\u201cA virtual zone person \u2013 a legal person engaged in IT activities and holding an appropriate status.<\/p>\n
Information Technologies (IT) \u2013 studying, supporting, developing, designing, producing, and introducing computer information systems, as a result of which software products are obtained (created).\u201d<\/p>\n
VZP Tax Exemption Clause (Article 99 of the Georgian Tax Code)<\/strong><\/p>\n \u201cProfit (distribution of profit) earned from the supply of information technologies (IT-defined above) outside Georgia developed by a legal entity of a virtual zone;\u201d<\/p>\n You see that the definition of \u201cIT\u201d according to the Georgian tax law is narrowed to the activity of creating software products (even here some additional questions exist e.g., does involvement in the creation of software suffice?). Moreover, following the clause of tax exemption of VZPs, the supply of IT developed by VZP is exempt, which does not seem correct tome. In addition, there are other mismatches between different clauses regarding VZP (in the Georgian Tax Code and other laws of Georgia regarding VZPs).<\/p>\n It is not fully clear whether lawmakers intended to provide tax exemption only on profit received from the service of creating software in Georgia. Nevertheless, intentionally or unintendedly, they set the important precondition in the definition and not all IT services are exempt.<\/p>\n Considering all the above, in my opinion, enjoying VZP exemption without a preliminary analysis might be associated with material tax risks. The tax risk exists until at least the tax administration publishes an instruction making all vague wording clear, until the wording is changed or until the advance tax ruling is obtained on that issue by the taxpayer.<\/p>\n On the other hand, a tax inspection might not be initiated in your company for a very long time and even if one is initiated, tax inspectors might not pay attention to the details of what the VZP company actually does. However, in my opinion, this low probability should not be a reason for disregarding existing tax risks. This is what I always recommend to my clients (not to rely on the probability of never having a tax inspection), but as ever the last decision is always the business owners\u2019.<\/p>\n To obtain almost full tax certainty regarding Virtual Zone Person\u2019s tax exemption, in some cases (e.g., if the risk is relatively high and if the turnover of VZP is medium-high) the best way to proceed is applying for an advance tax ruling issued by Georgia\u2019s Revenue Service (GRS), which is a legally binding document for the Georgian tax administration \u2013 thereby providing high tax certainty.<\/p>\n Lastly, it is important to note that if you obtain the status of a VZP, no one from the tax administration will immediately come to you and say that you are not qualified for tax exemption in Georgia. You will know exactly whether you qualify for an exemption only if a tax inspection is initiated by the audit department (where I worked for more than seven years) or in case of an advance tax ruling being issued by the GRS for your firm. I am referring Georgian tax authorities have started requesting information from VZPs regarding total income and the amount of exempt profit due to the VZP clause. It seems they are starting to pay more attention to this topic.<\/p>\n Tax benefits applicable for Georgian entities with the status of \u201cInternational company\u201d are relatively new in the Georgian tax legislation. This status applies to IT and shipping companies and to a quite long list of IT services (that differ from \u201cVirtual Zone Persons\u201d).<\/p>\n The status and tax benefits of \u201cInternational companies\u201d apply to much more IT services than in the case of \u201cVirtual Zone Persons\u201d. Besides, it is much clearer which IT activities qualify under the 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.<\/p>\n Tax Incentives Applicable for \u201cInternational Companies\u201d<\/strong><\/p>\n As I have already noted, benefits for \u201cInternational companies\u201d are applicable to more types of IT services when compared to VZPs. There is much more clarity as well as multiple tax incentives and exemptions for ICs, while VZPs are exempt only from corporate income tax.<\/p>\n Conversely, if a company plans to obtain the status of an international company, it should demonstrate at least two years\u2019 experience in IT (experience of a parent company might suffice). In addition, business substance in Georgia (actual expenses accrued, staff hired, offices rented, and so on) should be demonstrated. These requirements do not apply to the law for \u201cVirtual Zone Persons\u201d.<\/p>\n Please be aware that a status provided by the Georgia Revenue Service (e.g., \u201cVZP\u201d, \u201cSmall Business\u201d, \u201cInternational Company\u201d, or being registered in the \u201cFree Industrial Zone\u201d) is not a full guarantee of tax exemption. Certificates of VZP, IC and other special statuses are not binding by law for Georgian tax authorities. Obtaining the status is relatively easy than actually being qualified under the exemption. So, enjoy the tax benefits, but please do it only after a proper and thorough tax analysis of your case.<\/p>\n Georgian IT firms can either obtain the status of \u201cVirtual Zone Person\u201d or the status of an \u201cInternational Company\u201d. In both cases, highly beneficial tax benefits apply, however, there are several differences between the two statuses.<\/p>\n The most important difference is that less types of IT services qualify under VZP exemption than under the \u201cInternational Company\u201d exemptions. Besides, IC is characterized with a higher tax certainty compared to VZPs. Having said this, it is more complicated to receive the status of an \u201cInternational Company\u201d than to be granted a certificate of VZP, because the former requires two years of experience and business substance in Georgia. Importantly, different tax rates apply for the two statuses.<\/p>\n <\/p>\n","protected":false},"excerpt":{"rendered":" The Republic of Georgia offers multiple tax benefits to IT firms registered in Georgia who provide services abroad. In particular, IT companies in Georgia holding the status of a \u201cVirtual Zone Person\u201d (VZP) or the status of an \u201cInternational Company\u201d (IC) can enjoy various tax incentives. Based on my experience and knowledge of the Georgian […]<\/p>\n","protected":false},"author":615,"featured_media":82686,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1747,1749,1786,1793,1751,1790,1778,1768],"tags":[],"class_list":["post-89320","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-all-news","category-business-en","category-biznesi-en","category-news-in-english-en","category-finances","category-phinansebi-en","category-forbes-georgia-in-english-en","category-opinions","has-thumb"],"yoast_head":"\n![\"\"](\"https:\/\/forbes.ge\/wp-content\/uploads\/2021\/04\/N20-MAR21-ALL-PAGES-80-83_page-0003.jpg\")
<\/p>\n
\nto cases when development of software products is not obvious, for other cases a proper analysis might suffice.<\/p>\n![\"\"](\"https:\/\/forbes.ge\/wp-content\/uploads\/2021\/04\/N20-MAR21-ALL-PAGES-80-83_page-0004.jpg\")
<\/p>\n\u201cInternational Companies (IC)\u201d<\/h5>\n
\n
Conclusion<\/h5>\n