Co-Productions and the UK AVEC: What Producers Need to Know

International co-productions are an increasingly common way to finance and produce film and television projects. For producers working across borders, it is important to understand the difference between ‘official’ co-productions (which are approved under international treaties) and 'unofficial' co-productions (where partners collaborate across jurisdictions informally) and how this distinction affects eligibility for the UK Audio Audio-visual Expenditure Credit (AVEC) and the qualification requirements.

What is the difference between an official and unofficial co-production?

An official co-production is certified by the relevant competent authorities of the co-production countries under a bi-lateral co-production treaty or under the European Convention on Cinematographic Co-Production (European Convention).

Qualifying as an official co-production means meeting creative, cultural and financial splits that are proportional between the different co-producers and also involves the rights to the production being split between the co-producing partners.

An unofficial co-production is not entered into under a treaty or the European Convention and typically involves the overseas producer working as a service entity to the UK entity. They can be credited on the production as a co-producer but for the purpose of the UK incentive, they are a service provider and the UK entity is the main production company (for more information, see our article on how to structure your production for the AVEC).

Unofficial co-productions are effectively treated in the same way as other films (e.g., are subject to the Cultural Test) whereas official co-productions have a different route to qualification.

How does a production qualify as an official UK co-production?

To qualify as an official UK co-production, the production must be made under one of the bilateral co-production treaties that the UK has in place (see full list here) or the European Convention.

Different treaties have different minimum spend thresholds, but typically at least 20% of spend must be incurred on goods and services provided by companies or people from the relevant country. The co-producers must also each bring finance to the production and that is expected to be in proportion to their spend (i.e., if 70% of spend was to be British, the UK co-producer would be expected to bring around 70% of the funding to the production).

Under the European Convention, as well as meeting the spend requirements, the production must pass a points test obtaining at least 16 of 21 points as set out below.

There is some latitude for the relevant authorities (i.e., the BFI in the UK) to grant co-production status if 16 points are not reached based on the underlying characteristics of the production.

It is also worth noting that many treaties do not allow the co-producing companies to have common ownership or control – in most cases they are required to be independent of each other.

What are the benefits of an official UK co-production for film and TV producers?

From a structural UK perspective, there are three principal reasons why a production may look to qualify as an official co-production rather than engaging a foreign producer under a service agreement:

1. To access the Independent Film Tax Credit (IFTC) or enhanced AVEC without a British writer or director: Where a production would otherwise qualify for the IFTC but does not have a British lead writer or lead director, setting up as an official co-production gives an alternative route to accessing the higher rate of 39.75% rather than the standard rate of 25.5%.
2. To access the UK incentive without passing the Cultural Test: Official co-productions do not need to pass the Cultural Test in order to qualify for the UK incentive. Therefore, for a partially UK-based production that cannot pass the Cultural Test, being an official co production can be a pathway to access the UK incentive.
3. To access additional ‘soft money’ from other sources: In many jurisdictions (including the UK), additional soft money or grants can be accessed only by co-productions (e.g., the UK Global Screen Fund). This is often the case in Europe and is therefore a key reason to set up as a co-production as it can significantly reduce the net cost of productions.

There are of course other benefits to being an official co-production. Having on-the-ground co-producers with detailed knowledge of local production processes, locations, crew and other elements can be a huge advantage. It can sometimes also be beneficial from a sales or equity perspective as the co-producers may be able to bring additional investors to the project based on previous dealings and their reputation not to mention the direct access to a second market beyond the producer’s own country.

What are the challenges of structuring an official UK co-production?

There are two principle structural or incentive-related challenges of an official co-production when compared with a traditional structure:

1. The nature of co-productions means that the balance between services and spend must be maintained; therefore, there is far less flexibility during production. Elements cannot simply be moved to another country or a change in actors to non-party countries made without considering the overall breakdown. It can therefore be far more prescriptive in terms of what must be done.
2. From an incentive perspective, co-productions will always generate lower UK AVEC returns than a standard production by virtue of the cost basis that is used as the calculation. 

For standard productions, the UK spend is assessed as a proportion of global spend before the 80% cap is applied. For co-productions, the UK spend is only compared with the spend incurred by the UK co-producer. As such, the 80% cap can often effectively apply to all UK spend giving a reduction to the value of the incentive – the so called ‘co-pro tax’. 

The tables below illustrate this:

As with the advantages of co-productions, there are other challenges involved in co-productions, such as:

• Rights negotiations between the co-producers;
• Increasing documentation requirements; and
• Adviser fees often being higher due to the differing requirements for co-productions to access incentives when compared with standard productions.

Key factors to consider before entering into an official UK co-production

Below are key questions to consider before entering into an official UK co-production.

Do you need to enter into a co-production?

If you could make the production without it being an official co-production, you may get an increased UK incentive as set out above. However, does that increase offset any loss in overseas incentives or soft money that require co-production status to be obtained?

Have you considered the additional complexities?

As mentioned, co-productions have more stringent qualification requirements and the rules are a little more intricate than for standard productions. Making sure that you understand these and obtaining expert advice early to avoid surprises late in the closing process is vital.

Can you submit your application on time?

Unlike standard productions, there is a deadline for applying for interim co-production certification and productions must apply for an interim certificate.

Applications must be submitted at least four weeks before principal photography to all relevant authorities of the co-production countries. It is therefore important to align applications so that (allowing for currency conversion) the applications across the jurisdictions correspond to each other.

How Entertainment Partners can help

If you want to learn more about co-productions, watch the replay of our Master Series webinar for more insight from our team of experts. And when you’re ready to discuss your next project, get in touch with Entertainment Partners!

With vast experience in global and domestic tax incentives, our expert UK team can assist with all your co-production enquiries, as well as handle all your UK production incentive needs – from structuring advice, Cultural Test applications and associated reports, film and TV incentives estimates to formal opinions to lenders, incentive claim submissions and deal close support.