The future of film financing in Germany, though hopeful, remains murky as the government facilitates private investment in film.

Bernd Neumann, federal commissioner for cultural and media affairs, has committed himself to developing financing opportunities for local filmmakers in an effort to boost private capital for the local industry.

Chances for real reform look good. Germany’s economy is on the upswing, and it’s expected to grow at a faster pace in coming months thanks to an export-led expansion. The overall positive mood in the country could pave the way for real reform, even muting expected resistance to tax breaks by finance ministry bureaucrats.

Angela Merkel’s coalition government, in one of its first acts last year, nixed tax-sheltering film funds in order to stop the billions of euros that were flowing annually to Hollywood producers, and shore up much-needed tax revenue as part of the government’s tax-reform plan.

Move followed the highly publicized arrest of Andreas Schmidt, former head of leading fund company VIP Medienfonds, on suspicion of fraud and tax evasion. In March, tax authorities raided the offices of fellow fund Apollo Media.

Suffice to say, the crackdown has left the industry shaken and once boisterous financiers walking on eggshells. Yet while the flow of German cash to Hollywood has been shut, some local producers feel the government went too far.

“It was high time, it was necessary, but unfortunately, as is always the case in Germany, when the government sets out to do something, it does it extremely thoroughly. All they had to do is prohibit the tax deductibility of foreign film investments,” says producer Stefan Arndt of Berlin-based X Filme.

Arndt is hopeful that Neumann will succeed in persuading lawmakers to approve necessary reforms to ease local investment, and that Germany will fall in line with neighboring countries that have long supported private investment in film.

“It’s done in nearly every country — the U.K., Hungary, Luxembourg, Canada, even China. You just have to spend your money in the individual country and you get a tax credit, or whatever. The advantages are all the same in the end. The main thing is that the country in profits,” says Arndt.

Any new incentive for producers and investors will require part of the money to be spent in Germany. In addition, Neumann says the government is seeking to revamp tax rules for international co-productions, which have long been hindered by double taxation.

The much-needed legal clarity would go a long way in attracting more foreign players to Germany, say observers.

“German producers need support from around the world to make sure we get a law passed in this country allowing for direct investment in film,” Arndt adds. Not everybody is waiting, however.

David Groenewold, head of GFP Medienfonds, a fund operator that focused solely on German TV and film productions, was left in limbo by the government crackdown.

Deciding against reinvesting GFP fund revenue back into film for fear of legal complications, Groenewold decided to transform GFP into a real production outfit by taking over Odeon Film, a publicly listed subsidiary of pubcaster ARD’s Bavaria Film group.

“It’s time for film financiers to get involved in production companies and stop being passive investors,” Groenewold says.

Private fund operators, as they stand, continue to operate in a legal gray zone.

While they can no longer raise capital, some have been reinvesting revenue from past productions into new projects. Yet the law remains unclear about the ability of funds to offset such reinvestment against incoming revenue. A clarification of the law is expected.

In the meantime, Germany’s leading private film fund operators are adapting to the new reality. The newly established Federal Assn. of Private Capital Film & Media (BPFM) is rallying former tax-haven funds and helping them morph into legal private capital conduits for the German film industry.

Robert Strasser, who chairs the org, is hoping the local fund industry will play a key role in mobilizing private capital once the government decides on an investment model.

“These people have the know-how and the infrastructure to bring investors together with producers and to really facilitate the flow of private capital from individuals looking to make private placements in German film and TV production,” Strasser says.

Some E200 million ($240 million) could be raised annually through private investment, according to the BPFM. That, however, is a far cry from the nearly $2 billion raised in 2004 by private funds for mainly Hollywood pics.

Another legal but rarer alternative for local producers is the use of private placement, or direct investment, financing, which foregoes the need of a fund.

The drawback to such equity financing is that it’s more difficult to find a single wealthy individual willing to provide the lion’s share of a budget than to raise the same amount from several hundred or thousand fund investors.

Nevertheless, it’s one alternative some local companies are turning to.

Ludwigsburg-based Miromar Entertainment is using such financing for its upcoming WWI adventure “The Red Baron” starring Matthias Schweighoefer and Til Schweiger.

Another viable option, and one that increasingly more local producers are turning to, is international co-production.

“We can’t sit and wait until Germany has got its tax laws right,” says Arndt. “We have shown that we can handle big international budgets. The kinds of films we want to do can be made all over the world.”

Indeed, X Filme is doing more co-productions with international partners than ever before, including Bille August’s fact-based South African tale “Goodbye Bafana”; the Israel-set “Love Life”; “Mongol — The Early Years of Genghis Khan,” which recently shot in Mongolia with Russian co-producers; U.K. romantic comedy “Imagine Me and You”; and “Grass Roots,” an animated adaptation of cult comic “The Fabulous Furry Freak Brothers,” also with U.K. co-producers.