On 23 April, the UK and China signed a landmark film co-production treaty (the “Treaty”) with the aim of encouraging closer cultural ties between the UK and China. The Treaty offers a unique opportunity for UK films to side-step the Chinese foreign film quota which has historically been monopolised by Hollywood blockbusters. The Treaty contains a more detailed set of criteria than other UK co-production treaties, which films must meet in order to qualify and there will inevitably be some practical issues which early UK-Chinese co-productions will need to prepare for.

Background

The Treaty stems from recent efforts by the UK Government and British Film Institute (BFI) to foster closer cultural links with China. China’s box office audience, worth approximately £1.65 billion, is already the second largest in the world and forecast to grow to £3.5 billion by 2017. The Treaty is the latest of its kind entered into by the UK, following those already signed with Australia, Canada, France, Jamaica, New Zealand, South Africa, India, Israel, Occupied Palestine, Brazil and Morocco, alongside the multi-lateral EU convention on film co-production.

Although the Treaty has not yet officially entered into force – we understand that ratification in the UK is expected by September – films that commenced principal photography after 23 April 2014 and which don’t complete production until after the Treaty has officially entered into force will be able to qualify as an approved co-production.

How to qualify

The co-producers of a film must apply to their respective competent authorities in order for the film to be granted approved co-production status. In the UK, qualification is assessed by the BFI and in China by the China Film Co-Production Corporation. The criteria by which these authorities will assess an application are set out in the Annex to the Treaty. Some of the key requirements to be aware of are as follows:

• Co-producer relationship:
  • The Treaty contains a list of issues which should be addressed in the film’s co-production contract. Whilst some of these mirror provisions required by other UK co-production treaties, the Treaty has a more detailed set of requirements including provisions dealing with: non-fulfillment of obligations; production overages; export prohibitions; distribution and exploitation rights; and amendment procedures.
  • All work on the film (including post-production) must be carried out either in the UK or China, although exceptions can be made for script requirements. The division between UK and China should reflect the respective financial contributions of the co-producers.
• Financial contributions:
  • In line with most of the UK’s other co-production treaties, each co-producer should contribute not less than 20% and not more than 80% of the total production cost. Co-producers may be granted special dispensation to vary these figures for a project but only within a maximum ratio of 10:90.
  • Separately, the Treaty does allow “finance-only co-producers” but such a co-producer must be making a minority contribution only which, depending on the circumstances, should equate to not more than 25% and not less than 10% of the total production cost.
  • Non-party co-producers (i.e. additional co-producers from a state which doesn’t have any co-production treaty in place with UK or China) are permitted under the Treaty but their contribution must be not less than 10% and not more than 20% of the total production cost.
• Content:
  • At least 90% of footage must be specially shot for the film. Although this limit may be varied by the competent authorities, there is no express exception for documentaries, as in many of the UK’s other co-production treaties.
  • The language of the film must be either English or Chinese and the film must be subtitled or dubbed into English or Chinese as applicable.

Potential benefits of the Treaty

The Treaty provides several strategic benefits for qualifying films. While the UK Government and BFI have emphasised the importance in enhancing Sino-British cultural relations through film, co-producers are most likely to be interested in the following potential benefits:

• Exemption from China quota system – China’s state-controlled quota system only permits the release of 34 foreign films each year. It has proved difficult for UK-produced films to compete with the big-budget Hollywood films for these coveted spots and so British films have struggled to gain access to the lucrative Chinese market in the past. However, qualifying co-productions will be treated as being a ‘domestic film’ in China, meaning that such films will not be subject to the foreign-film quota.
• Financial benefits – qualifying films will also be classified as “domestic films” in the UK, meaning that they will be able to benefit from UK film tax relief as well as support from the BFI film fund and other lottery-funded screen agencies.

Practical considerations

Whilst the potential benefits for qualifying films are undeniably attractive, it is likely there will still be practical issues facing UK producers. For example, it is generally more difficult to convert Chinese Renminbi into British Pound Sterling than other more commonly used currencies, and co-producers may therefore need to agree that all Renminbi in the budget are spent locally by the Chinese co-producer. A foreign exchange hedging agreement may also need to be put in place to protect against any foreign currency exchange risk. There may be separate production considerations too, such as the need to acquire additional production insurance cover for China. Even where such issues are navigated, UK producers need to be wary of censorship and certification issues which have affected U.S. films in China in recent years. Given the likely lack of experience in dealing with China and significant cultural differences, UK co-producers may have to lean heavily on their Chinese counterparts for on-the-ground matters in China.

Client Alert - 2014-192