Tax incentive set to boost digital games development

The Government is aiming to attract a slice of the rapidly growing and highly lucrative digital games development market with a new tax incentive scheme. According to Paul Mee, a tax partner with Mazars in Galway, the relief for investment in digital games was introduced in the Finance Act 2021.

“The intention of the digital gaming tax credit (DGTC) is to attract the digital gaming sector to Ireland, similar to how the film relief credit expanded the film industry in Ireland,” he explains. “The digital gaming sector is very fast-growing and is currently estimated to be valued at $198.4 billion per annum. The DGTC will be a significant boost for efforts to establish the industry in Ireland.”

The DGTC still requires European Commission state-aid approval before it can be implemented but Mee is not expecting any difficulties there. “It is not the first relief of its kind in Europe,” he says. “France, Germany, and the UK – prior to Brexit – implemented similar schemes and it is not expected that the commission will push back on the implementation of the DGTC.”

He anticipates the relief being approved by the end of 2022.

The scheme is a hybrid of the existing research and development tax credit and film tax credit schemes. “Many of the concepts included in the DGTC are borrowed from the film tax credit,” Mee adds.

DGTC relief will be given by way of a corporation tax credit to the digital gaming development company. The relief available is 32 per cent of the lowest of either the eligible expenditure (essentially expenditure in Ireland), or 80 per cent of the total qualifying expenditure on the digital game, or €25 million, subject to a minimum spend of €100,000. This means the maximum credit available for a single project is €8 million.

Mee gives the example of a company that is going to spend €4 million on developing a game with eligible expenditure of €3 million in Ireland. “The credit available will be the lowest of 32 per cent of the eligible expenditure of €3 million, 80 per cent of the total qualifying expenditure of €3.2 million, or €25 million,” he explains. “In this case, the credit will be 32 per cent of €3 million, resulting in a credit of €960,000.”

The credit can be claimed in advance of the digital game being completed allowing the company to claim a tax credit on an annual basis. A company that meets the criteria for claiming both the R&D tax credit and the DGTC can avail of only one of them.

Cultural test

Mee also points out that a certificate must be issued by the Minister for Tourism, Culture, Arts, Gaeltacht, Sport and Media before a firm can avail of the credit. Very importantly, a cultural test must be met before the Minister will issue a certificate.

“A key point of the relief is the cultural content requirement of the digital game,” he notes. “In order to qualify for the relief, the digital game must contribute to ‘the promotion and expression of Irish and European culture’. Factors such as characters, language, subject matter and settings will all be taken into account and may be the biggest challenge for a company looking to avail of the DGTC.”

Another challenge is the clawback provision. Where a tax credit has been paid and it is subsequently found that all or part of the amount was incorrect, a clawback can occur. The clawback, which can amount to four times the amount of the incorrect claim amount in the case of a company and 2.5 times in the case of an individual, can be assessed on companies, subsidiaries or directors or any person who is either the beneficial owner or able directly or indirectly to control more than 15 per cent of the ordinary share capital of company.

“In other words, the directors and owners can be exposed to a personal liability if an error is made in claiming the relief,” Mee points out. “Such a personal liability is unprecedented with one exception, the film tax credit.”

He believes the Government should rethink that provision. “Personal exposure to a clawback is justifiable under the film tax credit as the credit is frequently provided up front, prior to the film company incurring any expenditure. Including the same clawback provision in a section that requires a company to actually incur the expenditure prior to Revenue issuing the credit seems unfair.

“The current clawback provisions in the DGTC will act as a deterrent for foreign digital games companies considering setting up in Ireland. We believe the legislation should be amended to remove the personal clawback to achieve the maximum effect possible. “