EUROPEAN COMMISSION. Brussels, 2008.VII.16 C (2008) State aid N202/08 Hungary Hungarian film support schemes 1. SUMMARY

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1 EUROPEAN COMMISSION Brussels, 2008.VII.16 C (2008) 3543 PUBLIC VERSION WORKING LANGUAGE This document is made available for information purposes only. Tisztelt Miniszter Asszony, Subject: State aid N202/08 Hungary Hungarian film support schemes 1. SUMMARY (1) I am pleased to inform you that the European Commission has assessed the Hungarian film support scheme notified by the Hungarian authorities and decided to consider the aid to be compatible with the EC Treaty. The scheme is approved until 31 December 2013 on the basis that the Hungarian authorities will implement any changes that may be required after the expiry of the Commission s Cinema Communication 1. (2) The procedure followed, the description of the different measures within the scheme and the Commission's assessment of them are set out below, as well as 1 Communication from the Commission to the Council, the European Parliament, the Economic and Social Committee and the Committee of the Regions on certain legal aspects relating to cinematographic and other audiovisual works (COM(2001)534 final of 26/9/01,OJ C 43 pp6-17 of 16/2/02); prolonged in 2004 (OJ C 123 pp1-7 of 30/4/04) and 2007 (OJ C 134 p5, 16/6/07). Őexcellenciája Dr GÖNCZ Kinga Asszony Külügyminiszter Bem rakpart 47 H BUDAPEST Commission européenne, B-1049 Bruxelles Belgique; Europese Commissie, B-1049 Brussel België Telefon: 32 (0)

2 the Commission's formal decision. As there are several types of film support, a table of contents has been provided for ease of reference. 2. TABLE OF CONTENTS 1. Summary Table of contents Procedure Description of the measures Objective Legal bases Duration & budget Funding bodies Beneficiaries Types of support...5 Support for film production Eligibility & cultural criteria Tax incentive for production support Operation of the tax incentive Territorial conditions Direct grants for film production Territorial conditions Aid intensity...12 Direct grants for activities other than film production Film plan development Preparation of film production Film distribution Distribution of Hungarian films Distribution of co-productions and art films Support for cinemas Support for art cinemas Support for the screening of art films Support for the organisation of film festivals Support for motion picture publications Assessment Existence of aid Tax deduction available to the film donor Contribution to the film producer from the tax incentive Compatibility Support for film production Film plan development, preparation of film production Support for film distribution Support for film theatres Support for the organisation of film festivals Support for motion picture publications Conclusion

3 3. PROCEDURE (3) The Hungarian film tax incentive was originally introduced in 2004 and was approved under the interim mechanism until end of The Hungarian authorities were informed at the time that modifications would be needed before the scheme could be approved after the expiry of the interim approval. In 2007, the Hungarian authorities had sought to extend the scheme, without proposing any adaptations to the scheme. (4) After informal pre-notification discussions, the Hungarian authorities notified this scheme to the Commission on 21 April On 8 May, the Commission requested clarification on certain aspects of the scheme. The Hungarian authorities replied on 28 May 2008 and provided additional information on 26 June DESCRIPTION OF THE MEASURES 4.1. Objective (5) The primary goal of the scheme is to support and promote the development of the Hungarian film culture. In order to achieve this goal, Act II of 2004 on motion picture (the Hungarian Motion Picture Act) sets out direct and indirect support measures Legal bases (6) The national legal bases for the scheme are as follows: Act II of 2004 on Motion Picture Act XLV of 2006 on the amendment of Act II of 2004 on Motion Picture Act XXXVIII of 2008 on the amendment of Act II of 2004 on Motion Picture Act LXXXI of 1996 on Corporate and Dividend Tax Joint Decree 12/2008. (III.29.) OKM-PM of the Minister of Education and Culture and the Minister of Finance on the detailed rules pertaining to the organisation, operation and procedures of the motion picture trade authority Draft Decree /2008. ( ) of the Minister of Education and Culture on State aid for the film sector other than aid for film production - 3 -

4 4.3. Duration & budget (7) The scheme will be introduced 15 days after this Commission decision and will continue until 31 December (8) As shown in the table below, the annual budget of the scheme is expected to increase in line with general inflation forecasts over its 5.5 year duration: HUF million Total Tax incentive 3,000 3,500 4,000 4,300 4,600 5,000 24,400 Direct grants 3,914 4,373 4,985 5,268 5,538 5,806 29,884 Total 6,914 7,873 8,985 9,568 10,138 10,806 54,284 EUR million Total Tax incentive Direct grants Total (9) The annual budgets for each component of the scheme are set out separately in the sections below describing each component Funding bodies (10) The tax incentive for film production is a fiscal measure financed by the Hungarian Ministry of Finance while the grants under the scheme are provided by the following Hungarian bodies: The Hungarian Motion Picture Foundation; The Hungarian Historic Film Foundation; and The National Cultural Fund. (11) The main funding body responsible for direct granting aid under the scheme is the Hungarian Motion Picture Foundation. The Hungarian Motion Picture Foundation was established by the Government of Hungary and 26 organisations of the Hungarian cinema profession as a private legal person under the responsibility of the Ministry of Education and Culture. The Hungarian Motion Picture Fund as the principal distribution body of direct budgetary sources made available for the field of Hungarian cinematography may grant support for all the measures within the Hungarian film support scheme. (12) The Hungarian Historical Film Foundation arranges sources for preparation of film production and film production activities, mainly in case of historical motion picture. 2 Exchange rate 1 EUR : HUF as at 26 June

5 (13) As part of the motion picture activities set out in the Motion Picture Act, the National Cultural Fund provides support to script development; pre-production; film production, film distribution; organisation of events in the field of motion picture and compilation and publishing of motion picture publications. (14) The two public Foundations and the National Cultural Fund are entirely funded from the State budget Beneficiaries (15) Direct or indirect support may only be awarded to individuals or organisations which are entities registered by the Film Office. Legal entities or companies without a legal personality which are registered in any EEA state must have a base (eg, an agency or a branch) in Hungary by the time the direct or indirect support is paid. (16) In this connection, the Film Office keeps records of: a) film producers and distributors applying for support, workshops and other cinematographic organisations, as well as natural persons who apply for support; b) cinematographic works under preparation and in production to which support has been awarded, as well as cinematographic works to be distributed. (17) This registration requirement does not apply to support which may be given to organisations and institutions that perform film distribution activities only in relation to their education, library and public collection duties, with the exception of public collections with specifically cinematographic professional orientation. (18) Support for film pre-production and film production may only be awarded to an entity producing a film. Support for film distribution may only be awarded to a film distributor Types of support (19) The different activities supported under the scheme are as follows: Film production; Script development; Pre-production of film projects; Film distribution; organising events for the motion picture industry; - 5 -

6 compilation and publishing of motion picture publications. (20) The support for each of the above activities is described in separate sections below. The subsequent assessment is divided into the same sections. Support for film production (21) The support for film production is the most significant part of the budget of the scheme. Two types of support are available under the scheme: a tax incentive; and direct grants from the funding bodies mentioned in section 4.4. (22) The annual budgets for film production support are as follows: HUF million Total Tax incentive 3,000 3,500 4,000 4,300 4,600 5,000 24,400 Grants from - Hungarian Motion Picture Foundation 2,720 3,100 3,600 3,800 4,000 4,200 21,420 - Hungarian Historical Film Foundation National Cultural Fund ,523 Total film production support 8,022 8,913 9,929 10,456 10,976 11, EUR million Total Tax incentive Grants from - Hungarian Motion Picture Foundation Hungarian Historical Film Foundation National Cultural Fund Total film production support Exchange rate 1 EUR : HUF as at 26 June

7 4.7. Eligibility & cultural criteria (23) To be eligible for the support for film production, whether from the tax incentive or from the direct grants, films must: fulfil at least two of the cultural content criteria in paragraph (24); or meet the criteria of a European co-production with a Hungarian producer, as defined in the European Convention on Cinematographic Co-production 4, whose aim is to promote European cultural diversity; and score at least 4 points from categories j) to n) below 5. (24) The cultural content criteria in the first section of the eligibility test for film production support are as follows, with a score of 1 point each: a) The storyline or the underlying work of the motion picture is based on a story (event), which is part of Hungarian or European culture or which is related to the presentation or adaptation of a story (event) which is important from the point of view of history, mythology or religion. b) The storyline or the underlying work of the motion picture contains persons or characters 6 which are related to Hungarian or European culture or which are decisive because of their relation with history, society orreligion. c) The motion picture presents Hungarian or European traditions and customs, or promotes such elements. d) The story of the motion picture is set in a Hungarian or other European scene, or a related cultural environment, or presents a Hungarian or other European settlement (town, landscape, region), or presents typical Hungarian or European cultural landmarks. e) The script or underlying work is based on a literary work or on an adaptation of another art work (products of fine or applied arts, music etc.) with cultural value. 7 4 Council of Europe European Treaty Series No 147, (Entry into force: ) The exact formulation of the eligibility criteria is that each film project must score "at least 16 points in a way that it qualifies for scores at least in four of the categories a) to n)," and are either European co-productions with Hungarian participation or fulfil at least two of the cultural criteria in categories a) to h) set out in paragraph (24). Since all films would achieve the 4 points in criterion i), the effective minimum industrial requirement is 4 points since films could obtain at most 8 points in the cultural criteria section. 6 The persons or characters must be well-known and they must have a substantial role in the film. 7 The adaptation of a "work of art of cultural value" refers to screenplays focusing on paintings, pieces of music, sculptures or any creation implying a genuine expression of art. It would cover, for instance movies like "Girl with a Pearl Earring" or "La Traviatta"

8 f) The storyline or underlying material of the motion picture is centered on an issue which is relevant for Hungarian society or the society of another European country from a cultural, sociological or political point of view. g) The motion picture reflects or presents an important Hungarian or European value - such as cultural diversity, the respect for cultural traditions and family, solidarity, equality of rights, protection of minorities, human rights, tolerance and environmental protection. h) The motion picture promotes knowledge about Hungarian or European culture and identity. (25) The cultural content of all projects is assessed by experts. (26) The second section of the eligibility test awards points for industrial criteria as follows: i) The film product is a motion picture product that creates value as a result of its genre 4 j.) The following contributors to the motion picture include Hungarian citizens or citizens of another EEA country, or non-eea citizens who have received an international film festival award: a. Director b. Producer c. Director of photography d. Script writer e. Leading/secondary actor/actress f. Composer g. Art director /production designer h. Costume designer i. Editor j. Make up designer k. Line producer / production manager l. Post production supervisor (either audio / VFX / DI) 6 points - maximum 1 point after every 2 scores k.) final version of the film in any official EEA language 4 l.) At least 51% of the contributors to the motion picture - not falling under the scope of point j) - are the citizens of an EEA country, or the motion picture is a co-production that does not qualify as a European co-production. 4 m.) The location of the shooting is in Hungary 3 n.) Preparation of film production or post-production in Hungary 3 (27) The points available for categories m) and n) are awarded on a pro-rata basis as explained in paragraphs (28)-(29). (28) Category m): Location of shooting: The points are awarded on the basis of days of principle photography declared in the script or production schedule submitted to the Hungarian Film Office regarding the entire production. If there is at least 1 day shooting in Hungary, the production receives 1 point

9 If the days of Hungarian shooting reach 25% of the total production days, the production receives 2 points. If the days of Hungarian shooting reach 50% or more of the total production days, the production receives 3 points. Examples: Days of Hungarian shooting Total days of shooting Hungarian portion of shooting point % 1 point % 2 points % 3 points Points received (29) Category n): Use of Hungary s cultural resources: The points would be measured on the budgeted costs of pre- or post-production, which are set out in the budget submitted to the Hungarian Film Office regarding the entire production. If there is any cost budgeted for Hungarian pre- or post-production, the production receives 1 point. If the portion of Hungarian pre- or post-production costs reaches 25% of the total pre- or post-production costs (whichever portion reaches the higher rate), the production receives 2 points. If the portion of Hungarian pre- or post-production costs reaches 50% or more of the total pre- or post-production costs (whichever portion reaches the higher rate), the production receives 3 points. Examples: Portion of Hungarian pre-productions Portion of Hungarian post-productions Higher rate to consider 0% 5% 5% 1 point 50% 0% 50% 3 points 0% 100% 100% 3 points 24% 30% 30% 2 points 4.8. Tax incentive for production support (30) The scheme distinguishes two types of productions in terms of tax benefits. Points received Films produced on order (production services): productions prepared in Hungary with the involvement of an undertaking which is liable to Hungarian tax but which does not qualify as a film producer

10 . Films not produced on order (co-productions or Hungarian films): productions produced by an undertaking having the status of a film producer or co-producer with a base in Hungary 8. (31) Both types of films have to meet the cultural criteria in section 4.7 to be eligible for the tax benefit. However, the first type of film is not eligible for direct grants from any of the funding bodies. (32) The tax benefit is effectively provided to the film donors based on up to 20% of the production budget. The tax benefit can be claimed if the film donor obtains a tax certificate from the National Film Office. (33) The tax certificate is issued after completion of the film production and after the expenditure has been audited. In the tax certificate the name of the film donor and the qualifying amount of tax benefit is specified. The film donor cannot claim the same tax benefit twice for the same donation to a film. The tax benefit is not available to anyone other than the film donor Operation of the tax incentive (34) This measure aims to encourage donors to contribute to the financing of eligible film productions. It allows corporate donors to deduct their donation to a film production from both their taxable income and from their tax liability. The Hungarian authorities regard this as a general measure as it is open to any business with a Hungarian tax liability. The maximum eligible donation is 20% of the Hungarian expenditure of the film production budget when the Hungarian production costs are 80% or more of the total production budget and 25% when they are below 80% of the total production budget. (35) The financial positions of the film producer and of a film donor under the scheme are illustrated in the example below: Example: A film production company produces a film with a total production budget of 1 million, % of which is Hungarian expenditure. A film donor with taxable profits of 2.35 million and which is liable to Hungarian corporation tax (at 16%) contributes 20% of the production budget. Since less than 80% of the film production costs are incurred in Hungary, the maximum eligible contribution the donor may make is 25% of 799,999.9, ie 200,000. Financial position of the producer: Hungarian production costs [H] 799,999.9 Non-Hungarian production costs [E] 200,000.1 Total production budget [H+E] 1,000,000 Maximum donor's contribution eligible [D] (= 25% H, since H is less than 80% of the ( 200,000) 8 As defined in paragraph (15)

11 total production budget) Remaining finance to be found by the producer 800,000 Financial position of the donor: Profit before donation [P] 2,350,000 Less: Donor's contribution to film [D] ( 200,000) Profit before tax [PBT] 2,150,000 Reduced tax liability [RT] (16% x PBT) 344,000 Less: Tax deduction for donation [D] ( 200,000) Tax payable [T] (RT-D) 144,000 The overall tax saved by the donor is therefore 232,000 (since the tax payable without having made the donation would have been 16% x 2.35 million, ie, 376,000). (36) Any corporate investor, including undertakings active in other economic sectors, is eligible for the tax benefit. The tax benefit allows for a deduction of the eligible amount both from the taxable income, and from the tax liability of the undertaking concerned. The maximum deduction is limited to 70% of the corporate income tax liability in any year. If the payment made to the producer is higher than this amount then the unused tax benefit can be carried forward for three subsequent tax years. If the donor is not able to utilise the tax benefits within this time frame, the tax benefit is ultimately lost. (37) Consequently, the most likely 'donors' to take advantage of the scheme are profitable businesses liable to Hungary's 16% corporate tax rate. Theoretically, it would also be possible for a 'donor' to be a company related to the film production company which receives the contribution, provided that the related company is subject to corporate tax in Hungary. At the same time, the Hungarian transfer pricing regulations require taxpayers to conduct relations with related parties at arm s length. This prohibits the producer and the donor from transferring gain-related benefits without consideration. (38) The contribution to the film production company made by the donor must be a free transfer of asset that creates a loss for the provider and a gain for the recipient. Consequently, the producer cannot provide marketing or PR services or any other consideration (eg, distribution rights) in return for the donation. In addition, the donor cannot form any right to appear as sponsor in the film, or make claims with regard to the promotion of the film, and is not entitled to any share of the distribution revenues

12 Territorial conditions (39) The qualifying expenditure refers to the expenditure in Hungary on both 'abovethe-line' (ie, including screenplay rights and salaries for film producers, principal cast, cinematographer and director) and 'below-the-line' film production expenditure. Expenditure 'in Hungary' in respect of salaries requires that the individual pays personal income tax in Hungary for the salaries to be included in the qualifying expenditure. (40) The tax incentive is based on a certificate of the qualifying expenditure which is issued for a given film production Direct grants for film production (41) The beneficiaries of direct support for film production may be any undertakings which meet the general conditions mentioned in paragraph (31). (42) Films eligible for support under the scheme are divided into the categories of so-called Hungarian films, co-productions with Hungarian participation ; as well as other films with Hungarian participation and other films which qualify as European co-productions based on an international agreement. This classification does not impose any additional requirements on the films eligible for support. (43) As mentioned in paragraph (31), so-called films produced on order, which do not involve an undertaking having the status of film producer with a base in Hungary, are not eligible for direct grants for film production Territorial conditions (44) Under the Hungarian Motion Picture Act, recipients of direct grants for film production are required to spend at least 60% of the grant in Hungary. The funding body is entitled to specify a higher percentage, though this may not exceed 80% of the grant Aid intensity (45) In principle, the maximum cumulative aid intensity, including both direct support and the tax incentive, is 50% of the film production budget. However, in the case of low budget films and difficult films, higher aid intensity thresholds apply. (46) In the case of feature films, full-length documentaries, popular scientific and animated films that are intended for theatrical distribution and which have a budget of less than HUF 237 million 9 (EUR 1.01 million); or in the case of co- 9 These thresholds will rise in line with the general inflation rate in Hungary over the period of operation of the scheme. The relevant figures are published each year before 31 January by the Hungarian Minister of Culture in the form of an information notice

13 productions with Hungarian participation, less than HUF 467 million Error! Bookmark not defined. (EUR 1.99 million); the intensity of the aid may be up to 90% of the film production budget or, in the case of co-productions, 90% of the of the contribution of the Hungarian producer. (47) In the case of documentaries, animated films, scientific and educational films, experimental or short films (ie, with the exception of feature films that are intended for commercial theatrical distribution), the cumulative aid intensity may rise to 100% of the film production budget, or 100% of the Hungarian contribution in the case of co-productions with Hungarian participation, provided that the funds required to produce such a film contributing to cultural diversity cannot be provided in any other manner. (48) If the original version of a film is in Hungarian and it is probable that the film production budget will not be recovered from any form of distribution, the cumulative aid intensity may extend to 90% of the film production budget (or 90% of the Hungarian contribution in the case of a co-production). If at the end, the budget of the motion picture turns out to be covered by revenues from any form of distribution, the amount in excess of the production costs is to be reimbursed to the granting authority. In case there are several granting authorities, the reimbursement is to be done in a proportionate manner to the direct support received. Direct grants for activities other than film production Film plan development (49) The Motion Picture Public Foundation (MPPF) and the National Cultural Fund (NCF) of Hungary may provide direct grants for film plan development, in accordance with the Motion Picture Act and the Draft Decree of the Minister of Education and Culture on the rules of State subsidies for non-film production related activities in the field of motion picture. (50) The budget of the measure by granting authority is shown in the following table: HUF/EU Total R million MPPF /0,52 130/0,55 150/0,64 155/0,66 160/0,68 165/0,7 880/3,74 NCF 46/0,2 48/ 0,2 51/0,22 55/0,23 58/0,25 60/0,26 318/1,36 (51) Film plan development is defined in the Motion Picture Act as the total of research, production, planning and organisation work aimed at the creation, merchantability and sale, feasibility and later realisation of film plans and scripts. 10 The figures concerning the Motion Picture Public Foundation include both film plan development and preparation of film production

14 (52) According to the information provided by the Hungarian authorities, the objective of the measure is to support the development of film plans in connection with high quality, thoroughly prepared both in artistic and technical terms motion pictures serving the development of the Hungarian and European film culture, which are expected to command success both in the domestic and international film market. (53) The beneficiaries of the measure are Hungarian film producers, ie, film producers having a base in Hungary, provided that the majority of the managers are from the European Economic Area, or from countries signatories to the European Convention on Transfrontier Television of the Council of Europe, and provided that such persons hold majority control over the undertaking in question. The Hungarian authorities have confirmed that in line with the general conditions mentioned in paragraph (15), the requirement to have a base (eg, an agency or a branch) in Hungary is only enforced upon the payment of the aid. (54) The eligible costs include: Option fees and other royalties required for screenplay development; Scriptwriter remunerations, honoraria; Research agency fees and research-related costs. (55) As a general rule, the aid intensity amounts up to 50% of the eligible costs. In exceptional cases, the aid intensity may amount up to 80% of the eligible costs, where the financing of the film plan development activity would not otherwise be possible for capital-short production companies. (56) The draft decree on non-film production related activities foresees that when determining the aid intensity level, all State subsidies available in the field of motion picture must be taken into consideration, taking into account all granting authorities. (57) The maximum aid amount is HUF 7.5 million (EUR ). (58) The aid is provided on the basis of calls for application published by the respective granting authorities. The successful applications are selected by the professional committees of the granting authorities which are composed of film professionals and value the applications with regard to their artistic and technical quality, and their contribution to Hungarian and European film culture. In order to qualify for support, the projects have to meet at least two of the cultural criteria described in paragraph (24) above (59) In the case of the Motion Picture Public Foundation, the decision on granting support is taken by the Board of the Foundation, on the basis of the recommendation of the relevant professional committees respectively for feature films, animation films and documentaries. In the case of the National Culture Fund, the decision is taken by the Motion Picture Committee

15 4.11. Preparation of film production (60) The Motion Picture Public Foundation (MPPF), National Cultural Fund (NCF), and the Hungarian Historical Film Public Foundation (HHFPF) may provide direct grants for the preparation of film production, in accordance with the Motion Picture Act and the Draft Decree of the Minister of Education and Culture on the rules of State subsidies for non-film production related activities in the field of motion picture. (61) The budget of the measure by granting authority is shown in the following table: HUF/EU Total R million MPPF /0,52 130/0,55 150/0,64 155/0,66 160/0,68 165/0,7 880/3,74 NCF 46/0,2 48/ 0,2 51/0,22 55/0,23 58/0,25 60/0,26 318/1,36 HHFPF 13/0,06 13/0,06 13/0,06 15/0,06 17/0,07 18/0,08 89/0,39 (62) Film preparation is defined in the Motion Picture Act as author s and organisational activities aimed at ensuring the material, technical and organisational conditions for film production, preceding the start of producing films. (63) According to the information provided by the Hungarian authorities, the objective of the measure is to support the preparation of film production activities in connection with high quality, thoroughly prepared both in artistic and technical terms motion pictures serving the development of the Hungarian and European film culture, which are expected to command success both in the domestic and international film market. (64) The beneficiaries of the measure are Hungarian film producers, ie, film producers having a base in Hungary, provided that the majority of the managers are from the European Economic Area, or from countries signatories to the European Convention on Transfrontier Television of the Council of Europe, and provided that such persons hold majority control over the undertaking in question. The Hungarian authorities have confirmed that in line with the general conditions mentioned in paragraph (15), the requirement to have a base (eg, an agency or a branch) in Hungary is only enforced upon the payment of the aid. (65) The eligible costs include: Option fees and other royalties required for screenplay development; Agency fees and honoraria related to film plan development; Research agency fees and research-related costs; Fees and expenses related to casting; Fees and expenses related to the compilation of the motion picture budget; 11 The figures concerning the Motion Picture Public Foundation include both film plan development and preparation of film production

16 Fees and expenses related to the planning, preparation and organisation of the motion picture s financing; Fees and expenses related to the search of co-producers, financiers and sponsors and to negotiation and contract execution with them; Fees and expenses related to the preparation and planning of the production schedule; Fees and expenses related to marketing and distribution planning (determining the target market and target viewers, cooperation with Hungarian, European and other foreign distributors, presentation at festivals, etc.); Fees and expenses related to pilot or demo production, test shooting; Fees and expenses related to location search; Fees and expenses related to the preparation of director and cinematographer concepts, production and custom design and the design of other creative components; Operating expenses related to the film plan development (maximum p to 8% of the subsidy amount, evidenced by invoices, e.g. current expenses, telephone/fax/internet bills, wages, stationery ); In the case of animated films: fees and expenses related to graphical research, pilot and storyboard preparation. (66) Both film plan development and preparation of film production cover costs related to pre-production and the dividing line between the two types of measures is not always clear. In principle, the direct support for film production may also include support for film plan development. However, granting authorities may not provide support for the same project and the same eligible costs under both measures. (67) As a general rule, the aid intensity amounts up to 50% of the eligible costs. In exceptional cases, the aid intensity may amount up to 80% of the eligible costs, where the financing of the preparation of film production would not otherwise be possible for capital-short production companies. (68) The draft decree on non-film production related activities foresees that when determining the aid intensity level, all State subsidies available in the field of motion picture must be taken into consideration, taking into account all granting authorities. (69) If the film subsequently goes into production, the costs related to pre-production activities are included in the production budget. In this case, any State aid provided to such pre-production costs is taken into account for the purpose of determining the maximum aid intensity in the case of film production activities, as described in paragraphs (45) to (48) above. (70) The maximum aid amount is HUF 7.5 million (EUR )

17 (71) The aid is provided on the basis of calls for application published by the respective granting authorities. The successful applications are selected by professional committees (professional colleges in the case of the Motion Picture Public Foundation and the National Culture Fund, the Board in the case of the Hungarian Historical Film Foundation) which are composed of film professionals and value the applications with regard to their artistic and technical quality, and their contribution to Hungarian and European film culture. (72) In the case of the Motion Picture Public Foundation, the decision on granting support is taken by the Board of the Foundation, on the basis of the recommendation of the relevant professional committees respectively for feature films, animation films and documentaries. In the case of the National Culture Fund, the decision is taken by the Motion Picture Committee. (73) In the case of the Hungarian Historical Film Foundation, the decision is taken by the Board of the Foundation. The Hungarian Historical Film Foundation provides support in line with its core objectives defined in the founding act of the foundation, which are the following: Supporting the research and the presentation in films of events decisive for the fate of Hungarian people, which have not been explored; Exploring the events leading to the 1956 revolution, the revolutionary events, and the historical tendencies following or despite its pull down; Presenting, by means of feature films and documentaries, of the core issues of the life of the Hungarian population living beyond the borders, or in emigration, and the changes which have occurred in their life style over the past half decade; Supporting the preservation, maintenance and adaptation of film documents concerning present historical evolutions and of materials prepared and collected by non-professional film authors Film distribution (74) The Motion Picture Public Foundation (MPPF) and the National Cultural Fund (NCF) of Hungary may provide direct grants in the field of film distribution, respectively for the distribution of Hungarian films, the distribution of coproductions with Hungarian participation, and the distribution of art category foreign films. (75) The budget of the measure by granting authority is shown in the following table: HUF/EUR Film types Total million MPPF Hungarian films 95/0,4 105/0,45 120/0,51 125/0,53 130/0,55 135/0,57 710/3,1 Co-productions, 90/0,38 100/0,43 110/0,47 115/0,49 120/0,51 125/0,53 660/2,81 art films NCF All films 56/0,24 58/0,25 61/0,26 66/0,28 69/0,29 72/0,31 382/1,

18 (76) The beneficiaries of the measures for film distribution are film distributors, i.e. according to the Motion Picture Act, business companies or any other organisations engaged in the distribution of films on a commercial basis. (77) The eligible costs include print production costs, advertising and publicity costs Distribution of Hungarian films (78) Hungarian feature films with a minimum length of 70 minutes for cinema release in Hungary, passing the cultural test foreseen in the Motion Picture Act are eligible for support under the measure concerning the distribution of Hungarian films. (79) When defining the maximum aid intensity and the maximum aid amount which may be awarded for the distribution of Hungarian films, distinction is made between the following categories of films: Category 1: films that are difficult to distribute and can be expected to attract a small audience; Category 2: artistically valuable films expected to draw moderate interest; Category 3: culturally relevant films addressing a wider audience. (80) In the case of category 3, the maximum aid intensity amounts to 50%. In the case of categories 1 and 2, considered by the Hungarian authorities to be difficult films, the maximum aid intensity amounts to 90%. This is because, according to the Hungarian authorities, these types of films are more intellectually challenging and face greater financial difficulties as they are expected to draw only a small audience. (81) The aid amount varies between HUF 3 million (EUR ) and HUF 10 million (EUR ) depending on the category of the film, the number of film copies produced, and the number of viewers. The parameters for determining the amount of aid are shown in the following table: Category Minimum copies First instalment Terms and amount of subsequent financing 1 2 HUF 1,5 million / EUR viewers HUF 1,5 million / EUR HUF 3 million / HUF 4 million / EUR viewers EUR HUF 5 million / EUR Above viewers HUF 5 million / EUR (82) The Hungarian authorities take the view that the measure for the distribution of Hungarian films is necessary due to the nature of the market, characterised by an isolated linguistic environment and comparatively lower audience shares than the European average. (83) Hungary has a population of 10 million. Annually, 11 million tickets are sold overall in cinemas, and out of this 1.5 million for Hungarian films. Theatres showing art films host 1 million viewers per year. Hungarian films are usually not distributed in cinemas outside Hungary, except for international coproductions. According to the information provided by the Hungarian

19 authorities, on average, ticket sales cover only one-sixth or one-seventh of the production costs of a Hungarian film Distribution of co-productions and art films (84) Co-production feature films with Hungarian participation passing the cultural test foreseen in the Motion Picture Act, or art category foreign films in line with the relevant criteria of the Motion Picture Act are eligible for support under this measure. (85) In line with the relevant provisions, art classification is provided by the National Film Office to any film production to be distributed which: a) contributes to the development of Hungarian, European or universal audiovisual culture through its art value; b) has been granted an internationally recognised festival award defined in the list published annually by the Office; c) is considered significant and of high standard from educational or cultural aspect by the Film Profession Committee. (86) The maximum aid intensity is 50%. The maximum aid amount is HUF 2 million (EUR 8.400). HUF 1 million is provided in the case of at least 2 film copies, and additional funding is provided depending on the number of viewers Support for cinemas (87) The Motion Picture Public Foundation (MPPF) of Hungary may provide direct grants for film theatres, in the form of operating subsidy for art cinemas, or selective support for screening art films. (88) The budget of the Motion Picture Public Foundation is shown in the following table: HUF/EUR Total million Art cinemas 220/0,94 230/0,98 240/1,02 250/1,06 260/1,1 270/1, /6,26 Art films 15/0,06 15/0,06 17/0,07 18/0,08 19/0,08 20/0,09 104/0,44 (89) In addition, the National Cultural Fund (NCF) may also support the screening of are movies, as part of its budget for the distribution of films Support for art cinemas (90) The beneficiaries of the operating support may be cinemas or cinema rooms having received an art classification according to Decree 46/2007 of the Minister of Education and Culture on the conditions for the classification of art cinemas and the rating of motion pictures by age limit. Film theatres with 6 screens or more are not eligible for support

20 (91) Upon request by the operator of the cinema, the National Film Office grants art category classification to single-screen cinemas or, in the case of cinemas with several screens, to specific cinema rooms which meet the relevant technical and registration conditions, and which cover at least 60 % of their publicly announced programme performances and exclusive film club showings by quarter year and by screen and at least once a day throughout 80 days by means of screenings starting between and 22.00: a) art category motion pictures; b) Hungarian films or co-produced motion pictures with Hungarian participation meeting the cultural test foreseen in the Motion Picture Act; c) motion pictures constituting part of the national film estate, or motion pictures that received supported rating from the Motion Picture Public Foundation of Hungary; d) motion pictures borrowed from the National Film Archives. (92) The cinemas having received the art classification receive a basic funding of HUF 0.4 million per quarter (HUF 1.6 million or EUR 6750 per year). Additional funding may be granted depending on the number of viewers, if it exceeds The parameters of the funding are shown in the following table: Art movie screen in the countryside Art movie screen in Budapest Base amount of a grant (HUF/EUR per year) 1.6 million / million / 6750 Condition of a grant (min. number of viewers/quarter) Grants available based on the number of viewers (minimum average price of a ticket: HUF 350) Extent of a grant as of 1001 viewers (HUF/EUR/ viewer) Maximum amount to be granted (HUF/EUR/quarter) / / / /1850 Maximum amount to be granted (HUF/EU R/year) 5.12 million/ 21, million/ 14,200 (93) According to the Hungarian authorities, without state subsidies art film theatres would operate with a loss. The average Budapest projection room has 100 seats, sells tickets at average HUF 500 (EUR 2) and operates at 20 percent average capacity. Projection rooms with shows every day have 40 viewer a day on average, and have an average revenue of HUF 20,000/day (EUR 80). Income from ticket sales per year comes to HUF 7 million (EUR 8000). The average cost of a room is HUF 10 million (EUR 40000) per year. Ticket revenues are charged a 43 percent loan fee, operators pay a rental fee, wages and related social contributions, and utility bills (heating, lighting, electricity). Art movie theatres outside Budapest have more seats, but due to lower ticket prices their revenues are lower and they have higher overhead costs. The average costs of a Budapest projection room amount to HUF 10 million (EUR 42,200)

21 Support for the screening of art films (94) Support for the screening of art films may be granted by the Motion Picture Public Foundation and the National Cultural Fund. (95) The beneficiaries of the measure are cinemas which show Hungarian films or art category films on at least 80 publicly advertised occasions per quarter. Cinemas having received art classification are not eligible for support under the present measure. (96) The measure subsidises the costs directly related to the screening of the films (film rental fees, advertising costs, film transport costs). The maximum aid intensity is 50%. The maximum aid amount is HUF 2 million (EUR 8440), granted for 160 performances. This means that a maximum of HUF 12,500 (EUR 53) may be granted per screening. (97) According to the Hungarian authorities, the average costs of a projection room amount to HUF 10 million (EUR 42,200) in respect of 400 performances per year Support for the organisation of film festivals (98) The Motion Picture Public Foundation (MPPF) and the National Cultural Fund (NCF) of Hungary may provide direct grants for the organisation for motion picture events. (99) The budget of the measure by granting authority is shown in the following table: HUF/EUR Total million MPPF 97/0,41 107/0,45 125/0,53 131/0,56 137/0,58 143/0,61 740/3,14 NCF 32/0,14 34/0,14 36/0,15 39/0,17 40/0,17 42/0,18 223/0,95 (100) The measure aims at supporting events, programmes and festivals that have traditions, guarantee significant international participation and have a cultural programme (e.g. Mediawave International Contemporary Art Festival, Titanic International Art Festival, Kecskemét International Animation Film Festival, CineFest International Festival of Young Filmmakers). (101) The eligible costs are: projection room rental fees, remuneration of artists and the jury, advertising and publicity costs, costs of programme bulletins and publications, accommodation and travel costs of guests, transport costs. (102) According to the information provided by the Hungarian authorities, the film festivals supported are usually run by non-profit organisations. The average budget of large festivals (budget over HUF 10 million or EUR 42,200) is HUF 60 million (EUR 240,000), average support is HUF 9 million (EUR 36,000). The average budget of smaller festivals (budget below HUF 10 million or EUR 42,200) is HUF 1-2 million (EUR ), average support is HUF (EUR 1200)

22 (103) The intensity of the direct grants made available to such events is generally below 50%. However, according to the Hungarian authorities, in certain important cases, an aid intensity exceeding 50% may be justified, due to the significance of an event, or due to their nature (e.g. festivals organised for alternative genres, a festival offering a selection of short films or documentaries, or a festival presenting difficult films, etc.). As a rule, such festivals can obtain less financing in the form of sponsorship, or other marketbased mechanisms Support for motion picture publications (104) The Motion Picture Public Foundation (MPPF) and the National Cultural Fund (NCF) of Hungary may provide direct grants for the compilation and publishing of motion picture publications. (105) The budget of the measure by granting authority is shown in the following table: HUF/EUR Total million MPPF 60/0,26 70/0,3 80/0,34 85/0,36 90/0,38 95/0,4 480/2,04 NCF 10/0,04 11/0,05 12/0,05 14/0,06 16/0,07 17/0,07 80/0,34 (106) The measure aims at supporting the compiling, printing and publishing of studies, books and publications aimed at introducing the outstanding filmmakers of the Hungarian and universal cinematography (e.g. the periodicals Mozinet, Filmvilág, Pergő Képek, Metropolis, or the website magyar.film.hu.). (107) According to the information provided by the Hungarian authorities, these publications could not be compiled without State aid as their issuance generates loss. The market cannot support this activity, but it is one of the traditional activities of Hungarian film culture and plays an important role both in the training of future film experts and in the dissemination of the values of the Hungarian and universal film culture. (108) The subsidies cover printing costs, royalties, editing, translation and advertising costs. The maximum aid intensity is 80%. In 2007, the highest aid amount, HUF 17,5 million (EUR 73,800) was provided to the Filmvilág Foundation, for the publication of the periodical Filmvilág throughout the year. 5. ASSESSMENT 5.1. Existence of aid (109) According to Article 87(1) EC, save as otherwise provided in the Treaty, any aid granted by a Member State or through State resources in any form whatsoever, which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall be incompatible with the common market, in so far it affects trade between Member States

23 (110) All the funds used to provide the support under this scheme are derived from the State budget or tax revenues. The funding bodies are either public bodies or entirely funded from the State budget. Consequently, State resources are involved in the scheme. (111) Since the beneficiaries of the direct grants available under the scheme are natural or legal persons in the audiovisual sector, this aspect of the scheme is selective. (112) The existence of aid in the case of the tax incentive has to be assessed in the case of both the film donor and the film production company which receives a donation as a result of the tax incentive Tax deduction available to the film donor (113) State resources are clearly involved since the Hungarian Finance Ministry suffers a loss of fiscal revenue as a result of the scheme. However, the Hungarian authorities consider that the tax deduction available to film donors should be considered to be a general measure because any company can be a donor. They have also provided calculations showing that taking into account factors such as inflation, the cost of capital of the donor and the time value of the donation, there is effectively no advantage to the donor under the scheme. On this basis, they argue that the tax deduction available to the film donor is not State aid. (114) In order to ascertain whether the scheme constitutes aid within the meaning of Article 87(1) of the EC Treaty, the Commission must assess whether the measure favours certain undertakings or the production of certain goods by granting a selective advantage. Moreover, such a selective advantage must distort or threaten to distort competition, being granted through State resources. It must also be capable of affecting trade between Member States. These four criteria being cumulative, it is sufficient that the scheme does not meet one of them in order to establish that the scheme does not constitute State aid. (115) It could be argued that there is de facto selectivity in respect of the film donors since only profitable companies are likely to have an interest in being a 'film donor'. In particular, the overall tax deduction cannot be more than 70% of their corporate tax liability in a given year. To obtain the full tax benefit in the same year, the profit before tax (after the donation) must exceed 116% of the contribution made to the film. (116) The scope for profitable companies to be the main direct beneficiaries is not considered to make the scheme selective. The Commission notes that those most likely to take advantage of any available tax deductions are generally the most profitable eligible entities. (117) In this case, no minimum donation is required, which enables small enterprises to participate in the scheme. A small company would probably donate less than a large one but would also have less taxable income and less tax liability