Tax incentives for IT companies in Georgia. Virtual Zone vs International Company

How does the “Virtual Zone” status differ from the “International Company” status and which is more suitable for you?

Until 2020, Georgia had only tax incentives for IT companies with the status of 'Virtual Zone', but the government of the country established new incentives for international companies. To further motivate investors, transnational corporations are encouraged to relocate their IT service centers to Georgia in order to reduce the tax burden. In this article, we will analyze the main differences between the status of 'Virtual Zone' and 'International Company'.

Virtual zone

Entrepreneurs who are engaged in the development of an IT product can count on the status of the Virtual Zone in Georgia and full exemption from corporate income tax and VAT. The list of areas of activity that fall under this status is limited. You can apply for it if: you are engaged in the development of your own software, site support, graphic design. A complete list can be found in our article.

In 2021 Tax Administration of Georgia has made adjustments to the interpretation of the Article on activities in the Virtual zone and among the mandatory requirements for compliance with the status of the Virtual Zone ‒ the subsistence (presence) on the territory of the country namely: administrative expenses, for example, renting an office in which employees of the company work, or the presence of specialists from among the citizens of Georgia on the staff.

The advantages that this gives you:

• The ability to open a company and an individual bank account remotely;
• Fast registration;
• Corporate income tax 0% (instead of 15%);
• Dividend tax 5%;
• VAT 0%;
• The same requirements for both residents and non-residents of the country;
• The confidentiality of your banking operations, if you open an account in Georgia, will be absolute, the banks of Georgia do not transfer data on their clients to tax authorities from other jurisdictions under the CRS protocol;
• Maximum convenience associated with the ability to open a multi-currency account, which allows you to carry out activities not only with euros and dollars;
• You need to get only 1 certificate - a resident of the virtual zone of Georgia;
• Full mobility in terms of doing business, since this process can be carried out from anywhere in the world;
• Legality, legality and transparency;

Cons of the 'Virtual Zone' status

The main disadvantage can be considered the limited list of spheres of activity that fall under the status of 'Virtual zone' of Georgia. In addition, tax exemption does not apply to all activities of an IT company that already has a certificate (status) 'Virtual Zone'. A precondition for obtaining the status of 'Virtual Zone' is the implementation of such IT activities from Georgia for foreign clients, as a result of which software products (software, mobile application, etc.) are created.

Example

If an IT company maintains a website or provides other IT support services, or the company already owns a software / mobile application and receives a subscription fee, it is unlikely that that company can claim the tax exemption offered to companies with 'Virtual Zone' status. (despite the fact that the status 'Virtual zone' for the development of the application itself has been received).

Risks

Obtaining tax exemptions for Virtual Zone companies without prior analysis may involve significant tax risk. The tax risk exists until, at least, the tax administration publishes an instruction in which all the vague wording is clear, or until the wording is changed, or until the taxpayer receives a preliminary tax decision on the matter.

On the other hand, a tax audit may not start in your company for a very long time, or even if it does, tax inspectors may not pay attention to the details of what your IT company actually does. But such a possibility should not be a reason to ignore the existing tax risks.

You will know for sure if you are eligible for tax exemption or not, only if the tax audit is initiated by the audit department.

It is important to note that if you receive the “Virtual Zone” status, no one from the tax administration will come to you immediately and say that you do not meet the requirements or are eligible for tax exemption in Georgia. You will only know for sure if you are eligible for such an exemption if the audit is initiated by the audit department. This applies to those cases when the development of a software product is not obvious; in other cases, only a thorough analysis may be enough.

Currently, the tax authorities of Georgia have begun to request information from the companies of the 'Virtual Zone' about the total amount of their income and the amount of tax-exempt profits. More attention is being paid to this topic.

International companies

The establishment of benefits for international companies has become an additional motivation for companies to relocate their activities to Georgia. Thanks to this, they not only save on taxes but can also count on reducing labor costs. 

These services may include any of the following:

• Software release;
• Publishing computer games;
• Release of other software;
• Computer programming, consulting and related activities.

The list of permitted activities is specified in government decree No. 619. 

This is a rather long list of IT services, in contrast to the areas suitable for the 'Virtual Zone'. The status and tax incentives of “International Companies” apply to a much larger number of services and it is clear which IT activities are eligible for tax incentives.

The advantages that this gives you:

• Corporate income tax 5% (instead of 15%);
• Dividend tax 0% (instead of 5%);
• Payroll tax 5% (instead of 20%);
• VAT 0%;
• 0% property tax for assets used in activities carried out in the status of 'International company' (instead of about 1%);

Significant tax benefits allow, first of all:

• Obtain an opportunity to further reduce the corporate income tax base through the cost of wages paid to employees who are residents of Georgia, and research and development costs;
• Reducing labor costs.

Cons of the 'International company' status

One of the main disadvantages is that in order to obtain the status of an international company and, therefore, to receive tax benefits, the applicant must have at least two years of work experience. In addition, it is necessary to demonstrate the existence of the actual presence of the business in Georgia (expenses incurred in Georgia, the presence of hired personnel in the country, etc.).

A Georgian resident company, which is subject to income tax (in accordance with part 1 of Article 97 of the Tax Code of Georgia), can also expect to receive the status of an international company. The company must have been in the permitted business for at least two years. Or at least two years of experience in this area must be one of the partners of the company who owns at least 50% of the share. Such requirements do not apply by law to Virtual Zone companies.

Comparison of two statuses

The advantages of International Companies are that more types of IT services fall under the status compared to the status of the 'Virtual Zone'. In addition, the law for International Companies is spelled out in more detail, and multiple tax breaks and exemptions apply, while Virtual Zone companies are exempt only from income tax.

Let's compare the taxes and conditions of the 'International Companies' and the 'Virtual Zone' in the table below:

Note: VAT (18%) should not apply to IT services provided by 'Virtual Zone' or 'International Company' from Georgia abroad.

Important! The statuses of 'International Companies', 'Virtual Zone', 'Small Business', 'Free Industrial Zone' are not a complete guarantee of tax exemption. Take advantage of Georgia's tax breaks, but only after a thorough tax analysis of your case.

Jara Accounting specialists will help you conduct this analysis and find the best tax regime. Leave a request to get the first free consultation.