The European Commission has adopted revised criteria for assessing under EU state aid rules Member States’ support schemes in favour of films and other audio-visual works. The new Cinema Communication allows aid for a wider scope of activities, highlights Member States’ discretion in defining cultural activities worthy of support, introduces the possibility to give more aid to cross-border productions and promotes film heritage. The Commission took into account the comments received during three public consultations of Member States and stakeholders.
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What is the purpose of the Cinema Communication and why is the Commission controlling film subsidies in the first place?
Audio-visual works, in particular films, play an important role in shaping European identities and reflecting the EU’s cultural diversity. The production and distribution of films and other audio-visual works also has an important economic dimension. Over one million people are employed in the EU’s audio-visual sector (1), which makes it one of the largest film producers in the world.
The European Commission is in charge of controlling state aid in the Single Market in all economic sectors. The purpose of state aid control is to avoid that Member States grant selective advantages to companies to the detriment of others. This allows companies from all Member States to compete evenly and without undue barriers. According to Article 108 of the Treaty on the Functioning of the European Union (TFEU), the Commission is obliged to assess the compatibility of state aid measures with the Single Market. At the same time, EU state aid control fully recognises the very specific nature of the cultural sector: Article 107 (3) (d) explicitly provides for the possibility of granting state aid to promote culture and heritage conservation, provided that it does not affect trading conditions and competition in the EU to an extent that is contrary to the common interest.
The Commission has therefore adopted specific criteria to assess state aid in the audio-visual sector: the Cinema Communication sets out the criteria under which the Commission will assess aid schemes put in place by Member States to support films and other audio-visual works. The Communication adopted today replaces the previous one adopted in 2001. This document allows operators and Member States to rely on stable and transparent state aid rules when designing their support schemes. The aim of the Communication is to encourage audio-visual creation while preserving cultural diversity in the European Union and to ensure the continued viability and competitiveness of this sector.
How much aid does the audiovisual sector receive in the EU?
A wide range of support measures are targeted at the film and audio-visual sector in the European Union, at national, sub-national and supranational level (including the EU’s MEDIA programme).
A 2011 study by the European Audiovisual Observatory (2) estimates that, in 2009, the total amount of audio-visual support spent by nearly 250 funding bodies reached almost 2.1 billion. This figure does not take into account tax incentives for production. According to a study on the impact of territorial conditions in film support schemes, an estimated 1 billion is provided annually by Member States through such film tax incentives (3).
Since the adoption of the 2001 Cinema Communication, the Commission has approved schemes for nearly all Member States, including not only national but also regional schemes.
Why was it necessary to review the previous criteria (i.e. the 2001 Cinema Communication)? What are the main changes?
The criteria to assess the compatibility of Member States’ film and audio-visual support schemes with EU state aid rules were set out in the Commission’s 2001 Cinema Communication (see IP/01/1326). Their validity was extended three times, most recently in 2009 (see IP/09/138). The 2001 Cinema Communication expired on 31 December 2012.
In the meantime, the audio-visual sector has undergone important changes. The introduction of digital technology in all areas of the audio-visual value chain has a profound impact on the sector and its financing. The aid schemes approved since 2001 also show that Member States use a wide variety of aid mechanisms and conditions. As the 2001 Cinema Communication only applied to production support, the Commission had to apply the rules by analogy in cases regarding, for example, support for film distribution or aid to cinemas.
The new Cinema Communication takes account of this evolution and will therefore increase legal certainty and ensure the continued viability and competitiveness of the European audio-visual sector.
The main changes in the new Communication concern the scope of activities covered by the rules, the applicable aid intensity, the conservation and non-commercial diffusion of aided works and territorial spending conditions.
What changes do the new rules introduce with regard to the activities that can be supported?
The rules set out in the 2001 Cinema Communication only applied to production support. The scope of activities that may be supported is extended to include all phases of an audio-visual work from the concept to the delivery to audiences. The new rules also state explicitly that the definition of cultural activities remains primarily the responsibility of the Member States, in line with the subsidiarity principle.
In particular, the scope of the rules is extended to state aid for cinemas This includes possible aid for the modernisation for cinemas, such as their digitisation. It is worth noting that small amounts of state support for cinemas may not involve any state aid in the meaning of the EU rules at all, because they have no appreciable effect on trade between Member States (see IP/06/1765 on the de minimis Regulation).
Transmedia and crossmedia projects use different media for telling one and the same story, each medium making a contribution to the whole. Insofar as such projects are linked to the production of a film, their film production component is considered to be an audio-visual work within the scope of the Communication.
The new Communication clarifies the rules for post-production and principal photography (i.e. the production phase when the movie is filmed). The principle is that aid must not be reserved for specific parts of the production value chain. The producer should be free to choose which items of the budget to spend outside the territory of the aid granting Member State. For example, a Member State should not offer producers extra incentives explicitly aimed at attracting post-production work to that Member State. The aid should be for production activities as a whole.
Why are games not included in the scope of these new rules?
The Commission does not have a critical mass of state aid decisions relating to games and therefore has insufficient experience to define common assessment and exemption criteria for this type of aid. Although games represent a fast-growing sector, not all games necessarily qualify as audio-visual works or cultural products. The production, distribution, marketing and consumption of games is different from that of films. It would therefore be premature to integrate this sector in the Communication. State aid measures supporting games will therefore continue to be assessed by the Commission on a case-by-case basis.
What are the changes concerning the level of aid (or ‘aid intensity’) that can be granted to an audio-visual work?
The aid to audio-visual production continues to be limited in principle to 50% of the production budget. For co-productions funded by more than one Member State the new rules extend this ceiling to a maximum of 60% of the production budget.
The costs of the distribution and promotion of audio-visual works may be supported with the same aid intensity. For example, if the distribution budget for a film is 20 000, the maximum aid amount for distribution would be 10 000 (or 50%).
Difficult audio-visual works (e.g. short films, films by first-time and second-time directors, documentaries, or low budget or otherwise commercially difficult works) are excluded from these limits. Under the subsidiarity principle, it is up to each Member State to establish a definition of difficult films according to national parameters.
Why did the Commission review the criteria concerning territorial spending conditions?
Under the new rules, Member States continue to be allowed to impose territorial spending obligations on beneficiaries of aid aimed at the audio-visual sector.
A territorial spending obligation can be any condition which restricts the beneficiary of aid in choosing where to spend the production budget. The 2001 Communication allowed Member States to impose territorial spending obligations if they wished to do so up to 80% of the production budget of a film that received aid. In other words, if a Member State gave a single euro of aid to a film, it could impose that 80% of the total production budget would be spent on its territory. At present 9 Member States do not impose any territorial spending obligations to aided films. Hardly any Member States impose such obligations up to the ceiling of 80% of the production budget. Only a limited number of national film support schemes have very extensive restrictions in terms of where and how the aid received can be spent.
The Commission considers that territorial spending conditions may be necessary to maintain a critical mass of infrastructure for films production in a given Member State or region. Yet territorial spending obligations should also remain proportionate, since they may also infringe the principles of the EU Single Market, in particular the free movement of goods (Article 34 TFEU) and the freedom to provide services (Article 56 TFEU). The Commission already had announced in its 2001 Communication that this system would need to be reviewed.
What territorial spending obligations does the new Communication allow?
In the new rules, the Commission has ensured that such territorial obligations remain proportional to the aid granted. When assessing such territorial spending obligations, the Commission will from now on take into account three elements:
First, Member States may require, as an eligibility criterion, that a minimum of up to 50% of the production budget is spent in their territory.
Second, Member States may require that 160% of the aid amount granted is spent in their territory. This may be in particular relevant for those Member States who wish to ensure that more than 50% of the production budget is spent in their territory.
Third, as before, in any case the territorial spending obligation cannot go beyond 80% of the production budget.
Illustrative examples of application of these principles:
1) As part of its support scheme, a Member State grants aid of between 30% and 50% of the production budget, depending on the type of film. The Member State has not set any specific eligibility criteria, but in all cases, it requires that 80% of the production budget is spent in the Member State. The Communication now allows the scheme to require that up to 160% of the aid amount is spent in the granting Member State. When an aid corresponding to 50% of the budget is granted, the requirement that 80% of the production budget is spent in the territory thus corresponds to the Communication criteria. However, for those films to which the Member State contributes to a lesser amount (e.g. 30% of the production budget), the 80% spending criterion is excessive and not in line with the Communication. The Member State should amend its scheme to make the territorial spending obligations lower in those cases (e.g. 48% spending requirement when an aid of 30% is granted).
2) Under its eligibility criteria, a national, a regional or local film support scheme makes support available only to films that spend 50% of the production budget in their territory. The aid intensity of the scheme is set at 30%. In this situation the rule that Member States may require that up to 160% of the aid given is spent in the territory would correspond to a spending obligation of 48%. Given that this percentage is not higher than the 50% set in the eligibility criteria, this factor is irrelevant in practice. The territorial spending level will be in any case at least 50%. The scheme is in line with the Cinema Communication.
In other words: for state aid schemes that impose 50% of the production budget of a film to be spent in their territory in order to be eligible at all for state support, the 160% rule remains without practical effect for as long as the aid intensity is not higher than 31%. Only above this level, an application of the 160% rule results in potential aid levels above the 50% threshold that is covered by the eligibility criteria. Only in these cases, the 160% rule thus has to be taken into consideration.
3) Under its eligibility criteria, a film support scheme makes support available to films whose sole original version is in an official language of a Member State with a limited territory, population or language and that spend at least 50% of the production budget in their territory. Moreover, it requires that 80% of the budget has to be spent in the territory. As the maximum aid intensity for any “difficult film” can go even beyond 50%, it follows that the spending allowed will be 80% of the budget. This scheme is therefore in line with the Communication criteria on territorial spending.
4) As a condition of granting aid, a local film support scheme requires that at least 200% of the aid amount has to be spent in that area. The Commission would not approve the local film support scheme unless the Member State reduces the territorial spending obligation to fit within the ‘160% of the aid amount’ territorial criterion of the Communication.
How can these rules apply to schemes such as film tax incentives?
As tax incentives are more and more used in various EU Member States to support audio-visual works, the Communication includes for the first time specific rules on this type of support by which part of the investment in the aid granting Member State can be used to reduce the corporate tax burden of the beneficiary. In this case, the aid is awarded and defined as a proportion of the production expenditure in the granting Member State.
In order to treat tax incentives in a way that is comparable to grants, the Communication sets the maximum expenditure that can be subjected to territorial spending obligations at 80% of the production budget. In addition, as for grants, Member States may require a certain level of production activity (of up to 50% of the production budget) in the territory as a condition to be eligible for state support.
Has the Commission made sure that the new rules will preserve cultural diversity?
The Communication offers Member States and regional or local public authorities wide possibilities to grant aid to the audio-visual sector in order to encourage creation and protect cultural diversity. As a party to the UNESCO Convention on the Protection and the Promotion of the Diversity of Cultural Expressions, the EU is fully committed to its cultural objectives. The Commission attaches great importance to the promotion of cultural diversity and has made sure to achieve a balanced outcome. As a result, the new Communication recognises that the fundamental freedoms of the Treaty may be restricted to some extent in order to protect cultural diversity.
Member States remain free to impose conditions on state funded films which ensure their link to a national or local culture. For example, Member States may require that a film is produced in a certain language, when it is necessary and adequate to pursue a cultural objective.
What does the Communication say about film heritage?
The new Cinema Communication emphasises the importance of film heritage objectives linked to the collection, preservation and accessibility of European films. Member States should encourage and support producers to deposit a copy of aided works for preservation and specified non-commercial use.
What was the process before adoption of these new rules?
The Commission consulted stakeholders and Member States extensively during a review process that lasted two years. This demonstrates the important role films play in Europe and the Commission’s commitment to reach a balanced text, based on input from all stakeholders. In particular, the Communication attempts to strike the right balance between the cultural, legal and economic considerations which are relevant to state support to the audio-visual sector.
In June 2011, the Commission launched the review with a public consultation on an issues paper. This resulted in a draft Communication. A second consultation in 2012 invited comments on this draft. A third consultation round took place from April to June 2013 (see IP/13/388), on the basis of a modified draft.
What happens next?
As from its publication in the EU Official Journal, the Commission will assess notified state aid measures in the audio-visual sector according to the criteria set out in the new Cinema Communication. Within two years from that date, Member States should also bring their existing schemes regarding film funding in line with the Communication.
The Commission also intends to propose rules on audio-visual aid in the next version of the General Block Exemption Regulation, in order to exempt unproblematic schemes from prior state aid approval by the European Commission. The schemes that comply with the rules set out in this Regulation will not have to be notified to the Commission. This will facilitate the granting of aid and reduce red tape for public administrations and the sector alike.
Full text of the Cinema Communication
Notes
1 : KEA European Affairs et al. (2010). Multi-territory licensing of audiovisual works in the European Union
. Final report prepared for the European Commission, DG Information Society and Media.
2 : Newman-Baudais, S. (2011). Public funding for film and audiovisual works in Europe
. 2011 Edition. Strasbourg: European Audiovisual Observatory (Council of Europe).
3 : Cambridge Econometrics et al. (2008). Study on the economic and cultural impact, notably on co-productions, of territorialisation clauses of state aid schemes for films and audiovisual productions
.
