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Film Biz on the Canary Islands Takes Flight as Tax Breaks Lure Producers

The film biz is aflutter in Spain’s Canary Islands. Led by blockbuster “Spanish Affair,” movies made in the Atlantic Ocean archipelago last year punched an extraordinary 25.5% market share in Spain, their best since 1977. In November, Spain’s industry, diminished by crisis and uncertainty about future subsidies, received another ray of sunshine: its first-ever tax incentives for international shoots.

Spain’s big-shoot business is now on a roll. HBO’s fifth season of “Game of Thrones” was shot in Andalusia, with Seville’s Alcazar Palace doubling for the sunlit Water Gardens of Dorne. Warner Bros.’ “Wrath of the Titans,” Ron Howard’s “In the Heart of the Sea” and Universal Pictures’ “Fast and Furious 6” were also lensed in the Canary Islands.

Qualifying as Spanish nationality movies, all of these films took advantage of the 2007 Spanish movie tax shelter, which offered deductions of 18% to Spanish investment in mainland Spain shoots, rising to 38% for the Canaries. With this investor-driven tax program now ratified but capped at deductions of $3.2 million for Spain and $5.8 million for the Canaries, the big question is whether Spain’s new tax credit program, aimed at foreign productions, can maintain Spain’s big-shoot momentum.

The devil will partly be in the details. Known as Article 36.2, a reference to Spain’s Nov. 27 Corporate Tax Law, the credits apply to movies, TV series, documentaries, animation and visual effects, says Adrian Guerra, who co-produced the Sean Penn starrer “The Gunman,” which shot in Barcelona using Spain’s tax shelter coin.

Tax credits for mainland Spain are 15% of a foreign production’s eligible budget, rising to 35% for the Canary Islands. Tax deductions per film are capped at $2.7 million in Spain and $5 million for the Canaries. On paper, these ceilings are a quarter-to-one-tenth of those in Europe’s other “big five” film powers.

Though the credits came into force Jan. 1, by late April Spain’s line producers were still waiting for clarification on two key issues: local spending amount eligible for tax deduction and terms of payment.

“Fifteen percent may not sound like much, but if it’s 15% of 100% expenditure that compares to some other countries, where rates may be higher but line-producers don’t receive invoices on much expenditure,” says Fresco Film Services’ Peter Welter Soler, a line producer on “Game of Thrones’” Spanish shoot.

“With regards to the creative side, the first port of call for all producers is going to be, ‘What are the creative needs of the project?’” says Olsberg SPI’s Andrew Barnes. “Can we either build or shoot on location for the budget that we have within the countries of interest?”

Taking in all expenditure, including per diems and hotel accommodations, most international shoots in mainland Spain look set to continue being location-driven. Here, full tax credits in Spain could be a significant sweetener, says Welter Soler.

“If you look at history, with its ups and downs, Hollywood has concentrated on Spain precisely because of its light and historical landmarks, architecture and landscapes, as well as its people’s ethnic mix,” Welter Soler adds. “Everybody says Spain has it all almost. You can do almost any other country here.”

“The major things Spain has got going for it is weather, A-class crews and locations,” says Denise O’Dell at Babieka, the physical production company on “Exodus” and Disney’s “Tomorrowland,” which shot in Valencia.

The Canary Islands, Basque Country and Navarre have extra lures, such as the Canaries’ tax shelter, even capped.

“If a big-budget movie is structured as a minority Spanish co-production, shoots a minimum two weeks in the Canary Islands and spends 50% of the co-production percentage in Spain, that would be top money, better than anywhere else in the world,” says Babieka’s Denis Pedregosa.

“Companies can outsource animation and visual effects work to the Canary Islands,” says Guerra. “For the price of a room in a shared London flat, workers can have a Canaries beachside apartment.”

Spanish movies such as “Fuego” have begun to tap into a 2013 30% shelter for Basque Country shoots, which is capped at 40% of production costs. Basque authorities hope to introduce credits for non-Spanish productions in 2016.

“Spain is not competing with Europe, but the world,” says David Hancock of IHS Technology. “Over 34 countries have tax incentive systems, plus nearly every American state, not to mention Canada and Australia. It’s a very crowded space. (But) producers need certainty, as much certainty as they can over the existence of a tax shelter going forward.”

So much of the international filmmaking business comes “down to a question of relationships, of knowing and trusting people. And trusting the governments to deliver rebates in a timely, regular basis,” Barnes says.

By this standard, one major Spanish asset is the now large clutch of physical production companies. In place since 2007, Spain has attracted multiple other projects. Seville alone has been the location for “Knight and Day,” “The Dictator” and “Game of Thrones.”

Spain’s government is required to deliver a written response by July on tax credit expenditure eligibility, says Guerra.

Welter says he hopes to have a big shoot for next fall, and Babieka is evaluating projects with its U.S. partners.

“Spain is coming out of recession,” O’Dell says. “I’m optimistic about the future.”

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