A film production contract regulates the relationship between the filmmakers (such as directors, screenwriters, and cinematographers) and the film producer. This contract obligates authors to cooperate in making a film and to assign their property rights to that work to the producer, allowing the producer to use, distribute, and generate income from the film. The film production contract plays a key role in protecting the rights of the filmmakers and ensuring the legal use of their works by producers. In practice, however, filmmakers, wanting to get tax benefits, often conclude these contracts as entrepreneurs. This article explores the legal and tax aspects of such a practice and gives an insight into possible alternatives
Legal Issues Faced by Entrepreneurs in the Film Industry
Even though the tax administration has not questioned over the years the practice of concluding copyright contracts as entrepreneurs, we deem it problematic. Namely, based on our interpretation, entrepreneurs cannot be filmmakers, as a cultural (filmmaking) activity, according to the Law on Culture, can only be performed by (independent) artists, cultural institutions, cultural associations, collaborators, or cultural experts. In that context, an artist is defined as a natural person who creates copyright works, while an independent artist is one who performs artistic activity as their profession. Therefore, we believe that a natural person can create film works exclusively as an (independent) artist, while the entrepreneur status is reserved for performing economic activities. This additionally affects the transfer of property rights, because if the entrepreneur cannot be a film author, they cannot transfer the property rights to the producer. In that case, there is a missing link in the chain of transfer of rights: in order for the entrepreneur to transfer the rights to the producer, they would first have to obtain those rights from the author, which never happens in practice
Authors as Individuals or Sole Proprietors
Of course, there are cases in which authors do not enter into contracts with producers as entrepreneurs, but as natural persons – directors, screenwriters or videographers. However, almost as a rule in such contracts, the authors agree on a single amount of compensation that the producer owes them, and it is on that amount that they calculate the income tax and related contributions. Therefore, it is not surprising that many authors, all potential issues aside, choose to enter into a film productiom contract as entrepreneurs. Instead of paying income tax and contributions, which often take more than half of their royalties, they opt for flat rate taxation, thereby reducing their tax burden to a much smaller amount.
Tax Optimization Opportunities for Film Authors
In this article, we argue that filmmakers can avoid high taxes on copyright contracts, even if they do not enter into contracts through their entrepreneurial actions.Namely, Article 88 of the Law on Copyright and Related Rights (Zakon o autorskim i srodnim pravima, hereinafter: ZASP) stipulates that within the film production contract the authors will oblige the producer of the film to 1) collaborate creatively on the production of the film, and 2) assign to him their property rights to that work. Assignment of property copyrights based on the contract is regulated by Section 6.2. of the ZASP, entitled “Transfer on the basis of a contract,” specifically in Article 61 of the ZASP, which prescribes that the author, that is, his legal successor, can assign some or all of the property rights to his work to another person. Article 92 of the ZASP expressly stipulates that the compensation for the film production does not include the compensation for other forms of exploitation of the film. Due to this, the film producers should pay two different fees to the authors based on the film production contract. One is a compensation for their artistic involvement, and the other for the acquisition of property copyrights.
Two Types of Fees Under the Law on Copyright and Related Rights
The conclusion based on the quoted provisions of the ZASP is that the author is entitled to two compensations under the film production contract. The first one is for “creative collaboration on the film production” and the second for the transfer of property copyrights. Creative cooperation is an engagement by which the author obliges to undertake actions such as: directing, shooting, creating scenography, costume design, and the like. Through that “engagement” the author’s intellectual property I created, such as: direction, shooting, scenography, costumes, and the like. Besides “creative cooperation,” it is necessary for the film producer to obtain the property rights of the author of the film and individual contributions to the film. Copyrights are acquired through transfer and/or assignment agreements, which is a form of legal transfer of intellectual property.
Tax Treatment of Fees for Creative Collaboration and Transfer of Rights
Interpreting the aforementioned provisions of the ZASP, one comes to the conclusion that the compensation for “creative collaboration” during the shooting of a film, representing an income obtained from copyrights, is subject to personal income tax (which is paid by deduction) and the corresponding contributions for mandatory social insurance. On the other hand, the fee for assigning copyrights is subject to the tax on the transfer of absolute rights, as it is an exclusive transfer of intellectual property rights that is unlimited in terms of time, space, and subject matter for a fee. In addition, any income that is realized as a positive difference between the sale and the purchase price of the property right that was traded is taxed with capital gains tax.
The Amount of Compensation for Rights Transfer in the Film Industry
Given that authors in most cases assign all their property rights to the film without any restrictions, the fee for the transfer of rights paid by the producer to the author should be significantly higher than the fee paid for the process of creating the film itself. As a result, most of the amount that the author receives from the producer on the basis of the film work contract should be taxed at the rate of 2.5%, with a possible addition of 15% on the income generated by the transfer of rights. This tax treatment represents a drastic reduction compared to the combination of income tax and contributions, the total taxation effect of which can amount to more than 50% of royalties, depending on specific circumstances and possible reliefs.
Properly Structured Contracts as the Key to Tax Optimization
To summarize, the film production contract is the basic instrument for regulating the relationship between authors and producers, ensuring the protection of authors’ rights and the legal use of their works. Although the practice of concluding contracts as entrepreneurs may be as a short-term solution for avoiding high tax obligations, in the long run, it creates more legal problems than it solves. According to current laws, authors cannot be entrepreneurs, and without proper transfer of property rights the key link in the chain of rights is lost, which can make contracts ineffective.
As we have already stated, given that authors most often assign property rights without restrictions, the fee for the transfer of rights paid by the producer significantly exceeds the fee for creating the film. This implies that the greater part of the total remuneration is taxed at a more favorable rate of 2.5%, with an additional taxation of 15% on any profit realized from the sale of rights. That kind of fee structure allows filmmakers significant tax savings and can be an effective strategy for optimizing income. Therefore, filmmakers have the possibility to avoid high taxes not only through entrepreneurial actions but also by properly drafting their contracts. With proper legal advice and an understanding of the legislative framework, filmmakers can secure their rights while preserving their creativity and artistic integrity.
