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), 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 new (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%), no VAT on B2B services provided to foreign clients. Read more about International Company Status here.
This Article Includes:
- What is a Virtual Zone company
- Its benefits and limitations
- How to know if your company will qualify
- A Free Checklist For The Application Process
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 company 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 (ie. you sell/licence 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, 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 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. But 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 or personal tax-resident, or 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 you 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, M73 from the list of NACE activities though you may or may not qualify within these categories, or from other 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 – instead, 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. But it is also easy to have your application rejected. 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 it 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, 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 form of other 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 such country or countries, on any income earned from your Georgian business. As Georgia is already part of FATCA, and will join the CRS 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 independent applications often suffer from.
Get a free 30 minute consultation with one of our ExpatHub tax advisers.
If you’d prefer to DIY the process, we’ve put together a straightforward checklist that you can follow. Please note, if you’d like to open your VZ company remotely, you must have representation in Georgia.