by Lorys Charalambous, Tax-News.com, Cyprus21 November 2014
The South African Revenue Service (SARS) has issued a tax guide to the current income tax exemption for the receipts and accruals of income derived from the exploitation rights of a film.
Aimed at stimulating the production of films within the country, the incentive was previously contained under section 24F of the Income Tax Act. Section 24F, which was repealed with effect from December 12, 2013, provided an upfront deduction, or in some circumstances a deduction which was spread over 10 years, for certain production or post-production costs incurred by the taxpayer.
That incentive was replaced by the provisions of Section 12O, which now provides for the exemption from normal tax of income derived from the exploitation rights of approved films. Section 12O came into effect on January 1, 2012, and applies to all receipts and accruals of approved films if principal photography commenced on or after this date but before 1 January 2022.
The receipts and accruals of income are exempt if the National Film and Video Foundation (NFVF) has approved the film as a local production or a co-production; if the income is received by or accrues to an investor; and only to the extent that the income is received or accrues within a 10-year period after the film's completion date. In addition, the tax exemption is limited to investors who acquired the exploitation rights before the completion date of the film.
The term "exploitation rights" is defined as the "the right to any receipts and accruals in respect of the use of; the right of use of; or the granting permission to use, any film to the extent that those receipts and accruals are wholly dependent on profits and losses in respect of the film."
The words "wholly dependent on profits and losses in respect of the film" indicate that the receipts and accruals must be dependent on the success of the film activity in respect of which the taxpayer undertook risk.
The NFVF has introduced a set of qualifying criteria, the South African Film Criteria, that are used to determine whether a film constitutes a local production or a co-production based on a point system.