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Last Updated: Monday, 11 August, 2003, 16:30 GMT 17:30 UK
Hollywood may lose German billions
Terminator 3
German money helped to bring Arnie back to the screen
A new tweak in German tax regulations could result in the disappearance of 20% of Hollywood's production budget.

Over the past few years, German investors have been pouring an annual 2bn euros (1.4bn; $2.3bn) into the US motion-picture business, stealthily becoming by far the most important foreign players.

These investments have been encouraged by German tax breaks of 100% and more for specially classified media funds.

But the German Finance Ministry has now sharply tightened the criteria for qualifying as a media fund - a move which is likely to make investing far less attractive.

Sleeping partners

Germany's rise to movie stardom has been barely noticed, because its investment funds have tended to be passive partners on film projects.

Their lack of overt involvement has led to the use of the disparaging phrase "stupid German money" in Hollywood.

The media funds' ability to pick winners has not been striking, but they have been behind some of the most prominent recent films, including this summer's Terminator 3.

The tax loophole was intended to persuade cautious German investors into backing risky creative ventures.

But unlike similar rules in other countries, it makes no stipulation for the nationality or type of allowable media investments.

Getting involved

This looseness will now change.

The German Finance Ministry - keen to maximise tax revenue to fight a looming budget deficit - has stopped short of closing down media funds entirely, as some had feared it might.

Instead, it has said it will allow tax breaks only to those investors closely involved in film production, rather than those who passively rake in the profits of others' creativity.

Although some media funds may welcome the idea of becoming more involved in decision-making on the movies they back, it is unlikely that Hollywood producers will feel the same.

In order to survive, media funds are likely to shift their attention to smaller domestic projects, and may also seek creative ways of working around the new regulation.

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