Vice President of the Brazilian video game trade association Abragrames, Carolina Caravana, announced during the opening session of Gamescom Latam that the history of the country’s gaming industry will now be divided into two periods: before and after 2024.
The turning point? the establishment of a new legal framework in May that, among other things, rewrites the rules regarding video games and provides gaming corporations with new incentives and investment prospects.
Even if “a new legal framework” sounds dry, talking to Brazilian creators about its potential impact on the local games sector makes you feel excited about it; you’ll hear the word “game changer” used often.
“We refer to it as the second phase of the Brazilian gaming industry,” states Rodrigo Terra, president of Abragames. “We’ve had the boss fight, now we have the next level.”
“When you try to be a safe place for companies, for the government to understand what the gaming industry is, and a safe place for investors to come to Brazil, this legal framework opens new perspectives,” continues Eros Silva of trade association Apex Brasil.
“This kind of legal framework [is] trying to dismiss misunderstandings of what gaming companies are, or what bad companies are.”
Thanks to the framework, businesses can now be classified as video game firms instead of just “software companies that make video games.” This will entail that they are subject to different tax laws than other software companies and have their own code number under the CNAE (National Classification of Economic Activities).
“We now have the opportunity to have Brazilian states looking into games from an economic perspective,” Terra argues. “Many other nations, including the United States, South Korea, France, Germany, and the United Kingdom, were doing that ten or fifteen years ago. These governments were setting up operations, tax breaks, hubs, and incentives to improve the performance of gaming enterprises.”
Additionally, games are now considered part of “culture,” which creates additional grant and funding opportunities. It is now simpler for the video game industry to set itself apart from the gambling and sports betting sectors because a distinction has been made between the two.
Since the government recognized the video game industry in Brazil as a legitimate one in 2003, this is the industry’s biggest advancement. Furthermore, trade associations and developers alike waged a protracted fight that culminated in the framework.
“We’ll spend about two years implementing everything, but when it’s finished, I think we’ll have the best place in the world to start and work in a games company”
A significant portion of the lobbying was carried out by Thiago de Freitas, the CEO and creator of Kokku, one of the biggest studios in Brazil, during his years of direct government service as a member of the National Commission for Culture. The framework’s development has mostly focused on tackling a significant performance gap in the market and figuring out “what we could do to make the Brazilian industry healthier for [developers],” he says.
“We’re one of the ten biggest countries when it comes to expenditure on games, but we’re not even close to that when it comes to making revenue for the video games industry here,” De Freitas says. “We’re now finally in a position where we can get investment and real opportunities to access equipment that has been so hard for us to access, such as dev kits, test kits.”
As we covered in our opening article for Brazil Games Week yesterday, local companies are mostly working on PC and mobile projects because it is more difficult for developers to obtain console development kits due to continuous restrictions on technology imports. Teams have been waiting six months for officials to release development kits that were stranded at the airport, according to Terra, but she believes this will be resolved soon.
De Freitas continues, “We do now have an opportunity for video games to be viewed as a true sector, not merely part of some other industry like cinema or technology. This differentiation between games and other tech or entertainment industries will also be a major advantage. When it comes to investment, bringing in equipment, and making sure we’re not taxed since this equipment is not built in Brazil, it will help create the proper policies that are specific to the video game business. Brazil will undergo a revolutionary transition as a result of this kind of investment and the associated tax benefits.”
The introduction of tax incentives may be a tremendous boon for the games industry, as we have seen in many global economies, including the UK and Canada. These incentives assist support studios and projects that might have otherwise struggled. De Freitas continues, “Tax incentives can help studios pay better salaries so they can offer larger, more experienced teams to their clients because many of Brazil’s largest studios, including Kokku, are built around work-for-hire services.”
“If you’re paying really high taxes here because of the employment labour laws, you can’t be that competitive and you can’t pay the kind of salaries you’d need to compete with European and North American companies,” he says.
Revisions to the tax code will also facilitate foreign investment in Brazilian studios, says Chris Bergstrasser, chief strategy officer of Kokku’s new parent company, OV Entertainment, based in the UK.
“In the past, Brazil companies had to do cash accounting instead of accruals, and because of that you’d see companies reporting loss after loss and then a magic profit towards the end,” he continues. “That makes it very difficult for us as outsiders seeking to invest to determine where to spend, and it’s damaging to a company’s ability to reinvest in itself and maintain that growth path. All that’s seen are businesses experiencing financial losses, followed by unclear events.
“That’s changed a lot to the point where you’re now seeing foreign investors – including myself – looking at Brazil with different eyes.”
We’ll talk more about Julianna Brito’s Indie Hero, an accelerator for independent Brazilian studios, tomorrow. Before the legal framework, she claims, Brazilian indies were practically “invisible to foreigners,” and being able to register a games firm will help make them more approachable to investors and partners.
“One of the first things investors are going to do when they come to a country they don’t know is see how many companies there are,” she explains. “They [think], ‘Oh, this market is developed there, since there are many companies,’ because [if] there are numerous companies.
“At one point, I spoke with some German investors who had come to Brazil to do research and they told me that there were no gaming firms there, no market data, and no one would invest. However, foreigners can no longer ignore us. They are going to notice that we are a market. They will also feel more secure if they carry their own money.”
However, Terra from Abragames cautions that creating tax incentives is a difficult task. He claims that the trip to tax benefits witnessed in the UK, Germany, France, and Belgium taught lobbyists for Brazil’s gaming industry a lot, but he also adds that extra impediments are added by the country’s current tax system.
“From a federal level and a state level, our taxation here is really a mess,” he explains. “They are [making adjustments] to more closely resemble what the US and Europe do for productivity and consumer goods industries. Many of our tax laws will be made simpler by the Tax Renewal Law, which is scheduled to take into effect in 2030.
“We might have to have that tax relief discussion again in two or three years as it might get stale by then. Thus, nobody is discussing it at this time. Years will pass before we discuss it. We must come up with more strategies to increase incentives and draw in more outside investment.”
Although tax benefits might not be forthcoming anytime soon, Brazilian developers are eager to investigate alternative avenues for obtaining fresh capital and investment. According to De Freitas of Kokku, studios find it “quite impossible” to obtain a loan because of the high interest rates in Brazil. This is only one of the many reasons he hopes the government would assist in identifying fresh avenues for gaming company investment.
“There’s no strong industry if you don’t have really close relationships with the government and have them support the growth of your industry with tax incentives, grants, making the environment for entrepreneurship less complicated, and more focus on teaching youth how to enter this industry,” he says.
Despite having a sizable population, Brazil nevertheless lacks the necessary educational background to produce AAA video games, for instance. To alter that, we must begin encouraging more businesses to invest in Brazil. In order for them to do so, they must perceive improvements to the environment to ensure that their money is secure here. Then, more Kokkus will start to show up here.”
Brito continues, “Indies have not only had trouble attracting the attention of the government, but they have also been invisible to foreign investors and partners.”
“Every time we went to discuss funds with [the government], they would ask, ‘Who are you? You and the companies don’t exist. We can now declare, “Hey, we need this; there are 1,200 gaming companies in Brazil that provide 20,000 jobs.” As a community, we can actually collaborate with the government in a number of areas to get particular projects underway.”
That is not to argue that prior to this paradigm, government backing was absent. Later this week, we’ll be publishing our interview with the São Paulo State Secretary for Culture, Creative Economy and Industries, who talks about the state’s support for the gaming business. Apex Brasil’s Silva also notes that some Brazilian governments already have funding programs in place.
“We now have an opportunity for video games to be seen as a real industry, not just part of some other industry like film or technology”
Thiago de Freitas, Kokku
It will take years to fully comprehend the framework’s effects, but for the time being, Brazilian engineers are optimistic that it will offer them an advantage over competitors worldwide. The “most contemporary and modern [gaming] legislation in the world,” according to Terra, is exactly that.
“Governments need to put things in boxes, and which box do you put games in?” he asks. “It was under software, but is it under technology or culture now? No, both are involved. Games are just games. It can’t be divided. This concept of a law has never before existed.”
Of course, this is only the start. It would take some time for the government to put the legal framework into effect after it was passed in May. The interministerial work groups tasked with addressing issue have already started their work.
“I think we’ll spend about two years implementing everything, but when it’s finished, I think we’ll have the best place in the world to start and work in a games company,” says Terra.
Silva of Apex Brasil anticipates that the framework will help further diversify the Brazilian video game sector in the future. Apart from customary game creators, there are also advertising game studios and the previously stated work-for-hire and services providers.
“The game will change for Brazil for the next five years,” he states. “We are going to see the small companies being invested in, creating more jobs, helping the economy, and bringing more dollars to Brazil.”