On 12 October 2021, as part of Budget 2022, the Irish Government announced the introduction of a digital games tax credit, subject to European Commission State Aid approval. The relief will be available at a rate of 32% on eligible expenditure of up to €25 million.
The Government indicated that it will be a refundable corporation tax credit for expenditure incurred on design, production and testing of a digital game and that a claim can only be made in respect of a game which has been issued with a cultural certificate from the Minister for Tourism, Culture, Arts, Gaeltacht, Sport and Media (“Minister”).
This reference to a cultural certificate indicates that the digital games tax credit will be modelled to some extent on the tax credit available to qualifying films, television drama, animation and creative documentaries pursuant to Section 481 of the Taxes Consolidation Act 1997 (as amended) (“Section 481 Tax Credit”). Philip Lee is one of Ireland’s leading experts on the Section 481 Tax Credit.
Section 481 Tax Credit – Similarities
The Section 481 Tax Credit is a refundable corporation tax credit available at a rate of 32% of the lower of (1) eligible expenditure incurred in Ireland or (2) 80% of the total cost of production or (3) €70 million (substantially larger than the mooted €25 million for the digital games tax credit). It requires that a cultural certificate be issued by the Minister before a claim for payment of the tax credit can be made to the Revenue Commissioners.
Based on the limited amount of information released by the Government on Budget Day there will be other substantive similarities between the digital games tax credit and the Section 481 Tax Credit.
Apparently the per project minimum spend for digital games to become eligible for the tax credit is €100,000. Film and television projects must have a minimum eligible expenditure of €125,000 and total budgeted expenditure (i.e. total production spend inclusive of Irish eligible expenditure) of no less than €250,000.
The Government has indicated that it will not be necessary to wait for the completion of a digital game in order to make a claim and its announcement references claims being made on an annual basis. Payment of the Section 481 Tax Credit can similarly be claimed before a film or television project is completed. 90% may be claimed during production if certain requirements have been satisfied and 10% after completion.
The Government has also indicated that a digital game developer will be required to sign an undertaking in respect of “quality employment”. Film and television production companies intending to avail of the Section 481 Tax Credit must undertake to provide quality employment and training and skills development opportunities; to comply with applicable employment, environmental and social law; be responsible for all statutory requirements of an employer such as tax and immigration permits; and have in place policies and procedures in relation to grievances, discipline and dignity at work (including harassment, bullying and equal opportunity).
A key component of the requirement for quality employment is for the production company to hire trainees known as “skills development participants” – with the minimum number of trainees to be engaged in each production dependent on the amount of Section 481 Tax Credit to be claimed – and provide detailed information on how these trainees will be upskilled during the course of the production.
Perhaps the biggest question to be answered is which types of video games will be eligible for the new tax credit. The reference to a cultural certificate being required means a culture test must be passed. This is unsurprising given that the European Commission is unlikely to approve this type of State Aid funding unless it is being made available for games that are culturally Irish or European.
For example, when the European Commission approved the UK’s Video Games Tax Relief (VGTR) in 2014 it came to the conclusion that the VGTR would focus on a small number of distinctive, culturally British games which have difficulties sourcing private financing.
In order to become eligible for the VGTR a video game is required to pass a points-based culture test. Prior to Brexit, points were based on whether the content of the game is British or European; if the game has a British cultural impact; if the UK’s video game development facilities are utilised; and if key creative individuals involved in the development of the video game are UK or EEA citizens.
This is instructive but our expectation is that the culture test for the Irish digital games tax credit is likely to be closer in form and content to the culture test currently used for film and television projects.
In order to be eligible for the Section 481 Tax Credit a film or television project must first fit into one of the eligible categories being film, television drama, animation and creative documentary. It cannot be in one of the ineligible categories which include advertising; reality television; current affairs; talk shows; lifestyle programming; staged performances; sporting events; games and live programming.
The Irish Government specifically pointed out on Budget Day that games produced mainly for advertising or gambling will not be eligible for the digital games tax credit and, based on the experience in film and television, this list of ineligible categories may expand to include other types of video games.
Provided that a film or television project fits into one of the eligible categories, it must pass a culture test and/or industry development test. To successfully pass the culture test three of eight possible criteria must be satisfied. It is also necessary to satisfy the Minister that quality employment will be provided on the production.
It remains to be seen how the culture test for the digital games tax credit will work in practice. It seems unlikely that these details will be published until the European Commission has approved the scheme.
The introduction of the digital games tax credit is very welcome and should help to expand the video games industry in Ireland. The rate of the tax credit at 32% is clearly competitive. In the UK the VGTR is 25% of “core” expenditure and the French tax credit for video games is 30% of qualifying expenditure. The ability to claim payment of the tax credit before completion of the game is also very attractive.
“We’re delighted the government is introducing the Tax Credit for Digital Games”, said Craig Stephens from Imirt, the Irish video games industry association. “This globally significant 32% tax credit will support our existing games development talent enormously, plus attract major investment from overseas. Ireland is ideally positioned to secure more of the rapidly expanding $300 billion worldwide industry. We look forward to our ongoing conversations with government to ensure the new credit can benefit as many video games developers as possible”.
However, the introduction of the tax credit does not mean that Irish video games developers will be immediately placed on an equal footing with their counterparts in other jurisdictions. For example, in the UK Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) funding can be utilised for video games development whereas the closest equivalent in Ireland, the Employment and Investment Incentive Scheme (EIIS), is less beneficial (although another announcement on Budget Day was the imminent reform of EIIS). Also, the UK’s entrepreneur relief and Capital Gains Tax (CGT) policy is more beneficial for video games developers than their equivalents in Ireland.
It therefore seems prudent that the Irish Government look at other forms of support for video games developers in addition to the tax credit. Positive moves in this area have been underway for some time with Creative Europe MEDIA providing funding for narrative storytelling video games and Enterprise Ireland providing support to games development companies through its funding schemes.
Additional information on the digital games tax credit should become available when the Finance Bill is published over the coming weeks.