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New criteria must be met by Virtual Zone Persons to enjoy corporate income tax exemption in Georgia

New criteria must be met by Virtual Zone Persons to enjoy corporate income tax exemption in Georgia

Taxation of Virtual Zone Companies A new guideline is available

A new guideline from the Georgian Revenue Service regarding taxation of Virtual Zone Persons in Georgia

A few days ago, the Georgian Revenue Service (GRS) published a new guideline on the taxation of Virtual Zone Persons (VZP) providing some necessary clarification on this disputable tax matter. 

If you do not yet know, a VZP is a special tax status applicable to IT companies operating in Georgia and providing certain types of software-related services from Georgia abroad. In such cases, VZPs are supposed to enjoy 0% corporate income tax (CIT) on the distribution of profits (distribution of dividends is subject to CIT in Georgia).

More details about VZP taxation as well as a comparison with the tax status of “international company” (both statuses are applicable to IT firms in Georgia) can be found here.

Unclear law about Virtual Zone Person taxation in the country of Georgia

Unclear law about Virtual Zone Person taxation in the country of Georgia

The purpose of the newly published guideline from the GRS was to clarify the unclear tax issues that have become the subject of recent disputes between tens of VZPs and the Georgian government.

At the start of 2021, the GRS began to interpret the tax law regarding VZPs in a new manner. This new interpretation was radically different compared to the previous interpretation of the same law commonly accepted by the business community and the government for the last ten years since VZP status was introduced in 2011.

According to the new interpretation, if a VZP does not hire local IT staff and/or VZP foreign developers (including shareholders who are developers at the same time) do not spend sufficient time within a fiscal year in Georgia, then no tax benefit will be granted.

As a result, after declaring the above-mentioned approach, the GRS started to one-by-one contact almost all VZPs operating in Georgia and request them to pay corporate income tax retrospectively, considering the statute of limitation, this is three years in Georgia.

The legal basis for the GRS to claim taxes from Virtual Zone Persons

Notably, the main legal basis for the GRS to challenge Virtual Zone Companies was the following wording provided in the law “on information technology zones of Georgia”, Article 6:

Activities in the virtual zone shall comprise the economic activities of legal persons related to the production of ITs in the territory of Georgia.”

Even though, it is not explained in any law of Georgia, what it means when it states “production of IT in the territory of Georgia,” the above wording was interpreted by the GRS as the following: VZP IT staff (including shareholders who also are software developers) should spend most of the year in Georgia and bring fiscal benefits to the country (by paying salaries to themselves and local staff and wage taxes to the Georgian budget) as well as contribute to the development of the IT field locally. According to the GRS, if no such benefits are received, then no tax exemption shall be given to VZPs.

This issue has become the subject of big discussion and many VZPs chose the path of tax disputes instead of just paying taxes retrospectively based on the GRS’s verbal request (I am currently defending the interests of multiple VZPs in tax dispute processes).

The problem VZPs faced in 2021 can be summarized in the following way:

Ten years after introducing the law regarding VZPs, the government of Georgia realized that Georgia has not received enough benefit (tax revenue, the development of the IT field, flow of new knowledge into the country) in exchange for providing tax exemption to VZPs. To receive said benefits, the authorities assumed that it would be logical to set additional preconditions for VZPs applicable retrospectively (e.g., hiring local staff, paying salaries and tax, having a physical office, and so on), GRS has considered the above-mentioned wording of the law “Activities in the virtual zone shall comprise the economic activities of legal persons related to the production of ITs in the territory of Georgia” as such precondition.

However, the above-wording is subject of various interpretation and does not belong to the applicable Law-Georgian Tax Code which is prevailing to the “law on information technology zones” and GTC was not (is not) worded in a way that taxpayers (VZP shareholders) could make conclusion that additional preconditions must be met for the tax exemption. For instance, the precondition that they must spend most of the year in Georgia and/or hire local IT staff and pay them/themselves a significant amount of salary. No law ever mentioned these preconditions directly or indirectly.

For more information about the new approach of the GRS regarding VZP tax exemption, you can read my previous article here.

As a result, some clarifications were needed by the lawmakers of Georgia. Otherwise, the dispute would have continued on long into the future.

That is why the GRS introduced the new guideline and provided an explanation of what criteria need to be met by VZPs to qualify for CIT exemption.

GRS regarding Virtual Zone Company taxation and tax exemption in Georgia

The new guideline of the GRS regarding Virtual Zone Company taxation and tax exemption in Georgia

The guideline does not provide much information about the meaning of “IT created in the territory of Georgia.” The guideline provides examples (descriptions of cases and solutions to them) but every such example is worded based on the assumption that the software was created in the territory of Georgia without explaining what it means.  

So, we still don’t know how to satisfy the criterion “creation of IT in Georgia” unless everything is perfect: VZP has few local senior IT staff hired and shareholders spend most of time in Georgia, taxable salary of VZP consist of significant part of its income. This is ideal situation and we know, according to the guideline, in such a case VZP has right on the tax exemption but what about non-ideal cases when shareholders and/or developers want to spend their time in other countries too, and they do not need to hire local staff as they handle all projects themselves?

The guideline does not explain how many days a contractor or an employed software developer or a shareholder (who is also developer) needs to be in Georgia while developing the software on behalf of the VZP. How many local staff should be hired and how experienced should they be? Should the company have a physical office in Georgia? to qualify as a company that “creates IT in the territory of Georgia.”

On the other hand, the guideline does reveal some noticeable new approaches of the GRS regarding criteria VZPs should meet to enjoy tax exemption.

New criteria set for VZPs to qualify for tax exemption

A list of important updates found in the guideline of the GRS:

  • If the shareholder of a one-man VZP is a software developer at the same time, then a minimum of 40% of the total amount of income should be paid as salary locally (and taxed accordingly). In General, the guidelines suggest to VZPs to pay salary (and subsequently – wage tax) to employees at least 40% of their income or the amount calculated according to market principles (if they are able to demonstrate such market rules). In summary, only 60% of a VZP’s income can be tax exempt, the rest must be paid as salary to staff and taxed.

Please Note: Even in such cases, it is not clear from the guideline how many days a shareholder/developer should spend in Georgia in a fiscal year.

  • Besides providing software, providing the right to use software is also considered an activity that qualifies for VZP tax exemption (this is good news, as before it was not fully clear from the wording of the law);
  • In addition, the guideline clarified some other issues about VZP taxation, but it still leaves important questions unanswered. For example, how many days the staff (including shareholder developers) should spend in Georgia and what other criteria should be met besides paying salary to staff of at least 40% of total income?

Hopefully, more clarification will be available after the tax disputes are over.

Tax Residence in Georgia

To sum up: taxation of Virtual Zone Person in Georgia. New criteria are set by the new guideline from GRS

The new guideline regarding taxation of VZPs in Georgia was issued by the GRS in early 2022. The guideline provides some noticeable new information, but it is not detailed enough and does not provide any answers to the most important questions.

For example, the guideline does not clarify what is enough of a business substance to qualify for VZP tax exemption? In what specific cases can a VZP say the software was created in Georgia?

On the other hand, at least now you know that even if a developer spends the whole year in Georgia, a VZP still cannot claim their total income as tax-free because some portion should be received by developers (even if they are shareholders at the same time) as salary locally and taxed accordingly. Also, the list of IT activities qualified under the tax exemption is broader than could have been previously concluded from reading the law, which is again positive news.

One thing is certain, the guideline can be used to start planning the future if you are a VZP shareholder and have some plans in Georgia. Answers to practical questions and further details are available on an individual basis. For tax consultations, you can contact me at

After a detailed individual analysis, I will provide guidance of what is the best and safest way to proceed with operating as a VZP in Georgia and paying zero corporate income tax wherever possible.