EUROPEAN COMMISSION. Brussels, 16/07/2008 C (2008) State aid N233/08 Latvia Latvian film support scheme 1. SUMMARY

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1 EUROPEAN COMMISSION Brussels, 16/07/2008 C (2008) 3542 PUBLIC VERSION WORKING LANGUAGE This document is made available for information purposes only. Dear Sir Subject: State aid N233/08 Latvia Latvian film support scheme 1. SUMMARY (1) I am pleased to inform you that the European Commission has assessed the Latvian film support scheme notified by the Latvian 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 Latvian authorities will implement any changes that may be required after the expiry of the Commission s Cinema Communication 1. 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). Viņa ekselence Artis PABRIKA kungs Ārlietu Ministrs Brīvības bulvāris 36 LV-1395 Rīga Commission européenne, B-1049 Bruxelles Belgique; Europese Commissie, B-1049 Brussel België Tālrunis: (0)

2 2. PROCEDURE (2) The Latvian authorities notified this scheme to the Commission on 13 May 2008 and provided additional clarification on 18 June 2008 and 20 June DESCRIPTION 3.1. Objective, legal basis, budget & duration (3) The scheme aims to support the development, production and distribution of national films and international co-productions. (4) The national legal bases for the scheme are as follows: Draft Regulation "Regulations on the granting of State budget financing to film projects and film culture projects"; Law on State Budget 2008; and Regulations of the National Film Centre on film project competitions. (5) The scheme is due to start on 1 August 2008, though the Latvian authorities have undertaken not to make payments under the scheme, other than under the de minimis rules, until they have received the approval from the Commission contained in this letter. The scheme will continue until 31 December (6) The Latvian authorities have also undertaken to implement any changes that may be required after the expiry of the Commission s Cinema Communication, and to notify the Commission of any such changes. (7) The overall budget of the scheme for the period of just over five years is LVL million (EUR million 2 ). The annual budget increases as follows during the period, mainly reflecting the general Latvian inflation rate of 15%: Year LVL millions EUR millions Totals Conversion based on an exchange rate of EUR 1 : LVL on 19 June 2008.

3 (8) The proportions allocated to the various elements of the support scheme are intended to remain constant throughout the period, even though the annual amounts increase Funding body (9) The main funding body responsible for granting aid under the scheme is National Film Centre of Latvia (NFC). The NFC is a State Agency under the Ministry of Culture of the Republic of Latvia responsible for implementation of State cultural policy in the field of film culture. According to NFC s Regulations, the main functions of the NFC include facilitation of Latvian film and film culture development, facilitation of accessibility of Latvian film and film culture in Latvia, promotion of Latvian film abroad and participation at international film events. The NFC is funded by the State budget. The NFC reports to the Minister of Culture on the results of its work and activities Types of support (10) The main objective of the scheme is to support and promote the development of Latvian film culture. For this purpose, support is granted for: Script development, development and production of feature, documentary and animation films of cultural, historical, innovative value for Latvia; Development and production of international co-productions and international collaboration in the field of film; Distribution of Latvian and European films, promotion of Latvian films and of Latvian film culture in Latvia and abroad; Educational and informational activities on Latvian film culture, further training and education of Latvian film professionals; Other activities developing the film landscape of Latvia. (11) The notification relates to the following categories of support: script support, development and production support, distribution support, co-production support, co-financing to film projects supported by European Union public funds and Eurimages, and the miscellaneous support described in paragraph (18). (12) Script support is allocated for development of full length feature and animation films. (13) Development support is allocated for the development of feature film, animation film, and documentary film projects, and is based on the presented plan for development work as well as the budget.

4 (14) Production support is allocated to independent production companies for the production of full-length feature films (65 minutes and more), short feature films, animation films, and documentary films. (15) Co-production support is allocated to independent production companies for the production of feature films, animation films and documentary films that are international co-productions (16) Co-financing support to film projects that have received funding from European public funds, such as MEDIA, and Eurimages is allocated to independent production companies for the development or production feature films, animation films and documentary films that have received funding from the afore mentioned European funds. (17) Distribution of Latvian and European films in Latvia and the production of release prints of films. (18) Miscellaneous support is allocated by the NFC for: Film festivals and forums in Latvia; Seminars, courses and other educational and training activities in Latvia; Participation of film professionals at film festivals and markets abroad; Further education and training of Latvian film professionals abroad. (19) The aid takes the form of direct grants. Every project is assessed by experts and priority is given to the projects that present high artistic and innovative values Beneficiaries (20) The beneficiaries of the scheme for all types of support can be legal bodies who are film producers or film distributors. At the time of payment, they must be registered in the Latvian Commercial Register, either as a Latvian company or as the branch or agency of a foreign enterprise. The beneficiaries cannot be broadcasting companies and more than 25% of the beneficiaries core capital or votes cannot belong to the state, a local authority, a broadcasting company or a local government s limited liability companies. (21) The Latvian authorities estimate that there will be between 11 and 50 beneficiaries under the scheme Eligibility criteria (22) The following projects are not eligible for support under the scheme: Projects that have already been finalised; Amateur film projects;

5 Television show and programme projects; Commercials, industrial film projects and film projects that are intended to be part of another non- cinematographic work; Pornographic film projects or projects that excessively propagate violence or insult human dignity Cultural criteria (23) The cultural content of all projects is assessed by the NFC. To qualify for the production support scheme of the NFC, the film needs to meet at least three of the following criteria: The screenplay on which the film is based is mainly set in Latvia, or in another Member State of the European Union, or in a State that is party to the Agreement establishing the European Economic Area, or in Switzerland; At least one of the principal characters is connected with the Latvian culture or Latvian language area; The screenplay on which the film is based is mainly written by a Latvian speaking author or by an author who permanently lives in Latvia; The screenplay on which the film is based is an adaptation of an original Latvian literary work; The main theme of the film addresses cultural, social, political and/or historical issues relevant to Latvian population; One of the final original versions of the film is in the Latvian language 3 ; 3.7. Territorial conditions (24) At least 65% of the public funding for script development, development and production of feature, documentary and animation films should be spent in the Republic of Latvia. (25) For other types of support covered by the scheme, there are no quantitative requirements which oblige the recipient to spend the support in Latvia Aid intensity (26) In general, the maximum cumulative aid intensity under the scheme is 50%. However, the Latvian authorities allow higher aid intensities for difficult and low-budget feature, documentary or animated films. (27) The maximum cumulative aid intensity from different public financing sources is: 3 Only in the case of co-productions where one of the co-producers is a Latvian producer

6 90% for low-budget films and low-budget co-production films which fulfil the criteria of the European Convention on Cinematographic Co- Production 4, whose aim is to promote European cultural diversity, 80% for difficult films. (28) The Latvian authorities consider that a low-budget film 5 is a film with a production budget less than or equal to: LVL 600,000 (approx EUR ) for full-length feature films; LVL 1,000,000 (approx EUR 1, ) for full-length animation films; LVL 700,000 (approx EUR ) for full-length feature co-productions. LVL 100,000 (approx EUR ) for short-length feature and animation films; LVL 80,000 (approx EUR ) for documentary film. (29) The Latvian authorities also consider that a difficult film is one with little prospect of commercial success which has two or more of the following characteristics: Has mainly Latvian dialogue; Story focuses on Latvian themes 6 ; Story focuses on Latvian history and/ or culture; Is a highly artistic film and/ or uses experimental or innovative film language; Is a film for children and/or young people based on an original script by Latvian (or permanent residents of Latvia) authors. 4. ASSESSMENT 4.1. Existence of aid (30) 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 4 Council of Europe European Treaty Series No 147, (Entry into force: ) These thresholds for the definitions of low- budget films may need to be increased as a result of inflation. If there is such an increase in inflation, the adjusted low-budget film thresholds will be approved by amendments to the regulations on state support to Latvian film and film culture projects by the Cabinet of Ministers of the Republic of Latvia. 6 The market for Latvian films is described in paragraphs (54) to (58). According to the Latvian authorities, films which focus on Latvian themes are unlikely to be made since they would only be of national interest and usually attract a very limited audience, even in Latvia.

7 certain undertakings or the production of certain goods shall be incompatible with the common market, in so far it affects trade between Member States. (31) All the funds used to grant the aid 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. (32) The scheme is selective in nature as the only recipients of the support are film producers or film distributors. Accordingly, the State favours certain undertakings and the production of certain goods and therefore the scheme threatens to distort competition in the EU. (33) Since film productions are traded at an international level, the financial advantage granted to the beneficiaries under the different types of support within the scheme could affect trade between Member States. (34) Consequently, the different types of support under the scheme constitute State aid within the meaning of Article 87(1) EC. The compatibility of the aid therefore has to be assessed. (35) Although the miscellaneous support described in paragraph (18) falls below the de minimis threshold, the Latvian authorities prefer not to have to meet the obligations of the de minimis rules. The types of activities supported (film festivals, film education/research and conservation of film heritage) are unlikely to be economic activities in the Latvian context 7. Accordingly, the funds given for miscellaneous support under the scheme probably do not constitute State aid within the meaning of Article 87(1) EC. However, even if any of them were considered to be economic activities, they are regarded by the Latvian authorities as being essential for the support of Latvian film culture and this is assessed in section Compatibility (36) The Commission s Cinema Communication 8 provides special rules on assessing State aid to cinematographic and other audiovisual works under Article 87(3)(d) of the EC Treaty. The scope of the Cinema Communication includes all kinds of audiovisual products distributed by multiple distribution channels. Accordingly, the Cinema Communication is applicable to the audiovisual productions which will be supported by the scheme and can be applied by analogy to the development of these productions. 7 For the Latvian authorities' description of the national context of film culture, see paragraphs (54) - (58). 8 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) until 31 December 2009, at the latest.

8 (37) The criteria of the Communication can also serve as a reference for assessing the compatibility of the scheme's support for the promotion and distribution of films with the State aid rules of the EC Treaty. However, given that promotion and distribution activities do not form part of the production of films, the Commission has to carry out a separate assessment of the necessity and proportionality of this aspect directly under Article 87 (3) (d). (38) The criteria of the Communication are set out in paragraphs (39) and (40). In view of the above, they are relevant for the assessment of the script, development, production, distribution and promotion support under the scheme. (39) General legality: According to point 2.3. (a) of the Cinema Communication, the aid scheme needs to respect the general legality principle, ie, the Commission must verify that the scheme does not contain clauses that would be contrary to EC Treaty provisions in fields other than State aid. In particular, the Commission must ensure that the EC Treaty principles prohibiting discrimination on the grounds of nationality and freedom of establishment have been respected. (40) Point 2.3. (b) of the Cinema Communication establishes four additional compatibility criteria: Cultural product: the aid must be directed to a cultural product. Each Member State must ensure that the content of the aided production is cultural according to verifiable national criteria (in compliance with the application of the subsidiarity principle). Territorial conditions: "The producer must be free to spend at least 20 % of the film budget in other Member States without suffering any reduction in the aid provided for under the scheme. In other words, the Commission accepted as an eligibility criteria territorialisation in terms of expenditure of up to 80 % of the production budget of an aided film or TV work but limited to the minimum degree required to promote cultural objectives." Aid intensity: "Aid intensity must in principle be limited to 50 % of the production budget with a view to stimulating normal commercial initiatives inherent in a market economy and avoiding a bidding contest between Member States. Difficult and low budget films are excluded from this limit. The Commission considers that, under the subsidiarity principle, it is up to each Member State to establish a definition of difficult and low budget films. Aid supplements for specific film-making activities: "Aid supplements for specific film-making activities (e.g. post-production) are not allowed in order to ensure that the aid has a neutral incentive effect and consequently that the protection/attraction of those specific activities in/to the Member State granting the aid is avoided.

9 General legality principle (41) There are no signs of incompatibility with the general legality criterion. Consequently, on the basis of the information provided by the Latvian authorities, the scheme does not raise any issues concerning its general legality under the EC Treaty Cultural product (42) The cultural content of all film projects are assessed according to the criteria set out in section 3.6. As all of these criteria refer to verifiable aspects of the cultural content of the resulting film, the Latvian authorities have established verifiable national criteria within the meaning of point 2.3.(b) 1. of the Cinema Communication. Consequently, the aid is directed towards a cultural product Territorial conditions (43) At least 65% of the financing under the scheme for script development, development and production of feature, documentary and animation films should be spent in the Republic of Latvia. The maximum financing under the scheme is 50% of the production budget, although this may reach 80% or 90% in the case of low budget or difficult films. Consequently, a producer is able to spend at least 40% [100% - (90%*65%)] of the production budget outside Latvia. Furthermore, it is theoretically possible for films to meet the cultural criteria without having to incur any additional expenditure in Latvia. (44) For other types of support covered by the scheme, there are no quantitative requirements which oblige the recipient to spend the support in Latvia. (45) As a result, the scheme respects the territorial criterion of the Cinema Communication Aid intensity (46) The Latvian authorities consider difficult and low-budget films to be as defined in section 3.8. Applying the subsidiarity principle, the Commission considers that the Latvian authorities have established a definition of difficult films which is in line with the Cinema Communication. (47) The maximum cumulative aid intensity is in general 50% of the film budget, except in the case of difficult and low budget films.

10 (48) The following table compares the low budget thresholds with the median film budgets in for the different types of films, based on data provided by the Latvian authorities 9 : Film type Median budget in (LVL) Low budget threshold (LVL) Low budget threshold (EUR) 2 Full-length feature films 646, ,000 Animated feature films 1,000,000 1,000,000 1,420,000 Feature-length co-productions 865, , ,000 (49) As is evident from the above table, the low budget thresholds set by the Latvian authorities are at or below the median film budgets for the same categories of films. The low budget thresholds for shorts and for feature-length documentaries are well below those for full-length feature films. (50) Consequently, in view of the characteristics of the market for Latvian film productions which meet the criteria for difficult and low-budget films (see also section 4.2.5), the Commission considers that the scheme complies with the aid intensity rules of the Cinema Communication Necessity and proportionality Promotion & distribution (51) As explained in paragraph (37), the promotion and distribution support under the scheme cannot be assessed only on the basis of the Cinema Communication criteria. The necessity and proportionality of the distribution and promotion support needs to be assessed for the purposes of applying Article 87(3)(d) of the EC Treaty. In case the projects receiving miscellaneous support were considered to be economic activities, this support also needs to be assessed directly under Article 87(3)(d) of the EC Treaty. (52) The objective of the scheme is to support and promote the development of Latvian film culture. In particular, the scheme aims to support the distribution of Latvian films, as well as European films, in Latvia. (53) This objective is in line with Article 151 of the EC Treaty, which provides that the Community shall take cultural aspects into account in its action under other provisions of this Treaty, in particular in order to respect and to promote the diversity of its cultures. (54) The Latvian authorities have provided various characteristics of the market for Latvian film. 9 The data for full-length feature films on which the median is based do not include the data for animated feature films and feature-length co-productions

11 (55) The market is limited to 2.3 million people, and Latvian films usually are not distributed in cinemas outside Latvia, except for international co-productions. Even then, according to the Latvian authorities, co-productions screened in cinemas in the country of the co-production partner do not attract any significant audiences and therefore do not represent major competition for local or other (European) productions. (56) In general a Latvian film in cinemas attracts approximately 5,000 7,000 viewers. In recent years, there have been very few market successes over 100,000 viewers. Even in these cases, the films have been very far from recovering their production costs. (57) As a result, according to the Latvian authorities, most Latvian films are difficult and/or low budget films. The market for Latvian films, due to the limited language area, is very limited and therefore difficult and not commercially viable. This is why Latvian films are difficult to produce and to distribute. Until 2006 the average number of Latvian full length fiction films produced per year was 2 films. (58) Local TV channels do not invest in Latvian film. In view of the limited commercial prospects, no money is available to finance the production, distribution or promotion of Latvian films. (59) According to the Latvian authorities, the distribution prospects for Latvian and European films in Latvia is quite dire. Both Latvian and European films are distributed in Latvia mainly in the capital city of Riga during special events, films days and film festivals. Number of cinemas in Latvia ( ) Screening places Full-time cinemas Total screens (60) The constantly diminishing numbers of cinemas/ screening places in rural Latvia (see graph) means that Latvian/ European films are basically inaccessible

12 to people living outside Riga. The small number of inhabitants and lower general income in these areas mean that, with only rare exceptions, Latvian and European films generate losses for cinema owners. The film print / advertising / technical costs are higher than the income from tickets. (61) As a result, the owners of cinemas/ screening places do not take in Latvian/ European films because, in most cases, they do not generate enough income to cover the exploitation and marketing costs. This is why, in the view of the Latvian authorities, the only way to maintain Latvian films at a minimum level of visibility and to ensure that Latvian film culture exists and is available, is to use State aid to support Latvian film development, production, promotion, distribution, as well as development of professionalism and in general film culture. (62) Therefore, the Commission considers that the promotion and distribution support within the scheme is necessary and proportionate to the objective pursued and does not distort competition to an extent which would be contrary to the common interest in line with Article 87(3)(d) of the EC Treaty. Miscellaneous support (63) As explained in paragraph (35), the types of activities (film festivals, film education/research and conservation of film heritage) benefitting from the miscellaneous support given under the scheme are unlikely to be economic activities in the Latvian context described above. However, even if any of them were considered to be economic activities, the underlying objective is in line with Article 151 of the EC Treaty. Furthermore, the amounts involved are small. (64) Consequently, given the Latvian context noted above and that, as noted in paragraph (59), the Latvian authorities regard State aid for film festivals, film education/research and conservation of film heritage as being essential for the scheme's objective of supporting and promoting Latvian audiovisual culture, this support is necessary and proportional for the purposes of applying Article 87(3)(d) of the EC Treaty. (65) Therefore, the Commission considers that, if any of the funding under the miscellaneous support were State aid, it would be compatible with Article 87(3)(d) of the EC Treaty. 5. CONCLUSION The Commission has accordingly decided to consider the aid to be compatible with the EC Treaty until 31 December 2013, on the basis that the Latvian authorities will implement any changes that may be required after the expiry of the Commission s Cinema Communication. Please note that the full text of this letter will be published in Latvian on the Internet site:

13 Yours faithfully, For the Commission Commissioner Kroes Member of the Commission