Question:

     Why do Hollywood studios transfer the ownership of their movies (on paper) to German  corporate shells?

Answer:

     To profit from a loophole in the German tax code.

     It turns out that Hollywood’s most consistently profitable illusions are not the movies it makes but the movielike shams it puts together with German tax shelter funds.    Last year, for example, these German funds "invested" some $3 billions-- on paper at least-- in Hollywood movies. What make this Hollywood-arranged mirage so valuable to German investors is that it enables German them to avoid, or at least defer paying their taxes.  What makes it profitable to the studios it that the German funds allow them to skim off the top between 8 and 12 percent-- 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 tax shelters work like this: a provision of German tax law allows investors in a German movie to take an immediate tax deduction on their film investments, even if the film they’re investing in has not gone into production, Germans in high tax brackets can borrow a large sum for their “investment” and defer their entire tax bill for many years.

      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 in lease and other payments, the studio is guaranteed a profit.

      In 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, Lord Zweite ProductionsDeutschland, pay $150 million to New Line Cinema 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” sum.

      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.



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