The UK video games tax relief plans had been the subject of scrutiny by the Commission as to whether they were in line with EU state aid rules.
However, the Commission has now given its backing to the regime which will allow companies to claim tax credits of 25% off the "qualifying production costs" associated with producing 'culturally British' video games. A cultural test has been established to ensure that the tax relief cannot be claimed by producers of other kinds of video games.
"The video games tax relief will provide an incentive to video game developers to produce games meeting certain cultural criteria," the Commission said in a statement. "After the Commission opened an in-depth investigation, the UK removed the originally envisaged territorial spending obligations imposed on beneficiaries of the scheme."
"The UK demonstrated in particular that the proposed cultural test ensures that the aid supports only games that are of cultural value. Only around 25% of UK produced games would be eligible for aid. Without this support the number of new culturally British games is likely to decline considerably," it said.
To ensure fair competition across the entire trading bloc, EU rules place a general ban on member states giving advantages or incentives, whether in the form of tax relief, grants or other forms of state aid, to commercial companies. However, state aid can be justified for general economic development reasons.
Member states must apply to the Commission for clearance on a case by case basis before they can offer funding or incentives which amount to state aid, although some types of aid may fall within the General Block Exemption Regulation and there is a de minimis threshold under which aid is automatically exempted from the rules. Member states can be required to recover illegal aid from companies which have received public support in breach of the state aid rules.
Chancellor George Osborne said: "This is a key industry of the future and I want Britain to be one of its biggest centres. 95% of UK video games companies in the UK are SMEs. This relief is one of the most generous in the world and will help them to grow, creating new jobs for hardworking people."
Representatives of the video games industry in the UK also welcomed the state aid approval for of the UK video games tax relief scheme.
Dr Jo Twist, chief executive of Ukie, the UK games and interactive entertainment trade body, said: "This is amazing news for the UK games and interactive entertainment sector and will help developers of all shapes and sizes to grow and make more games right here in the UK. This is the culmination of an immense amount of hard work and we’re delighted to have played our part in a collective effort to get the tax reliefs in place."
Dr Richard Wilson, chief executive of TIGA, whose members include developers and technology firms involved in the UK video gaming industry, added: "TIGA has been campaigning for video games tax relief for seven years because it will create jobs, boost investment and enable the production of more British video games."
"Tax breaks for games production will help the UK fight its way back to the forefront of video game development," he said. "The video games tax relief will benefit a highly skilled, high-tech, R&D intensive and global export focused industry. TIGA now looks forward to working with the government and other interested parties on the implementation of the video games tax relief to ensure the full benefit of this landmark moment in the history of our industry."