Germany and the UK have taken different approaches to financially supporting homegrown talent in the film industry, but both aim to bolster domestic production of new movies. Henrik Armah and Ben Wilkinson weigh up the differences between the two schemes

At the start of last year, both the German and the UK governments set up new schemes aiming to support their domestic film industries. Although the two schemes have some similarities, they have initially produced markedly different effects, with Germany undergoing something of a boom while the UK experienced a relatively sluggish 2007. Nonetheless, it is still early days and it remains to be seen if the schemes can achieve their long term goals.

Both the German Federal Film Fund (Deutscher Filmfoerderfonds – DFFF) and the UK film tax credit (FTC) were meant to replace tax-driven models that were perceived as being more of a boost to intermediaries and investors than to producers and the domestic film industries. The new regimes aim to place the benefit of government subsidies squarely with producers and the wider national film industry and bolster domestic production by largely excluding money spent overseas from being eligible for the subsidy.

How the schemes compare

Unlike the FTC, the DFFF operates as a grant rather than a tax relief, cash flowing money to producers with a domicile or branch in Germany. In all, funds of E60m (£47.4m) per year are available for an initial period of three years. Funding per project is available, at 20% of the total 'German spend'; this is, for European Union (EU) regulation purposes, based on a maximum of 80% of total production costs. This is broadly comparable to the amounts available under the FTC to UK producers. To qualify as 'German spend' for the DFFF, services or goods have to be purchased in Germany – for instance an indicator is whether salaries would be subject to German income tax. This -contrasts with the UK, where the key factor in determining whether spend qualifies as 'UK spend' for the purposes of the FTC is where budget items are "used or consumed". There is a 25% minimum German spend requirement for a project to be subsidised by the DFFF (alternatively, 20% of a budget exceeding E20m (£15.8m) or a total amount of E15m (£11.8m) as German spend will suffice). This 25% requirement is mirrored by the FTC.

The UK and German regimes include a cultural test in order to pass the EU's rigorous rules on state aid. The two culture tests are broadly similar, based on points systems for content, cast and crew, with exceptions for films that qualify as co-productions under the European Convention on Cinematographic Co-Production or under bilateral treaties with non-EU member states.

Industry reaction

The new regimes were generally greeted with a certain degree of scepticism by the respective national film industries. In the UK, there was initial concern over the cultural test from producers, especially as in the course of the legislative process it was rewritten to be weighted more in favour of UK culture rather than simply UK spending. The fact that the credit would not be available for British-shot but non-culturally British Hollywood productions (such as the recent Batman movies) was seen as a downside, as was the fact that, for British productions, the cost of British talent and crew shooting abroad would not count as UK expenditure.

German producers broadly supported the DFFF as being a big asset for the German film industry, thanks to its aim of promoting Germany's international competitiveness. Producers were especially attracted by the fact that they can easily calculate the amount they will possibly be granted. Another key advantage of the DFFF for co-productions is that, unlike the FTC, some "dramaturgically justified" spend for shooting outside Germany can be taken into account for the calculation of the subsidy (however, not for calculating the minimum German spend). Smaller producers, however, criticised the DFFF as paving the way for Hollywood productions into Germany rather than supporting domestic productions.

Eighteen months on

Although UK film production experienced a slight dip in inward investment and local production spending in 2007, it is undoubtedly co-productions that have suffered most from the new system. The fact that only UK spend qualifies for the relief acts as a powerful disincentive. This was reflected by the decline in co-production spending between 2006 and 2007 from £111m to £74m. The status of co-productions as the "loser" under the new regime was highlighted by the drop in interim co-production certificates from 61 in 2006 to a mere 27 by 2007.

Overall, total UK spend on film production dropped from £845m in 2006 to £747m in 2007. Industry figures have spoken of a 'flight to quality' since the end of the sale and leaseback era, with financiers focusing on commercially viable films from established producers rather than 'free money for bad films' available previously.

Symbolically, James Bond returned to the UK this year. After a brief defection to the Czech Republic for Casino Royale (which was set up as a co-production), 007′s latest outing, Quantum of Solace, is being produced largely in the UK, thanks partly to the FTC's lower minimum UK spend threshold. Other films to benefit from the FTC include The Chronicles of Narnia: Prince Caspian, The Other Boleyn Girl and St Trinian's.

In contrast to the rather patchy effects of the UK FTC, the first year of the DFFF was a real boost for the German film production industry. Overall in 2007 the DFFF subsidised projects with a production budget of approximately E570m (£450m), of which about E390m (£308m) (68.5%) was 'German spend'. In total, 99 projects benefited from DFFF funding last year, including 34 cross border co-productions headed by Speed Racer and Valkyrie which both were already heading to the Czech Republic until Germany established its new scheme.

The short and mid-term effects on the German film industry are obvious: the business is growing, Germany is back on the map for international projects; the Federal Employment Agency recorded an increased number of people employed in the film business who will gain valuable experience while working on international co-productions. One winner of the DFFF so far is the German production company Studio Babelsberg, which is also a studio facility and a production services provider. The DFFF led to Babelsberg's most successful financial year since privatisation in 1992. In comparison to 2006 with only one production shot at the Babelsberg lot, the studio was tremendously busy with hosting 12 productions.

Looking forward

Although the German Government has allocated funds to extend the DFFF for another three-year period from January 2010, it remains to be seen how the US guild strikes, the weak dollar, and the credit crunch influence the increasingly international German film industry (as well as the UK film industry). Another challenge for both the UK and German industries comes from Eastern Europe, where Hungary and the Czech Republic offer producers generous subsidy schemes and low production costs.

The UK film industry has been buffeted by several changes to the UK tax environment in recent years aside from the new tax credit, not least the abolition of sideways loss relief in relation to partnerships and sole traders in successive budgets. But so far the evidence of 2008 looks good for a genuine revival for the UK film sector; with UK production investment in the first quarter of 2008 almost double that of the same period in 2007 and inward investors feeling more confident both of the FTC and the UK financing environment generally.

In Germany, the results of the second DFFF year already display how strong the implications of the scheme actually are. In the first half of 2008, 43 projects (including 17 international co-productions such as Ninja Assassin and The Reader) have been approved funds by the DFFF with a total amount of E26.7m (£21.1m). The total German spend of these productions is around E158m (£124.7m). Time will tell how the DFFF-funded projects succeed and how much of the potential success will be attributed to the German elements of international co-productions.

On a wider European level, it remains to be seen how both schemes in the future comply with the European Commission's goal of having a pan-European film industry rather than national subsidy systems with local spend requirements. Time will tell if Neelie Kroes, European Commissioner for Competition, is willing to renew both schemes' approvals beyond their date of expiry which is currently the end of 2009 for the DFFF and the end of March 2012 for the FTC.

Henrik Armah is an associate in Berlin and Ben Wilkinson a London-based trainee in the media, communications and technology group at Olswang.

GermanyJuly2008