The video game industry has won a seven-year battle to claim government tax breaks. The European commission has agreed to extend the credits, which are already available to film and theatre productions, allowing games makers to claim back 25% of their qualifying production costs.

Tax breaks have already boosted domestic film production, increasing the number of Hollywood features and telivision shows made in Britain. Without the same support, the commission said on Thursday, the number of new "culturally British" games being produced was likely to decline considerably.

Studios such as Rockstar North, the American-owned – but Edinburgh-based – designer of Grand Theft Auto, will need to meet a number of tests before qualifying for the scheme.

About a quarter of the games made in Britain today would qualify, with marks awarded for British locations, characters, and dialogue as well as the use of British developers, composers, designers and studios.

Industry association Tiga initially secured the tax breaks in the Labour government's final budget in March 2010, but they were dropped later that year by the coalition.

In April 2013, the commission launched its investigation, saying there was no obvious market failure in this "growing and dynamic sector". An announcement had been expected in time for this week's budget, but the news was delayed. The competition commissioner, Joaquin Almunia, said on Thursday: "Our initial doubts have been dispelled. The proposed aid for video games will indeed focus on a small number of distinctive, culturally British games which have experienced difficulties in finding private finance."

According to Tiga, employment in the sector fell by more than 10% between 2008 and 2011 and investment by £48m as tax breaks available in other countries began to affect work in the UK.

Tax director Rachel Austin at accountants Deloitte said: "The relief will provide a huge boost to an industry that has faced fierce competition in recent years from developers in countries such as Canada and France, where tax incentives are already offered."