Tax Incentives That a Gaming Company Can Expect in Leading Countries — Column by REVERA

Lawyers from the firm REVERA detailed the tax incentives available for gaming companies in China, South Korea, the United Kingdom, Canada, and Germany.

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Svetlana Gordey and Darya Savko

Each country has its advantages regarding its tax system. In this article, we reviewed the most popular jurisdictions where the majority of notable video game publishers and developers are concentrated.

China

The complexity of this jurisdiction lies in the fact that legal regulations do not allow foreign companies to distribute their products in China on their own. Foreign companies must either register an office in China or find a local partner and enter the market through them.

Regarding tax incentives that can be used by video game developers, China has implemented a special tax regime called Reduced rate for high & new tech enterprises. This regime applies to companies that:

• are registered in China (excluding Hong Kong, Macau, and Taiwan) for at least one year;
• own the core technology of their key products or services through independent R&D, transfer, donation, merger, acquisition, etc.;
• have core technology for their key products (services) that fall under areas listed as "Advanced Technologies Areas Actively Supported by the State," encompassing over 200 categories of technologies, products, and services in eight major technological areas;
• have technical personnel engaged in R&D and corresponding technological innovation activities making up more than 10% of the total workforce for the current year;
• over the last three fiscal years (actual operating period for newly established enterprises), must meet specific R&D expenditure requirements relative to total revenue from sales for the same period:
  • at least 5% if the latest annual sales income is below 50 million yuan;
  • at least 4% if the latest annual sales income is between 50 million yuan and 200 million yuan;
  • at least 3% if the latest annual sales income exceeds 200 million yuan.

The corporate tax rate for companies under this special regime is 15% compared to the standard 20%.

South Korea

The country provides a tax benefit called Special taxation for transfer, acquisition, etc. of technology, applicable to South Korean companies, including intellectual property like video games. Tax incentives concerning profit tax rates are as follows:

For a taxable base up to 300 billion Korean won, the rates are:

• transfer — from 5% to 10.93%
• license — from 7.5% to 16.40%.

For a taxable base exceeding 300 billion Korean won, the rates are:

• transfer — 12.5%;
• license — 18.75%.

The country also bolsters support for the gaming business. This year, South Korea's Ministry of Culture, Sports, and Tourism is spending around $52.5 million on subsidies for Korean gaming companies. Most of the funding ($18.7 million) is for game development, with $13.3 million aimed at helping small to medium studios promote games outside South Korea. An additional $4.2 million was allocated to the state organization Game Talent Institute.

The United Kingdom

The Video Games Tax Relief (VGTR) or UK Games Tax Relief Scheme is a tax incentive intended to support game developers in the UK. Note that games made for promotional purposes or gambling are excluded. If your project is for commercial distribution to the public, you may qualify for video game tax relief.

VGTR permits companies meeting certain criteria to claim a tax relief of up to 20% of core game production costs. Developers may claim relief based on the lesser amount—80% of total core costs or actual core costs incurred within the European Economic Area (EEA).

If a video game is profitable, the tax relief can be used to reduce corporate tax. If the game incurs losses, applicants may receive a cash payment from HMRC (Her Majesty’s Revenue and Customs) of 25%.

To utilize VGTR, your company must be registered in the UK as a Video Games Development Company (VGDC) and be responsible for most planning, development, testing, and final production.

Besides being developed by an appropriate game studio, your video game must pass the British cultural test, evaluating elements such as setting, characters, theme, and dialogue to ensure the game has genuine British or European cultural content and significance.

Canada

Canada offers generous tax credits and investment incentives for video game development companies.

For example, the Canadian government offers a business research grant through the National Research Council's Industrial Research Assistance Program (IRAP). The grant supports innovative technology research and development labeled "Made in Canada," with a specific level of technical risk and uncertainty. It's beneficial for those developing innovative games or software wishing to leverage government incentives.

The province of Ontario also provides funding to accelerate video game development through the Ontario Interactive Digital Media Fund (IDM). The grant aids digital media developers in conceptualizing new digital media products and in their development and commercialization.

The CanExport program for small and medium businesses aims to assist gaming studios with marketing activities in markets outside Canada.

Germany

Since 2020, Germany has a program aimed at boosting the gaming industry, providing cost reimbursement for production. Projects receive various compensations depending on expenditure volume: up to 50% reimbursement for projects between €100,000 and €2 million, from 25% to 50% for projects between €2 million and €8 million, and up to 25% for projects with production costs exceeding €8 million.

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As for the United States, one of the major gaming markets, unlike other countries mentioned in the article, there are no specific favorable tax regimes for video game developers or other intellectual property.

There are also tax complications. Unlike most countries with uniform tax rates nationwide, U.S. sales tax regulations vary by state. Each state sets its own state-level sales tax rate, and each city, county, and municipality within a state can implement its own local sales tax, which adds to the state sales tax.

Due to these varying rates, the final sales tax amount depends on the end user's address, requiring companies to have a reliable mechanism for collecting such data.

When a company sells digital products in multiple U.S. states, it's crucial to track whether it has achieved an economic presence in a particular state. Creating a nexus in a state (defined by a specific threshold of transactions or sales with consumers in that state) necessitates company registration with local state tax authorities and the payment of sales tax in that state. This complicates compliance, as companies must file tax returns and remit sales tax separately in each state where they establish a nexus.