On December 29, 2022, the Revenue Service introduced major changes to corporate tax rules concerning Virtual Zone companies. Find out more about the changes in our latest article here.
Georgian Virtual Zone Tax Benefits: for businesses (legal entities) in the IT sector. Pay 0% corporate tax and 0% VAT.
There are plenty of articles online which make the Virtual Zone sound like a magic tax haven, open to pretty much anyone with a vague connection to the IT industry. In reality, it’s not that easy to get this special tax status.
However, if you do qualify, the tax benefits are every bit as good as they sound.
This article explains everything you need to know about Virtual Zone companies in Georgia (Country), how to know if you might qualify, and how you can get the benefits provided by the Georgian government.
NOTE: If your company has at least 2 years proven experience in the IT sector, the newer (Oct 2020) International Company Status (ICS) may actually offer even better tax breaks than the Virtual Zone in some cases. With ICS you get 0% dividends tax, 5% corporate tax, only 5% on employee salary (reduced from 20%), as well as no VAT on B2B services provided to foreign clients. Read more about International Company Status here.
Important Changes to Virtual Zone Status (Q1 2022)
A new Revenue Service Methodical Instruction (Original Georgian Version Here – English version below), means some significant changes to taxation and other elements for Virtual Zone (VZ) status. The most recent amendment to this instruction, issued on 28th March 2022, means additional changes.
Some of these changes clear up a number of gray areas which we have been warning our clients about for years. The key clarifications/updates, as well as the main new rules, include, but are not limited to:
- In order to benefit in full from the 5% dividends and 0% Corporate income tax rates, a VZ company must utilize Georgian-based employees with qualifications in the IT field. Employees in other fields (accountants, assistants, etc.) are not sufficient.
- In the 28th March update, the Revenue Service has decided to abandon the 40% method – read the description of this defunct rule below. As a result of the recent update, the method for reassessing the distributed funds of VZ companies who do not utilize Georgian-based IT employees (who are not company founders) has become vaguer, as the Revenue Service is now entitled to evaluate which part of the dividends shall be deemed as salary payouts based on the available data on remuneration in the Georgian labor market. Sadly as this is a very recent change there is no practice available on which to base any conclusive opinion on exactly how this will be applied.
- If a registered VZ company obtains International Company Status (ICS) the VZ status will be revoked from the 1st day of the month in which ICS status was obtained.
The previous information on the 40% is now out of date:
If not employing qualified IT personnel (for example, in the case of IT solopreneurs or instances where the company shareholder(s) are the only qualified IT specialists in the company), then 40% of “financial income” (a term undefined by the RS, but which we believe could mean gross turnover but have no way of knowing for sure at this time) would be considered the salary of the directors (essentially because the directors ARE the employees) and would be taxed at 20%*. This may still provide for a lower tax rate than a regular Georgian LLC, depending on your profit margins, though given the uncertainty of the 28th March amendment it would be a significant risk until we have actual practice to base our opinion on, rather than just the very vague documentation on this topic.
Depending on your turnover, IT solopreneurs (who can trade as individual entrepreneurs and do not require a legal entity) could also consider the Small Business Status (1% tax rate) if they qualify and will be tax residents of Georgia.
The below information in the rest of this article is based on our previous analysis before the new instruction was released, though much of it remains valid, it has not been updated to reflect the new changes and for that reason we highly advise a consultation with one of our experts before proceeding with Virtual Zone status.
Once implications of the new instruction have been seen to be applied in practice, we’ll update our findings and this article in more detail.
This Article Includes:
- What is a Virtual Zone company
- Its benefits and limitations
- How to know if your company will qualify
What is the Georgian Virtual Zone?
The status of “Virtual Zone” is a special tax status which can be granted to certain types of companies operating in the IT sector. The tax benefits apply only to services/products provided to foreign (outside Georgia), non-resident clients.
If you generate revenue through Georgian business (legal entity) activities related to software development, including SaaS (Software as a service / subscription-based software), and your business provides those products/services to non-Georgian companies or to individuals that are non-residents in Georgia, you are eligible to get Virtual Zone status and have access to benefits like 0% corporate income tax and 0% VAT.
In theory, general IT consulting, Internet marketing, eCommerce, Crypto, and other IT-related services may have at one time qualified. But today, it is highly unlikely that an application based on those sorts of businesses would actually be approved Virtual Zone status, unless you could show a majority component within the business as being software and development based (i.e., you sell/license ecommerce or internet marketing software).
Having the Virtual Zone tax status means that you enjoy several benefits, including being exempt from different types of taxes. See the table below.
Summary Of Virtual Zone Benefits And Their Limitations
Corporate income tax 0% instead of
If you start working with Georgian clients and earning revenue from within Georgia, only the amount generated from Georgian sources needs to be taxed – corporate income tax 15%, VAT 18%.
Value-added tax (VAT) 0% instead of 18%. You also can voluntarily register as a VAT payer and pay 0% VAT on business income, but be able to claim back VAT when you make purchases from other VAT registered companies in Georgia.
You must withhold and pay income tax from the salary of your employees in Georgia (20%) plus 2%+2% for the mandatory contribution to the pension fund.
Only distributed dividends are taxed at 5%.
|During distribution of dividends to non-resident shareholders, your country of personal tax residency should be considered carefully.|
To avoid double taxation, Georgia is participating in double taxation avoidance treaties, which you can read more about here and check all the participating countries.
0% Export Tax on exports leaving the Georgian customs territory.
Getting a certificate for your legal entity is free, and there are no annual license fees.
|The application process can be tricky and has a high chance of being declined if not prepared correctly.|
You do not have to be a Georgian resident, personal tax-resident, or a partner with a Georgian resident, in order to get Virtual Zone status. The business must be located in Georgia, but can be managed from anywhere. But…
As the company director, being a resident or tax-resident in Georgia will significantly increase your chances of your company getting approved.
In theory, your staff can be based anywhere, not just in Georgia, but…
Though you are not obligated by Georgian legislation to hire local staff, your application is much more likely to be denied if you do not employ local staff as your main team and show a real physical company presence in Georgia.
Why would the Georgian government give these benefits to companies?
The purpose of this law is to attract investments and create a favorable environment for those who will perform economic activities in the field of information technology. To boost the Georgian economy, the government has implemented a lot of reforms and made doing business in Georgia easier than ever before. In 2020, Georgia Ranks 7th in the World for Ease of Doing Business.
Who Can Apply (Do you Qualify?)
Some firms claim they can help anyone get that incredible Virtual Zone tax status for their business… But in reality, to qualify you must:
- Be an IT company (typically connected to software development).
- Your registered business activity would likely be something classed within J62, J63, or M73 from the list of NACE activities, though you may or may not qualify within these categories, depending on the exact nature of your business.
- Have already registered your business (legal entity) in Georgia.
- Know that the tax benefits only apply for clients you serve who are based outside of Georgia (clients in Georgia will be taxed at regular non-VZ rates).
- Have some sort of economic substance in Georgia (an office with Georgian employees is typically required). See the FAQs below.
- Have access to a Georgian phone number & bank account (for revenue service purposes. If you don’t have these, you can hire a local accountant as your representative).
A legal entity, for example, a Limited Liability Company that is registered in Georgia, can apply to get Virtual Zone status, even if you are a non-resident.
Registering your legal entity is relatively easy and affordable compared to other European countries. However, it is also easy to have your application rejected. Additionally, if you don’t speak Georgian, it’s easy to make mistakes during the application process.
If you want more help with registering a legal entity in Georgia, read our guide to opening your LLC here.
I’m a Freelancer / Solopreneur in the IT sector, do I qualify?
Although there are no rules stating you don’t qualify, in practice, cases like these, where there is a single company director with no employees in Georgia, will almost certainly get rejected. A few years ago, the program was easier to join. But since 2020, rejections are typical for anyone without substance in Georgia. Either way, you would have to open an LLC in Georgia, because sole traders and/or foreign entities do not qualify under any circumstances.
What sort of economic substance do I need in Georgia?
Typically, you need to demonstrate actual physical premises and/or local staff, but the exact requirements depend on the nature of each individual case. One of our advisers can talk through your unique situation and advise what you would need to do, and whether staff/premises would be necessary or not to have a higher chance of a successful application.
Do I, as company director, need to live in Georgia to benefit from the Virtual Zone status?
No. You can manage the business remotely. But if you’re not residing in Georgia yourself, you’ll need to have some other form of presence here, such as a local office.
It should also be noted that if you are a tax resident elsewhere, you may owe additional taxes in that country/countries, on any income earned from your Georgian business. As Georgia is already part of FATCA, and will join the CRS (Common Reporting Standard) in 2023, your current country of tax residency may have access to your bank account details in Georgia. If you are a tax resident in Georgia, then no additional tax is levied on dividend distributions after the initial 5%.
Can I open the business remotely?
Yes. If you already have substance here, we can assess your application and help you get a positive result. If you do not have substance, we can give assistance on getting it in place to ensure a successful application.
Are there any capital requirements or annual fees?
No. Once you open an LLC (which also has no capital requirements or annual fees) then, after establishing sufficient substance, you can proceed with the VZ application. Your company does not have to generate any minimum turnover and no additional annual fees are levied against continued operation of the business. We can help you file your monthly tax returns.
How To Apply For The Georgian Virtual Zone
- Register your legal entity (business) – takes about 2 working days.
- Register your entity with the Revenue Service and its online portal – 1 working day.
- Submit your digital Virtual Zone Application at http://newzone.mof.ge/ – Minimum 10 working days for application processing (but expect a 30 day wait in practice).
- You may then be asked to provide additional proof and clarification of your business model, your services/products, local staff contracts, and more. Another wait of 10 to 30 days for additional documents to be reviewed. If accepted, additional 2 working days to get the certificate.
Whether you need to follow all 4 steps, or are just looking to apply for the final Virtual Zone status, we can help make the process as painless as possible, and help you avoid the common mistakes that independent applications often suffer from.
Given the complications, rule changes, as well as all the audits that occurred in 2021, we do not recommend pursuing Virtual Zone status without the advice of an experienced tax advisor. However, we’ve put together a straightforward checklist below where you can understand the overall process a little more. We take no responsibility for how you use the below guide or the results or potential back taxes for incorrect registration, or any other affect of following our information. Please note, if you’d like to open your VZ company remotely, you must have representation (via a Power of Attorney) in Georgia.