? At the very least, they must have operational expenses, not to mention PR."

Lou Wasserman's words once again blew Linton's mind. How could Germans be this good to Hollywood?

"No, they actually have an even better way to make money, and they earn more than us," he said.

"What do you mean? Is the German government giving them bonuses or something?"

"Sort of, but it's technical -- it's still part of the tax rebate policy."

"I thought all the taxes were rebated to us. Is there some extra rebate policy involved?"

"Do you know the personal income tax rate in Germany for high earners?"

"No idea. It can't be higher than America's, right?"

"Actually, it is. Germany has very heavy taxes. For high earners making over 300,000 marks a year (about $250,000), the income tax rate is as high as 51%. Germany doesn't have charitable foundations like the U.S. for major tax deductions. Although there are some legal means to reduce taxes, the amounts saved are minimal," Lou Wasserman explained.

"Wow, that's high. But what does that have to do with film rebates?"

"It relates to this -- Germany's new tax law also stipulates that if personal or some corporate income is invested in films, that income is exempt from taxes, while any returns from the investment are treated as normal post-tax income, which is tax-free.

So, for instance, if a German earning $1 million a year would normally pay $510,000 in taxes and net $490,000, but if he invests that $1 million in films, he later receives $1 million as a tax-free return from the film company."

"My God, are the Germans crazy?" Even Robert couldn't help but exclaim.

"Yeah, do you understand what this means?" Lou Wasserman asked.

"What?"

"It means TCG can raise huge sums from high-income Germans without spending a penny on funding. Plus, these funds cost zero capital and they charge high fees for their services.

Take Mission: Impossible as an example. TCG can easily attract $100 million from private German investors and use that money to buy the film rights from us. Meanwhile, we sign an agreement to lease the film rights for 70 years at $100 million. We can also sign a memorandum to buy back all rights after the film's release for $10,000.

TCG uses that $100 million investment capital to help investors save $50 million in taxes. Charging 15%-20% as fees on that amount is no problem -- it's far better than the 51% tax rate; that's at least $15 million profit for them.

More importantly, TCG bears no investment risk in the film, and the process is fast. Even if their settlements with investors are slightly complex, it won't take more than two months. Save huge taxes in under two months -- would investors complain?

We only have to cycle the project through Germany without affecting any shooting or production risks. In just a couple weeks, we grab $13 million in rebates."

"Damn, that's a genius tax policy. Our Hollywood company benefits, the German shell company profits, and the investors win -- everyone gains."

Linton was stunned by the genius roundabout of this rebate process. What kind of mastermind could have designed such an amazing tax policy?

Looks like the German government is truly generous, even nobler than the legendary Mr. Matsushita -- definitely deserving of a little red badge.

No wonder German films have faded from prominence. With policies like this, no matter how much the government invests, film companies can easily earn hefty fees without any risk. Who would bother to invest effort and take risks making real films?

"So, we have to act fast with Mission: Impossible before shooting begins and cycle this project through Germany to claim those rebates. This is our first time doing it, so the process might be tricky, but once we pull it off, it will be huge for us in the future. Let Roman handle it on our side."

"Sounds good. Robert will also manage here and take full part. Hey, any limit on how many films apply for rebates?"

"No limit, why?"

"Our company has four other films starting this February -- The Sixth Sense, As Good as It Gets, Scream, and The Long Kiss Goodnight -- all with big investments. Can we try submitting all for rebates in Germany?"

"Should be possible. Bring them all over to try. No losses if it doesn't work. Too bad our Waterworld didn't make the cutoff -- missed such a lucrative opportunity."

"As long as the movie is a big hit, this is just a small amount of money. Is Waterworld officially scheduled?"

Linton thought, 'Luckily that flop didn't get the first batch of rebates or it might have tainted the reputation.'

"Thanks for the good luck. It's set: June 9th for official release, premiere on June 7th. Be sure to come."

"I won't miss it," Linton promised.

*****

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