Virtual Zone Entity in Georgia - Can this tax regime work for you?
Assuming you are an IT - engineer (web developer, back-end or front-end developer), or work in IT field you might be interested in company formation in Georgia with Virtual Zone Entity status. To use the tax incentives effectively, you need to either move to Georgia yourself, or move your staff here (IT employees), hire local engineers, get an office and have Georgia-related expenses. We will discuss these point below in our article.
According to the Law of Georgia on Information Technology Zones, information technologies (IT) are defined as "study, support, development, design, production and introduction of computer information systems, as a result of which software products are obtained (created)". So if your business is related to any of this activities, you may be eligible for VZE status and may use the tax regime for such business.
The Virtual Zone Entity (VZE) is fully exempt:
(a) From Corporate Income Tax (CIT) on profit that the company gets from provision of Information Technologies (services) outside of Georgia;
(b) From VAT on provision of Information Technologies outside of Georgia;
As the result, normally, companies pay only 5% dividend tax on the dividends distributed to the shareholder. No distribution (nor deemed distribution) of dividend - no tax.
How can you obtain the status?
To get a Virtual Zone Entity status, the company formation in Georgia shall consist of submission of respective documentation (evidence), that the Company works in IT industry. (i.e. an agreement with a client or other relevant papers that would show that you deliver Information Technology products or services.
The main pre-requisites to qualify for VZE status tax incentives are the following:
- (a) You have to have a registered business in Georgia (see business registration guide);
- (b) You have to be providing IT services / products outside of Georgia (service - recipient shall be non-resident of Georgia);
- (c) Your core IT activities for provision of services shall be conducted in Georgia (this is a controversial subject and we'll talk about this down below, (see: Eligibility (what to pay attention to)).
Eligibility (What to pay attention to):
Requirements for producing / conducting Information Technologies in / from Georgia under VZ status:
In April, 2021, Georgian Revenue Services started asking VZ businesses, whether they had employees in Georgia. Later, it turned out, that the RS changed their policy regarding the VZE's and even though it is not very clear from the legislation, the RS believes that in order to qualify for only 5% taxation, the VZ company has to produce software / other IT products/services IN Georgia.
This means, that the IT business would have to substantiate, that the activities related to IT production are conducted in Georgia.
According to article 6 of Law of Georgia on Information Technology Zones, "Activities in the virtual zone shall comprise of the economic activities of legal persons related to the production of ITs in the territory of Georgia." (note: official translation of https://matsne.gov.ge/). The way we (LTA) would translate this provision into English, would be "The economic activities of a Virtual Zone Entity, shall be related to Information Technology production and shall be conducted on the territory of Georgia"
This provision can be understood in various ways, one of the understanding being, that the fact that the company is registered in Georgia, would mean that the company conducts IT production in Georgia. Secondly, we believe IT sphere is very abstract and not related to particular geographical territory.
On the other hand, it is possible for them (the RS) to maintain, that as the business doesn't have Georgian Employees, doesn't have an office in the country, and does not have any operational expenses in Georgia, by not showing that IT activities (production/services, etc.) take place in Georgia, there is a risk that your activities are taxed 5% + 15% corporate tax.
The more facts and documents there are, linking software/IT production to Georgia, the less risk of subjecting your company to regular taxation there is. Thus, we suggest, the following ways for proving production activities in Georgia:
(a) Having employees and an office in Georgia: Hiring local software developers, or other IT staff. it is advisable for them to have respective degrees. The workforce in IT field is quite good in Georgia and may reduce your costs for acquiring IT specialists. You should take into account that it must be believable that the employees are hired for the right reasons, meaning, that they're actually submerged in the process of software production / services.
In case you're a one-man company, we'd suggest that the company director lives in Georgia and having an office would be an additional asset.
If you are a director of a VZE and you're not fully located in Georgia, but have local employees, we'd also suggest that you take business trips to Georgia. This could show that you are interested in your business and the development of your office here. Visiting for a week or two could show that you at least know your employees, that you've trained them personally, etc. (even though now, it is absolutely possible to get to know them by Virtual Meeting Rooms). The RS have asked whether some of the VZE status owners have crossed the Georgian border, so that's why we think, it could be an additional incentive, showing, that you personally come and supervise the business processes in Georgia.
(b) Getting sub-contractors to do software development or other work: We're not sure whether you need such help, but if needed, keep in mind that this could also help.
(c) Having other expenses in Georgia: We are not sure what additional expenses may be, but think about what services could be used for your work in Georgia. We think, you could use some of Georgian Server solutions.
- For any further enquiries contact us today.
- Author: Mery Togonidze
- Associate Legal Partner of LTA Georgia
