We are often asked what the best place is to create a video game studio. There is no easy answer to that question, as many factors are to be taken into account, and everyone may prioritize them differently: depth of the talent pool, quality of schools, quality of life, local professional associations, dedicated events… to mention just a few. Corporate taxation is an objective factor though, and an impactful one.

 

THE CORPORATE TAX ANGLE

 

What is the share of the value you create that will you really have in the end? It may seem counterintuitive, but the answer will vary A LOT depending on which European country your studio is incorporated in.

 

From this perspective, European countries fall into three categories: those that will take a chunk of your profits (9-10 out of 28 countries), those that will allow you to keep exactly what your earned, ensuring a perfect tax neutrality (11-12 out of 28), and those that will actively subsidize your business, making it possible to earn more than what your performance alone should have entailed (6-8 out of 28).

 

This holds true for studios with production costs that do not exceed a few millions per year. If you are building the next Assassin’s Creed, or if you head a multinational group, threshold effects and additional rules will kick into play and lead you to a potentially very different conclusion.  

 

THE BOOST FROM SECTORAL INCENTIVES

 

The key game changer is your games’ eligibility to a sectoral incentive, namely the digital games tax credit in Ireland, the crédit d’impôt jeux video in France, the credito d’imposta videogiochi in Italy or the video games tax relief in the UK. 

 

Specific to the game industry, these tax credits are more generous than general R&D incentives, as long as your production costs remain in the above-mentioned range. All are refundable, meaning that they will be paid to you if you have no tax liability to offset them against, which is quite typical of the initial development phase.

 

If your games are not eligible to these sectoral incentives, the hierarchy among the countries partially changes. Those ranking highest are the countries with the most generous (and refundable) R&D incentives.

 

In both cases, Ireland comes out as the most favorable jurisdiction.

 

DIFFERENCES ARE MASSIVE

 

To rank the 28 countries studied according to their “tax-friendliness”, we have modeled the first ten years of a game studio from a financial perspective, and compared the simulated pre-tax and post-tax results on a cumulated basis. In a normal world, the post-tax result should be inferior to the pre-tax result by an amount equal to the tax burden. However, as is evidenced in the chart on the side, a sizable number of European countries will not impose any tax on the profits of your young studio. Even better, the countries for which the result is a positive number will actually subsidize it, through the refund of tax credits or the surrender of tax losses. 

Our scenario is as follows: a freshly incorporated studio embarks into a 3-year development of its first game (production costs of close to 1m€ over 3 years are assumed), and partners with a publisher, accepting to give away a share of its future revenues (50% cut) in exchange for yearly advances and of the burden of marketing costs. This first game is a commercial success, and generates over its lifetime (7 years) far more than what it cost to the studio (a 148% Life Time Value or LTV, net of publisher’s share, is assumed). A second game is developed as from year 4, with a slightly bigger budget (close to 1.3m€), and the partnership with the publisher continues. After another 3-year of development, the second game launches and meets again a well-deserved success (159% LTV trajectory / 152% LTV by the end of year 10, as a few more revenues are to be collected over years 11 and 12). Thanks to the profits reaped from these first titles, the studio decides to self-publish its third game (incurring marketing costs of 400 k€ over 3 years). Ten years from its creation, the studio launches this third game. It is a resounding success, paying off 59% of its development & marketing cost on the year of its launch (LTV trajectory of 235% / 59% LTV one year from its launch, when our scenario ends). For the sake of completeness, minor administrative costs and work-for-hire revenues have been factored in.

 

We have simulated the tax impacts taking into account:

   - the corporate income tax (CIT) rate and, where it exists, the reduced rate applicable to small & medium businesses, as well as any applicable surcharge;

   - if applicable, the minimum CIT that a loss-making company has to pay;

   - the possibility to offset the net operating losses incurred during some of the development years against past (“carry-back”) or future (“carry-forward”) profits;

   - any R&D incentive;

   - any sectoral incentive;

   - any “IP box” (or “patent box”) leading to reduced taxation of revenues derived from eligible IP’s. 

 

Under this scenario, if your games meet the criteria for the sectoral incentives, Ireland, UK and France would add between 1.6m€ to 1.3m€ to the results generated by your studio over the course of the ten years.

 

If your games are not eligible to these incentives (casual games, gambling, adult-only…), the best jurisdiction remains Ireland (+1.1m€), followed this time by Austria and Spain (+0.5m€).

 

It is important to note that the tax subsidy (or tax burden, if negative) calculated by the end of the tenth year is not intended to be correct by the euro. Some shortcuts had to be taken for the sake of the comparison, some assumptions made. The results are highly dependent on the assumptions used. However, you can rest assured that you will be better off in the top countries than in a country with no refundable tax subsidy… if your games are eligible and for as long as these schemes last.

 

Moreover, as the sectoral and R&D incentives are basically sized in accordance with your R&D costs, they grow with your cost base, not your revenues. Studios with light development costs (e.g. mobile studios), would thus rank these 28 countries very differently, applicable CIT rate becoming the prominent criterion.

 

By way of disclaimer, please note that we have run our calculations with the greatest care, relying on data sourced from reputable tax law firms (PWC, EY, KPMG, Deloitte, Grant Thornton, Garrigues…), from firms specialized in innovation financing and from governmental websites. However, we cannot guarantee that our calculations are fully correct and strongly advise you to consult a local law firm before actually making a decision as to the place of incorporation of your studio.

 

It is not all about tax though

 

It is important to stress that corporate tax is far from being the only factor you should consider when selecting the country where you are going to incorporate your studio. For instance, think of the cost of labor, the cost of living, social benefits, non-tax incentives (such as the financings granted by Luxembourg), richness of the ecosystem (think of the private funds Mojang, Rovio or King sponsor in the Nordics), general investment incentives (such as in Malta or in some Eastern Europe countries), regional incentives (e.g. Canary islands, Polish investment zones…) quality of IT infrastructure, dividends & capital gains taxation, your own taxation as individual… all matter and all are beyond the scope of this study.

 

Once your decision is made, it is advisable to be assisted in the legal aspects of company creation, in the drafting of the claim of the sectoral tax credit, in documenting your R&D effort, in ascertaining your right to a reduced tax rate on the revenues from such or such other IP, etc. Some States have created a favorable environment for your business to flourish but benefiting from it imposes to abide by strict and complex rules.

 

We, in Indie Plaza, know how frustrating this can be, so we have started building a database to help you find the expert you need. Stay tuned!