Free Industrial Zone Enterprise

1. Introduction

One of the most privileged and popular status among other statuses provided by Georgian tax legislation is the Free Industrial Zone Enterprise (hereinafter “FIZ Enterprise” or ”FIZ Company”). Entities with this status are exempt from almost any taxes and enjoy favorable customs framework. That’s why the temptation and demand for this status is very high, but along with the benefits, it has strict restrictions and conditions to follow as well. The main purpose of this post is to get to know to the FIZ Enterprise status more closely and write down the benefits it has. First of all, let’s define the the Free Industrial Zone Enterprise.

2. Definition

According to Law of Georgia on Free Industrial Zones a FIZ Enterprise may be an enterprise of any legal structure and any form of ownership registered within a free industrial zone (hereinafter “FIZ Area”) according to enterprise registration norms defined by Georgian legislation.

Free Industrial Zone is the type of a free economic zone envisaged by the “Tax Code of Georgia” where the business-friendly regulations, favorable tax, and customs regulations apply. It is a special territory in Georgia exceeding 10 hectares, with defined borders and a special status granted by law. A free industrial zones are designated for economic activities for a certain period of time, and entities within the zone shall be governed under special economic and legal regime as determined by the Law.

There are five free industrial zones operating in Georgia in the following cities: Poti (sea port), Kutaisi (third largest city) and Tbilisi (capital city):

• Poti Free Industrial Zone
• Kutaisi Free Industrial Zone
• Tbilisi Free Zone
• Hualing Free Industrial Zone
• Tbilisi Technological Park

Activities within a free industrial zone shall be conducted by enterprises registered in that zone. Enterprises registered outside of free industrial zone (both Georgian and foreign) may conduct activities within free industrial zone through permanent establishments registered in that zone, except for Georgian enterprises distributing electricity, water, and natural gas, as well as providing communication and sewerage services and conducting related activities within a free industrial zone.

A free industrial zone enterprise shall conduct activities in other territory of Georgia (outside of free industrial zone) as a permanent establishment of a foreign enterprise.

3. Benefits of Fee Industrial Zone Enterprise

The main privileges of FIZ Enterprises enjoy and which makes it attractive for investors are significant tax exemptions and favorable customs framework, which are as follows:

• Corporate Income Taxes (CIT) (15%) Exempt on dividend distribution;
• Value Added Tax (VAT) (18%) Exempt on exporting and selling goods within FIZ area;
• Dividend Tax (5%) Exempt to act as an income tax agent on paid Dividends;
• Salary Tax (20%)Exempt to act as an income tax agent on paid salaries;
• Interest Tax (5%)Exempt to act as an income tax agent on paid interests;
• Property Tax (1%)Exempt on the properties being within FIZ Area;
• Reverse VAT (18%)Exempt;
• No VAT applies to goods produced in foreign countries which are imported in FIZ;
• No import tax applies to goods produced in other country which are imported in FIZ;
• No VAT applies to the transactions carried out among FIZ entities;
• Export of the goods produced in FIZ within territory of Georgia is free from Customs duty;
• Payment in the free industrial zone can be made in any currency.

The question is, if FIZ Enterprise don’t pay for all this taxes, what taxes does it pay for? Almost no taxes are left with just one or two exemptions, which may be the Income taxes on received services from nonresidents and other Corporate income taxes on operations under tax code of Georgia. For example, if the FIZ Enterprise uses the international shipping, or transportation service from nonresident entities of Georgia it should pay source income tax of 10% in Georgia, or if FIZ Enterprise has no documented expenses it should pay of 15% corporate income tax on these kind of expenses.

Please note that selling of goods produced in Georgia to the FIZ Enterprise is considered to be an export operation for the purposes of the Tax Code of Georgia and are free from VAT. This means that if Georgian entities sell their goods placed in export mode to FIZ Enterprise with proper customs declarations there will not be VAT. Otherwise, if selling of goods are made simply without customs declaration it is not treated as an export operation and will be taxed as usual.

FIZ Enterprise is not considered as a tax agent in relation to paid salary, dividend and interest and does not have to withhold income tax at the source of payment. This does not mean that the beneficiaries receiving these types income are also exempt from income tax. They have to declare these taxes themselves and pay to the budget.

Due to the above-mentioned benefits, utility fees for electricity, gas, etc. are 18% cheaper than in other territory of Georgia which is also important and very attractive factor for businesses.

4. Restrictions of Fee Industrial Zone Enterprise

We have pointed out from the outset that giving so along with so many benefits, the FIZ Enterprises has strict restrictions and conditions to follow as well. Let’s first begin with one of the most important issue. There was from the beginning and it is today a records in the Tax Code of Georgia (Article 25) that –

• The FIZ Enterprise may not provide services to a person (other than a FIZ Enterprise) registered under the legislation of Georgia
• The Government of Georgia has the right to determine the types of services to be provided by a FIZ Enterprise to a non-resident (other than a permanent establishment of a non-resident in Georgia), which will be considered as a permitted activity in the free industrial zone by the FIZ Enterprise.

Based on this records, many people thought so that the FIZ Enterprises would be able to provide services to non-residents for the FIZ Enterprise and would be exempt from taxes. However, in 2020, the Georgian Revenue Service issued a special situational guidance where FIZ Enterprises are not allowed to provide any services because the Government of Georgia has not yet determined any the types of services, which could be provided by a FIZ Company. So, we should remember that, when we are talking about free economic zones or FIZ Enterprise we imply the production & processing of goods, not providing any kind of services.

The FIZ Company is prohibited from providing any kinds of services to both local and non-resident entities (except to FIZ Enterprise within FIZ Area).

The following activities are prohibited within the FIZ Area and therefore for the FIZ Enterprises:

• Hotel and residential buildings;
• Import, storage, production or/and sale of arms and munitions, defense technology;
• Import, storage, production or/and sale of nuclear and radioactive substances;
• Import, storage, production or/and sale of Narcotic and psychotropic substances;
• Import, storage, production or/and sale of Excise goods (Tobacco products, Alcohol and etc. except for personal use).

A FIZ Enterprises are not allowed to purchase services from a person (other than other FIZ Enterprise) except for:

• Auto-tech services;
• Fast food service;
• Postal service;
• Medical care;
• Advertising services;
• Laboratory services;
• Design, design services;
• Expeditionary services;
• Fire services;
• Examination services;
• Cleaning and waste management services;
• Main equipment repair services
• Security services and/or services related to letting or leasing out property provided by an organizer and/or administration of the Free Industrial Zone;
• Transport, communication, sewage, audit and/or consulting services, execution of financial transactions and/or delivery of financial services by a licensed financial institution, as well as services relating to installation, assembly and/or construction of fixed assets;
• In addition to the listed services above, any kind of service, if the total cost of these types of services (s) (excluding VAT) does not exceed 2% of the annual income or expenditure (of its choice) of the FIZ Enterprise.

According to the Tax Code of Georgia (Article 25):

• If a FIZ Enterprise supplies goods to a person (other than a FIZ Enterprise) registered under the legislation of Georgia, the FIZ Enterprise shall pay 4% of the revenue received/receivable from the supply of such goods (if the supply of goods is made free of charge – 4% of the market price of such goods) not later than the 15th day of the month following the month in which the goods are supplied.
• If a person (other than a FIZ Enterprise) registered under the legislation of Georgia supplies goods (other than electricity, water and natural gas intended for local consumption and/or production) to a FIZ Enterprise, the FIZ Enterprise shall pay 4% of the market price of the supplied goods not later than the 15th day of the month following the month in which the goods are supplied.
• If a person (other than a FIZ Enterprise) registered under the legislation of Georgia delivers goods to a FIZ Enterprise, the market price of the supplied goods shall be used for taxation purposes.

FIZ Enterprises are isolated from other ordinary enterprises and are limited to operations with them but not completely. FIZ Enterprise can have an office and a certain part of its staff can work normally outside FIZ Area, but if it has production, it must have within Free Economic Zone.

5. Obtaining Fee Industrial Zone Enterprise Status

A free industrial zone enterprise may be an enterprise of any legal structure and any form of ownership registered within a free industrial zone according to enterprise registration norms defined by the legislation of Georgia.

FIZ Enterprise status is granted by the Georgian tax authorities as a result of the request of authorized representative of enterprise. To apply for this status, you have to be a Georgian enterprise incorporated by Georgian Legislation and registered in free economic zone. To register within FIZ Area you have to contact to Free Economic Zone organizer (The five industrial zones mentioned above are in Georgia today) pay annual fee (which is not so expensive) and get special license.

The Organizer and/or an administrator shall not be a free industrial enterprise and it must be registered in other territory of Georgia (outside the free industrial zone) as determined by the legislation of Georgia.

6. Conclusion

Georgia has a free trade agreement with the European Union which means that Georgian goods can be exported without tariffs comparing to Asian goods. Therefore, the FIZ Enterprise status is a good way to produce and export goods for the EU market.

Many countries, including Georgia have free economic zones to develop their production and economy. Although Georgia adopted the Law on Free Industrial Zones in early 2007, the Free Industrial Zones have not been as successful as expected. There are several factors and reasons for this. First of all, the tax legislation is already liberal, and it is easy to obtain entrepreneurial licenses and permits in Georgia. Also, there are already successful free economic zones in the region, including neighboring Turkey, which it is difficult to compete with. Moreover, according to law on Free Industrial Zones, an investor leases an object within a FIZ Area and does not have the right to take ownership of the object (for the period for which the Fee Economic Zone was created), which reduces its interest in FIZ Enterprise status. On of the reasons also can be that Georgian government is not promoting it at the appropriate level.

For more information or to get help with obtaining a status contact us.