China Coproduction 101, Broken Down by Chinese Entertainment Law

The rapid development of China film market has made headlines around the world in recent years. The overall box office in 2015 reached 6.36 billion USD with a growth rate of more than 40%. To this extent, China has become the world’s second largest film market and the third largest film production country. The significant potential of the market captures an increasing number of foreign film companies’ attention. In accordance with Catalogue for the Guidance of Foreign Investment Industries (Amended in 2015), film production falls within the scope of the restricted catalogue for foreign investment, where only contractual joint ventures is allowed; and setting up a film investment company, film production company or film distribution company are prohibited. Moreover, foreign films are subject to the quota system (up to 34 film imports on a revenue-sharing basis annually) and the limit on the amount of box office revenue that foreign entities collect from movies distributed in China (basically 25% for Hollywood movies and 15% for others）.
Therefore, co-production with the qualified Chinese mainland company on a project-by- project basis becomes the most important way to enter China’s film market, and such coproduction films with the co-production qualification and License for Public Projection of Films will be treated as domestic films, allowing Chinese and foreign production companies receiving a larger share of revenue (around 43%).
China Film Co-production Corporation (hereinafter “Co-production Corporation”) is one organization authorized by Chinese competent authorities specially to administer the affairs relating to Chinese-foreign film co-productions. The domestic party of the co-production should be in charge of obtaining all administrative permits from the stage of project registration to distribution, while foreign parties render assistance in providing relevant materials. Prior to the actual production of the coproduction film, the domestic party shall submit relevant materials to the Co-production Corporation and relevant authorities for shooting approval. Shooting will only commence with such approval. Screening and releasing of the films requires the License for Public Projection of Films which should be obtained through similar administration process. Detailed information regarding the application process and materials requirements is available at the Co-production Corporation’s official website.
Chinese laws and competent authorities for films (Film Bureau of State Administration of Press, Publication, Radio, Film and Television) have not expressly provided many special requirements regarding the project registration and censorship in connection with co-production films. The common practice is performing overall assessment by reviewing the content case by case. Thus, the registration of co-production films is subject to the risk of policy and uncertainty. However, the review and censorship requirements and tendency is not untraceable. Generally speaking, the main policy is including Chinese elements (story, plot with certain relevance to China) in the films. For instance, the Chinese main cast shall not be less than one third; part of the real shooting shall take place in China; and Chinese investment ratio shall not be less than one third. Although detailed regulations regarding Chinese elements in coproduction films have not been provided, relevant administrative department will assess the qualification of coproduction films based on the factors including script (complete script is required for project registration), story, cast, shooting places, rights and revenue distribution.
China has signed Film Co-production Agreements with fourteen countries including South Korea, India, Singapore, Belgium, France, Spain, Italy, Britain, Australia and New Zealand. Terms and conditions may vary from countries to countries. Therefore, it is advised that such Film Co-production agreement signed by the particular country and China (if any) should be used for reference for the relevant co-production project.
Directed by Zhang Yimou and released by the end of 2016, the fantasy film “The Great Wall” may be the largest coproduction project (the total production cost is more than 150 million USD) which targets the global market. The film is presented by Legendary Pictures, Universal Pictures, China Film Group Corporation and Le Vision Pictures(LeTV). As the biggest investor, Legendary Pictures is responsible for film development, production, daily production management; Universal Pictures as the second inventor is responsible for publicity and distribution outside China; and China Film Group Corporation and LeTV are responsible for obtaining all adminis­trative permits as well as publicity and distribution in China. Each party makes best use of its resources and advantages to ensure the successful operation of the film project. In addition, the film contains significant Chinese elements, including the sets, theme, background, and main cast, which contributes substantially to its great box office in China.
As mentioned above, except for co-production films, foreign direct investment in film production is under the restricted catalogue of Chinese industry. According to the current legal practice, foreign entities may indirectly involve in film production through the VIE mode. Under the basic business structure of the VIE (Variable Interest Entity) mode, a domestically- registered company will run as operating company for film production (“OpCo”)； and a Wholly Foreign-owned Enterprise (“WFOE”) established by a foreign holding company would sign a series of contractual control agreements with OpCo (exclusive management service agreements) and a series of management agreements with shareholders (loan and equity pledge agreements) of OpCo. All those agreements are created to make sure WFOE has the right to delegate the legal representative, directors, general manager and other senior management personnel in OpCo. Ultimately, through the agreements above, WFOE exercises effective control over the OpCo’s operation, profits, etc., and achieves the purpose that the economic benefits derived from OpCo could be consolidated into its financial statements. With certain compliance risk, such mode needs to be adjusted according to the governmental policies and supervision regulations. During the establishment and operation process of VIE, it is necessary to fully consult with the Chinese lawyers in this field.
In summary, Sino-foreign film coproduction is still a relatively safe way for foreign capital to enter China’s film market. With more and more co-production films produced as well as the promulgation and implementation of "Film Industry Promotion Law of the People's Republic of China", the relevant administration procedures may be simplified, and it could be expected that a more open and favorable investment environment for foreign capitals will be coming soon.