Netflix takes German film-fund levy to court

31 January 2017 9:54am
Remote Control

6 December 2016. By Magnus Franklin.

Netflix has asked EU judges to overturn a German tax on foreign video-on-demand services, saying pan-European media law forbids the measure.

The court challenge marks an important departure for the US streamer, which has kept a low lobbying profile in the EU until now.

The appeal before the EU’s General Court in Luxembourg also has wider repercussions: It comes as European legislators are weighing a draft law that would impose levies resembling the German one on streaming services across the bloc — a measure that could force Netflix to contribute 5.8 million euros ($6.2 million) a year to national film funds.

Netflix is challenging a European Commission decision that approved a revised German law on film financing that went into effect on Nov. 22. The updated system extends the tax to video-on-demand services based outside Germany’s borders.

The levy on video distributors runs as high as 2.3 percent of the price of certain programming for companies with annual revenue of more than 60 million euros. The tax is expected to generate 13 million euros a year for the national fund, which subsidizes the production of German-language movies.

The revamped financing system has two main features. It extends financial support for distributors of German-language programming to foreign video-on-demand services. But it also exposes such operators to a tax that previously had been levied only on domestic video-on-demand platforms.

Country of origin

Netflix launched its European service in 2012, establishing its EU headquarters in the Netherlands. After a trial run in the UK and the Nordic region, the online streamer began selling its content to German viewers in 2014.

Under Germany’s previous film-funding system, the US company faced no levy. But the new version could force it to contribute 2.3 percent of its revenue from rentals and sales of films and other programs that run to more than 58 minutes on its German-language service.

Netflix says it’s protected under the EU’s “country of origin” media principle, which subjects broadcasters only to the rules of the country where they are based, regardless of where they send their signal. That principle aims to simplify life for video distributors that would otherwise need to comply with 28 different sets of national media rules.

The dispute arose after the commission opened an investigation into Germany’s updated film fund, to see if it involved illegal state aid that distorted competition.

To justify the change, the German government noted that online video was grabbing an ever-growing share of the television-viewing market. It also voiced concerns that large international video-on-demand distributors were choosing “a single establishment within the union from where they serve many or all member states.”

The commission itself noted the explosion of online services. When the current EU audiovisual law came into effect in 2010, the prevalence of on-demand services established in one member state but serving customers elsewhere in the bloc was “still a phenomenon of minor importance,” the regulator said.

Since then, the video-on-demand market in the EU has grown by 272 percent, creating a market worth 2.5 billion euros a year, the commission said. In Germany alone, the market was worth 315.2 million euros in 2014 — “172 percent more than 2010,” it said.

Fair competition

In opening its investigation, the commission questioned whether the extraterritorial claims of the fund complied with an EU rule that says countries “shall not restrict retransmissions on their territory of audiovisual media services from other member states.”

Germany’s defense was that the tax wasn’t imposed to promote German film. Instead, the levy “followed the logic” of a value-added tax on services, meaning it wasn’t covered by the country-of-origin principle in the EU audiovisual directive.

“German providers would be at a competitive disadvantage if they would continue to be taxed, while the foreign competitors on the national market would not be subject to the same tax,” the government said.

The commission accepted this argument. A measure excluding foreign video-on-demand providers, it concluded, would discriminate against providers based in Germany, which would be “subjected to a tax, while they are competing on the same market.”

Netflix is challenging this decision in an appeal to the General Court filed on Nov. 25, according to the court’s registry.

Legislative interplay

The question of whether national film levies can be drawn from companies outside a country’s borders is one of the most controversial elements in a current proposal to update the EU’s audiovisual rules.

Under the plan, providers such as Netflix could end up contributing 5.8 million euros a year to national film funds if they serve the five biggest EU markets, according to commission estimates. The annual contribution of iTunes could reach 8.2 million euros.

If legislators approve the plan, the revised German film-financing system would be underpinned by a specific provision in EU law. Without the law, the German measure would be more exposed to court challenges, such as the one Netflix has filed on the basis of EU state-aid rules.

Negotiations on the revamped EU audiovisual law are ongoing, but will probably be wrapped up by the time Netflix’s appeal has worked its way through the bloc’s courts. Even so, the arguments that the company, Germany and the commission put to judges could end up influencing the direction of the draft law.

The case reference number is T-818/16 — Netflix International and Netflix v European Commission.