Virtual Zone Person

1. Introduction

One of Georgia’s goals is to become an information technology center in the region, and since 2011 the country has been attracting international investment and stimulating the IT business. Even from January 1, 2011 law on information technology zones came into force, changes were made to the tax code and the Government resolution on the procedures and conditions for virtual zone person’s status was realized, which sets an important regulatory and tax benefits and attractive environment for export-oriented IT companies.

Let’s explain what a virtual zone person means and what benefits these entities enjoy in detail.

Virtual zone person is a legal entity that carries out information technology activities and has been granted the appropriate status.

2. Benefits of Virtual Zone Person

Virtual zone person is exempt from:

• Special Regulationsdon't need licenses, permits and other regulatory documents to conduct their activities;
• Corporate Income Tax (15%)tax on the profits earned from supplying outside Georgia the information technologies created by virtual zone person;
• VAT (18%)tax on the supply with VAT outside Georgia of information technologies (ITs);
• Export Dutiesexport duties on exporting from the customs territory of Georgia of the information technologies created by virtual zone person.

Here we also mention one important detail. If a virtual zone person incurs certain costs (such as renting a office, hosting, etc. not salary) associated with performing its activities, it can register as a VAT taxpayer and receive and deduct VAT on these costs from other taxes. This is because selling IT services or products outside Georgia are exempt from VAT with the right of deduction. If a virtual zone person hires an employee, then tax benefits doesn’t apply to the salaries paid to him/her and are taxed as usual by 20%.

3. Example

George, who is a programmer incorporated a company and got virtual zone person’s status in 2019. George creates/develops computer software with mobile applications and sells licenses outside Georgia on behalf of the virtual zone person. Total net profit of  200,000 GEL was generated from the sales in 2019 and fully distributed as a dividend. Due to the fact that by tax code of Georgia it is obligatory to register as a VAT taxpayer after the income exceeds 100,000 GEL and in 2019 the income of the virtual zone person exceeds 200,000 GEL,  George doesn’t have to register his company and pay VAT. Moreover, it is exempt from corporate income tax, which means that it pays only 10,000 GEL (200,000 * 5%)  to the budget and George will receive net amount of 190,000 GEL revenue as a physical person.

4. The terms and conditions of granting the Virtual Zone Person’s status

In order to receive the virtual zone person’s status a candidate must apply to the Ministry of Finance of Georgia. The candidate electronically fills in the application form posted on the website www.newzone.mof.ge, which is sent to the Financial Analytical Service. The list of information-technological projects  done during the last three years (if any) should be attached to the application. The Financial Analytical Service is authorized to request additional information regarding the information-technological activities of the candidate. The status shall be granted to the interested entity no later than 10 working days after the application for granting the status.

Virtual zone person’s status is issued for life if there is no reason to cancel it.                               

It should be noted, that the status is issued only to legal entities (not to individuals) and doesn’t require any experience. Moreover, it doesn’t require or impose any restrictions on the initial capital, directors, founders and employees of the enterprise. So you can register a company and then apply for a status immediately. However, of course, having some experience in information technology activities or a contract with a foreign client will make it more easy to get a status.

5. Cancellation of Virtual Zone Person’s Status

The Financial Analytical Service of Ministry f Finance of Georgia revokes the virtual zone person’s status: a) if the status obtained is used to avoid paying taxes in accordance with the current legislation; b) on the basis of the electronic application, which is sent through the website. In case of revocation of the status the Financial Analytical Service shall ensure the deletion of the electronic certificate from the Financial Analytical Service website (www.fas.ge).

6. Conclusion

Virtual zone person has significant tax and regulatory benefits, which creates a very attractive business environment for people working in the field of information technology. The demand on the status is growing over time, and therefore obtaining it becoming more difficult also. If before it was obtained only on the basis of the submission of certain information, today some information needs to be specified and additional documents may be required to submit.

Because information technologies in Georgia are not yet so developed that to have significant exports of related services, the demand on virtual zone person’s status largely comes from foreigners. They can incorporate a company and obtain the status in Georgia remotely, even without coming to the country. For more information or to get help with obtaining a status contact us.