The 30 percent normative indirect state film subsidy available in the form of a tax refund can be applied for both Hungarian and foreign films. Both in the case of films produced based on foreign orders and foreign co-produced films, the Hungarian production company responsible for Hungarian production has the right register the subsidy application with the National Film Office and to draw the subsidy against the certificate issued by the Film Office.
The most substantial cost acknowledged for the purpose of the film subsidy, i.e. the direct Hungarian film production cost ("Hungarian spend”) may, on the one hand, include the costs or expenditures incurred directly in the books of the Hungarian production company and, on the other hand, the remuneration of the foreign actors and crew members that is not recognized directly in the books of the Hungarian production company but only if these individuals are subject to tax in Hungary on their income deriving from the Hungarian shoot.
As a separate group, we have to mention the costs and expenditures which do not qualify as direct Hungarian film production costs ("Foreign spend”) but may be considered in the base of the 30 percent indirect film subsidy up to one-fourth of the total subsidy. This includes, for example, the remuneration of the foreign persons paying taxes on their Hungarian work abroad.
The changes introduced from 2019 concern all three cost types.
Remuneration of actors and crew members
In the case of film productions registered before 2019, the Act on Motion Picture differentiated between productions in respect of which the foreign actors and crew members working on the Hungarian set concluded contracts with the Hungarian company (meaning that they were paid by the Hungarian production company) and the productions in the case of which there was no Hungarian payer. In this case, the actor was typically in contract with the foreign company ordering the production or the co-production partner as a result of which the costs of the foreign persons were not recognized on Hungarian books. In this case, previously only 50 percent of the foreign actor's pay qualified as direct Hungarian spend. However, at the same time, there was a category under which the pay of a foreign actor or crew member could qualify as direct Hungarian spend to 100 percent, for example, if the foreign person concluded a contract with the Hungarian production company.
From this year, the above described differentiation ceases just like the differentiation between the eligibility of foreign and Hungarian actors and crew members' cost. Actor and crew member pay will be regarded on a standard basis to 100 percent as cost accountable for the purpose of film subsidy but only up to the amount of three million forints! Only 50 percent of the part in excess of this limit will be accountable for the purpose of indirect film subsidy.
An exception from this rule is if the actor or crew member does not pay personal income tax or simplified contribution to public revenues (EKHO) in Hungary but is a payer of small taxpayers' itemized lump sum tax (KATA),small business tax (KIVA),simplified entrepreneurial tax (EVA) or corporate tax.
The legislator's rationale behind the amendment of cost accounting is for the change to represent a restriction only in the case of higher-amount remuneration of typically foreign individuals. It is no doubt that the 50 percent restriction may result in a major cut in the pay of famous Hollywood stars. Looking at the US statistics below, it is clear that with US actor pays the three million forint limit for eligible costs is easy to reach at average pays even in the case of a relatively short film shoot. For example, the base pay of an actor exceeds three million forints in the case of a high-budget film on the 13th day of shooting.
On the practical side, this also means that the change complicates the accounting of film financing substantially as from this year, both payments received by individuals and payments through intermediary companies will have to be considered for the 3 million forint limit. In connection with this, we can expect a revision of the former forms applied by the National Film Office such as, for example, the form for the detailed reporting of non-Hungarian costs in order to be able to manage the calculation of incomes on aggregate basis.
Costs of Hungarian production companies
A further element of the changes from 2019 is the specification of eligible producer costs and the introduction of standard management of these costs. As a result, the many descriptions of producer activities – including, among others, line, co-, executive producers and other producer activities – will have a standard content and a 4 percent threshold value will apply to these for accounting purposes.
However, in the cases where the producers covered in cost control as foreign crew members pay tax in Hungary, they are exempt from this 4-percent threshold but, according to the amendment, the 50 percent restriction above the amount of three million forints applies to them also.
The completion guarantee may not exceed 5 percent of the indirect film production cost or an amount of one hundred million forints in the future either.
* Act II of 2004 on Motion Picture