Georgia’s tax legislation offers a number of high value incentives for IT corporations operating in the country and offering IT services to foreign customers, writes Gela Barshovi, founding partner of the audit company TPsolution.
Georgia was ranked 6th in the World Bank’s Doing Business rankings for 2017.
One of the best advantages of this developing eastern European country in terms of doing business is Georgia’s simple bureaucratic procedures for launching a business, low level of corruption and, most importantly, beneficial tax system.
The Georgian government’s policy to attract foreign investment into the country means the country’s tax legislation offering several tax incentives.
For example, the new corporate income tax system that entered into force in 2017 allows Georgian companies (with only a few exceptions) to pay corporate income tax only upon the distribution of dividends. In other words, if those companies reinvest their profit, they pay no tax for the reinvested amount. While this offers an enticing tax benefit to set up a business in Georgia, the country provides an even better tax system for IT companies.
Virtual zone person
According to Article 8 of Georgian Tax Code (GTC) a “virtual zone person” (VZP) is a legal entity operating in the IT sector, having obtained a certificate that proves this status.
A company with this status gains the advantage of paying no corporate income tax in Georgia on the revenue derived from providing information technology services (i.e. web development, application building) to non-residents in accordance with Article #99 of the GTC.
In addition, once a VZP status has been obtained, a company will be able to enjoy the tax benefits for as long as they continue to offer foreign IT services.
How to obtain a VZP certificate
The process of obtaining the status of a VZP is very easy and fast, making the process much more attractive to prospective IT companies.
A limited liability company represents the most popular legal form in Georgia and it takes only one day to register as one, which is possible with zero capital and costs GEL 100 ($39). This status allows a company to apply for a VZP certificate using the tax authority’s online platform and submitting proof of it operating in the IT sector. Usually the authority prefers to receive three years of evidence of operating in the IT sector, but this is not compulsory, especially for newly registered companies seeking to obtain a certificate. Nevertheless, companies are usually issued with a certificate within 10 business days.
The important benefit of such a certificate is the high tax certainty. Once the tax authority issues the certificate, it will no longer be withdrawn if a company meets the main criterion of providing IT service abroad.
Payment of VAT
Tax benefits for IT companies are not restricted to direct taxes, however.
Articles 160 and 161 of the GTC state that VAT is payable in Georgia only for operations taking place within its territory.
Provisions within Article 166 of the GTC further state that VAT cannot be charged when IT services are provided to non-residents, as this classed as being carried out outside the territory of Georgia.
How much and which taxes are to be paid in total?
An IT company that performs services outside Georgia, having obtained VZP certificate will pay withholding tax on dividends, which amounts to 5%, according to paragraph 1 of Article 130 of the GTC.
In addition, 20% of the withholding tax has to be paid upon the payment of salary to employees, as well as a property tax of up to 1% of the average book value of a company’s assets.
Georgia’s network of 56 income tax treaties with most European and many non-European states also provides an additional blanket of protection for taxpayers from double taxation risks. Those treaties are mostly based on old versions of the OECD model tax convention (2008 and older).
Overall, an IT company choosing to operate in Georgia to service its foreign clients will not only save taxes, but also enjoy tolerant regulations, simple procedures, low costs, a very low level of corruption and take advantage of the available labour trained in the sector.