What are the main risks of investing in the Tax Shelter?

A tax benefit under conditions.

Nevertheless, there is no zero risk when it comes to investment, whether in Tax Shelter or elsewhere, as factors of uncertainty persist: the financial stability of the intermediary, risks relating to the film industry, inability to obtain global gain, changes in the legal framework, etc. We would therefore like to go over the main risks of investing in the Tax Shelter, because transparency of the offer is a priority for SCOPE.

Last update on : 15.05.2020

Intermediary risks

Structure of the intermediary and financial stability. Its singular structure gives SCOPE an undeniable advantage on the Tax Shelter market. Backed by SCOPE Pictures (producer) which entrusts it with the task of raising funds, SCOPE Invest has an exclusive fundraising remit to finance projects (co)produced by SCOPE Pictures. Inasmuch as the shareholding and the management team of SCOPE Pictures and SCOPE Invest are identical, it is highly unlikely that the representative entity would undermine its sister company by putting an end to an activity that constitutes its main source of income. There is moreover no conflict of interest on the Tax Shelter Offer between SCOPE Pictures and SCOPE Invest.1

The total equity of the two companies stood at €8 million on 31 March 2017:  €5.5 million for SCOPE Invest and €2.5 million for SCOPE Pictures. With the €15 million in funds raised in 2017, the “equity ratio” divided by the “funds raised annually in Tax Shelter” of SCOPE Invest and SCOPE Pictures is more than 50%, i.e. the highest in the sector. This is a major element for assessing the Investor’s risk if a compensation procedure is resorted to.

 


 

1. If it were to occur, a procedure provided under Article 523 of the Companies Code would be triggered. Cf. point 5.2.4.3 of the SCOPE Invest Prospectus.

Last update on : 15.05.2020

Legal framework risks

Developments in Tax Shelter legislation. In a general manner, any change in the legislative framework, whether it be the abrogation or amendment of the federal legislation on Tax Shelter2 (to address a change in the corporate tax rate), can shake up the competition game. The changes that have occurred in the legal framework since 2004 nonetheless remain positive since the procedures for the approval of Tax Shelter operators3 and the obligation to publish approved offers have helped to clean up the market. The European Commission has for its part renewed its approval of the Tax Shelter mechanism until 2020. It is worth noting nonetheless that in parallel it has launched an assessment of national aids to the film industry. We would therefore argue, as a precaution, that no change can have retroactive effect and that in the event of a change, a period of transition and adaptation can still be expected.

 


 

2. Legal references: the Corporate Tax Reform Act of 25 December 2017 (Moniteur Belge [Belgian Official Gazette] of 29 December 2017; the Act of 26 May 2016 amending the Act of 12 May 2014 (Moniteur Belge [Belgian Official Gazette] of 7 June 2016); the Act of 12 May 2014 amending Article 194ter of the Income Tax Code 1992 relating to the Tax Shelter regime for audio-visual production (Moniteur Belge [Belgian Official Gazette] of 27 May 2014).

3. SCOPE Invest was granted eligible intermediary accreditation on 23 January 2015 for an unspecified period. If withdrawn for non-compliance with the conditions under which it was granted, it would not affect the ability to obtain the Tax Shelter Certificate for the operations under way.

Last update on : 15.05.2020

Product risks

Tax advantage under conditions. A set of conditions have to be met for  the tax certificate to be issued and the exemption authorized. If one condition or the other were not met, the investor would lose the tax advantage and might have to pay default interest. In addition to an approved intermediary and work, the proper completion of the film and the requirement of a minimal percentage of the expenditures on Belgian soil within a fixed period are key criteria4. Because it sees both to fundraising (SCOPE Invest) and the executive production of the work in Belgium (SCOPE Pictures), SCOPE endeavours to comply strictly with the requirements of the Tax Shelter mechanism. To guarantee the proper completion of the film in the event of a partial failure of the Offer, SCOPE Invest has investors join a given project only once more than 80% of the financing has been contractually secured from its foreign partners.

Effective taxation rate and optimization of gains. A tax rate below 33.99% (tax year 2018) or 29.58% (tax year 2019) may reduce the global gain considerably of the Tax Shelter investment period, or even cause a loss. It is therefore in  the investor’s interest to consult his usual tax advisor about the interest of such an investment.

 


 

4. In order to address the socio-economic stakes that lie at the core of the Tax Shelter, and thus make sure that the tax certificate is obtained, SCOPE proceeds to a set of expenditures in Belgium for an amount equivalent to 90% minimum of the value of the certificate, within a maximum period of 18 months following the signing of the framework agreement (24 months for animation films).  See the article: "What films have benefited from the Tax Shelter?".

Last update on : 15.05.2020

Sector risks

Between a DVD market at a low ebb and the continuous growth of video services on demand and related platforms (e.g. Netflix), the sectoral conditions remain uncertain. For their part, investments tend to be less numerous and more targeted. In Belgium the success of 2015 reform  led to an influx of funds (ca. €200 million raised annually) and generated a shortage of audio-visual projects.

SCOPE’s approach to the issue is quite distinct from that of its competitors. To avoid a surplus of funds and to give preference to direct approaches with investors, SCOPE did not sign a partnership agreement with a banking institution.

Last update on : 15.05.2020

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