Italy Revises Tax Credit, Retaining 40% Rate but Banning AI Expenses

Italy has unveiled new revisions to its international film tax credit, maintaining its widely known 40% rate for qualifying production expenses but introducing notable restrictions around the use of artificial intelligence (AI). The changes, presented at the Venice Film Festival by Lucia Borgonzoni, undersecretary of state to the ministry of culture, and Nicola Borelli, director of Cinema and Audiovisual at the Ministry of Culture, mark a significant step in how AI costs are regulated in film production.

Under the revised framework, productions must spend at least €250,000 in Italy to qualify for the 40% credit. However, for specific above-the-line costs involving non-European entities, the rate will reduce to 30%. One of the most groundbreaking updates relates to AI. Any costs incurred in Italy involving AI will not be eligible for tax relief, except when AI is used for special effects. Productions must also disclose if AI has been used in their Italian operations.

Moreover, Italian executive production or post-production companies are now required to include clauses in their contracts with authors and performers, granting them the right to refuse the use of their work or likeness by AI systems. This move has been described by one industry executive as one of the first instances where a national authority has ruled against tax relief in certain cases where AI is used.

While most aspects of the international tax credit remain unchanged, Borelli emphasized that the incentive has attracted over €2 billion in international investment since 2017. He also criticized the spread of misinformation regarding the reform process, which had created uncertainty among international producers. This uncertainty caused delays in government-issued forms and guidelines, leading some productions to postpone or abandon their plans to shoot in Italy this year.

Key details of the revised international tax credit include an annual limit of €20 million per company or group of companies, with no maximum limit per individual production. However, if a company applies for both the international and local production tax credits, the local credit does not count towards the €20 million cap.

Other regulations remain consistent, including the requirement that eligible costs must be tied to professional roles governed by national collective labor agreements. These costs are capped at the rates outlined in the agreements, with a 20% increase allowed for each employee. Furthermore, the ability to transfer the tax credit is confirmed, and applicants must submit their final application within 180 days of completing activities.

A notable change benefiting post-production companies is the removal of the previous obligation to complete at least one day of filming or work on Italian soil. This modification was strongly lobbied for by post-production firms in Italy, easing the burden on companies handling international projects that may only require post-production services.

Lastly, applicants must comply with Italy’s protocol on workplace harassment and violence in the film and audiovisual sector, as outlined by the country’s most representative employer and trade union associations. These rules ensure that productions benefiting from the tax credit adhere to ethical workplace standards.

This comprehensive revision, while keeping core elements intact, introduces modern measures to regulate AI's influence in film production, ensuring Italy remains a competitive and ethical location for international projects.