Georgia is continuing to attract foreign business to the country, inviting foreigners to establish subsidiaries and new companies or to open up branches. With a view to this, special tax regimes have been created for IT companies. As distinct from other states, the criteria for companies claiming eligibility for tax benefits in Georgia are extremely liberal.
The first status that an IT company can obtain is the status of a company of a virtual zone (a Virtual Zone Entity or VZE).
A legal entity can establish a VZE, as can an individual who has two years of experience in IT. An existing contract for the development of software and IT solutions as well as the supply of other services in the field of information technologies may serve as evidence of such experience.
To obtain tax benefits, relevant services should be provided outside Georgia, in other words, the customers should be foreigners.
Although a VZE belongs to a virtual zone, the company itself cannot be virtual. A VZE must lease an office and hire employees in Georgia. Neither the employee headcount nor the level of salaries is regulated. A VZE is obliged to pay 20% tax on its employees’ salaries, and another 4% must be contributed to the Pension Fund for employees who are Georgian nationals or who have permanent residency status.
When the tax base is determined, expenses on the company’s core activities should be deducted from it. However, if it is identified that the company is transferring large amounts to ‘non-core’ contracting parties, the tax authority will assess “a gift” in the form of 15% profit tax. A VZE is entitled to carry out other types of activity. However, it will be obliged to pay profit tax at the rate of 20% on the income from such activities.
Finally, the best part is that tax on dividends is only 5% for a VZE.
The second status to which an IT company may lay claim is the status of an international company engaged in IT or the shipping industry, including building and owning ships. Companies with international status are prohibited from carrying out other types of activity.
Either a Georgian or a foreign legal entity that has two years of experience in either of the permitted fields may establish such a company. The relevant experience can be confirmed by contracts in either the IT or shipping sectors that are still in effect or have been performed, as well as by invoices showing that work has been performed and paid for. With regard to a contract which the parties are still performing, a joint letter is required from the founder company and its customer to the effect that the contract is in effect.
A company with international status should have an office in Georgia and employees who are officially documented.
For such companies, the profit tax rate is 5% and tax on salaries is also 5% (instead of 20% for a VZE). Pension contributions in the amount of 4% are also preserved for employees who are Georgian nationals or who have long-term residence status. The taxable base is reduced by the amount of salaries paid and of costs involving the testing of software and IT solutions. Companies that have international status are exempt from VAT, but the main thing is that no tax on dividends is paid at all.
Andrei Gusev, Nordic Star’s Managing Partner, and Dan Fayutkin, Senior Counsel, advise Russian and foreign clients on how an IT company can be established in, or relocated to, Georgia.