Film Financing and Television Programming: A Taxation Guide Now in its seventh edition, KPMG LLP’s (“KPMG”) Film Financing and Television Programming: A Taxation Guide (the “Guide”) is a fundamental resource for film and television producers, attorneys, tax executives, and finance executives involved with the commercial side of film and television production. The guide is recognized as a valued reference tool for motion picture and television industry professionals. Doing business across borders can pose major challenges and may lead to potentially significant tax implications, and a detailed understanding of the full range of potential tax implications can be as essential as the actual financing of a project. The Guide helps producers and other industry executives assess the many issues surrounding cross-border business conditions, financing structures, and issues associated with them, including film and television development costs and rules around foreign investment. Recognizing the role that tax credits, subsidies, and other government incentives play in the financing of film and television productions, the Guide includes a robust discussion of relevant tax incentive programs in each country. The primary focus of the Guide is on the tax and business needs of the film and television industry with information drawn from the knowledge of KPMG International’s global network of member firm media and entertainment Tax professionals. Each chapter focuses on a single country and provides a description of commonly used financing structures in film and television, as well as their potential commercial and tax implications for the parties involved. Key sections in each chapter include: Introduction A thumbnail description of the country’s film and television industry contacts, regulatory bodies, and financing developments and trends. Key Tax Facts At-a-glance tables of corporate, personal, and VAT tax rates; normal non-treaty withholding tax rates; and tax year-end information for companies and individuals. © 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 382456 Film Financing and Television 2 Programming: A Taxation Guide Financing Structures Descriptions of commonly used financing structures in film and television production and distribution in the country and the potential commercial tax implications for the parties involved. The section covers rules surrounding co-productions, partnerships, equity tracking shares, sales and leaseback, subsidiaries, and other tax-efficient structures. Tax and Financial Incentives Details regarding the tax and financial incentives available from central and local governments as they apply to investors, producers, distributors, and actors, as well as other types of incentives offered. Corporate Tax Explanations of the corporate tax in the country, including definitions, rates, and how they are applied. Personal Tax Personal tax rules from the perspective of investors, producers, distributors, artists, and employees. Digital Media For the first time, we have included a discussion of digital media tax considerations recognizing its growing role in the distribution of film and television content. KPMG and Member Firm Contacts References to KPMG and other KPMG International member firms’ contacts at the end of each chapter are provided as a resource for additional detailed information. Please note: While every effort has been made to provide up-to-date information, tax laws around the world are constantly changing. Accordingly, the material contained in this publication should be viewed as a general guide only and should not be relied upon without consulting your KPMG or KPMG International member firm Tax advisor. Production opportunities are not limited to the countries contained in this Guide. KPMG and the other KPMG International member firms are in the business of identifying early-stage emerging trends to assist clients in navigating new business opportunities. We encourage you to consult a KPMG or KPMG International member firm Tax professional to continue the conversation about potential approaches to critical tax and business issues facing the media and entertainment industry. Thank you and we look forward to helping you with any questions you may have. Tony Castellanos +1 212-954-6840 [email protected] Benson Berro +1 818-227-6954 [email protected] The following information is not intended to be "written advice concerning one or more Federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230 as the content of this document is issued for general informational purposes only. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. © 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 382456 Film Financing and Television 3 Programming: A Taxation Guide United States Introduction The United States is the world’s leader in film production, distribution, and technology. The United States film industry should continue to maintain its role as the international center of film production in the 21st century. Key Tax Facts Highest effective corporate income tax rate 35%* Highest personal income tax rate 39.6%* Highest capital gains tax 20% Net investment income tax for individuals, 3.8% estates, and trusts Normal nontreaty withholding tax rate on 30% dividends income Normal nontreaty withholding tax rate on 30% interest income Normal nontreaty withholding tax rate on 30% royalty income Tax year-end: Companies may choose their own tax year-end subject to certain limitations; individuals utilize a calendar year unless they maintain appropriate books and records for a fiscal year. *In addition to the above federal tax rates, state and municipal taxes may be imposed, ranging from 0 to 12%. Branch profits tax imposes additional 30% tax on foreign corporations engaged in a U.S. trade or business. Alternative minimum tax is also imposed. Film Financing Financing Structures Co-Production A U.S.-resident investor may enter into a joint arrangement with a non-U.S. investor to finance and produce a film in the U.S. Under a co-production structure, each investor contributes funds to the project commensurate with its anticipated benefits from the exploitation of the film. The rights to exploit the film may be allocated to the partners according to their respective territories, with the remaining territories being divided or held jointly among the parties according to mutual agreement. United States © 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 382456 Film Financing and Television 4 Programming: A Taxation Guide Where the investors contribute funds to, and share in the profits of, the project, the co- production will generally be characterized as a partnership for U.S. tax purposes. Generally, a partnership itself is not subject to federal income tax. In addition, many co-productions are carried on through a limited liability company (LLC), which can elect to be taxed as either a corporation or a partnership, the latter being the more common choice. Certain state and municipalities, however, may levy a tax on the partnership. For example, California levies an annual tax of US$800 on limited partnerships and LLCs. California also assesses an annual fee based on an LLC’s gross receipts up to a maximum of US$11,790. The discussion below regarding partnerships and the taxation of partners applies where the co-production is characterized as a partnership. A significant concern in a co-production that is characterized as a partnership is whether the non-U.S. investor is considered to be engaged in a trade or business in the U.S. A partner in a partnership that is engaged in a trade or business in the U.S. is deemed to be engaged in a U.S. trade or business. Such a non-U.S. investor, generally, must file a U.S. income tax return reporting his distributive share of the partnership’s net effectively connected income and pay the tax due on such income. If considered engaged in a U.S. trade or business, a non-U.S. investor is required to file a federal income tax return even though the non-U.S. investor may have no income effectively connected with the U.S. trade or business or the income is exempt under the terms of a tax treaty. In such cases the federal tax return may be limited in scope. If the non-U.S. investor is a resident in a treaty country, the co- production partnership must be engaged in a trade or business through a permanent establishment before the partner is subject to federal income tax on his distributive share of the partnership’s income that is attributed to the permanent establishment. Non-U.S. corporate investors may be subject to a branch profits tax and branch tax on interest at a statutory rate of 30%. These taxes can be reduced or eliminated by treaty in many cases. Under certain circumstances, the co-production may not constitute a partnership for U.S. tax purposes. For example, if the co-production is conducted by a U.S. corporation, the corporation itself is subject to federal income tax, and the investors are subject to tax on dividends received (subject to potential treaty relief for non-U.S. investors) from the U.S. Corporation. If the co-production is conducted by a non-U.S. corporation, U.S. investors will be concerned with an assortment of U.S.