The numbers behind the industry.
paradoxical and absurd as it sounds, it's cheaper for a
Hollywood studio to make a big-budget action movie than
to make a shoestring art film like Sideways. Consider Paramount's
2001 action flick Lara Croft: Tomb Raider. On paper, Tomb
Raider's budget was $94 million. In fact, the entire
movie cost Paramount less than $7 million. How did the studio
collect over $87 million before cameras started rolling?
First, they used the German tax-shelter gambit. Loopholes
in Germany's tax code are responsible for a good portion
of Paramount's profits—an estimated $70 million to
$90 million in 2003 alone. Best of all, there's no risk
or cost for the studio (other than legal fees).
Here's how it works: Germany allows investors in German-owned
film ventures to take an immediate tax deduction on their
film investments, even if the film they're investing in
has not yet gone into production. If a German wants to defer
a tax bill to a more convenient time, a good way to do it
is by investing in a future movie. The beauty of the German
laws as far as Hollywood is concerned is that, unlike the
tax laws in other countries, they don't require that films
be shot locally or employ local personnel. German law simply
requires that the film be produced by a German company that
owns its copyright and shares in its future profits. This
requisite presents no obstacle for studio lawyers.
The Hollywood studio starts by arranging on paper to sell
the film's copyright to a German company. Then, they immediately
lease the movie back—with an option to repurchase
it later. At this point, a German company appears to own
the movie. The Germans then sign a "production service
agreement" and a "distribution service agreement"
with the studio that limits their responsibility to token—and
For the privilege of fake ownership, the Germans pay the
studio about 10 percent more than they'll eventually get
back in lease and option payments. For the studio, that
extra 10 percent is instant profit. It is truly, as one
Paramount executive told me, "money for nothing."
In the case of Lara Croft: Tomb Raider, Paramount
sold the copyright to a group of German investors for $94
million through Tele-München Gruppe, a company headed
by German mogul Herbert Kloiber. Paramount then repurchased
the film for $83.8 million in lease and option payments.
The studio's $10.2 million windfall paid the salaries of
star Angelina Jolie ($7.5 million) and the rest of the principal
Paramount made some more preproduction cash by taking advantage
of the British government's largesse. To qualify for Section
48 tax relief in Britain, the movie had to include some
scenes filmed in Britain and employ a couple of British
actors. Given Lara Croft's peripatetic plot, neither
condition presented an artistic problem. Again, Paramount
entered into a complex sale-leaseback transaction, this
time with Britain's Lombard Bank. Through this legal legerdemain,
the studio netted, up front, another $12 million—enough
to pay for the director and script.
pay for most of the rest of the movie, Paramount sold distribution
rights in six countries where the Tomb Raider video
games were a big hit with teenage boys. These pre-sales
in Japan, Britain, France, Germany, Italy, and Spain brought
in another $65 million.
Through this triple play, Paramount earned a grand total
of $87.2 million. The remaining budget—less than $7
million—would be covered by licensing the film's U.S.
pay-television rights to Showtime (a network owned by Paramount's
corporate parent, Viacom). At no cost to its treasury, Paramount
launched a potential franchise—don't forget that sequels
can be financed with the same "risk management"
couldn't Sideways, which cost just $16 million,
use these tricks to pay off its much smaller budget? Because
the international financing game favors big-budget movies
with international appeal. Even if a $16 million production
did entice a German tax shelter for some reason, the lawyers'
bill for arranging the transaction would eat up most of
the leaseback skim. A movie like Sideways, which
is artistically grounded in California, would also have
a hard time qualifying for the British tax subsidy. And
finally, Sideways lacked the advance name recognition
that's required to ring up large pre-sales in foreign markets.
Of course, it's not only Paramount that employs these devices—every
studio uses them to minimize risk. Remember all those stories
about how New Line was betting its entire future on the
Lord of the Rings trilogy? Not quite. New Line
covered almost the entire cost by using German tax shelters,
New Zealand subsidies, and pre-sales. If studio executives
don't crow in public about such coups, it's probably out
of fear that such publicity will induce governments to stiffen
their rules—as, for example, Germany periodically
does with its tax code. When you've got a golden goose,
you don't want to kill it while it's still laying eggs.
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