In this article, you will read all about Free Industrial Zones. Why register a company under Free Industrial Zone address? Should you stay away from FIZ? What kinds of tax incentives can a company gain from being FIZ? May there be a negative outcome? You will find answers to all of your hypothetical questions, with arguments, based on our experience.
What is Free industrial zone and what does it do exactly?
While searching the internet for possible tax incentives for your business, you will not be able to bypass suggestions to register your business in Georgia under Free Industrial Zone address. The temptation is huge, as FIZ companies are suggested a wide variety of tax incentives, which we discuss below, but before deciding, you should know what does FIZ offer exactly and whether your company would gain from such registration.
According to the respective law FIZ companies are created for production / manufacturing, processing, provision of any kind of services WITHIN FIZ. Therefore, Free Industrial Zones are the best platforms for manufacturing, processing of goods. The minute your company registers on the address of the Free Industrial Zone - you are subject to all tax incentives defined by Georgian Tax code.
Tax Incentives
FIZ companies are exempt from almost all taxes. There is 0% tax on Corporate Income Tax, 0% Dividend tax, 0% Property tax, 0% Import tax and 0% VAT, 0% Reverse Charge VAT.
There is a 4% tax on import of goods from Georgia to FIZ and 4% tax on export of goods from FIZ to Georgia (to a legal entity or a person). But if you import from abroad or export to countries other than Georgia, 0% tax applies, as mentioned above. Also, import of electricity, water and gas for personal use, is also subject to 0% taxation.
The 4% import/export to Georgia tax, shall be paid no later than 15th day of the next month from the date delivery of goods took place. In case the goods were delivered or received for free from and to a Georgian company, the tax shall still be paid and be calculated from the market price of such goods.
You will also have to keep in mind that you don’t pay 20% income tax on behalf of your employees, but they would have to administer income tax payment themselves. Depending on how familiar your employees are in preparation of taxes, this part may not ever bother you, but you may have to educate them on how to keep track of their duties.
You may encounter some misleading information on the internet, from the sites that advertise FIZ zones in Georgia, that there are additional incentives for companies registered in FIZ, such as no need to keep the books - WHICH IS NOT CORRECT! FIZ companies must be in full compliance with accounting and financial reporting compliance.
As Georgia has DTAs with many countries, some companies may benefit from FIZ taxation regime twice as much. This cases shall be subject to discussion though, and the results may vary from case to case. You will better understand the concept with the help of your counsel, including us and we’re ready to assist you with the matter, or any other question, anytime.
When not to register in FIZ? Disadvantages of FIZ
- FIZ companies are not exempt from requirements of obtaining special mandatory licences / permits determined by Georgian law (though there are SOME exceptions) such as brokerage licence, other types of financial licences, moreover such licences should be issued by the special governmental bodies for FIZ companies (which does not normally exist, as companies registered in FIZs normally assumed they would not be required to obtain any further licence other than what they received from FIZ administrator. But FIZ administrator just gives you a licence to be presented on the FIZ territory and is not authorized to issue any governmental licence or permit!). Therefore, in fact in most cases, if your activity is subject to mandatory licence or governmental permit - we highly advice to double check possibility of registration AND obtaining of special licence / permit with tax professionals. Often, in such cases it is advisable to be registered as ordinary company and not within FIZ territory.
- The main disadvantage when registering as a FIZ company, is that you will not be able to open a Georgian bank account. This is due to negative experience they had with such companies. Namely, there were numerous cases of unidentified transfers to / from FIZ companies. At the same time, we would say that there is still a chance to open one if you provide sufficient evidence that you truly operate in FIZ, e.g. you have a manufacturing facility there which is exporting goods from Georgia, employees, office. Alternatively to that, there is still possibility make this company operable through foreign banks services. At the same time we would like to warn you that after opening of such foreign bank account you are obligated to inform its details to the Revenue Service via the respective form within 5 days.
- Uncertainty with respect to TRADING. There are many companies who are registered in the FIZ solely for trading from there. Very often these companies don't even import / export goods to or from FIZ. Such trading is not directly forbidden by the law, but we would say at least that the purpose of creation of FIZs did not involve creation of Georgian companies that just trade internationally without crossing Georgian border. Currently most of companies registered in FIZs are conducting exactly this business. And as mentioned in our previous article: In I quarter of 2021 Revenue Service started to get in touch with FIZ companies representatives and showing their position that FIZ companies are NOT ALLOWED to conduct purely trading activities. It means that FIZ companies should not buy and sell products without their processing on the territory of FIZ. For considering the goods as “processed” the goods shall change their HS codes, normally at least its last four digits, but to be more precise it is better to follow the respective instructions, depending on country to which the goods are exported.
- If your company renders services FIZ status shall be of no use for you, this is why: Firstly, there is a direct indication in Georgian Tax Code that the FIZ company cannot render services to Georgian resident entities. So, if you intend to render services to Georgian entities, we can firmly say you will not be exempt from taxes from such income. Also - as there is no ordinance from the Government yet on what kind of services FIZ company can provide abroad - provision of any kind of service abroad shall be subject to regular taxation. The contents of the provision is enough to be wary of registering at FIZ if all you do is render services to a resident or non-resident entities. Until there is a proper explanation from Georgian Government, we suggest that the lack of clarity on the situation could result in Georgian Revenue Services interested in FIZ companies paying taxes on every service rendered or purchased. Moreover, according to the latest tax manual N2656 issued by the Head of Revenue Service with respect to provision of services by FIZ companies abroad - income distributed by such FIZ company shall be subject to normal corporate income tax, as the list of services which are allowed to be provided by the FIZ company is not yet issued by the Government.
- Also keep in mind that according to Georgian Tax Code, it is also prohibited to purchase services by Free Industrial Zone companies from the Georgian entities.
Fees
Free Industrial Zone Annual licence fee ranges were anywhere between USD5,000 to USD15,000 in Georgia, but now they dramatically reduced and are between USD2,000 and USD5,000.
So, is it worth it?
Should you register as FIZ company? - The answer is typical for every lawyer: It depends.
If you have a company that manufactures goods and imports, PROCESSES and exports them to and from Georgia, being a FIZ company gives huge benefits tax-wise. But if you're a company rendering services or purely trading company - FIZ registration shall be of no use for you.
May you need help with registering your company in Free Industrial Zone, please contact us and we will consult you in more detailed way and assist you through the last step to being successfully registered as a Free Industrial Zone Company.
