Since 2010, the Czech Republic has been supporting filmmakers with millions of euros each year.  Fortunately, despite scepticism expressed by certain politicians in the first years of the newly institutionalised program of incentives, the money available each year continually rose.  In 2014, a record-breaking CZK 800 million (USD 38 million[1]) was assigned to the program. This year’s sudden drop is perceived as only temporary.  CZK 500 million (USD 19.5 million[2]) is yet to be distributed among the projects and more funds again are being negotiated for 2016. Both local movie makers and international producers have benefited from the incentives and world-known projects like HBO’s The Borgias, BBC’s Musketeers, Korean climate engineering sci-fi movie Snowpiercer, and Hollywood blockbuster Mission: Impossible – Ghost Protocol were able to cut costs by receiving financial support from the Czech Republic.

Institutional Framework

The State Cinematography Fund (“Fund”) is a government body responsible for administering (among other functions) the support provided to the cinematographic sector. Although the Fund is a relatively young body, it proves that a legislative background can give the supporting scheme the necessary level of stability.  Until 2012, support activities were divided between the Fund’s predecessor and the Ministry of Culture. Film incentives were originally run by the Ministry for three years as an experiment on the basis of a government resolution.  Subsequently, the rules were enacted as part of the more complex Audiovisual Act.

Since the unification the cinematographic sector has been supported by two types of subsidies: (a) cinematography subsidies, and (b) film incentives. While the cinematography subsidies are dedicated mainly to supporting the development of Czech cinematography and have the form of a classical subsidy (or a subsidy combined with a share in the supported project’s revenues), we will focus on the second type, film incentives.

In the context of EU regulations on state aid it is necessary to point out that the Czech government had to ask the European Commission whether the film incentive scheme complied with state aid rules. In 2010, the Commission approved the scheme – at that time, the expected budget was up to CZK 5.4 billion until 2015.  Now it is clear that only around 36 percent of the approved state aid limit has been used.

An eligible film project is entitled to receive a refund of up to 20 percent of the eligible costs (services and goods) incurred on film production in the Czech Republic, or 10 percent of staff salaries (paid in the Czech Republic). There is a minimum threshold of the eligible costs for different types of film projects: motion pictures at least 70 minutes long – CZK 15 million; TV series episodes at least 40 minutes long  – CZK 10 million (including the whole series); and documentaries for cinemas and TV at least 70 minutes long – CZK 3 million. There are additional limits on the overall amount of state aid including the film incentive: the eligible costs may represent only up to 80 percent of the total film budget and the maximum amount of state aid (for example, received in other countries or from different grants) should not be higher than 50 percent of the film budget.  Exemptions apply only in rare cases.

Before a film producer may receive the refund they must successfully overcome red-tape, shoot the movie, spend all the money and finally prove that that the money is eligible for the incentive. The key to success is being prepared in time.

Application races

It is obvious that the Fund’s budget is limited as opposed to the potentially unlimited needs of filmmakers. In order to sift through those waiting in the line, the Fund administers a three-stage application procedure for film incentives (the first two stages being crucial).

First, the project needs to be registered and only those films passing the cultural test, which tries to ensure that the supported film has as much in common with European or Czech culture as possible (a legal condition for being compliant with European state aid rules), will succeed to the next stage. At this moment, only a script and a synopsis (for a TV series the script of the first episode and synopsis of the remaining episodes is sufficient) need to be attached to the application. This first application is subject to a CZK 30,000 administrative fee (USD 1,200), refundable if the project is not registered. Of most importance is that the Fund sets the deadline for filing of this application once the budget for the respective year is known – this year, film producers had just 17 calendar days to file an application from invitations being issued.

The Fund then publicly announces which projects are registered and from this moment another deadline runs. Although the law requires that producers apply for this second stage, listing the project, within three months of registration, it is necessary to apply much sooner to benefit from the specific provision of the law ensuring that the available funds are proportionately divided among the applicants filing an application on the same day. The Fund treats all applications received within one week of registration as delivered on the same day.  All these applications are put into one group for the purpose of dividing the available money. Any other application (filed later) is treated on a first-come, first-served basis.  If there is no money left, the application is rejected.

The application for listing must be accompanied by many production details, including the planned detailed budget, a financial plan and other appropriate documentation proving what the particular sources of financing will be and that at least 75 percent of the budget is already secured, the provisional time schedule and known staff names, and a co-production agreement, if the project is co-produced by a company based outside of the Czech Republic. As a final point, it requests the allocation of specific amount of money (based on the prospective costs) as the film incentive.

The Fund’s decision is strongly dependent on the overall number of applications and may take up to three months (even though the law requires that the Fund decide in 30 days). After receiving the Fund’s decision, the producer must ensure that at least 70 percent of the eligible budget be spent within next 12 months, but the request for payment of the incentive (the third stage) must be filed within three years. If the second-stage decision awarded a lower amount because the Fund’s budget was insufficient to satisfy all eligible projects, the producer may apply for the remainder of the originally requested incentive once the budget is raised or provided for the next year.  The application will have priority over regular applications.

It is apparent that well prepared projects have much more chance to achieve a good position in the annual round of incentives. For instance, the time between invitations being issued and the deadline for filing the second-stage application was just 43 days this year.  Producers of 67 registered projects applied for more than CZK 1.2 billion. Due to these time-constraints and other conditions that the applicant must fulfil, it is vital to have a reliable local partner (such as a co-production company or a production services company) or to be prepared to manage the whole application process by itself.

Legal intricacies

Any prospective foreign film producer must, however, be aware of the peculiarities of Czech legislation on film incentives. Although the main purpose of the incentives is to maintain employment and competitive strength within the Czech cinematography sector (Czech film professionals are traditionally renowned specialists and local film studios are well equipped) and it is irrelevant where the production money comes from if it needs to be spent locally, the law requires that a producer or a co-producer be a company established in the Czech Republic and registered as a taxpayer. The issue is in the definition of the (co-) producer – only a copyright (co-)owner fits into this definition. In other words, projects that intend to involve just a Czech production services company (and not a co-producer bringing its own finances) need to establish a proper contractual arrangement both to remain eligible for the film incentives and not share the copyright with others. In addition, the parameters of film incentives approved by the European Commission state that the recipient of the incentive must be an enterprise established in the Czech Republic.  This condition must be verified by the Fund in the third stage, even though the Audiovisual Act might be less stringent.

These legal issues lead to the common situation when the Czech entity applies for the incentive and it is up to the contractual safeguards that serve to protect the main producer’s financial interests.  Under Czech law, the incentive is non-transferrable and the Fund even checks whether the bank account stated in the third stage of the application is held by the applicant. Although there have been no known cases of misappropriation of incentives by a production services company, no one may logically count on the fact that such a company will not become insolvent before receiving the incentive. The risk increases especially if the production companies are involved in several projects at a time.

As we have already noted, the project may vastly benefit from the preparation done ahead of the incentives application process. The ultimate safeguard for a foreign producer is to have their own Czech special production vehicle – the extra costs are outweighed by legal security and relatively more freedom in a contractual relationship with service companies.

Steady perspective

This year might be closed for new film projects, as it is obvious that any possible Fund budget raise would serve only currently listed projects.  The Fund admits that it does not intend to open any additional invitations this year. On the other hand, the current minister of finance does not oppose the concept of film incentives and buttressed by the appropriate legislation needs only to decide how much money will be used this way.

The EU approved state aid scheme expires this year and the Fund with the Ministry of Culture and the Ministry of Finances will apply for a new one. There are unofficial expectations that some parameters that complicate the matter legally will be changed. And as we have seen until now, the total amount of state aid could be much higher and still legally compliant with European rules.