The tax reliefs for companies in the gaming sector in China, South Korea, the United Kingdom, Canada, and Germany were discussed by the lawyers at REVERA.
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Svetlana Gordey and Darya Savko
Each country has its advantages in terms of tax systems. In this article, we reviewed the most popular jurisdictions where a significant number of prominent 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 independently. Foreign companies need to either register their own office in China or find a local partner to enter the market through them.
As for the tax benefits that can be leveraged by video game developers, China has introduced a special tax regime called "Reduced rate for high & new tech enterprises." This regime is applicable to companies that:
- are registered in China (excluding Hong Kong, Macau, and Taiwan) for at least one year;
- are the right holders of the core technology of their key products or services through independent R&D (research and development), transfer, gifting, merger, and acquisition, among others;
- the core technology of key products (services) is related to areas listed in the "State-encouraged Key High-Tech Fields," covering more than 200 categories of technologies, products, and services in eight major technology areas;
- have technical personnel engaged in R&D and relevant technology innovation activities constituting more than 10% of the total number of employees in the current year;
- over the last three financial years (the actual operation period for newly established enterprises), R&D expenses should account for a certain percentage of the enterprise's total sales revenue for the same period:
- at least 5%, if the last annual sales revenue is below 50 million yuan;
- at least 4%, if last annual sales revenue ranges from 50 million yuan to 200 million yuan;
- at least 3%, if the last annual sales revenue exceeds 200 million yuan.
The corporate tax rate for companies under this special regime is 15% instead of 20%.
South Korea
The country has a preferential tax regime called "Special taxation for transfer, acquisition, etc. of technology," applicable to South Korean companies and extending, among other intellectual property objects, to video games. Regarding profit tax rates, the following benefits are provided:
Rates applicable to the tax base up to 300 billion Korean won are:
- transfer — from 5% to 10.93%
- license — from 7.5% to 16.40%.
For the part of the tax base exceeding 300 billion Korean won, the rates are:
- transfer — 12.5%;
- license — 18.75%.
The country also provides governmental support for the gaming business. This year, the South Korean Ministry of Culture, Sports and Tourism will spend about 52.5 million dollars on grants to Korean gaming companies. Most of the funds (18.7 million dollars) are aimed at financing game development, with an additional 13.3 million dollars dedicated to aiding small and medium-sized studios in promoting games outside South Korea. 4.2 million dollars was also allocated to the state organization Game Talent Institute.
United Kingdom
Video Games Tax Relief (VGTR) or the UK Games Tax Relief Scheme offers a tax incentive designed to support game developers in the UK. Note that games created for advertising purposes, as well as gambling, are excluded. If your project is intended for commercial release to the general public, you may qualify for video game tax relief.
VGTR allows companies meeting specific criteria to claim a tax relief of up to 20% of the core production costs of a game. Game developers can claim relief on the lower of either 80% of total core costs or actual core costs incurred within the European Economic Area (EEA).
In cases where a video game generates a profit, tax relief can also be used to reduce the amount of corporate tax. If the video game incurs losses, applicants can receive a cash payment from HMRC (Her Majesty's Revenue and Customs) of 25%.
Additionally, to benefit from VGTR, your company must be registered in the UK as a Video Game Development Company (VGDC) and be responsible for most of the planning, development, testing, and final production.
Besides being developed by an appropriate game studio, your video game must pass the British cultural test, which considers factors such as setting, lead characters, themes, 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 companies engaged in video game development.
For instance, the Canadian government provides a business research grant (the National Research Council of Canada's Industrial Research Assistance Program (IRAP)). The grant aims to support the research and development process of innovative "made-in-Canada" technologies with a certain level of technical risk and uncertainty. This program is relevant for those developing an innovative game or software and seeking support through government incentives.
The province of Ontario also offers funding to accelerate video game development through the Ontario Interactive Digital Media Fund (IDM). The grant supports digital media developers in creating concepts for new digital media products, as well as in the development and commercialization of these products.
The CanExport program for small and medium-sized businesses is aimed at assisting game studios in conducting marketing activities in international markets outside Canada.
Germany
Since 2020, the country has had a program aimed at developing the gaming industry and incentivizing developers through cost reimbursement. Projects receive varying compensation based on expenditure volume, namely: up to 50% reimbursement for projects from 100,000 euros to 2 million euros, 25% to 50% for projects from 2 million to 8 million euros, and up to 25% for projects with production costs exceeding 8 million euros.
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In terms of the United States, one of the major gaming markets, unlike the other countries mentioned in the article, there are no specific preferential regimes for video game developers or other intellectual property.
Additionally, there are unique challenges related to taxes. Unlike most countries where tax rates are uniform nationwide, sales tax rules in the US vary by state. Each state sets its own statewide sales tax rate, and each city, county, and municipality within the state can impose its own local sales tax, which adds to the state-level sales tax.
Because all these individual rates vary, the final sales tax amount depends on the end user's address, necessitating a reliable mechanism for companies to collect such data.
When a company sells digital products in multiple US states, it is crucial to monitor whether the company has established economic nexus within a specific state. Having nexus in a state (defined by a specific threshold of transactions or sales with consumers in that state) requires the company to register with the state's local tax authorities and remit sales tax in that state. This complicates compliance as companies must file tax returns and remit sales taxes separately in each state where they have nexus.