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SOFICA : news on french private funds for film investment

 

Movies an television financing companies (named “Sofica” in French) are a major actor in film and audiovisual works financing. This tax measure has undergone many changes and the related tax benefits have often been revised and gradually came down from 48% to 36%. On the contrary, finance law for 2017 raises the maximum rate and reinforces the attractiveness of Sofica for investors, while for several years the tax measures were losing their attractiveness to investors.

 

Creation and organization of an innovative system

 

Sofica were legally implemented in July 1985 and are in charge of private fund-raisings designed to production financing, in return of a tax advantage (art. 238 bis HE of French Tax Code). Soficas have to be yearly authorized and have a short lifespan as their dissolution is organized after 5 years. CNC insures the management of the measure, in partnership with the French office for tax and public finance (DGFIP). Within this frame, Sofica issue their request to the DGFIP, which is co-examined by the CNC. Such request aim to confirm that the Sofica fulfill every eligibility criteria such as: Sofica governance quality, respect of tax laws and the signature of the CNC Sofica charter. Previous investments quality and commitments for the next fund-raising are also examined. If obtained, the authorization comes with a maximum authorized fund-raising amount notified to Soficas by the budget minister. It is understood that 90% of the Soficas fund raising shall be spent within 12 months from their registration on Business and Societies French Register. As an example, in 2016, 11 Soficas were approved for a global investment of 62,2 M euros in 2017.

 

A tax advantage floating but increased for 2017

 

Soficas allow a meeting between finance and cinematographic production. Any subscription by a private individual of Sofica share allows a tax advantage on income tax up to 30% of the subscription amount, subject to the double limit of 25% of the overall net income and 18 000 € (in comparison with the 10 000€ limit of other tax loopholes). The rate is adjusted up to 36% if the Sofica commits to make at least 10% of its investments in « non-backed » production companies. Most importantly, finance law for 2017 provides that this rate will be increased to 48% if the Sofica invest at least 10% of its fund raisig wether for the development of audiovisual  series (fiction, documentary or animated) or the acquisation of cinmatographic or audiovisual foreign exploitation right (article 199 unvicies of French Tax Code). Most of the Soficas organize their investments in order to benefit from the higher exemption rate. Subscribed shares must be preserved at least 5 years and any transfer during those 5 years would call the tax advantage into question, the transmission by estate being not concerned. Such an investment remains risky as the annual return rate is pretty low ( between 0,5 and 6,5%). Nonetheless, with an exemption rate increased at 48% the return rate shall also increase. Such increase in the rate is welcome, indeed previous successive decreases in rates had made it more difficult to find subscribuers because the more the rates of tax deductions are falling the more  investors expect a return on investment.

 

A difficult return of investments for the Soficas

 

Sofica recover their investments on the first movie receipts until their investment recovery, most often in competition or evan after distributors. Nonetheless after recoupment of their investments, Soficas percentages quickly decrease. Therefore Soficas cannot benefit from big incomes even on successful movies. Therefore, Soficas essentially obtain monetary benefits by selling their rights during their 4th year of existence before their dissolution. However, as soficas' investment requirements focusi on independent film, it may be difficult to resell rights to TV channels. Without the purchase of their rights, the loss of earnings for Sofica, and accordingly for subscribers, may be significant. Thus, Investment in the Sofica remains risky and the subscriber's main interest lies less in the return on investment than in their attraction for the cinema industry.

 

A system dedicated to cinematographic creation

 

Soficas’ investments can be a contribution in cash or a capital contribution in a society which has for exclusive activity cinematographic or audiovisual production. These investments are regulated and notably cannot exceed 50% of the European part of a work budget. In addition, the Sofica may invest only in French-language films, except in the case of European co-productions, in which they may invest up to 20% as long as the film is produced in the language of the majority co-producing country, member of the EU.

 

Creation of Soficas aimed to provide increased support for independent production and wished to focus the investments toward works for which this new contribution were essential. It is why  that the notion of "backing" was created, with the CNC tending to favor "non-backed" investments, in particular by increasing the tax relief they generate. The « Sofica Charter » provides the « backing » criteria and the soficas’ commitments. It is annually negotiated and made public by the CNC. In compliance with the charter, in 2015 60% of the soficas’ investments were non-backed investments and 64,8 % of the investments were in favor of films with a budget lower than 8 millions euros.  Moreover, 39,8% investments as coproduction participation were directed to first and second films. In average the financing from Soficas represent 6,4% of the films’ budget and accordingly the average investment is up to 329 k€.

 

Finally, a producer must know that CNC investments approval is mandatory for the films benefiting from soficas’investments as it allows the CNC control of such investments. Furthermore,  during the recoupment of their investments, Soficas apply an interest rate to the amount due by the producer. This rate may be annually reviewed and is evaluated on state bonds basis.

 

The Soficas’ system is therefore both a guarantee of the sustainability and diversity of French and European production and a genuine support for independent production, all via tax incentives.

 

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