Tax incentives in Georgia (country) applicable for IT companies holding the status of “Virtual Zone Person” or “International Company.” Which one is better and why?
The Republic of Georgia offers multiple tax benefits to IT firms registered in Georgia and providing their services abroad. Particularly, IT companies in Georgia holding a “Virtual Zone Person” (VZP) status or status of an “International Company” (IC) can enjoy various tax incentives/exemptions.
Based on my experience and awareness of the Georgian tax legislation, I will briefly explain the pros and cons of VZP and IC status and compare them to each other in this article.
“Virtual Zone Person (VZP)“
An IT firm in Georgia, with a VZP certificate, can enjoy a full exemption from corporate income tax (CIT) on specific types of IT activities performed from Georgia for foreign customers. It is a highly beneficial tax exemption, however, it is not as straightforward as many people (including some accountants) think.
I have highlighted the words “specific type of IT activities” above, as the VZP status does NOT apply to all types of IT services. Moreover, tax exemption does not apply to all IT firms holding a VZP certificate (status).
There is a misbelief among some entrepreneurs and tax professionals that VZP exemption applies to any type of IT services for being provided abroad from Georgia. This view is not fully correct. In fact, there is an important precondition for qualifying under VZP status and even if VZP status is obtained, it is not guaranteed to be exempt from CIT.
The precondition for qualifying under VZP status is performing such IT activities from Georgia for foreign clients as a result of which the software products (e.g. software, mobile application…) are created.
As already mentioned, the above is the precondition for granting a VZP status, which, from my point of view, eliminates quite a long list of IT services. Besides, even if IT firm obtains a VZP status from the Georgian competent authorities, still it is not a guaranty for the tax exemption (see the citation of the exemption clause below).
In other words, if IT service performed by VZP is not creating applications, software or other IT products, such services hardly can qualify under VZP exemption. For example, if your IT company provides website maintenance or other IT support services, or a company already owns a software/mobile application and receives a subscription fee, it is unlikely that this company can qualify under tax exemption offered to VZP companies (VZP status may be obtained though).
To put it shorter, the IT firm mentioned above can have problems of obtaining a status of VZP but even if VZP status is obtained, (it is easier than the exemption) the main problem of qualifying under the tax exemption might still remain unsolved.
The citation of the definition of VZP (article 8 of GTC):
“A virtual zone person – a legal person engaged in IT activities and holding an appropriate status.
Information Technologies (IT) – studying, supporting, developing, designing, producing and introducing computer information systems, as a result of which software products are obtained (created).”
VZP tax exemption clause (article 99 of GTC)
“Profit (distribution of profit) earned from the supply of information technologies (IT-defined above) outside Georgia developed by a legal entity of a virtual zone;”
You see that a definition of “IT” according to the Georgian tax law is narrowed by the activities of creating software products (even here some additional questions exist – e.g. creating software by VZP, or involvement in creation of software also suffices, etc.). Moreover, following the clause of tax exemption of VZPs, the supply of IT developed by VZP is exempt, which does not seem grammatically fully correct for me. In addition, there are other mismatches between different clauses regarding VZP (in the GTC and other law of Georgia regarding VZPs).
It is not fully clear for me whether the law-maker intended to provide tax exemption only on the profit received from the service of creating software in Georgia, nevertheless, is it the fact, that intentionally or unintendedly they set the important precondition in the definition and not all IT services are exempt.
Considering all above, in my opinion, enjoying VZP exemption without a preliminary analysis might be associated with the material tax risk. The tax risk exists until at least the tax administration publishes an instruction making all vague wordings clear or until the wording is changed or until the advance tax ruling is obtained on that issue by the tax payer.
On the other hand, the tax inspection might not be initiated in your company for a very long time or even if it starts, tax inspectors might not pay attention to the details of what the VZP company actually does. However, in my opinion, such probability should not be a reason for disregarding existing tax risks. This is what I always recommend to my clients (not to rely on probability of never having tax inspection) but of course, the last decision is always of the business owners.
For obtaining an almost full tax certainty regarding Virtual Zone Person’s tax exemption, in some cases (e.g. if the risk is relatively high, if the turnover of VZP is medium or high) the best way to proceed is applying to advance tax ruling issued by Georgia’s Revenue Service which is a legally binding document for Georgian tax administration – thus, provides high tax certainly.
Lastly, it is important to note that if you obtain a status of VZP, no one from tax administration will immediately come to you and say that you are not qualified or you are qualified under the tax exemption in Georgia. You will know exactly whether you qualify for such exemption or not only in case if a tax inspection is initiated by the audit department (where I worked for more than 7 years) or in case of the advance tax ruling is issued by the GRS for your firm. (I mean cases when development of software product is not obvious, for other cases just a proper analyses might suffice).
For your information, currently Georgian tax authorities started requesting information from VZPs regarding the total amount of their income and the amount of the exempted profit due to VZP clause. It seems, they are starting to pay more attention to this topic.
“International Companies (IC)“
Tax benefits applicable for Georgian entities with a status of “International company” are relatively newly introduced in the Georgian tax legislation. Such status applies to IT and shipping companies and to a quite long list of IT services (differently from “Virtual Zone Persons”).
In other words, status and tax benefits of “International companies” apply to much more IT services than in case of “Virtual Zone Persons”. Besides, it is much more clear which IT activities qualify under the tax exemptions/incentives granted for ICs (the list of IT activities qualifying under IC status are provided by the law, sometimes together with NACE codes of such business activities). Therefore, higher clarity is provided by the law regarding ICs than regarding VZPs.
Tax incentives applicable for “International companies”:
- 5% corporate income tax (instead of 15%);
- 0% dividend tax (instead of 5%);
- 5% wage tax (instead of 20%);
- 0% property tax for assets used in activities performed under “an international company” status (instead of about 1%);
- The possibility to further decrease the base of corporate income tax with expenses of salary paid to Georgian resident employees and R&D expenses.
As I have already noted, benefits for “International companies” are applicable for more types of IT services compared to VZPs. Besides, clarity is much higher and multiple tax incentives and exemptions apply for ICs while VZPs are exempt only from Corporate Income Tax.
On the other hand, if a company plans to obtain a status of “an international company,” it shall demonstrate at least 2 years of experience in the IT field (experience of parent companies also might suffice). In addition, business substance in Georgia (actual expenses accrued, staff hired, office rented, and others) should be demonstrated. Such requirements do not apply by the law so strictly to “Virtual Zone Persons”.
Taxation of “international companies” VS Taxation of “Virtual Zone Persons”
In the table below you can find a brief comparison between the taxation of two tax modes discussed hereby:
|“Virtual Zone Persons” and “International Companies”|
|Corporate Income tax||0%||5%|
|Property tax||up to 1%||0%|
|Additional tax benefits||No||Yes|
|Preconditions of demonstrating 2 years’ experience||Factually no/not strictly||Yes (factually and by the law)|
|Obligation of demonstrating business substance||Not strictly for taxation purposes, mostly for banks||Yes|
|List of IT services qualified under the exemption||No list is provided/low certainty of the VZP definition and the exemption clauses, some preconditions, bigger room for interpretations||Quite broad list of qualified IT services and higher clarity|
|IT service shall be provided abroad||Yes, determined by the law||Not clearly determined by the law yet but limitation applies in the practice|
Note: VAT application (18%) is not linked to any mentioned status, but mostly, VAT should not apply on IT services provided by either VZP or IC from Georgia abroad especially after 2021 (still, each case requires an individual analysis, especially before 2021).
Notably, the following ordinary tax rates are applicable in Georgia:
|Corporate Income tax||15%||monthly declaration (payable in case of distribution of dividend)|
|Wage Tax||20%||monthly declaration|
|Dividend Tax||5%||monthly declaration|
|Property tax||up to 1%||Annual declaration|
Please be aware that a status provided by the Georgia Revenue Service (e.g. “VZP”, “Small Business”, “International company”, being registered in “Free Industrial Zone”) is not a full guaranty of tax exemption. Certificates of VZP, IC and other special statuses are not binding by the law for Georgian tax authorities. Obtaining the status is relatively easy than actually being qualified under the exemption. So, please, enjoy the tax benefits but please, do it only after a proper, thorough tax analysis of your case.
Georgian IT firms can either obtain a status of “Virtual Zone Person” or a status of “International Company”. In both cases, highly beneficial tax modes apply, however, there are several differences between those 2 status.
The most important difference is that less types of IT services qualify under VZP exemption than under the “international company” exemptions. Besides, IC is characterized with higher tax certainly compared to VZPs. On the other hand, it is more complicated to receive the status of an “international company” than a certificate of VZP, because the first one requires 2 years of experience and business substance in Georgia (2 years’ experience in the field of parent companies might also suffice though). Importantly, different tax rates apply for those 2 status.
About the author: Gela Barshovi is an international and Georgian tax consultant and founder of a Tbilisi based consulting&accounting firm TPsolution. For any tax-related services, accounting/reporting services, and/or questions regarding the article, you can directly contact him at firstname.lastname@example.org