Ireland was very innovative in 1987 by introducing what was then referred to "Section 35".  This is now "Section 481" (of the Taxes Consolidation Act, 1997 (as amended)).  Despite some occasions when it was feared that this incentive would be abolished, Ireland has remained committed to assisting film production and on 3 February 2006 (now included in the Finance Act 2006), the Minister for Finance announced a significant increase in the benefit available under Section 481 as well as an increase in the grant to Bord Scannan na h eireann/Irish Film Board.  Further reviews are anticipated to ensure that Ireland maintains a competitive edge for incoming productions.  This paper is primarily intended to explain S.481 financing but I will also briefly to the Irish Film Board which is a major source of funding for Irish films.

A.       Irish Film Board

• The Irish Film Board is a statutory body established by the Minister for Arts, Sports and Tourism ("Minister").  It is principally concerned with providing development and production loans and also provides slate funding to Irish production companies.  When providing production funding, it can also provide part of this funding during pre-production.
• The Board deals primarily with independent Irish-based production companies and is focused essentially on projects based around Irish-based writers and/or directors and other Irish-based talent.
• The loans are interest-free but are recoupable out of receipts worldwide and takes a financier's profit participation, calculated on the percentage level of the loan.
• Producers are encouraged to apply to the Board for development funding before a draft script is written.  They are encouraged to make reciprocal arrangements where possible for productions with European partners and to work with European partners from a variety of jurisdictions.

B.       Special features of Section 481

Whilst many territories, including many US States,  have now introduced tax incentives in efforts not only to assist local film(s) production, but to attract "foreign" productions, Section 481 retains two very specific benefits which are (or may) not be generally available and may be overlooked in the competition to attract outside productions and co-productions, where the question is often simply "how much can I get"?

• The gross Section 481 funding is provided in advance so can be used, and indeed has to be used, in funding production costs. When the cost (including legal, facility and interest charges) of cash flowing future benefits, such as tax credits, is taken into account, this is a very significant benefit and substantially increases the face value of the Section 481 benefit. 
• As well as feature films, it is available for television dramas, animation productions and creative documentaries.

Additionally, there is no requirement that a co-production qualifies as an official co-production under the European Convention on Cinematographic Co-Production or under a bi-lateral treaty.

2.       Qualifying Criteria

The relief is available on Eligible Expenditure incurred on Qualifying Films directly or indirectly by a Qualifying Company.

Eligible Expenditure  This is expenditure incurred on the cost of production of a Qualifying Film which is:

• incurred on eligible goods, services and facilities. These are ones which are used in the State and are provided within the State by a relevant person (directly or indirectly) to the Qualifying Company.  A "relevant person" is a  person carrying on business in the State from a fixed abode;
• paid to an eligible individual; being a person who is an Irish citizen or a citizen of another Member State of the EC or who is domiciled or resident or ordinarily resident in the State or in another Member State of the EC.

Qualifying Film  This is a film in respect of which the Revenue has granted a Certificate.  In granting the Certificate the Revenue will consider the contribution the film will make to either or both the development of the film industry in the State, and the promotion and expression of Irish culture. 

The film must be a feature film or a television drama, animation production or creative documentary.  It cannot be a game show or magazine programme or reality show etc.

Qualifying Company  This does not have to be an Irish Company, but it has to be carrying on a trade in the State, and in practice it always is an Irish Company, and it must exist solely for the purposes of production and distribution only one film.

3.       Cash Value of Section 481 Benefit

The increased relief in the Finance Act 2006 means that Section 481 relief is available on 80% of the cost of production of a Film, with an overall cap on the gross Section 481 investment (to be incurred on Eligible Expenditure) of Euro 35 million i.e. 80% of a budget of up to  b,43,750,000.  The relief will be available in the same way on higher budget films but the relief is limited to the capped amount.  In short, therefore the relief is available on the lower of the Eligible Expenditure or 80% of the cost of production (subject to the cap).  Certain production costs are not included in calculating the budget cost allowed for Section 481, specifically deferments, legal, accounting or other costs of raising Section 481 funding, promotional or distribution costs or capital expenditure. 

Under the new provisions, a net benefit of up to approximately 15% - 17% of the production cost can be obtained under Section 481, subject of course to the "Eligible Expenditure" being equal to 80% of the cost of production.  Where the Eligible Expenditure is less than 80% of the cost of the film, the benefit will reduce pro-rata, with a floor of 10% of Eligible Expenditure in order to qualify for the relief.

Step 1.  A special purpose company (the Section 481 Company) must be formed, which is a Qualifying Company.  Initially the Irish producer's personnel will be the shareholders, but as this company will form the vehicle through which the investors will provide the Section 481 funding and through which they will be paid the monies which are ultimately repayable to them, the shareholding will change as part of the Section 481 investment procedure.  The directors/secretary are the Irish producer's personnel, and this does not generally change.

Step 2.   A Certificate from the Revenue must be applied for and obtained.  The Certificate will only be granted when the Revenue is satisfied that the film is a Qualifying Film and that the production satisfies the necessary criteria. A detailed form, showing the financial and other arrangements, and in particular showing the identities and nationalities of the personnel, the level of Qualifying Expenditure and the proportion which this forms of the total budget,  must be completed and submitted, together with a diagram showing the financing structure, deal memos for the non-Section 481 funding, the agreement commissioning the Section 481 Company to carry out the Irish production work on the film and a Distribution Agreement which provides that, in return for the grant of rights by the Section 481 Company, it will be paid  an advance  which is payable to the investors under step 7 below.  If the film is a co-production, the draft Co-Production Agreement, must also be submitted.

Within 7 days of receipt of a properly completed application form and accompanying documentation the Revenue will issue a Notice.  Receipt of this Notice is necessary before commencement of principal photography or animation drawing or model movement and before any Section 481 investment is made.  Otherwise, a Certificate will not be issued and any Section 481 investment will not be entitled to relief.  The Notice does not guarantee the grant of a Certificate; it is the first requirement in the process, and may or may not be critical, depending on the timescales involved. 

It generally takes a few weeks (the Revenue specifies allowing 30 days) for the Revenue to review and be satisfied with the application and grant the Certificate, and may involve one or more meetings with the Irish producer. The Certificate will specify the requirements to be satisfied, including compliance with the terms specified in the application which has formed the basis for the grant of the Certificate.  Refusal by the Revenue to issue a Certificate can be appealed by application to the Court.

Step 3.   There are established institutions and accountancy firms who provide the fundraising service and in practical terms, they generally have a list of available potential investors, so are able to raise the funds without delay.  The investment must be made by way of a subscription for shares in the Section 481 Company. As part of the closing procedure the promoter arranges for the issue/transfer to a nominee of the shareholders of the shares in the Section 481 Company.

Step 4.   It is a requirement that the whole of the Section 481 money which is raised, say 80% of the budget in the case of a maximum qualification case (the Gross Section 481 Amount ) be spent on production costs.  If the net benefit is, say 17%, this means that the Section 481 Company will receive 63% (the Differential) to which, in real terms, it is not ultimately entitled. Therefore there has to be a compensating amount to cover this 63% difference set aside or in some way secured which, after costs and expenses but including interest will, one year later, pay to the Section 481 Company a distribution advance. In order to close the Section 481 financing, this amount must generally be deposited in a secure defeasance or escrow account before drawdown of the Section 481 funding on terms that, if the Section 481 funding is not provided, it will be repaid.  In exceptional cases, but this is not usually applicable in multiparty financing of independent productions, the investors' representatives may be prepared to accept the creditworthiness of the distributor of the Film (e.g. a major studio) without the necessity for the usual security. 

One of the complexities on Section 481 financing is to establish what monies are permitted to be utilised as security for payment to the Section 481 investors of the distribution advance.  IFB and other State funding cannot be used to secure this.  The investors are not entitled to be repaid any of their (gross) investment other than for failure to deliver the Film (when no tax relief is given to them) or in return for the grant of rights.

Step 5.   As the Section 481 money is provided up front, the Revenue relies on the Irish producer to ensure compliance with the Certificate, so it is a responsibility not to be taken lightly. The identity and credentials of the Irish Producer are taken into account in the decision as to whether a Certificate will be issued.  In co-productions, the documentation will require that the other parties will not do anything to cause the terms of the Certificate to be breached. The Irish producer will monitor the production to ensure compliance.  The Certificate may be withdrawn at any time for failure to comply with it.

Step 6.   On completion of the film, an audit must be submitted to the Revenue, together with a completed form and declaration showing compliance with the Certificate, the identities of the personnel engaged, in particular showing compliance with the Eligible Expenditure requirements and provided that it is satisfied that the Certificate has been complied with and that the Eligible Expenditure is in accordance with the requirements, the Revenue will issue final certification of the film under Section 481.

Step 7.   Subject to the delivery of the film, not less than 1 year after closing the Section 481 financing, the distribution advance is paid from the defeasance / escrow account to the Section 481 Company in return for the grant of distribution rights in the Film by the Section 481 Company.  It distributes this to its shareholders, the investors, by way of a return of capital.  A Company can only return capital to its shareholders when it is clear of all other liabilities; the shareholders have the last call on a company's assets.  It is therefore essential that the Section 481 Company has no liabilities on completion and delivery of the Film and this is a risk which the investors take in making their investments.

To sum up, Section 481 provides a valuable contribution to Irish film financing, which has been well tried and tested and used on numerous productions, with varying budgets, from Hollywood blockbusters to small art-house films and television programmes and series.

April 2006

Geraldine East is a Partner of A&L Goodbody specialising in Media and Entertainment Law in the UK and Ireland with particular emphasis on film and television production and financing.  She has over 25 years experience in this area, acting for producers, financiers, distributors, studios and public funders.  She has advised on numerous productions and co-productions, in the UK, Ireland and internationally, ranging from "The Dead" and "The Madness of King George", to those currently in production/post-production: "Puffball", "Silk", "The Forest" and "32A".