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Question:
Why do Hollywood
studios transfer the ownership of their movies (on paper)
to German corporate shells?
Answer:
To profit from a loophole in the German tax code.
It turns out that Hollywood’s most consistently
profitable illusions are not the movies it makes but
the movielike shams it puts together with German tax
shelter funds. Last year, for example,
these German funds "invested" some $3 billions--
on paper at least-- in Hollywood movies. What make this
Hollywood-arranged mirage so valuable to German investors
is that it enables German them to avoid, or at least
defer paying their taxes. What makes it profitable
to the studios it that the German funds allow them to
skim off the top between 8 and 12 percent-- a sum that
amounts to several hundred million dollars each year.
Since the movie studios do not give up any actual
rights or control over their movies, it is "money
for nothing," as one Paramount executive explained,
adding that his studio made between $70 and $90 million
from these tax shelters in 2003 (more than it made on
all its movie releases combined).
The tax shelters work like this: a provision
of German tax law allows investors in a German movie
to take an immediate tax deduction on their
film investments, even if the film they’re investing
in has not gone into production, Germans in high tax
brackets can borrow a large sum for their “investment”
and defer their entire tax bill for many years.
The beauty of the German tax code, as far
as Hollywood is concerned, is that unlike tax laws in
other countries, it does not require films to be shot
locally or to employ local actors or personnel. It simply
requires that the film be produced by a German company
that owns its copyright and shares in its future profits.
These requirements have proved child’s play for
the savvy legal minds of Hollywood. First, a German
tax-shelter fund invests in a German corporate shell.
The shell, in turn, buys the copyright for a movie and
the right to produce it. Simultaneously, the shell leases
the copyright back to the studio and enters into a Production
Service Agreement and a Distribution Service Agreement
to authorize the studio to produce and distribute the
movie. Next, completing the fiction, the studio pays
the corporate shell a “minimum advance”
in lieu of any actual participation in the movie’s
earnings or ancillary rights. In the eyes of German
tax authorities, this satisfies the requirement that
the German corporation enjoy a share of profits. Finally,
at some point, the studio exercises its option to buy
back the copyright--and, presto, the German connection
with the film, which only ever existed on paper, is
nullified. And, of course, since the German corporation
paid more for the initial copyright than it ever makes
back for it in lease and other payments, the studio
is guaranteed a profit.
In 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, Lord Zweite ProductionsDeutschland, pay $150
million to New Line Cinema 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 honor the pretense 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.
The studios have good
reason not to talk about the skim they take from German
tax shelters. If anyone were to look behind the curtain
and see that the wizard is really just a bunch of American
studios taking money from German tax shelters, the German
treasury, which is the only real loser in this game,
might well change the rules and take back the very real
German money that makes the American illusion possible.
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