Guidance Note for Film Producers and Promoters on
The certification of qualifying films
Under “Section 481”-Tax relief incentive
For investment in film

This Note does not have the force of law and does not affect any person's right of appeal. Nor is it, in all instances, a full statement of the law as it applies, or has applied, to Section 481 investment schemes. Film Producers and Promoters should refer to the law as appropriate. Unless stated to the contrary, all statutory references are to the Taxes Consolidation Act 1997, as amended.

October 2005

1. Introduction

Section 481 of the Taxes Consolidation Act 1997 provides tax relief for investments in qualifying films. A qualifying film is a film for which the Revenue Commissioners have issued a Certificate under Section 481. Further provisions are included in Regulations made by the Revenue Commissioners, with the consent of the Ministers for Finance and Arts, Sport and Tourism.

The purpose of this Guidance Note is to outline how to apply for a Certificate, the information required, and the evaluation criteria to be applied.

A Certificate is issued by the Revenue Commissioners but both the Minister for Arts, Sport and Tourism and the Revenue Commissioners have specific responsibilities in relation to the certification process. These are outlined at Sections 3 and 4 respectively below.

The Minister has responsibility to ensure that it is appropriate for the Revenue Commissioners to consider the issue of a Certificate for a film, having regard to -

• The categories of film eligible for certification and
• The contribution a 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 Revenue Commissioners have responsibility to ensure that all other aspects of the project, including the financial aspects, have the potential to satisfy the requirements of the law. The Revenue Commissioners will not issue a Certificate unless they have received an authorisation from the Minister for Arts, Sport and Tourism and they are satisfied with the other aspects of the proposal. Notwithstanding the dual roles, there is a simplified application procedure so that the producer/promoter has to deal with only one body.

The Application Form (attached) incorporates both the requirements of the Minister and the Revenue Commissioners. Consequently, application need be made only to the Revenue Commissioners. The Revenue Commissioners will consult with the Minister as required.

A Certificate is issued on the basis of the information supplied during the applicatibbon process. Any material change in the information supplied that may arise as the project progresses must be notified to and agreed by the Revenue Commissioners. If the information on which the Certificate is based is not correct, is misleading or incomplete, or the Revenue Commissioners are not notified of material changes, the Certificate may be revoked.

Each Certificate contains an expiry date and Certificates not used by the expiry date should be returned to the Revenue Commissioners.

If the Revenue Commissioners refuse to issue a certificate the applicant has a right of appeal to the Appeal Commissioners and to the Courts.

This Guidance Note applies in respect of applications received on or after 1st January 2005.

2. The Application Process

An application for a Certificate must be made in writing, in the form prescribed by the Revenue Commissioners, and contain such information as may be prescribed in Regulations made under Section 481 (2E). These requirements are incorporated in the Application Form and supporting documentation, as listed at Appendix C of the Application Form.

It may be the case that not all agreements will have been signed at the time the application is being made. In the absence of completed documentation the application for certification should include a full explanation of the scheme. In particular, Revenue will require:

1. A diagram showing all the players, their responsibilities and the flow of funds between them
2. An outline of the various agreements proposed, the parties involved and purpose of the agreement
3. Letters of intent in relation to the non-Section 481 funds
4. Any issues that might impact on the conditions for Section 481 relief.

Where a completion bond is not available, at the time of application, Revenue would be satisfied with an outline view of arrangements. The investors' nominee company must not be party to such a bond. When a signed, dated and witnessed copy of the completion bond becomes available, it should, as with other finalised agreements, be forwarded to Revenue. Any deviation from information previously submitted should be noted and explained.

The Certificate will be based on the information submitted and on the understanding that the proposals will not contravene any of the conditions for relief. This puts a certain onus on the producers and it would be wise for them to consult with Revenue about any unusual aspects as the various agreements are being finalised.

The applicant must be a qualifying Company i.e. a company which:

1. is incorporated and resident in the State,
   or
   is carrying on a trade in the State through a branch or agency;
2. exists solely for the purposes of the production and distribution of only one qualifying film; and
3. does not contain in its name the words “Ireland”, “Irish”, “Éireann”, “Éire” or “National”, where the company name in question is either-
   registered under either or both the Companies Acts, 1963 to 1999, and the Registration of Business Names Act, 1963,
   or
   registered under the law of the territory in which it is incorporated.

The Revenue Commissioners, following consultation with the Minister, will issue a notice in writing to the applicant company within seven days of the receipt of a properly completed application form and required supporting documentation. Receipt of this notice is necessary before:

1. Principal photography, first animation drawings or first model movement (as the case may be) commences. A Certificate will not be issued if such activities commence before an application for the Certificate is made.
2. An investment qualifying for tax relief under Section 481 is made (otherwise, the investment will not qualify for relief)

The issue of such a notice in writing by the Revenue Commissioners is no guarantee that a Certificate will subsequently issue or that questions will not arise when the application is processed.

Applicants should allow at least 30 working days for the processing of an application by the Revenue Commissioners in consultation with the Minister. It is expected that a Certificate will issue within this time period in the vast majority of cases. In exceptional instances delays could arise due to unresolved issues.

The application form should be addressed to:

Office of the Revenue Commissioners
Direct Taxes: Business Incentives
Stamping Building
Dublin Castle
Dublin 2.

The following Sections 3 and 4 highlight the main issues to be considered before a Certificate is issued.

3. Specific Requirements of the Minister for Arts, Sport and Tourism

3.1 The Revenue Commissioners may not issue a Certificate in respect of a film unless they have received authorisation from the Minister for Arts, Sport and Tourism.

The Minister, in considering whether to give the Revenue Commissioners an authorisation in relation to a film, will have regard to:

• The categories of film eligible for certification; and
• The contribution a film will make to either or both the development of the film industry in the State and the promotion and expression of Irish culture.

Accordingly, the Minister will:

• Consider the case made by the promoter in relation to the contribution the project will make to, for example, the promotion and expression of Irish culture;
• Examine the professional capability (creative and technical) of the promoters/producers and creative collaborators;
• Examine the anticipated net contribution that the Section 481 Scheme and other State aid schemes will make to the project;
• Examine the contribution to be made by the project to the expression of creativity and culture in the State through the development of production capability and skills in the media of film and television;
• Give special consideration to Irish language productions; and
• Consider those opportunities provided by the project for quality employment and training. A minimum of two trainees for each €1.27M of Section 481 monies raised, up to a maximum of eight trainees, must be employed on the project

3.2 The following types of film-produced on a commercial basis with a view to the realisation of profit and produced wholly or principally for exhibition to the public in cinemas or through television broadcasting-are eligible for certification:

• Feature film
• Television drama
• Animation (whether computer generated or otherwise, but excluding computer games)
• Creative Documentary, where the project:
• Is based on an original theme, preferably demonstrated by a script or treatment the design and style of which bear the undeniable stamp of creative originality and personal perspective;
• Contains a certain “timeless” element so that there is no loss of interest when the event with which it may be linked has passed;
• Involves production arrangements which give evidence of, in particular, a substantial period of preparation and a significant period devoted to post- production;
• Contains significant original filming; and does not merely report information.

The following types of film are not eligible for certification:

• Films made for exhibition distribution as an advertising programme or as a commercial
• Films comprising or substantially based on:
• Public/special performance(s) staged for filming or otherwise;
• Sporting event(s);
• Games/competitions;
• Current affairs/talk shows;
• Demonstration programmes for tasks, hobbies or projects;
• Review/magazine-style/lifestyle programmes;
• Unscripted or “reality”-type programmes;
• Product produced in-house by a broadcaster or for domestic consumption in one country

3.3 Producer Criteria: The Minister has certain requirements in respect of the producer. These are:

1. A full producer of the project, credited in the main titles of the film must be based in Ireland and a producer company participating in the production must be registered in Ireland or have a permanent agency or branch operating in Ireland until all compliance terms and conditions as set out in the Section 481 Certificate have been met in full. The Irish-based producer shall be responsible for compliance reporting and shall be a director of the aforesaid company.
2. The Irish Producer must be credited in the opening and/or main titles of the film and this credit should be not less than that of'producer'/'co-producer'/'executive producer'.
3. The condition in the Section 481 Certificate referring to this requirement will read as follows: -

“The Irish Producer's name is to appear in the opening credits reflecting accurately the producer's role, or exceptionally, in the main titles, as dictated by the dramatic requirements of the film.”

A full producer of the project, credited in the film credits in no less favourable a position than the other producer or producers (whether in the opening or closing credits), must be based in the State, and a producer company participating in the production must be registered in the State or have a permanent agency or branch operating in the State. This Irish-based producer shall be responsible for compliance reporting and shall be a director of the aforesaid company.

4. Specific Requirements of the Revenue Commissioners

4.1 General

The Revenue Commissioners' responsibility centres on the potential of the project, as presented, to comply with the requirements of the law. In considering this, the Revenue Commissioners will examine the financial aspects of the proposal with regard to the legal, commercial and corporate arrangements for the production of the film. In particular, they will be concerned that the appropriate level of non-Section 481 funding is provided and that the budget and financial structures are appropriate for the proposed project. All aspects of the company's application will be examined including the required supporting documentation (as listed at Appendix C of the Application Form). In examining the application, the Revenue Commissioners may consult with any expert they consider appropriate.

To consider an application Revenue will need a clear understanding of the proposal, who the main players are and the contractual relationships between them. Sufficient detail should be given in the budget or explanatory documentation to show how any significant budgeted amounts will be spent, the recipients of the payments and the purpose for which they are paid. The producer or promoter can ensure that processing is not delayed unnecessarily and that queries are kept to a minimum by giving an appropriate level of information and by explaining any unusual feature or issues that are likely to give rise to queries. For example, the amount under a particular heading on the budget may be out of line with the industry norm for a particular reason. Giving the explanation up-front will minimise the need for correspondence on the issue.

The Revenue Commissioners may consult with any person, agency or body of persons and may disclose any detail in the company's application.

4.2 Definitions

Reference is made in the following pages to various definitions contained in Section 481 or in the Regulations, as well as in this Guidance Note. These are:

Eligible Expenditure:

The term eligible expenditure is a used extensively throughout this Guidance Note and is to be understood as meaning collectively both “eligible goods, services and facilities” (as defined in the Regulations) AND “eligible individual” as defined in Section 481 of the Act.

“Eligible expenditure” means the total spent in the State on eligible goods and services and on the employment of eligible individuals.

Eligible Goods, and Services and Facilities:

Eligible goods, services and facilities are defined in the Regulations and are designed to encompass expenditure, by the qualifying company, on goods, services and facilities purchased from a business in circumstances where:

• The business operates from a fixed place of business in the State
• The activities of the business are carried on in the State by employees of the business, or, in the case of a sole trader by that individual, together with his/her employees and
• Any goods supplied or used are supplied from normal trading stock, and any equipment or facilities used are part of the assets normally employed in the business. In such circumstances the goods supplied or the equipment used would be part of the business's own resources.

The goods supplied or equipment used by a supplier may have originally been sourced abroad. However, where such goods or equipment are part of the stock-in-trade of or assets used by a person with a fixed place of business in the State, then the service or goods supplied will constitute eligible expenditure. For example:

• A qualifying company engages a company, operating in the State, to provide catering on a shoot. Assuming the company, provides the service from its own resources, it will qualify as eligible expenditure, by the qualifying company.
• A qualifying company leases cars from an Irish based car hire/leasing company. Assuming the car hire/leasing company, provides the cars from its own resources, it will qualify as eligible expenditure, by the qualifying company.

Where the provision of a service or facilities by a person to the qualifying company, is sub-contracted to another person, Revenue will take a look-through approach so that expenditure by the qualifying company will only qualify as eligible expenditure, if the person to whom the work is sub-contracted has a fixed place of business in the State and provides the goods, service or facilities from their own resources. Similarly, if a person arranges for another person to provide the service, that other person must also satisfy the requirements relating to the provision of eligible goods and services.

For example:

• A qualifying company engages an Irish company to provide lighting. The Irish company subcontracts the work to another company. The provision of the service, by that other company, will qualify as eligible expenditure, by the qualifying company, only if the company to whom the work was sub-contracted carries on that business in the State and provides the service from its own resources.

Eligible Individual:

As defined in the Act, “Eligible individual” means an individual who is a citizen of Ireland or of another Member State of the European Communities, or an individual domiciled, resident or ordinarily resident in the State or in another Member State of the European Communities.

Where the qualifying company employs an eligible individual and pays that individual directly, in respect of work carried on in the State, on the production of the qualifying film, such a payment will qualify as eligible expenditure. Similarly, where the qualifying company makes a direct payment to a self employed individual, who comes within the residency or citizenship requirements outlined above and that individual provides only labour, such expenditure will also be eligible expenditure, in relation to activities performed in the State. Where, however, a person provides goods, services or facilities, the person must operate from a fixed place of business, in the state.

Total Cost of Production:

This term is relevant for the purposes of calculating the amount of Section 481 investment a company is permitted to raise. This particular amount is related to the percentage of the total cost of production by reference to the percentages set out at paragraph 4.3.3.

The total cost of production includes all expenditure necessary to produce the film from the development phase and including post-production and the cost of providing an archive print as required by Irish law. The following would not be included:

• Costs associated with the distribution or promotion of the film;
• Costs arising after delivery of the materials contracted for with the relevant distributor or ion/broadcaster;
• Legal, accountancy and other costs of raising relevant investments; the Section 481 funds;
• Costs of organising or providing pre-sales monies including those connected with facilitating designed to facilitate a return for investors;
• Costs of acquiring rights other than those necessary for the production of the film;
• Expenditure on the purchase of capital assets used in the production of a film but which are not used up in that process, for example, cameras, lighting, sound recording equipment, etc.;
• Amounts that are paid out of, or are dependent on, or arise from rights in, the receipts, earnings or profits of the film; or
• Fees or other payments deferred unless the payment of such sums is made no later than four months after the first occasion on which the completed film is delivered to any financier or distributor thereof.

4.3 Funding of the Project

The amounts raised under Section 481 should be invested and made available to the production company from the outset, i.e. before commencement of principal photography/first animation drawings/first model movement, as the case may be, or where this is not possible, at the latest before 25 per cent of the total production budget has been incurred. The Revenue Commissioners are prepared to consider waiving this requirement in exceptional circumstances. Promoters/Producers seeking a waiver should submit a detailed explanation of the exceptional circumstances that give rise to the delay in investing the funds. It is stressed that any waiver will be considered only in exceptional cases and that applications for special treatment should be a rare occurrence.

Relief will not be given for replacement capital i.e. investments to be used in the production of a film by a company which has sufficient funding without the investment. For example, some commissioning companies agree to provide all of the funds for the film as part of the commissioning agreement. Such films are not appropriate for Section 481 funding. This requirement would not rule out the repayment of temporary loan facilities granted in the development phase pending receipt of the Section 481 investment.

4.3.1 The Non-Section 481 Funding:

Letters of undertaking from those contributing the non-Section 481 funding must be provided, with the application for a certificate. These letters must indicate the amount of each contribution and when the funding will be made available to the production company. The funding must be made available to the company on terms whereby it will not be repaid until film has been delivered. The non-Section 481 money must be made available by way of a cash contribution, for example by way of a loan or subscription for shares or other cash investment. It is not acceptable to provide the non-Section 481 amounts in non-cash form by, for example, deferring fees.

4.3.2 Co-Productions:

If the co-production is an official co-production, evidence of application for approval from each of the national competent authorities should be submitted with the application. The actual letters of approval from each of the national competent authorities should be submitted once these become available.

4.3.3 The Section 481 Funding:

The applicant must state the amount of Section 481 funding it is proposed to raise. That amount cannot exceed the lower of

1. Eligible expenditure (as defined above); or
2. An amount determined as follows:

• Where the total cost of production does not exceed €5,080,000–66 per cent of the cost;
• Where the total cost of production is between €5,080,000 and €6,350,000-the appropriate percentage of the cost is determined by the formula –
  (11 x E)
  [66-€1,270,000]

where E is the excess of the total cost of production of the film over €5,080,000;

• Where the total cost of production exceeds €6,350,000–55 per cent of the cost.

In no case may the total amount raised under Section 481 exceed €15,000,000.

4.3.4 The cumulation of State Aid shall not exceed 50 per cent* of the production budget of the film. State Aid includes direct aid from any EU state and any input from any State-funded agency including the Irish Film Board

(* This limit may not apply to films classified as “difficult or low budget”).

4.4 Budget

The budget for the film should be submitted in “Universal” format or similar. Both the top sheet (summary budget) and the detailed budget are required. In addition, a breakdown of the total cost of production as between eligible expenditure (as defined at paragraph 4.2) and non-eligible expenditure should be given. In the case of a co-production, details should be given of the particular items of expenditure to be funded by each co-producer.

It is important not to overestimate the level of eligible expenditure as this will impact on the investor's entitlement to the relief should the outturn not reach the level estimated.

Applicants will be aware of items in the budget that might give rise to queries because of their unusual nature or apparent high cost. Unnecessary queries on these items can be avoided if an explanation is given in the application.

Where the film is co-financed by the Irish Film Board, or where a Completion Bond exists, evidence of this should be submitted with the application. In evaluating the budget Revenue will have regard to any independent evaluation, for example, by the Irish Film Board or by a recognised Completion Bond Company.

The law permits the Revenue Commissioners to refuse to issue a certificate if they are not satisfied with any aspect of the Company's proposal. In relation to the budget a certificate may be refused if the Revenue Commissioners have reason to believe that the budget or any particular item of proposed expenditure in the budget is inflated.

4.5 Financial Arrangements with Countries other than EU/Treaty Countries:

Section 481 provides that a company shall not be a qualifying company if the financial arrangements that the company enters into in relation to the qualifying film are - (i) Financial arrangements of any type with a person resident, registered or operating in a territory other than:

1. a Member State of the European Communities, or
2. a territory with the government of which, arrangements having the force of law by virtue of Section 826(1)(a), have been made,

OR

(ii) Financial arrangements under which funds are channelled, directly or indirectly, to, or through, a territory other than a territory referred to in clause (I) or (II) of subparagraph (i).

However, amendments made in the Finance Act 2005 provide for approval by the Revenue Commissioners of certain financial arrangements involving territories outside the EU with which Ireland does not have a double taxation treaty, in limited circumstances. The arrangements involving such a territory must relate to an investment in a qualifying film and/or the filming of part of a film in the territory. Requests for approval must be made before the arrangements are effected and the Revenue Commissioners must be satisfied with the arrangements and the ability of the qualifying company to provide records.

The Revenue Commissioners may specify a condition in relation to financial arrangements, where such arrangements have been approved by them, in any flim certificates issued by them.

In addition, in considering whether to grant an approval under this paragraph in relation to financial arrangements, the Revenue Commissioners may seek any information they consider appropriate in relation to the arrangements or in relation to any person who is, directly or indirectly, a party to the arrangements.

Where the Revenue Commissioners have approved financial arrangements in accordance with this paragraph, no amount of money expended, either directly or indirectly, as part of the arrangements may be regarded, as an amount of money expended on either the employment of eligible individuals or on the provision of eligible goods, services and facilities.

4.6 How the Project is Structured

Simple structures provide the most transparent mechanism for the delivery of the project. Complicated structures involving a large number of companies or other entities for the production, financing or distribution of a film can cause difficulties for both the investors and the Revenue Commissioners in understanding the financial aspects of the project. In examining structures of this nature, the Revenue Commissioners will have to be satisfied as to the commercial rationale for the structure. The applicant will also have to demonstrate that the structure will not hinder the Revenue Commissioners in verifying compliance with the conditions for granting relief as set out in the law.

4.7 Requirement that the Investment Be at the Risk of the Investor

Section 481(18) of the Taxes Consolidation Act 1997 provides that relief will not be given in respect of a relevant investment unless that investment -

• Has been made for bona fide commercial reasons and not as part of a scheme or arrangement the main purpose or one of the main purposes of which is the avoidance of tax;
• Is made at the risk of the allowable investor company or the qualifying individual, as the case may be.

No provision may be made, therefore, to protect an investor from the normal commercial risk of the investment in relation to:

• Budget overruns in the production of the film which arise from any fraud, neglect or failure on behalf of the qualifying company;
• Fraud or other misapplication of monies allocated or invested for the production of the film;
• Failure of the film to meet contracted standards of production, content and execution;
• The full payment of lawful creditors, including persons employed in the production of the film;
• Failure of commercial exploitation of the film to recoup to the production company its investment in the production of the film;
• 3rd party litigation against the production company

In deciding if the investors are bearing the commercial risks, all aspects of the investment scheme must be evaluated. However, certain key issues have been considered in the past and these are commented on below.

4.7.1 Pre-Sales Agreements:

Pre-sales agreements are a feature of the film industry and provided the agreements are genuine commercial transactions they are unlikely to contravene the risk provisions. The Revenue Commissioners will seek to distinguish between genuine commercial transactions and contrived arrangements designed to secure a return to the investors. The return to the investors must arise from the on-sale of the fully completed film, or rights to the fully completed film, to independent third parties and not to connected or “captive” distribution companies.

The features of a commercial arrangement would include -

• The purchaser is a genuine film distribution company and not a “captive” or intermediary company the main purpose of which is to secure the return to investors. In some instances, artificial arrangements are set up using what are, in effect, conduit companies through which the pre-sales return is passed to the Section 481 Company. These companies operate only as distributors of films promoted by the same promoter with the main purpose of ensuring the investors' return.
• The purchaser is clearly an independent third party not directly, or indirectly, under the influence of any of the parties involved in the investment scheme including the investors, banks providing loans to the investors, investment scheme promoters/producers, persons involved in supplying services in connection with the film or the producer. However, the fact that the only connection the purchaser has with the project is the provision of the non-Section 481 finance would not breach the independence rule.
• The decision on whether to accept or reject the film rests with the independent third party alone.
• The purchaser does not exercise day-to-day control over the production of the film or over the administration of the budget. This would not preclude a purchaser, who is also the non Section 481 investor, approving key elements of the production, for example, choosing the producer, crew etc. but the day-to-day control must rest with the Section 481 Company.
• The pre-sales amounts must not be paid to the Section 481 company prior to the delivery and acceptance of the film. In cases where a Section 481 company is involved in a co-production with another company, the pre-sales amount must be payable only on delivery and acceptance of a fully completed film even where the Section 481 company has been responsible only for part of the production.
• Pre-sale monies should not be “ring-fenced”-i.e. they should be payable into the production company's bank account following delivery and acceptance of the completed film and must be available to the production company for use inpaying creditors, if any remain, following completion of the film. The investors (or their nominee) should not be a party to any pre-sale agreement, nor should they have any say in relation to payment of the money due under the pre-sale agreement.
• Where the pre-sales money is held in an escrow account, the escrow agreement must clearly provide for its return to the person or entity that provided it if the film is not delivered and accepted. Similar criteria must apply where the pre-sale money is held in an account under a defeasance arrangement.

4.7.2 Completion Bonds:

Completion bonds taken out on behalf of the production company from recognised insurers are acceptable. Bonds taken out by or on behalf of the investors to secure a return of the investment if the film is not completed would not be acceptable.

The bond should provide for the completion of the film but without a requirement to meet the standard acceptable to the purchaser under the pre-sales agreement. The bond should not provide for a cash payment to the investors as an alternative to the completion of the film nor should it insure against budget overruns arising from the fraud or neglect of the production company. Bonds that provide for a cash payment to the Section 481 production company in the event of abandonment would be acceptable provided there are no arrangements in place to allow investors access to these funds in priority to any other party having a claim on the company's assets.

4.7.3 Bank Loans to Investors:

Most Section 481 investment schemes offer loan facilities to investors. The risk provisions would be breached if there are any agreements, arrangements or understandings by which the lender would be reimbursed other than by recourse to the Section 481 investors. Examples would include arrangements by persons other than the investors to give a charge or other security to the bank in connection with the loan or to place amounts on deposit with the bank in circumstances where the deposit might not be returnable.

4.7.4 Nominee Companies:

The legislation requires the Section 481 investors to hold the shares directly in the production company. This does not prevent a situation where shares beneficially owned directly by an individual investor are recorded on the share register in the name of a nominee. The nominee is usually a specific company incorporated for the purposes of Section 481 investments.

4.7.5 Put/Call Options:

Options to purchase the shares in the Section 481 company granted to the nominee company or any company funded by, or with links to, the producer, Production Company and/or the lending bank will not be acceptable.