External financing and VAT taxation in investment agreements
Depending on the chosen financing model for the investments, the tax consequences of such transactions may vary. For example, a co-production agreement is subject to VAT. And what about external financing agreements and VAT taxation?
External financing and VAT taxation on investments in film production
In its judgment of October 7, 2025 (Case No. I SA/Gd 540/25), the Provincial Administrative Court in Gdańsk resolved a significant dispute concerning the VAT taxation of transactions involving film production financing. The case centered on a foundation producing a documentary film on religious themes, which had entered into a partnership agreement for film production financing. The significance of this ruling extends far beyond the particular factual circumstances, addressing the fundamental question of VAT taxation boundaries in the context of complex financing structures for diverse projects where parties jointly participate in a project’s commercial risk and where financial flows do not constitute remuneration for specific services.
This judgment represents a substantial contribution to our understanding of the substantive scope of the Value Added Tax Act as applied to atypical legal constructions. The Court established clear limits to an overly expansive interpretation of “supply of services,” indicating that not every financial flow between commercial entities automatically creates a VAT obligation for the recipient. This determination must be analyzed within the broader context of European film production financing, where traditional models based on territorial exploitation rights encounter new forms of cooperation and project risk-sharing.
The Economic Realities of Film Production Financing in Europe
Contemporary film production, particularly in Europe, is characterized by remarkably complex financing structures. According to European Audiovisual Observatory data, a typical European feature film with a budget of €2-3 million obtains funding from numerous distinct sources; for larger productions, this figure reaches twenty or more discrete financing streams. The financing model typically combines public support in the form of grants and loans from film funds, constituting on average 41% of the budget in mid-sized European markets; presales of distribution rights representing approximately 16% of the budget; producer investments averaging 15% of the budget; broadcaster support of approximately 11%; and tax incentive schemes accounting for roughly 8% of the budget. The remainder comprises alternative sources, including partnership financing, product placement, and crowdfunding.
This mosaic of financing sources reflects a fundamental challenge facing the film industry, aptly described by economist Richard Caves as the “nobody knows” principle. Film production requires substantial ex ante capital investment amid complete uncertainty regarding the project’s commercial success. The quality of film as an experience good can only be assessed after viewing, and most viewers watch a given film only once or twice, meaning consumption uncertainty exists for virtually every film. Quality signals such as critical reviews, viewer recommendations, or festival awards become available only after production costs have been incurred – that is, too late to assist in securing financing. Consequently, investors must rely on ex ante signals such as director reputation, recognizable actors, or other “bankable names,” which remain unavailable to low-budget productions.
European films face particularly challenging circumstances relative to American productions. Although Europe produces twice as many feature films annually as the United States – 1,072 feature films in the European Union compared to 709 in the U.S. in 2017 – European films’ share of the EU theatrical market amounts to merely 27-31% of admissions, while American films capture 63-70% of market share. This disparity means that the average American film attracts four times as many viewers in Europe as the average European film, despite European films being twice as numerous.
The principal cause of this imbalance lies in linguistic barriers and cultural differences within Europe, which prevent European productions from achieving economies of scale comparable to Hollywood productions. A film that succeeds in its country of origin often requires 12-18 months to build, through film festivals and awards, sufficient reputation to enable distribution in other European countries. This protracted recognition-building period results in desynchronized exploitation windows across territories, complicating coordinated pan-European marketing campaigns and increasing dependence on local distributors possessing market-specific knowledge. In 2016, European films generated 60% of their revenues domestically, 21% in other European countries, and merely 19% outside Europe. Of approximately 5,200 European films released to the European market, only 650 were exhibited outside Europe – a ratio of one to eight.
Traditionally, presale agreements and minimum guarantees (MG) have played a crucial role in financing European films. Under this construction, a distributor or broadcaster pays the producer a predetermined sum in exchange for exclusive distribution rights within a specified territory, distribution channel, and temporal window. These advance payments may constitute anywhere from several percent to over 50% of a film’s budget and frequently serve as collateral for production credit extended by banks. According to 2016 research by Oxera and O&O, presales to EU and non-EU distributors represent approximately 35% of local film budgets and as much as 55% of large international production budgets.
This system fundamentally rests on the principle of territorial exclusivity. Distributors and broadcasters concentrate their activities on national markets and seek assurance that their substantial marketing and promotional investments will not be undermined by competing exploitation of the same film simultaneously in the same territory. Territorial exclusivity enables price differentiation between high-income and low-income markets, protection against free-riding on the distributor’s marketing efforts, and adaptation of distribution strategy and release timing to local market conditions such as regional holidays, weather patterns, or the density of local production premieres.
Nevertheless, this model faces mounting pressure from several market and regulatory factors. The development of supranational VOD platforms such as Netflix and Amazon Prime Video, which by 2016 had already captured 10% of paid service revenues compared to traditional pay television while experiencing 60% annual growth, is fundamentally transforming the distribution landscape. Netflix commanded 47% of all SVOD subscribers in the European Union in 2016, and Amazon 20%, while the largest European platform, SKY, possessed merely 4% of the market. Simultaneously, consumer expectations are evolving, with audiences accustomed to immediate content access on streaming platforms. Younger generations particularly expect the ability to view content of interest at any moment and on any device, which conflicts with the traditional model of gradual film release across successive temporal windows and territories.
Consequently, the film industry is experimenting with alternative distribution models. Examples include day-and-date strategy, wherein a film is released simultaneously in theaters and on VOD platforms; premium VOD, where the online price is elevated during concurrent theatrical exhibition; or even reverse windowing, where a film appears online first and subsequently in theaters. The successful implementation of reverse windowing for Lars von Trier’s “Melancholia” in the United States in 2011 provides an instructive example: the film was released on VOD one month before its theatrical premiere, generating $3 million in theaters and $2 million on VOD – a superior result compared to the director’s previous films.
These transformations engender tensions between traditional market participants and new entrants. The 2017 conflict between Netflix and the Cannes Film Festival, when the festival instituted a requirement that films be exhibited in French theaters as a condition for competition participation, perfectly illustrates these tensions. Netflix, whose business model depends on simultaneous online content availability across all countries, could not accept the French requirement of a 36-month window between theatrical premiere and SVOD availability. Netflix consequently withdrew its films from the 2018 festival, including Alfonso Cuarón’s Oscar-winning “Roma,” which subsequently won the Golden Lion in Venice.
Confronting these challenges, the industry is also pursuing alternative financing sources. International co-productions prove particularly effective – films co-produced by partners from different countries generate on average three times more admissions than purely domestic productions and circulate twice as broadly geographically. Crowdfunding, though growing dynamically, remains financially marginal. The European crowdfunding market expanded from €1.2 billion in 2013 to €7.7 billion in 2016, with film, television, and radio projects collectively raising €71 million, representing 33% of campaigns in the culture and creative industries sector. However, the average amount raised by film projects on Kickstarter is merely $1,000-10,000, indicating this source’s limited role in financing full-length productions.
I cite this and all other financial data concerning the European film market from the study commissioned by the European Parliament, “Film Financing and the Digital Single Market: its Future, the Role of Territoriality and New Models of Financing” (2019).
Within this market and regulatory context, the partnership financing model with profit participation – the subject of the analyzed judgment – emerges as an attempt to find a middle path between the traditional presale model grounded in territoriality and the new global platform model. The partner acquires neither territorial exploitation rights nor becomes a co-producer in the classical sense. Instead, the partner participates financially in a project executed independently by the producer, in exchange for the right to share in potential profits, regardless of the territories or distribution channels from which such profits derive. This construction may prove particularly attractive for low-budget films with uncertain commercial potential, where traditional distributors lack interest in purchasing territorial rights with minimum guarantees, but where partners willing to risk capital in exchange for participation in potential success might be identified.
The Factual Circumstances of Case No. I SA/Gd 540/25
Foundation E., headquartered in G., an active VAT taxpayer engaged in religious film production, entered into an agreement with a Partner, also an active VAT taxpayer, the subject of which was financing the production of a documentary film. The Partner undertook to transfer a specified amount for film production in exchange for a defined share of profits from the sale of licenses authorizing public screenings of the film. This construction raised questions from the outset regarding its tax qualification, combining elements of project financing with participation in the venture’s commercial risk (check: strategic consulting for entrepreneurs).
The partnership agreement’s key elements constituted a specific mosaic of mutual obligations and entitlements. On the Partner’s side, the agreement principally contemplated the transfer of financial resources for film production at specified times and amounts, with complete absence of any copyright acquisition. The Partner obtained, however, the right to a portion of profit from licenses for public film screenings, while fully participating in project risk, including risk of failure. Significantly, the Partner possessed awareness of the possibility of not recovering portions of expended financial resources, and the Partner’s role was limited exclusively to transferring funds, without performing any other activities related to film production or distribution.
On the Foundation’s side, the agreement created a considerably more elaborate catalog of obligations. The Foundation committed to producing the film while retaining exclusive copyrights, securing entities interested in acquiring licenses, transferring to the Partner the established profit share within 45 days of quarter-end, presenting production and licensing activity reports, and providing current information regarding budget changes and profit amounts achieved. A critically important element of the construction was that the Foundation bore no obligation to return to the Partner the transferred funds in the portion not covered by distributed profit share.
The film project’s specificity further complicated the entire construction’s legal assessment. Given the religious film’s specialized nature, directed toward a limited audience, the probability of obtaining profits from sales was modest. The Foundation contemplated film commercialization through granting distributors paid licenses for public screenings in theaters and on streaming platforms; however, it possessed no certainty whether resources obtained from licenses would even cover production costs. This uncertainty regarding the venture’s economic outcome constituted a significant element characterizing the entire relationship between parties.
The Foundation’s approach to acknowledging the Partner’s contribution was equally characteristic. For partners whose contribution was limited exclusively to transferring financial resources, the Foundation contemplated a general acknowledgment formula in the film’s end credits, without specifying partner names. This represented neither advertising nor promotion, but merely customary thanks for assistance rendered, further distinguishing this construction from typical sponsorship agreements wherein sponsors receive concrete, measurable reciprocal services of a promotional nature.
Legal Issues Presented in the Individual Interpretation
The Foundation submitted a request for individual interpretation, formulating three questions concerning the described construction’s tax consequences. The first question addressed whether the Partner’s transfer of funds to the Foundation constituted, for the Foundation, a taxable supply of services under Article 5(1)(1) and Article 8(1) of the VAT Act and, if so, what would constitute the tax base and whether the Foundation should issue an invoice. The second question concerned the situation of distributing to the Partner a profit share not exceeding the funds transferred, while the third question addressed distribution of a profit share exceeding the amount of funds transferred by the Partner.
The Foundation consistently maintained that none of the described activities was subject to VAT taxation. It argued that it did not perform an individualized service for the Partner in exchange for received funds, no transfer of license rights occurred within the meaning of Article 8(1)(1) and (2) of the VAT Act, and the Partner commissioned no service, merely participating in financing a project executed on the Foundation’s initiative. Consequently, in the Foundation’s view, no basis existed for issuing an invoice absent paid services.
The Foundation emphasized that the contribution not covered by profit share would be irrecoverably lost by the Partner, conferring upon this contribution a character analogous to donation. Beyond the intangible benefit, understood as a sense of participation in an important religious mission, the Partner could obtain material benefit in the form of profit share only when the sum of such share distributions exceeded the contributed amount, regarding which no certainty existed. This construction, in the Foundation’s assessment, transcended typical obligatory relationship schemas known to the VAT Act.
The Director of National Tax Information’s Position
In an individual interpretation dated April 30, 2025, the Director of National Tax Information (KIS) adopted a position partially adverse to the Foundation. Regarding the first question, the Director deemed the Foundation’s position incorrect, determining that the Partner’s transfer of funds constituted, for the Foundation, remuneration for services subject to VAT taxation. Conversely, regarding the second and third questions, the Director deemed the Foundation’s position correct, accepting that profit share distributions, regardless of whether they exceeded the contributed amount, did not constitute paid services.
The interpretative authority grounded its determination in the concept of reciprocal services. The Director stated that in the examined case, reciprocal services occurred between the agreement parties. The executed agreement indicated that in exchange for the Partner’s financial contribution, the Foundation committed to producing the film, transferring to the Partner the right to a profit share obtained from license sales, securing entities interested in acquiring rights to public film exhibition, presenting reports, and providing current information regarding budget changes. This multiplicity of obligations on the Foundation’s side was interpreted by the authority as creating an individualized service.
The Director argued that the Foundation as film producer would act, as it were, at the behest of the Partner transferring financial resources for film production, undertaking specified actions related to film production and exploitation. Simultaneously, the Producer would transfer to the Partner the right to share in profits from license sales. The authority thus concluded that an individualized service existed on the Foundation’s part toward the Partner, who derived specified benefits therefrom. The Partner, as co-financier of film production, would be entitled to derive benefits and advantages from the completed film, obtaining payments of specified amounts from achieved profits.
The Director emphasized that beyond the intangible benefit, the Partner would obtain material benefit in the form of profit share from licenses granted for film screenings when the sum of such share distributions exceeded the contributed amount. This potential material benefit was deemed sufficient grounds for determining the existence of paid services. As the tax base, the Director indicated the entire amount transferred by the Partner for film production, citing Article 29a(1), (6), and (7) of the VAT Act, according to which the tax base comprises everything constituting payment that the Foundation receives from the Partner in exchange for the rendered service.
The Provincial Administrative Court in Gdańsk’s Determination
The Provincial Administrative Court in Gdańsk granted the complaint in its entirety, finding the allegation of material law violation well-founded and setting aside the challenged individual interpretation in the challenged portion. The Court concurred with the Complainant’s position that in the presented factual circumstances, reciprocal services between parties did not occur. This represents a fundamental thesis forming the basis of the entire determination and requiring detailed discussion in the context of broader VAT Act interpretation.
For a given relationship to qualify as a supply of services within the meaning of the VAT Act, several prerequisites must be cumulatively satisfied. The Court indicated, invoking the extensive jurisprudence of the Court of Justice of the European Union, that only relationships characterized by specified features may be considered supplies of services for remuneration. There must exist some legal relationship between service provider and service recipient within which reciprocal performance occurs. Remuneration received by the service provider must constitute value transferred in exchange for services rendered to the service recipient. The existence of a direct and clearly individualized benefit on the part of the goods or services supplier is necessary. Payment for received performance must maintain a direct connection with the activity that would be subject to this tax. Finally, the possibility must exist of expressing in monetary terms the value of this reciprocal performance.
The Court emphasized a crucial factual circumstance that determined the case’s outcome. Financing film production by the Partner cannot be deemed payment for film production services, as the Partner not only commissioned no service from the Complainant but also received none, as in exchange for its contribution, it was to receive only a portion of profit share from this production. This represents a fundamental distinction from typical principal-agent relationships in film production, where one party commissions another to produce a specific cinematographic work according to specified guidelines and in exchange pays established remuneration. In the examined case, the Partner formulated no guidelines, exercised no influence over the film’s artistic conception, did not control production progress, and acquired no rights to the final product.
The Partner’s transfer of funds to the Complainant as a condition for participation in potential profits likewise does not fall within the scope of payment for film production services. The Court noted this relationship’s particular character, wherein the Partner transfers funds not in exchange for concrete performance but as capital contribution to a project that may or may not generate profits. This represents a fundamentally different construction from a typical service agreement, where remuneration is due for the mere performance of specified activities, regardless of their ultimate economic result.
The Court expressly criticized the interpretative authority’s approach, stating that the authority’s position that every flow of funds between agreement participants must constitute either supply of goods or supply of services merits disapproval. This represents excessive simplification, ignoring the complexity of contemporary commercial relationships and the diversity of legal constructions employed in practice. This thesis possesses fundamental significance for the entire practice of VAT application to complex financing structures. The Court expressly stated that despite the VAT Act’s broad substantive scope, one cannot accept that every activity or event resulting in paid enrichment of one party through another party’s action or omission constitutes supply of services.
The Court indicated that inasmuch as no regulation in tax law, particularly VAT Act provisions, addresses film production financing agreements or provides answers concerning mutual internal settlements’ tax consequences, one must consider analysis of the agreement’s entirety and its purpose. This represents a significant methodological indication for assessing atypical legal constructions’ tax consequences. The Court emphasizes the necessity of a holistic approach to contract interpretation in the VAT context, considering their economic substance and purpose rather than merely the formal structure of financial flows. Such an approach aligns with the principle, well-established in CJEU jurisprudence, of economic content’s primacy over legal form in VAT provisions’ application.
The Court endorsed the Foundation’s position that transferring funds to it does not entail paid supply of services within the meaning of Article 5(1)(1) and Article 8(1) of the VAT Act. This conclusion also derives from the fact that no transfer of license rights within the meaning of Article 8(1)(1) and (2) of the provision occurs in exchange for transferred funds. The Partner acquires neither copyright nor licensing rights to the film, receiving merely the right to share in potential profits from commercialization, which possesses a fundamentally different legal character (check: legal advice on risk). The right to profit share constitutes an obligatory right vis-à-vis the Foundation, not a right to use or dispose of the work.
Particularly noteworthy, the Court suggested an alternative legal qualification, indicating that at most, one might cautiously consider whether a financial service on the Partner’s part exists. This represents an exceptionally significant observation opening an entirely different interpretative perspective. If any VAT taxation element should be sought in this construction at all, it would more appropriately be on the Partner’s side as provision of financing services, rather than on the Foundation’s side as alleged provision of film production services. This suggestion by the Court, though cautiously formulated, indicates the possibility of a completely different perspective on the analyzed relationship’s legal character.
The Court unequivocally stated that the Director improperly decoded the Complainant’s and Partner’s roles in the entire transaction, as the Partner commissioned neither film production from the Foundation nor performance of specified activities on its behalf. This crucial determination demonstrates that the interpretative authority erroneously interpreted the legal character of the relationship between parties, treating it as a classical commission or work-for-hire agreement, whereas it actually constituted a construction of capital participation in a risky project.
External financing and VAT taxation – Practical Implications
The Provincial Administrative Court in Gdańsk’s judgment constitutes a significant reference point for interpreting the tax consequences under VAT of atypical project financing constructions. This ruling assumes particular significance in the context of contemporary transformations in film production financing, where traditional models grounded in territorial presale of rights must adapt to new market realities dominated by global streaming platforms and evolving viewer expectations.
For entities engaged in film production, this judgment provides a clear signal that agreements for project co-financing with profit-sharing rights need not automatically generate VAT obligations for the producer upon receipt of funds. The condition, however, is proper construction of such agreements to clearly distinguish them from typical commissioned service agreements. According to the ruling, key elements supporting absence of VAT taxation include: absence of specific service commission by the financier; retention by the producer of complete artistic and organizational control over the project; absence of copyright or licensing rights acquisition by the financier; both parties’ participation in the venture’s commercial risk; the conditional and uncertain nature of benefits accruing to the financier; and inability to identify concrete, individualized performance for the financier’s benefit.
From the perspective of tax advisory practice, this ruling underscores the necessity of detailed documentation of parties’ intentions and agreements’ actual character. For hybrid constructions combining elements of different agreement types, particularly important is precise specification whether parties intend to execute an agreement for specific service provision or rather an agreement for cooperation in realizing a joint venture with risk-sharing and potential profit distribution. The Court’s suggestion regarding possible qualification of performance on the financier’s side as financial services likewise merits attention, opening an intriguing interpretative perspective for future cases.
In conclusion, the Provincial Administrative Court in Gdańsk’s judgment represents an important step toward rational and economically justified interpretation of VAT provisions concerning complex project financing structures. It confirms that the VAT system, being a tax on value added in production and distribution processes, should not automatically encompass all capital flows between commercial entities, particularly when such flows possess the character of capital investment with risk participation rather than payment for concrete, individualized performance.
Founder and Managing Partner of Skarbiec Law Firm, recognized by Dziennik Gazeta Prawna as one of the best tax advisory firms in Poland (2023, 2024). Legal advisor with 19 years of experience, serving Forbes-listed entrepreneurs and innovative start-ups. One of the most frequently quoted experts on commercial and tax law in the Polish media, regularly publishing in Rzeczpospolita, Gazeta Wyborcza, and Dziennik Gazeta Prawna. Author of the publication “AI Decoding Satoshi Nakamoto. Artificial Intelligence on the Trail of Bitcoin’s Creator” and co-author of the award-winning book “Bezpieczeństwo współczesnej firmy” (Security of a Modern Company). LinkedIn profile: 18 500 followers, 4 million views per year. Awards: 4-time winner of the European Medal, Golden Statuette of the Polish Business Leader, title of “International Tax Planning Law Firm of the Year in Poland.” He specializes in strategic legal consulting, tax planning, and crisis management for business.
