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Guide of Georgian Virtual Zone Tax Benefits


Guide of Georgian Virtual Zone Tax Benefits


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Introduction


Georgia's Virtual Zone Status (VZS) is a tax incentive program established in 2011 to foster the growth of the country's information technology sector. The VZS is designed to create a favorable business climate for certain IT companies to attract foreign investments, promote industry development, and create job opportunities for Georgian citizens.


While the benefits of 0% corporate tax, 0% VAT, 5% capital gains tax on dividends, and no annual license fees are enticing, the process of obtaining and maintaining Virtual Zone status requires careful navigation. This guide will walk you through the intricacies, recent changes, and alternatives, empowering you to make informed decisions for your business.



The Georgian Virtual Zone: What It Is and How It Works



The Georgian Virtual Zone


The Virtual Zone is a special tax status granted to specific types of companies operating in the IT sector. The tax benefits primarily apply to services and products provided to foreign (non-Georgian) clients. 


For investors operating in Georgia, the VZS offers an array of advantages, including exemption from corporate income tax at a rate of 15%, zero payment of value-added tax (VAT), and no requirement for Georgian residency to qualify for this status.



Recent Updates to Virtual Zone Status (Q1 2022)


Recent updates to the Revenue Service's regulations have brought significant changes to the Virtual Zone landscape.


Employee Requirements:


VZPs must now employ Georgian-based IT professionals to fully benefit from tax breaks. This requirement ensures that the companies contribute to the local economy by creating jobs for Georgian IT specialists.


Revocation of the 40% Rule:


The "40% rule," which allowed IT solopreneurs to be taxed on 40% of their income as if it were salary, has been discontinued. This change brings some ambiguity regarding the tax treatment of non-Georgian IT staff and IT solopreneurs who previously relied on this rule.


Economic Substance Emphasis:


There is now a greater emphasis on demonstrating "economic substance" within Georgia. This includes having physical premises and employing local staff, which strengthens the application for VZP status. The requirement for a physical presence in Georgia signifies a shift towards ensuring that VZPs have a tangible impact on the local economy.


Updated Application Process:


The application process for VZP status has been streamlined to include electronic submissions through the Financial-Analytical Service's website. The status is granted within 10 working days and is issued permanently, with electronic certificates provided within 2 working days after approval.


Taxation Details:


The new guidelines specify how profits are taxed, focusing on distributed profits, non-economic expenses, gratuitous supplies, and payments. Profits from IT services provided outside Georgia are tax-exempt, while those generated within Georgia are taxable.


Clarifications on Profit Distribution:


The guideline provides clear examples of how profit distribution should be handled, particularly emphasizing the need for local IT professionals and the proper allocation of profits for tax purposes.


Revocation Conditions:


The conditions under which VZP status can be revoked have been clarified. If a VZP is found to be using the status to avoid taxes or if it fails to comply with the regulations, its status can be revoked. The revocation process includes notification to the Revenue Service within 2 working days.


These changes aim to tighten the regulations around the VZP status to ensure that the benefits are granted to companies that have a substantial presence and contribute to the local economy in Georgia.



Virtual Zone Benefits for IT Companies in Georgia



Virtual Zone Benefits for IT Companies in Georgia


To fully utilize the potential of the Georgian Virtual Zone, IT businesses need to adopt a strategic operational model that integrates local talent, legal compliance, and technological infrastructure.


Key Components of an Optimal Model:


Local Workforce:

  • Hiring qualified IT professionals in Georgia ensures compliance with recent regulations mandating local talent for full tax benefits.

  • Georgia's growing pool of skilled IT professionals provides access to cost-effective talent with valuable local insights.

Physical Presence:


  • Physical presence is a crucial factor in obtaining and maintaining Virtual Zone status.


Technological Infrastructure:

  • Investing in secure communication channels, cloud-based collaboration tools, and reliable internet connectivity is essential for seamless communication and efficient project management between your Georgia-based team and remote management.


Legal and Tax Compliance:


  • Partnering with the Gegidze agency ensures adherence to evolving regulations and optimizes tax benefits, mitigating the risk of non-compliance and potential penalties.


Focus on Core Competencies:


  • Outsourcing non-core functions like accounting and legal services allows your IT team to concentrate on their core strengths: software development and innovation.


Continuous Improvement:


  • Regularly assess and adapt your operational model to changing market conditions and regulations, ensuring your business remains agile and competitive.


Example Operational Model:


An IT company could establish a small office in Tbilisi, staffed with a core team of Georgian software developers and project managers. Remote management, potentially based elsewhere, would oversee strategic decision-making and business development. Cloud-based tools would facilitate communication and collaboration, while Georgian legal and accounting companies would handle Tax optimization for individuals and companies.

By adopting a well-structured operational model like this, IT businesses can maximize the benefits of the Georgian Virtual Zone, minimize risks, and achieve sustainable growth in the global market.



Virtual Zone Status (VZS) in Georgia: Pros and Cons



Virtual Zone Status (VZS) in Georgia: Pros and Cons


In corporate decision-making, it is essential to analyze the pros and cons associated with any alternative, especially when considering a specialized tax benefit system like the Virtual Zone in Georgia (VZS). For investors in Georgia, the VZS offers various advantages, including exemptions from corporate income tax, VAT, and no requirement for Georgian residency.


Detailed Overview of Georgian Virtual Zone Benefits

0% Corporate Income Tax


Virtual Zone companies are exempt from corporate income tax on profits derived from IT services provided to foreign clients. This significant tax break allows businesses to retain more of their earnings, fostering growth and reinvestment.

0% Value Added Tax (VAT)


VZ companies enjoy a 0% VAT rate on eligible services and products delivered to clients outside of Georgia. This eliminates the burden of VAT collection and remittance, streamlining financial operations and enhancing competitiveness.

Reduced Tax on Dividends


While dividends distributed by VZ companies are still taxed, the rate is reduced to 5%, compared to the standard personal income tax rate of 20%. This incentivizes investment and rewards shareholders while maintaining a degree of tax revenue for the government.

No Residency Requirement


The Virtual Zone welcomes foreign entrepreneurs and investors. There's no obligation for owners or managers to reside in Georgia, allowing for flexible business structures and remote management.

0% Export Tax


Exporting IT services or products from Georgia under VZ status incurs no export taxes, further reducing the financial burden on businesses and promoting international trade.

Free Certification and No Annual Fees


Obtaining and maintaining Virtual Zone status involves no additional costs beyond standard company registration fees. There are no annual license fees, making it a cost-effective option for businesses.

Understanding the Constraints of the Georgian Virtual Zone


  1. Limited to IT Activities: The Virtual Zone's tax benefits are exclusively available to companies engaged in specific IT-related activities. Businesses operating outside this scope do not qualify.

  2. Tax on Georgian-Sourced Income: If a VZ company generates income from clients within Georgia, that income is subject to the standard 15% corporate income tax rate. This necessitates careful segregation of income sources for accurate tax reporting.

  3. Tax on Employee Salaries and Pensions: Salaries paid to Georgian employees are subject to a 20% income tax, and both employer and employee contribute 2% each to the pension fund. While the overall tax burden remains lower than in many other countries, these costs should be factored into financial planning.

  4. Economic Substance Requirement: To maintain VZ status, companies must demonstrate a genuine presence in Georgia, typically through physical offices and/or local staff. While remote management is allowed, a lack of economic substance can lead to status revocation.


Government's Rationale for Offering These Benefits


The Georgian government offers these generous tax incentives through the Virtual Zone to achieve several strategic objectives:


  1. Attract Foreign Investment: By creating a favorable tax environment for IT companies, Georgia aims to attract foreign direct investment, stimulating economic growth and job creation.

  2. Promote the IT Sector: The Virtual Zone is designed to nurture the development of Georgia's IT industry, positioning the country as a regional technology hub.

  3. Diversify the Economy: By encouraging IT businesses, the government seeks to diversify Georgia's economy away from traditional sectors and foster innovation.

  4. Enhance International Competitiveness: The tax benefits make Georgian IT companies more competitive on the global stage, attracting international clients and projects.



Eligibility for Georgian Virtual Zone Status


It is crucial to understand the eligibility criteria for the Georgian Virtual Zone as it can unlock significant tax benefits for your business. Meeting the qualifying requirements is essential to take advantage of this opportunity and can have a positive impact on your business's financial health.


Who Can Apply?


While the Virtual Zone appears open to any IT-related business, in reality, the eligibility requirements are more stringent. The primary candidates for Virtual Zone status are:


  • IT Companies Focused on Software Development: Companies whose core business revolves around software development, including SaaS (Software as a Service), are the most likely to qualify. This includes activities like programming, software design, and implementation.

  • Businesses with Foreign Clients: A substantial portion of your revenue should come from clients outside of Georgia to benefit from the tax exemptions. The Virtual Zone's advantages might be limited if you primarily serve the Georgian market.

  • Companies with Economic Substance in Georgia: Demonstrating a physical presence in Georgia, such as an office, and employing local staff, particularly IT professionals, significantly strengthens your eligibility. This proves that your business is actively contributing to the Georgian economy.


Criteria and Qualifying Sectors


To be eligible for Virtual Zone status, your business activities should align with the following criteria:


  • Registered Legal Entity: You must have a registered legal entity in Georgia, such as a Limited Liability Company (LLC). Sole proprietorships or foreign entities are not eligible.

  • Focus on the IT Sector: Your primary business activities should fall under specific IT categories defined by the Statistical Classification of Economic Activities in the European Community (NACE). These typically include software development, data processing, hosting, and IT research and development.

  • Economic Substance: While not explicitly stated in the law, having a physical office and employing local staff in Georgia is often crucial for a successful application.

  • Foreign Revenue: A significant portion of your revenue should be generated from clients located outside of Georgia.


Steps to Obtain Virtual Zone Status



Steps to Obtain Virtual Zone Status


  1. Register Your Legal Entity in Georgia: Opening a Limited Liability Company (LLC) in Georgia is a crucial step. While the process is straightforward, seeking professional assistance can help avoid potential pitfalls (you also can check our blog on How to open an LLC business in Georgia).

  2. Register with the Revenue Service: Enroll your company on the Revenue Service's online portal to facilitate tax reporting and compliance.

  3. Submit Your Application: Submit your Virtual Zone application through the official online portal. Ensure your application is comprehensive and includes all required documents and information.

  4. Provide Additional Information (If Requested): The Revenue Service may request additional documentation or clarification regarding your business activities, staff contracts, or office lease agreements. Be prepared to respond promptly and thoroughly to any inquiries.


Navigating the Application Process


Registering a legal entity in Georgia is relatively straightforward, but the application process for the Virtual Zone can be intricate and time-consuming. Businesses must go through pretty complicated processes to benefit from the "regally reduced" taxes; in reality, it's not as straightforward as it seems. 


Besides, if the company is eligible for virtual zone status, it can enjoy a real tax haven in Georgia.


Many businesses benefit from enlisting the services of legal and tax professionals. When it comes to applications for Virtual Zone Status (VZP), Gegidze is a one-stop shop for businesses, making the process less painful. That's how it works.


  • Gegidze manages company registration paperwork.

  • Handles the application process for IT Virtual Zone status

  • Take care of document legalization.

  • Gegidze secures the virtual zone status and helps businesses operate with full compliance.



Tax Advantages of the Georgian Virtual Zone


The Georgian Virtual Zone offers a compelling tax landscape for IT companies, particularly small businesses and individual entrepreneurs. Let's delve into the specific tax advantages and how they can benefit your venture.


Small Business Tax Benefits in Georgia


1% Tax Rate for small Businesses:


For small businesses with annual turnover not exceeding 500,000 GEL (approximately USD 185,000), the Virtual Zone offers an incredibly low tax rate of 1% on profits. This significantly reduces the tax burden, allowing businesses to reinvest more earnings into growth and development.


0% Corporate Income Tax (For Foreign-Sourced Income):


Virtual Zone companies are completely exempt from corporate income tax on profits from IT services provided to clients outside of Georgia. This applies to small businesses structured as Virtual Zone LLCs and individual entrepreneurs operating in the IT sector.


0% VAT on Exports:


Virtual Zone companies are exempt from Value Added Tax (VAT) when providing IT services or products to foreign clients. This enhances competitiveness in the global market and simplifies financial administration for small businesses.


Restrictions and Forbidden Activities


While the Virtual Zone offers attractive tax benefits, certain restrictions and forbidden activities apply. Understanding these limitations is crucial to ensure compliance and avoid potential penalties.


  1. Activities Outside IT Scope: The tax benefits are exclusive to IT-related activities. Businesses engaged in other sectors are not eligible for Virtual Zone status.

  2. Georgian-Sourced Income: Income generated from clients within Georgia is subject to standard tax rates (15% corporate income tax and 18% VAT). Virtual Zone companies must meticulously separate their income sources for accurate tax reporting.

  3. Forbidden Activities: Certain activities are strictly prohibited within the Virtual Zone. These include gambling, financial services, and the production or sale of excisable goods (alcohol, tobacco, etc.).


Certification and Maximum Turnovers


Businesses must obtain a certificate from the Revenue Service to maintain Virtual Zone status. There are no specific turnover limits for small businesses enjoying the 1% tax rate. However, companies with higher turnovers may be subject to additional scrutiny to ensure compliance with Virtual Zone regulations.


Eligibility for 1% Tax Status


To qualify for the 1% tax rate, your business must meet the following criteria:


  1. Small Business Status: Your annual turnover should not exceed 500,000 GEL.

  2. IT Sector Focus: Your primary activities should fall under eligible IT categories defined by Georgian law.

  3. Compliance: You must adhere to all Virtual Zone regulations and reporting requirements.


VAT Exemptions


Virtual Zone companies providing IT services to foreign clients are exempt from VAT. However, if you also offer services to Georgian clients, VAT will apply to that portion of your income at the standard rate of 18%.



Starting a Small Business in Georgia: The Virtual Zone Advantage


The Georgian Virtual Zone offers an enticing environment for entrepreneurs and small businesses in the IT sector. The combination of low taxes, simplified administration, and access to a growing pool of IT talent makes it an attractive destination for startups and established businesses alike.


If you're considering starting a small business in Georgia, the Virtual Zone can significantly reduce your tax burden and boost your bottom line. Whether you're an individual entrepreneur or a small IT company, the Virtual Zone's tax benefits can be a game-changer.



Setting Up a Bank Account in Georgia: A Guide for Virtual Zone Companies and Entrepreneurs



Setting Up a Bank Account in Georgia


Opening a bank account in Georgia is a crucial step for businesses operating within the Virtual Zone or for individual entrepreneurs seeking to take advantage of the country's favorable tax environment. Fortunately, Georgia offers a welcoming banking system with options for both local and international clients.


Guide to Opening a Bank Account in Georgia


Opening a bank account in Georgia can be done in two ways:


  1. In-Person: Visit a Georgian bank branch with your passport and any additional documentation they may require.

  2. Via Representative: If you cannot travel to Georgia, appoint a proxy using a notarized Power of Attorney and a notarized copy of your passport.


For a smoother process, consider establishing tax residency in Georgia by staying for 183 days.


Bank Account Options for Foreigners


Georgian banks offer various account types to cater to different needs:


  • Current Account: Ideal for businesses (including Virtual Zone LLCs) and individuals, allowing international transfers, currency exchange, and bill payments in GEL, USD, and EUR.

  • Deposit Account: Designed for savings, offering interest on deposits with flexible withdrawal options.

  • Card Account: Provides a convenient way to make payments and purchases for both residents and non-residents.


Online and Remote Account Setup


Many Georgian banks now offer online bank account opening options, simplifying the process for non-residents. Some banks, like Bank of Georgia and TBC Bank, allow you to initiate the process online, while others might require a visit to a branch for finalization.


However, non-residents typically rely on a representative (proxy) with a notarized POA to open an account remotely.


The process usually involves:


  1. Finding a Proxy: Choose a trusted individual or company in Georgia to act as your representative.

  2. Document Preparation: Notarize and apostille your POA and passport copy, and have them translated into Georgian if necessary.

  3. KYC and Application: Your proxy will complete the bank's Know Your Customer (KYC) form and submit your application and the required documents.

  4. Account Activation: Once approved, your proxy will receive your account details and instructions for setting up online banking.


Corporate Bank Account Setup for Virtual Zone Companies


Virtual Zone companies, typically structured as LLCs, follow a similar process for opening a corporate bank account. Along with standard documentation like passports and KYC forms, you'll need:


  • Company Registration Documents: Provide your company's official incorporation documents.

  • Shareholder Information: Include signed notes and ID copies for shareholders with 25% or more ownership.

  • Georgian Phone Number: Ensure your company has a local phone number for communication with the bank.


Some banks may also request additional documents like income verification or proof of assets.



Offshore Banking Opportunities in Georgia


Offshore banking in Georgia presents a compelling option for individuals and businesses seeking financial diversification, enhanced privacy, and potential tax benefits. With a robust legal framework and a growing digital banking sector, Georgia offers a unique blend of opportunities tailored to international clients.


Benefits of Offshore Accounts in Georgia


  1. Tax Optimization: Georgia's favorable tax regime can offer reduced or exempt taxes on certain types of offshore income, making it an attractive destination for tax planning.

  2. Currency Diversification: Holding assets in multiple currencies can mitigate risks associated with currency fluctuations and protect your wealth from devaluation.

  3. Investment Diversification: Access international markets and financial instruments not readily available in your home country, expanding your investment portfolio and potential returns.

  4. Privacy and Security: Georgian banks uphold strict confidentiality policies and robust security measures to protect your financial information and assets.

  5. Ease of Banking and Digital Services: State-of-the-art digital platforms enable convenient account management, transactions, and access to financial services remotely.

  6. Business Expansion: Georgian offshore banking facilitates international trade and capital movement, supporting businesses in their global growth endeavors.



Steps to Open an Offshore Account in Georgia



Steps to Open an Offshore Account in Georgia


Opening an offshore account in Georgia can be remarkably simple, particularly with the assistance of business consulting and full stack services providers . Here's a general outline of the process:


  1. Choose a Bank: Select a reputable Georgian bank that offers offshore banking services tailored to your needs. Consider factors like ease of account opening, fees, online banking capabilities, and customer service.

  2. Gather Documentation: Prepare the required documents, which typically include your passport, proof of address, and information about your source of funds.

  3. Complete Application: Fill out the bank's application form, providing accurate and comprehensive information.

  4. Verification and Approval: The bank will verify your information and assess your application. Approval times can vary.

  5. Fund Your Account: Once approved, you can fund your account through wire transfer or other accepted methods.



Ready-Made LLCs with Virtual Zone Status: A Fast Track to Georgian Tax Benefits


For entrepreneurs and businesses looking to take advantage of Georgia's Virtual Zone incentives without the complexities of company formation, pre-approved ready-made LLCs with Virtual Zone status offer a convenient solution. These established Georgian companies with limited liability provide a quick path to benefiting from the tax advantages of the Virtual Zone.


Included Services and Benefits


Ready-made Virtual Zone LLCs typically come with a comprehensive package of services and benefits, including:


  • Pre-Approved Virtual Zone Status: The company is already registered and approved for Virtual Zone status, saving you the time and effort of the application process.

  • Registered Legal Entity: The LLC is fully registered and compliant with Georgian law, providing a solid legal foundation for your business.

  • Company Documents: All necessary company documents, such as articles of association and registration certificates, are included.

  • Registered Office Address: A registered office address in Georgia is provided, fulfilling the legal requirement for businesses.

  • Bank Account Opening Assistance: Many providers offer assistance in opening a corporate bank account, streamlining the financial setup of your business.

  • Optional Services: Additional services like accounting, tax consulting, and legal support may be available for an extra fee.


Pricing and Service Details


The pricing for ready-made Virtual Zone LLCs can vary depending on the provider and the specific services included. However, you can typically expect a one-time fee for the company itself and potential additional fees for optional services.


Here's a general overview of the pricing structure:


  • Company Formation and Virtual Zone Registration: This covers the cost of acquiring the pre-established LLC and its Virtual Zone status. Prices can range from €1,480 to €4,200 - depending on the provider and included services.

  • Optional Services: These may include legal address services, accounting and bookkeeping, bank account opening assistance, and ongoing tax compliance support. Prices for these services can vary significantly.



Additional Insights and Resources for Doing Business in Georgia


Virtual Zone LLC Benefits


FEATURE

VIRTUAL ZONE STATUS (VZS)

CLASSIC GEORGIAN LLC

Corporate Tax (Foreign)

0%

15%

Corporate Tax (Domestic)

15%

15%

VAT (Foreign)

0%

18%

Dividend Tax

18%

18%

Business Activities

Limited To IT

20% (Personal Income Tax)

Eligibility

Stricter (Requires IT Focus, Foreign Revenue, Local Presence)

More Flexible

Administrative Burden

Potentially Higher Due To Specific Requirements And Reporting

Generally Lower



Incorporating a Classic Georgian LLC


While the Virtual Zone offers significant advantages for IT businesses, incorporating a classic Georgian Limited Liability Company (LLC) remains a popular choice for entrepreneurs across various sectors.

 

For entrepreneurs with diverse business interests, a classic Georgian LLC offers a versatile option, allowing you to operate in various sectors beyond just IT. And even without the Virtual Zone's special tax rates, Georgia's 15% corporate income tax is still very competitive globally.


Plus, setting up an LLC in Georgia is surprisingly simple, with minimal paperwork and capital requirements. Best of all, you don't even need to be a resident to own and run your Georgian LLC, making it a great choice for international investors.


If you're considering incorporating a classic LLC, Gegidze agency can guide you through the process and ensure compliance with Georgian regulations.


Key Reasons to Do Business in Georgia


Georgia, a country regarded as a politically stable, corruption-free investment place with minimal operating costs and located on the old Silk Road connecting East and West, became one of the most business-friendly places globally, attracting international companies to expand business operations here.


  • Strategic Location: Situated at the crossroads of Europe and Asia, Georgia offers a strategic gateway to both markets, facilitating trade and logistics.

  • Favorable Business Environment: Georgia ranks high in ease of doing business indices, boasting streamlined procedures, minimal bureaucracy, and a transparent legal system.

  • Skilled Workforce: The country boasts a well-educated and multilingual workforce, particularly in the IT sector, making it an attractive destination for talent acquisition.

  • Low Taxes: Georgia's tax system is notably business-friendly, with competitive corporate income tax rates and various tax incentives available.

  • Free Trade Agreements: Georgia has free trade agreements with numerous countries, including the EU, China, and Turkey, opening doors to vast markets.

  • Political Stability: The country enjoys political stability and a pro-business government, providing a secure environment for investments.


Economic and Business Climate


Georgia's economy has experienced significant growth due to robust tourism, substantial infrastructure investments, and increased foreign investment. The region has maintained relative price stability, avoiding excessive inflation. 

Georgia provides an appealing environment for businesses, emphasizing free trade and offering favorable conditions for foreign investors. Continuous improvements to transportation infrastructure, such as roads and airports, enable the efficient movement of goods and services. Moreover, the government consistently introduces new programs and incentives to bolster business success.




small business in Georgia



Frequently Asked Questions (FAQs)


Do I qualify for Virtual Zone status as a Freelancer or Solopreneur in the IT sector?

While there are no explicit rules excluding freelancers or solopreneurs, obtaining Virtual Zone status as an individual entrepreneur in the IT sector is challenging. Recent regulations emphasize the need for "economic substance" in Georgia, typically demonstrated through physical offices and local employees. However, consulting with a tax advisor is recommended to assess your specific situation and explore potential options.

What sort of economic substance do I need in Georgia?

Do I need to live in Georgia as a company director to benefit from Virtual Zone status?

Can I open my business remotely?

Are there any capital requirements or annual fees?

How do I apply for the Georgian Virtual Zone?


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