Virtual Zone in Georgia: A common misconception surrounding the Virtual Zone Status (VZS) suggests that it pertains to remote work. However, this notion is misleading. The VZS tax incentive system is not associated with remote work or the virtual establishment of a business. Instead, it was implemented in Georgia in 2011 with the objective of promoting growth in the country’s information technology sector. The VZS is exclusively granted to specific IT companies, and the Georgian government seeks to establish a favourable business environment to attract foreign investment, stimulate industry development, and generate employment opportunities for Georgian residents. In December 2022, the Tax Inspectorate updated the tax regulations for obtaining this status. This article provides an overview of the specific rules and requirements for acquiring Virtuz Zone Status.

Understanding the Purpose and Criteria for Georgia’s Virtual Zone Status

In the sphere of corporate decision-making, it is imperative to conduct a thorough analysis of the pros and cons associated with any given alternative, particularly in the context of a specialized system of tax benefits. For investors operating in Georgia, the Virtual Zone Status (VZS) offers an array of advantages, such as exemption from 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.

It should be noted, however, that a company enjoying VZS is exempt from income tax solely if the earnings were obtained from information technology services rendered outside of Georgia. In the event that the company receives revenue from a Georgian resident on the territory of Georgia, it incurs an obligation to pay income tax (15%) solely on the income acquired from a Georgian source.

The VZS companies are subject to a 5% tax on dividends, while the standard rate of personal income tax remains at 20%. Additionally, if such companies employ Georgian nationals, they must pay a 4% Pension Tax, which is shared between the employee and the company in a 2% each scheme.

Although Virtual Zone Status offers several benefits, there are also certain drawbacks that must be considered. One of the primary impediments to obtaining this status is related to the nature of one’s operations. Specifically, if a company’s activities do not align with those related to IT technology, such as creating, maintaining, and managing software products and computer equipment via studying, designing, developing, implementing, and providing support, then Ordinance 49 precludes it from being eligible for VZS candidacy.

VZS Eligibility Criteria: Need to Know

The Virtual Zone Status (VZS) eligibility criteria in Georgia are contingent upon adherence to business activities that fall within the scope of VZS. The head of the revenue service issued Order N7547, which outlines the Informational Technologies that qualify for VZS, including computer information systems’ study, support, development, design, production, and implementation leading to software products.

It is imperative to acknowledge that, as per Ordinance No. 49, Article 3 Paragraph 2, extant companies in Georgia possessing the status of the virtual zone are obliged to furnish a comprehensive inventory of their IT projects undertaken within the last three years, if such exist. The rationale behind this stipulation is to authenticate the company’s involvement in IT operations.

The prospective candidate is required to establish a lawful presence in the Georgian jurisdiction through registration with the National Agency of the Public Registry. The registered entity is expected to engage in information technology-related undertakings, with a particular focus on software development, and conduct economic operations within the Georgian borders. To substantiate its presence in the region, the entity should employ individuals with specialized qualifications in information technology. Furthermore, the distribution of products beyond the confines of Georgian territory is permissible.

Meeting these criteria enables companies to acquire Virtual Zone status and benefit from various advantages such as tax exemptions and streamlined administrative procedures.

Obtaining a virtual zone status: Procedure

The process of obtaining virtual zone status in Georgia is a comparatively efficient and straightforward procedure, particularly when compared to similar processes in European and CIS countries. The primary stage of this process involves preparing the necessary founding documents and registering the company in accordance with Georgian legislation. Only once this initial registration process has been completed, can an application for Virtual Zone Status be submitted. Due to the significant influx of entrepreneurs seeking to establish businesses in Georgia and obtain VZS, the review process for applications has experienced an increase in duration. Despite Georgian legislation stipulating a 10-day timeline for obtaining virtual zone status, our empirical research indicates that the process may take anywhere between 20 working days to one month from the time of submission to the Tax Service of Georgia.

Upon successful approval of virtual zone status, a certificate will be issued by the Internal Revenue Service within two working days. This certificate is issued with an indefinite validity period.

Factors Contributing to the Removal of Virtual Zone Status

The acquisition of Virtual Zone Status entails a considerable temporal investment on account of the high volume of applications. Nevertheless, the application procedure is straightforward and does not require extensive documentation. Once the status is granted, it remains permanent and does not necessitate annual renewal. It is imperative to acknowledge, however, that the possibility of losing this status exists. Multiple factors may contribute to the revocation of this status.

• • Tax avoidance.
  • Obtaining International Company Status (Virtual Zone status will be revoked from the beginning of the month from which you are granted International Company Status).
  • On your application for the elimination of status.

Liquidation of the Virtual Zone status occurs within 2 working days.

Georgia has emerged as a favourable destination for companies in the information technology (IT) sector, with over 1,000 entities having secured virtual zone status within the jurisdiction and enjoying the benefits it has to offer. For those contemplating establishing a business in Georgia, the Legalese Georgia team is pleased to offer a complimentary consultation with our expert to offer tailored and pragmatic guidance on navigating the intricacies of Georgian legislation, taking into account the individual circumstances of your enterprise, and ensuring that you commence operations in compliance with all legal requirements.