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Business

Hollywood Grumbles Over German Fund Plans

New plans by the German government to cut tax benefits for investors in Hollywood films could help the country’s stagnant economy but could also have unfavorable effects on the movie industry’s own crisis.

There may not be many German actors dominating the silver screen in Tinseltown these days but Hollywood will definitely be feeling Germany’s influence in other ways as the cash-strapped European powerhouse considers pulling the plug on millions of euros in investment.

Arnold Schwarzenegger, currently starring in Terminator 3: Rise of the Machines, may not be back if Germany goes through with plans to impose restrictions on the media funds that go a long way in bringing Hollywood blockbusters to the screen. It’s a little known fact that about 20 percent of Hollywood's entire production budget comes from German media funds, according to the estimates of financial experts. Films such as Kramer vs. Kramer, Mission: Impossible 2 and Enemy at the Gates have all had a helping hand from German investors. The chances of the viewing public seeing the fourth Terminator in the future would be severely dented if such a large source of funding dries up.

Hollywood is suffering its own cash crisis but it’s nothing compared to Germany’s financial woes. However, things could get a lot worse for the film industry in Los Angeles if what the big wigs in La La Land call "stupid German money" stops flowing in from the other side of the Atlantic.

The considerable investment Germany has provided over many years has long been a thorn in the side of Berlin’s finance ministry, yet, under current rules, those who choose to invest in Hollywood productions can write off 100 percent or more in initial losses against tax, making investment in the movies an attractive option for thousands of private investors looking for a home for their money. Germans invest about €2 billion in media funds per year, with about 70 percent of that going to projects in the United States.

New rules for film investment

But all that will change if a new ruling by the German government comes into force. Chancellor Schröder's administration, burdened with an economy which is buckling under a three-year stagnation, aims to remove existing tax breaks for investors buying into such movie-based funds as Deutsche Capital Management's IMF 3, and Chorus ApolloMedia funds except in cases where these investors take an active role in choosing the screenplay and the cast of a film.

This is unlikely to sit well with the movie moguls who are counting every cent and dollar in the shadow of the Hollywood hills. Germany’s new plans would make the pre-production process more expensive, not to mention more time-consuming and complex. Plus, the idea of having German investors picking the cast of a massively expensive production, a cast which will determine if people go to see the film and therefore make it a success, will have some producer’s in a cold sweat.

However, Andreas Konle, the chief financial officer at Internationalmedia, which helped produce Terminator 3 with money from German media funds, believes that although placing the power of casting in the hands of investors may be a recipe for disaster, the plans would not mean the end of media fund financing.

"I doubt that it makes sense to have dentists and lawyers decide on whether to have Richard Gere star in a film or a German actor," he told Deutsche Welle. "But we think the changes will be manageable and media funds will continue to exist."

Slump in Hollywood films

Other people in the business have a less rosy view of the proposed plans, due to come into effect next year. Many in the financial sector have unsurprisingly criticised the German government. Karsten Mieth, of media fund provider Chorus, told Reuters: "Big U.S. firms just won't accept having their cast determined in such a way." Michael Oehme, head of the Federation of German media funds, added, "We will see a massive slump in investments in big U.S. film projects." Oehme said the funds may shift from bigger to smaller film projects or invest more in TV productions.

Financial experts are sitting firmly in the back row, watching the story develop in front of them before making any firm decisions. "If the U.S. firms are no longer willing to take on this German investment, media fund products in Germany will decrease," one financial adviser in Berlin said. "But one needs to see how creative the fund firms are. If they are able to work around the new ruling and can maintain the tax advantages, media funds will continue to be attractive."