5% corporate tax, 0% dividends tax, and only 5% tax withholding on employee salaries. It might be time to move your IT company to Georgia (country).
On October 8th, 2020, the new “International Company Status” was announced in Georgia, which grants the opportunity for certain types of companies in the IT & Maritime sectors to qualify for some pretty excellent tax breaks if they base their companies in Georgia (country).
Summary of taxes:
- Low 5% Profit Tax (Corporate Income Tax – Normally 15% in Georgia). Tax is levied at the time of distribution only. Reinvested profits are not taxed.
- 0% Dividends Tax (Instead of 5%).
- 5% Tax withholding on employee income (reduced from 20%) + the standard 2%+2% pension contributions for employees who are legal residents of Georgia.
- 0% Property Tax (except land) on property if this property is intended for or used to carry out the permitted activities of the international company.
What is International Company Status (ICS)?
The International Company Status (ICS) is a special tax status in Georgia available to certain types of Georgian enterprises, which must be operated in Georgia. This can include Georgian enterprises which represent foreign (non-resident) enterprises.
In essence, if you have a Georgian or non-Georgian enterprise that operates in one of the qualifying IT or Maritime sectors outlined in the legislation, then so long as you register as a Georgian enterprise, have a Georgian office, and carry out the work in Georgia, you could benefit from the very low taxation rates listed above.
This program is aimed at enticing foreign IT & Maritime companies to base themselves in Georgia, and, as you can see, the tax rates are very attractive.
Information in this article is based directly off the revised Article 23 from the Georgian Tax Code (not yet available in English at the time of writing), and off Ordinance 619.
Who Can Apply (Do you Qualify?)
Will your business qualify? You must meet all the conditions below.
- The applying company must have (both at the time of application and going forward) at least 98% of their annual revenue derived from activities within the allowable IT or Maritime sectors. See the full list below.
- The company seeking this status must be a Georgian enterprise operating for more than 2 years in the given sectors (see Article 2.1.a);
- OR be a Georgian enterprise that represents a foreign (non-resident) enterprise. The non-resident enterprise must have operated for more than 2 years in the given sectors (see Article 2.1.b);
- OR a Georgian enterprise (the applicant), owned by another enterprise (parent – Georgian or non-resident). The parent company must have 2+ years of experience in the given sectors and more than 50% ownership of the Georgian enterprise (see Article 2.1.c).
- The Georgian Enterprise may not be established in a free industrial zone.
- The Georgian enterprise must have physical substance in Georgia, meaning that the enterprise “shall carry out basic income-generating activities in Georgia and have adequate human resources to carry out such activities, with the necessary qualifications,” – Ordinance 619 (Article 2.2).
One important clarification to note is that the enterprise, which must have at least 2 years of operation in the required sector, does not have to already be a Georgian enterprise – Ordinance 619 (Article 2.1.b).
Effectively, your non-Georgian enterprise can register a brand new enterprise in Georgia as a representative, then open an office in Georgia, and subsequently qualify for this status as soon as substance in Georgia can be shown.
A representative company would operate under the same name as the parent company and be owned by that non-resident parent company. Effectively, this means you are opening a local Georgian branch of the non-resident enterprise.
OR your foreign company can be the majority owner of any Georgian enterprise and apply that way.
The parent company would not have to show that they derive 98% of their annual revenue within the required sectors, only that they had at least 2 years experience within those sectors.
Example 1:
Non-resident Corporation, Stuff Corp., has multiple divisions. The IT division makes up 20% of their annual revenue, and has been active for more than 2 years. Stuff Corp. decides to open a branch in Georgia, Stuff GE, to handle all their IT needs. IT services will generate 98% of the revenue within this Georgian enterprise. The Georgian enterprise, Stuff GE, once awarded International Company Status, will benefit from all the taxes listed above.
Example 2:
Non-resident company, Nice widgets LLC, has been operating as a software company for more than 2 years. The director decides to move to Georgia and start a new company. Nice Widgets LLC opens a Georgian enterprise, Nice Widgets GE LLC, and is the majority shareholder of the new enterprise whose Georgian employees will create software from their new office in Tbilisi. After International Company Status is granted, Nice Widgets GE LLC, will benefit from all the taxes listed above.
Other Considerations
Beyond the tax benefits and qualification criteria, there are a couple of other points to consider.
VAT
Unlike the Virtual Zone status (also for IT companies) there is no broad VAT exemption defined for enterprises with International Company Status. This means such enterprises will be liable to follow Georgia’s typical VAT rules.
But if your clients are based outside of Georgia, a number of VAT exemptions are likely to apply.
- If your products/services are exclusively B2B, then it is very likely you will not have to charge VAT on anything.
- If you become a VAT registered company in Georgia, then you will also be able to claim back all VAT on purchases, and thereby avoid Georgian reverse VAT.
If, however, your products/services are B2C, then in some cases those transactions might be VATable. The details of this are complex, so it’s best to discuss your unique case with a Georgian Tax adviser.
Revocation of Status
It is possible for the International Company Status to be revoked at any time if you operate outside the parameters of the status or elect to have the status revoked.
Revocation is defined in Ordinance 619 (Article 3 – Revocation of the status).
The most pertinent point is that if you begin to generate revenue (more than 2%, not including VAT) from activities that are not on the permitted list, then the status can be revoked within 10 working days of the Ministry of Finance initiating a review of your case.
How To Apply
Applications must be made through the RS.ge (Revenue Service) online portal.
In order to apply, you will need to provide:
- Enterprise registration data (identification number, name, legal form). In the event that the non-resident enterprise that has the required 2+ years operation experience and the Georgian enterprise does not, the details of both enterprises will be needed.
- Legal and actual addresses (place of business) of the enterprise.
- The type of permitted activity(-ies) your business performs.
- The place from which services are rendered (i.e., Georgia).
- The date of submission of the application and the signature of an authorized representative.
The Revenue Service (RS) will take up to 10 business days to assess your application. If additional information is required, you will have 10 business days from the date of this notification to supply the additional information. If the RS is satisfied, they will submit the application to the Ministry of Finance who will get final approval on the application.
Once the Ministry of Finance approves the application, you will be awarded International Company Status from the first day of the same month in which the status was granted.
If you need help with this process, or advice on making a successful application, you can get a free consultation with one of our expert tax advisers.
Full List Of Permitted Activities
IT activities, including:
a) the following activities provided for by Code 58.2 of the Georgian National Classification of Economic Activities:
a.a) 58.2 – software release;
a.b.) 58.21 – releasing of computer games;
a.c ) 58.29 – releasing of other software;
b) the following activities provided for by Code 62 of the Georgian National Classification of Economic Activities:
b.a.) 62.0 – computer programming, consulting and related activities;
b.b.) 62.01 – computer programming activities;
b.c) 62.02 – consulting activities in the field of computer technology;
b.d) 62.03 – computer management activities;
b.e) 62.09 – other activities related to information technologies and computer services;
c) production and / or delivery of digital products, including software support and delivery of updated versions of software;
d) website development and / or delivery;
e) web hosting, remote maintenance of software and hardware;
f) software and related updates;
g) provide images, texts and information to ensure access to a database;
h) remote system administration;
i) online delivery of allocated memory capacity;
j) grant access to or download software (including purchasing / accounting software or antivirus software) and updates;
k) banner ads blocking programmes;
l) download drivers, such as software that connects computers to peripherals (such as a printer);
m) automatic online installation of filters on websites;
n) automatic online installation of firewalls;
Maritime activities:
o) commercial and maintenance services by a shipowner and / or those related to ship ownership, including:
o.a) ship rental with or without a crew (bareboat charter)
o.b) route planning and / or analysis;
o.c) giving route instructions to a ship’s captain as agreed with the charterer of vessels;
o.d) the counting of stallia, disbursement report analysis and management;
o.e) managing disputes over cargo-related claims, commercial and legal issues, and written chartering agreements;
o.f) organising new shipbuilding orders and / or the service of buying and selling used ships;
o.g) supervising the physical condition of a ship and / or supplying a ship with relevant technical parts and / or food products;
o.h) coordinating shipbuilding, ship docking and repair activities, and conducting inspections in accordance with the requirements of industry regulators;
o.i) ensuring compliance with the ISM Code, an international standard for the safe management and operation of ships and for pollution prevention, with the requirements of state control over flags and ports, and with the rules of a classification association.
- Source Ordinance 619 Anex 2, Article 1
Translation of revised version of Article 23 – International Company (October 2020) From Source: Georgian Tax Code
- An international company is a Georgian enterprise, which carries out activities defined by a resolution of the Government of Georgia and receives income only from these activities.
- A person is granted the status of an international company by the Government of Georgia.
- Carrying out activities by an international company that are not defined by a resolution of the Government of Georgia shall result in the revocation of the status of an international company from the date of granting this status.
- An international company may not be established in a free industrial zone.
- (Removed – 14.07.2020, №6817) .
- (Removed – 14.07.2020, №6817) .
- Income from employment in an international company is taxed at 5 percent.
- Dividends issued by an international company shall not be taxed at the source of payment and shall not be included in the gross income of the person receiving the dividend.
- The object of taxation of the profit tax of an international company shall be determined in accordance with the first part of Article 97 of this Code.
- The profit tax rate of an international company is 5 percent.
- The amount taxable with the profit tax of an international company is obtained by dividing the amount of the loan / expense incurred by the object of taxation by 0.95.
- In case of expenses incurred in Georgia by a resolution of the Government of Georgia, an international company has the right to reduce the taxable amount of profit tax in the amount established by the Minister of Finance of Georgia.
- An international company is exempt from property tax (except land) if this property is intended or used to carry out activities permitted by a decree of the Government of Georgia.
- The Minister of Finance of Georgia shall establish the procedure for providing information on employment to the tax authority and the application of the benefit provided for in paragraph 7 of this Article.
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