Hollywood’s most consistently
profitable illusions are not the movies it makes but
the movielike shams it puts together with its German
“partners.” In 2003, German tax shelters,
with the aid of German corporate shells and the happy
cooperation of American studios, invested some $3 billion
in the total fiction that they were owners, producers,
and profit-sharers in Hollywood movies.
It works like this: A provision of German tax law allows
investors in a German company to take an immediate tax
deduction on their film investments, even if the film
they’re investing in has not gone into production.
In practice, this means that Germans in high tax brackets
can borrow a large sum for their “investment”
and defer their entire tax bill to a more convenient
The American studios, for their part, net between 8
and 12 percent from these tax-shelter deals--a sum that
amounts to several hundred million dollars each year.
Since the movie studios do not give up any actual rights
or control over their movies, it is "money for
nothing," as one Paramount executive explained,
adding that his studio made between $70 and $90 million
from these tax shelters in 2003 (more than it made on
all its movie releases combined.
The beauty of the German tax code, as far as Hollywood
is concerned, is that unlike tax laws in other countries,
it does not require films to be shot locally or to employ
local actors or personnel. It simply requires that the
film be produced by a German company that owns its copyright
and shares in its future profits. These requirements
have proved child’s play for the savvy legal minds
of Hollywood. First, a German tax-shelter fund invests
in a German corporate shell. The shell, in turn, buys
the copyright for a movie and the right to produce it.
Simultaneously, the shell leases the copyright back
to the studio and enters into a Production Service Agreement
and a Distribution Service Agreement to authorize the
studio to produce and distribute the movie. Next, completing
the fiction, the studio pays the corporate shell a “minimum
advance” in lieu of any actual participation in
the movie’s earnings or ancillary rights. In the
eyes of German tax authorities, this satisfies the requirement
that the German corporation enjoy a share of profits.
Finally, at some point, the studio exercises its option
to buy back the copyright--and, presto, the German connection
with the film, which only ever existed on paper, is
nullified. And, of course, since the German corporation
paid more for the initial copyright than it ever makes
back for it, the studio is guaranteed a profit.
Consider the case of The Lord of the Rings: The Return
of the King. A Munich-based tax-shelter fund, Hannover
Leasing, had a corporate shell pay $150 million to New
Line Cinemas for the movie’s copyright, which
it simultaneously leased back to a New Line affiliate.
It also entered into agreements for New Line to produce
and distribute the movie. At the end of filming, New
Line Cinemas paid the German company the agreed-upon
minimum advance (which approximately equaled the interest
on the initial investment) to honor the pretense that
the Germans had participated in the profits. For engaging
in these strictly paper transactions, New Line “earned”
$16 million, a tidy “money-for-nothing”
The studios have good reason not to talk about the skim
they take from German tax shelters. If anyone were to
look behind the curtain and see that the wizard is really
just a bunch of American studios taking money from German
tax shelters, the German treasury, which is the only
real loser in this game, might well change the rules
and take back the very real German money that makes
the American illusion possible.
How do studios make money otherwise? See