This post was written by Mathew Alderson, a Beijing-based Australian attorney who joined us earlier this year after having worked with us on a number of matters involving the creative services industry. Since Mathew has considerable experience representing foreign companies involved in China’s film industry, I asked him to write this post setting out the basic rules for foreign companies doing film co-productions in China.
Foreigners engaging in film production in China need to comply with a set of rules administered by the State Administration of Radio Film & Television (SARFT) and China Film Co-Production Corporation (CFCC). CFCC is a subsidiary of China Film Group Company. I have overall found both SARFT and CFCC quite accommodating to foreign film productions in China.
Though at first glance the rules for Sino-foreign film co-productions in China seem fairly clear, a closer review gives rise to a number of issues. Some of these issues and questions will be discussed in subsequent postings. The following summary of the rules is intended to provide a frame of reference for such a discussion while at the same time setting out the basics
1. No film can be co-produced in China without a co-production license. The license is granted by SARFT but processed by CFCC. Anyone engaging in film production in China without the required license is in violation of the law and subject to monetary penalty.
2. There are two types of co-productions of interest to foreign players. The first is “collaboration,” in which the Chinese side and the foreign side both invest cash in the project. The Chinese side provides both cash and infrastructure. In this case, the foreign and Chinese producers are co-owners of all the copyright and related intellectual property (IP) in the film. Contribution of assets and distribution of proceeds is flexible and is determined by contract. However, the whole arrangement is subject to approval by both CFCC and SARFT.
The second type of co-production is the “entrusted production,” in which the foreign side contributes all of the funds and hires the Chinese side to do the production in China. In this case, the foreign side owns the copyright and the related IP. This approach still requires the same approvals and reviews required for a collaboration.
3. The project must receive a co-operative production license from SARFT. Application is made through CFCC. CFCC reviews the script (which must be submitted in Chinese translation), the financial status of the foreign co-producer and the basic structure of the project, with particular emphasis on the percentage of Chinese actors in the film and the location of production work.
Matters such as capitalization and distribution are left primarily to the parties. However, the basic principle is distribution based on percentage of capital contributed. Initial review is done by CFCC and the regional (provincial) level of SARFT. Once approved at that level, approval by SARFT Beijing is also required. The regulations provide that SARFT Beijing must respond within 10 days. However, there is no rule on how long the lower level bureaus may take for their review.
4. The script must be submitted in Chinese. The script is reviewed and approved by CFCC for compliance with China’s various censorship rules. After the film is completed, the film is again reviewed to ensure that it accords with the previously approved script. The project is not complete until after the final review and the issuance of a film public showing license. The rules contemplate that the film will primarily be done in Chinese and then translated into foreign languages. The rules have no provision for films that are in English or some other foreign language in their original form. Presumably this is a matter that is subject to the discretion of the CFCC.
5. After the film has been approved and licensed, the co-producers enter into a co-production agreement. SARFT has a standard form for that agreement. In its most basic form, the project is treated in almost exactly the same manner as an equity joint venture. The producers open a joint bank account for deposit of the capitalization funds. Both producers have control over that account. The accounting too is similar to that of an equity joint venture. The co-producers share in profits and losses based on their equity contribution. An annual audit is conducted, profits and losses are allocated, and taxes are paid. Though the regulations and form agreements are silent on this, proceeds of the foreign co-producer presumably can be remitted on an annual basis after payment of tax is confirmed. Details of when and how capitalization occurs and when and how profits are paid are flexible and are set out in exhibits to the main co-production agreement. However, all such arrangements are subject to review and approval by CFCC and SARFT.
6. CFCC remains involved in the project after production begins. For example, CFCC handles the visas for foreign workers and the customs for any imported production equipment.
7. In principle, all production work is done in China. Work can be done outside China, but only with CFCC approval.
In my next post(s), I will discuss the tax, international money transfer, collection agent and completion guarantor issues that often arise in the context of financing Sino-foreign film co-productions in China.