In 2003, Hungary launched fundamental reforms in the areas of motion picture industry and motion picture culture. It was recognised that Hungarian motion picture culture and the motion picture profession could only be boosted by a simultaneous development of the motion picture industry. The Act on Motion Picture adopted in 2003 (Act II of 2004) provided a specific regulatory framework for the reform measures to revive the motion picture industry as a branch of the economy and to cater for its prosperity.

The reforms formulated in the Act have a dual objective: on the one hand, to turn Hungary into one of the most attractive and most competitive motion picture locations in Central Europe; and on the other hand, to generate new funding resources for the Hungarian motion picture sector. Hungary intends to realise this dual objective simultaneously, providing exceptionally favourable conditions for all those deciding to shoot films on location in Hungary.

What does this tax incentive system offer to motion picture producers?

The new system is intended to increase the number of films produced - partly or entirely - in Hungary, therefore to strengthen the Hungarian audiovisual industry, to increase the production capacity of the country and the number of experts employed in this sector, thus to generate a positive impact on the entire economy. The tax incentive system achieves this by
· offering financial refund and investment opportunities to encourage foreign film producers to come to Hungary to make films as they may reduce their film production costs this way;
· generating additional resources for co-productions and national films by encouraging Hungarian enterprises to make investments for motion picture production. Through the tax incentive system, the amount of contribution / investment available in Hungary is 20% of local film production costs (in Hungary).
Contributions and investments come from the pre-tax profits of business associations in Hungary which intend to reduce the amount of tax they would be required to pay by way of offering contribution / investments for the purposes of motion picture production in Hungary.

Why do corporate taxpayers have an interest in making investments into film production?

Such corporate taxpayers
· can reduce their tax base by the amount (or 50 per cent of the amount) of their contribution / investment;
· can also reduce the amount of tax payable by the amount of their contribution / investment; thereby they can make considerable tax savings. The table below illustrates the benefits of contribution / investment for tax savings purposes, providing two examples of imaginary enterprises. Both companies in the examples have produced 1000 units of profit before tax, but the first offers a contribution for film production purposes while the second does not.

	Taxpayer providing contribution for film production purposes	Taxpayer not providing contribution for film production purposes
Taxpayer's profit before tax	1,000	1,000
Amount of contribution for film production purposes	100	0
Tax base	900	1,000
Tax payable	(900 x 0.16) - 100 = 44	1,000 x 0.16 = 160
Amount of payments made	144	160
Savings	16

(If the taxpayer also receives some share of the revenues from the film in return for the investment, the tax base may be reduced by 50% of the amount invested.)

What productions may receive contribution under this tax incentive?

The Act on Motion Picture makes a distinction between two types of production from the viewpoint of the tax incentive:

1. films produced to order (production services): productions made in Hungary by foreign filmmakers with the participation of a commissioned Hungarian film production company like Flame Film.
2. films not produced to order (co-productions or Hungarian films): productions made by a Hungarian film production company like Flame Film alone or in co-production, with the financial involvement of domestic investors.

The first model is intended to support films where the budget of the film is fully available (typically by a foreign filmmaker or studio), but the objective is that the foreign filmmaker reduce production costs in Hungary by the refund.
In this case, the contribution (refund) is directly received by the foreign filmmaker, to be provided by the domestic corporate taxpayer. The taxpayer provides such refund for the film producer exclusively for tax reduction purposes.
The second model is intended to support films where the producers cannot provide the total budget of the film, therefore they intend to involve external private sponsors as well.
In this case the funding (investment) is received by the Hungarian production company (co-producer) of the film from the domestic corporate taxpayer. In return for the investment, the taxpayer not only receives a tax incentive but it will have a share of the revenues from the film as well (the minimum thereof is not specified).

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