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Private capital increases the complexity of audio-visual production and requires the incorporation of legal services

| News | Culture, Sports & Entertainment

Interview with Mabel Klimt and Patricia Motilla on consultancy and financing of Spanish cinema through the setting up of Economic Interest Groupings (EIG)

Interview | Audiovisual451 has interviewed two partners of the firm who are part of the team of Andersen Tax & Legal's Department of Culture, Sport and Entertainment and who are committed to advising and facilitating the financing of Spanish cinema through the setting up of Economic Interest Groups.

On the one hand, Patricia Motilla, head of the Culture, Sports and Entertainment area, specialized in advising investment banking clients, also has extensive experience in internationalisation processes and is a specialist in advising the film, theatre and live entertainment industry, where she has participated in the structuring processes of financial products for tax returns and has delved into the regulatory scope of the sector, with extensive specialisation in foreign films.

For her part, Mabel Klimt is a partner in the Culture, Sports and Entertainment area of Andersen Tax & Legal, a specialist in Entertainment Law, with extensive experience in providing comprehensive advice on audio-visual production, mainly in film, television and animation. She also has a long experience in advising on personal data protection, as well as in the field of Internet and New Technologies.

Audiovisual451: What is the distinguishing feature of Andersen Tax & Legal for the audio-visual sector?

  • Patricia Motilla:"We work fundamentally in a multidisciplinary way, we do not believe that the approach to an audio-visual production should be made exclusively from a financial point of view or from a fiscal or intellectual property point of view... We believe that teamwork gives a very important added value to the audio-visual work. We are having constant discussions because intellectual property law has a totally opposite way of thinking to tax and accounting law. What we have to do is put it all together for optimal funding.
  • Mabel Klimt: "Producers have always experienced this in their own eyes, but now that there are specific tax vehicles we have to be extremely delicate in the development of these financing processes.

A451: What are the codes and peculiarities of Economic Interest Groups for audio-visual production?

  • P. M:"The incorporation of private capital into audio-visual production and the performing arts has complicated things. Obviously, this private capital goes into the cinema sector to benefit from tax incentives, but this makes it necessary to set up financial structures that are seen from two different perspectives. Whereas for the producer this financial vehicle, this financial product, is an Economic Interest Grouping (EIG), that is, one more line in the financing of the audio-visual work, for the investor it is an investment in a financial product of fiscal profitability. Instead of investing in an investment fund, this investor invests in film but looking for a return. Therefore, the whole structure to be assembled must be very careful, not only from the fiscal point of view, which is the big mistake. Other variables such as contracts, e.g. the transfer of exploitation rights with international sales, television, etc. have to be taken into account, because any overlap in a sale immediately triggers indemnities whose risk would go to the film ".
  • M. K:"The EIG is one more producer of the film and obviously all guarantees must be given to external investors. For this reason, the role of lawyers is becoming increasingly important. Many producers tell us that we are becoming more and more like the American agent, because the knowledge of the audio-visual business that we have to have for the assembly of this type of structures has to be very deep ".

A451: What is Andersen Tax & Legal's position in the Spanish audio-visual sector in this respect?

  • P. M:"I think that our positioning in the market is very good, we are in the centre of the sector and that is because our approach to the work is multidisciplinary. For example, it is necessary to take the impact of subsidies from the accounting and tax point of view into account... Also from the point of view of regulatory law, with the complexity of orders and calls for proposals. The EIGs are just another part of the financing that has to be combined with sales of allowances, discounts at banks... The participation of financial institutions in this type of project is beginning to be very active".

A451: The birth of the EIGs for cinema was an impact that perhaps caught the sector a bit off-track, how is it now?

  • M.K: "From the beginning, what this EIG figure was until what it is now there has been a long time and changes. For a producer who is approaching an EIG for the first time, even if he has 20 films on his shoulders, it's always a bit dizzy. It's about changing the way we work, about keeping accounts... there are a number of aspects that need to be taken very seriously.
  • P.M: "There is a very important nuance, this type of structures cannot be carried out successfully without lawyers. At this point, when the participation of private capital is needed, the complexity of producing an audio-visual work increases as it is structured with an EIG and this forces producers to incorporate legal services into their teams. In addition, lawyers also enter the cinema when private capital arrives but, when you start an audio-visual work with budgets of two, four or ten million, I am talking about important amounts, there are professionals to locate, a director, a director´s assistant, scriptwriters, wardrobe team leaders, photography, makeup, post-production... My question is always the same, where is the lawyer? Where's the CFO? By this I mean that, even if you do not want to set up an IEA when producing, the Spanish audio-visual industry requires legal and financial advice. When we work on these issues with the Americans, the first at the negotiating table is the lawyer. But the CFO and the producer are also sitting down. In Spain, the producer still sees the lawyer as a necessary nuisance if he wants to obtain private capital for his film, they don't realize that we can also solve many future conflicts. It is also true that many producers who have worked with us several times already relax and put themselves in our hands.

A451: Has the producer's point of view changed?

  • M.K: "It's true, they used to tell you the script, the story, and now they tell you how the financing is going. That is why I was saying that things have changed a lot, all the players involved, not only the producers, but also the administration, have realised how important these financial products are. The agility that they offer to the sector is very important, at a time when public aid has greatly diminished, this EIG tool is essential. There is no medium-high budget movie that doesn't use it. Now, in fact, the figure of the EIG is used for films with low budgets and in that it has had a lot to do with the performing arts, which have staged EIGs with very low budgets compared to cinema.
  • P.M: "In my opinion, the change that cinema has suffered with the decline in public support has helped it to become more professional from a legal and tax point of view. The change has also been substantial at the technical level. Creativity and production capacity have always been very good, but now we have an important legal and financial stock and much more experience. This is dragging other disciplines along, for example, the 30th Goya Awards Ceremony was held through the EIG and we did it. It was a complex job because we had to study it very thoroughly, because it was part of the performing arts, it was a success.

A451: Has the new funding model also boosted this figure?

  • M. K:"At the present time few producers can afford to produce a film without the figure of an EIG. The new model has taken the existence of the external investment mechanism into account and the EIG. Obviously, there are direct references in the legislation itself and if a producer wants to take advantage of all the possibilities, he knows that public aid can be made compatible with private investment. This I think will make production budgets grow, because producers will be more able to maximise aid, the higher the budget, the easier it is to take advantage of the tax incentive.

A451: Territories such as the Canary Islands, Navarre and the Basque Country are paradises for the AIEs and responsible for their proliferation, are they not?

  • P.M: "At a certain point in time, four or five years ago, it is true that it was often sought to shoot in the territories of Spain with better tax incentives, especially the Canary Islands. Now that has changed, even if things are going well in the Canary Islands or in Navarre and the Basque Country. The first thing a producer needs to know is how much the film will cost, how it will be financed, and which is the gap we have to cover. From then on, we must start to weigh the greatest tax deduction that can be obtained depending on where it is rolled. That is to say, the classification given to the film as a Canarian, Basque, Navarrese or peninsular work. It should not always be a priority to go to a territory offering higher percentage tax relief. I will tell you that some of the films in which we are going to participate in 2018 had the intention of being shot in the Basque Country and finally will be made in the common territory. Many aspects have to be assessed, because depending on which cases it is not the same to make a production in Madrid as having to move the whole team to the Basque Country or the Canary Islands. I think that the growth of the AIEs has not been so much due to the greater incentives of certain territories ".

A451: When should a producer seek advice to benefit from private investment?

  • M. K:"We recommend the producers to come as soon as possible, the greener the project, the better. Because from that first moment we can recommend guidelines of action that will avoid headaches and save you money. If we get very close to the end, even if he has done some previous work, we have to audit everything. (Continues).

A451: What is Andersen's position in film production and where does he start and end his work?

  • P.M: "When a producer arrives with his project, we analyse the cost of the film, what is available at that moment and how it will be financed. We are automatically faced with the first weakness of subsidies, which demand a great deal of regulatory requirements. We are also involved in this whole process. As we move forward, the funding goes one way or another. We're talking about a year and a half or two years before the film hits the cinemas. We start to supervise all the contracts and negotiate them, but having very clear that the business is the producer's, until we arrive at the beginning of filming where we are available 24 hours to solve any problem, any incident, delay... It is our added value. I assure you that we review all contracts, including those of the technicians.
  • M.K: "Our professional requirement is getting bigger and bigger, we don't limit ourselves to passing a contract on, revising it and returning it, no. We try to have everything under control and be the producer's conscience. Our premise is that our help to the producer will be phenomenal, because if you take a good experience, regardless of the size of your production, surely you will come back to us. Our job is also to accompany them throughout the financing process of their film.
  • M.K: "The key to everything is in the previous work, until the shooting has been 18 months of work, much of our work is to monitor each step, to know the needs. We have to explain to all the producers involved how this structure works very well in order to avoid any kind of friction.

A451: And how do these structures fit together internationally?

  • P. M:"The incorporation to the international firm is helping us a lot, because having an office in all the countries and even in Los Angeles makes it much easier to know the legislation of other countries when we are facing a co-production".
  • M. K:"A few months ago, partners from all over Andersen's Europe were in Madrid and one of the topics discussed was cultural financing, the French and Dutch colleagues, for example, were happy to see how the department was working in Spain and it gave them peace of mind to know that they could count on us if they needed it at any time".

A451: One of the firm's most important contributions is also the search for financing, not just advice...

  • P.M: "Although our client is the film, we have reached collaboration agreements with asset managers, specifically with Dunas Capital, who deal with financial placement. We reiterate once again the importance of the added value that our department brings, approaching all these projects in a transversal way. The agreement with Dunas Capital has made it easier for us to approach institutional clients who are starting to invest in film. When you move 16 films a year you need a significant investment, we are talking about millions of euros. Our responsibility is to do all the legal, tax and financial advisory work, but also to bring investors closer together, which is precisely what we do through Dunas Capital ".
  • M.K: "The tandem we make with Dunas Capital, the security we give them, after auditing the entire film financing process, and the experience of Dunas to find the right investor for each film we believe is perfect. The system is co-invested in a much more agile process and the producer no longer has to suffer until the very last moment. In short, in addition to the creation of the EIG, advice and control of all legal and tax aspects, we offer you the possibility of seeking financing from external investors through this agreement with Dunas Capital. In addition, we are about to sign a similar agreement with another partner for investments in the Canary Islands.
  • P. M:"It should not be forgotten that for investors it is a financial product in which they are looking for profitability. But this step demonstrates the maturity of the system, investors are no longer afraid and repeat. We know the business, you have to be close to the customer to know their needs, because this is a complex business.

A451: What are the weaknesses of EIGs in the sector?

  • M. K:"One of the debts that the EIGs have with the sector is precisely with animation, because the fit is much more complex. We need greater security because investments are usually stronger and for longer. We should also look at how EIGs fit in when a foreign producer brings in capital to shoot advertising. A lot of money is invested in advertising, but in a very short period of time and the requirements laid down in the tax law for investment are not met, I think that money is being lost, because to the extent that capital is foreign, and expenditure is being made here, something should be done to support it. At this point, it would be good to say that we think that the new order of the film law seeks to fit between government subsidies and private investment. I think that the ICAA is very positive about this type of formulas for financing through Economic Interest Groupings. What is clear is that no commercial film can no longer do without an IEA. It is very important to comply with all the requirements of the law, but great legal certainty is also necessary and that we are not subject to interpretations of the law by the Treasury.

A451. Could you comment on some of the titles in which you have participated with this figure?

  • P. M:"We have worked in all types of audio-visual productions. In films such as' Nadie quiere la noche' by Isabel Coixet; films produced by Fernando Colomo PC, such as' La banda Picasso' or' La noche que mi madre matar a mi padre'; we have also participated in the recent' Perfectos desconocidos'. We have dealt with all facets, for example, we worked on one of the films in the' Jason Bourne' s' series that was shot in Spain with a budget of several million, but also on documentaries with very small National Geographic budgets or on films under a million euros. From our point of view, the Economic Interest Grouping, whether it is 100,000 euros or 20 million euros, requires legal advice. Every year we usually work on a number of films that range from nine to 15. In 2017 there were 15, and by this year it will be more. It is possible that there may be 50 active each year following the whole process. Some of us are closing and others are taking care of the new ones. We are nine people working on this in Andersen and we will be incorporating more staff. Even in many of these overlapping productions, actors and other professionals coincide, it is a reality of the sector.

A451: In short, what are the fundamental advantages of creating an EIG for audio-visual production?

  • P. M:"The first advantage of an EIG is its value to finance the film, it covers at least 25% of the cost of production, up to 43% on average if it is in the Canary Islands. Now you have to know that in order to obtain this 25% you have to be clear from the beginning that you are going to finance the film through this system.

A451: Would it be ideal to create an EIG for each film?

  • M. K:"We recommend that a new EIG be made for each film. It could only be maintained if it is the same producer, the same rating date and has the same investors. Because we believe that if not, one film can contaminate the other. In other words, if a film creates uncertainty for an investor, it can damage another film that has nothing to do with it. They are not worth reusing.


For further information, please contact:

Mabel Klimt Yusti

Patricia Motilla Bonías

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