New Approach of Georgian Tax Authorities Regarding „Virtual Zone Persons“

New Approach of Georgian Tax Authorities Regarding „Virtual Zone Persons“

Companies providing certain type of IT services from Georgia to foreign customers can obtain a certificate of “Virtual Zone Person” (VZP) and enjoy corporate income tax (CIT) exemption in Georgia. Georgian CIT is 15% payable upon the distribution of dividends (not annual bases), which is not applicable to VZPs qualified under the exemption.

As you can see, VZPs can operate in Georgia without CIT obligation and Georgian tax authorities until couple of weeks ago had been quite liberal regarding such exemption (e.g. lass control, easiness of providing VZP certificates, etc.), however from March-April of this year, they started declaring stricter approach with regard to VZP tax incentive.

The new (stricter) approach of Georgian tax authorities

According to the articles of Georgian tax code (GTC), dedicated to VZPs, it is not specified whether the business substance in Georgia (e.g. office, staff located in the country) is a necessary precondition for them to qualify under the tax exemption. Absence of such precondition in GTC was enough ground for concluding that VZP exemption apply even without having a business substance in Georgia if all other criterions were met.

Here is the citation of all 3 articles in the Georgian tax code regulating taxation of Virtual Zone Persons:

Article 8 of GTC (definitions)

„35. A virtual zone person – a legal person engaged in IT activities and holding an appropriate status.

  36. Information Technologies (IT) – studying, supporting, developing, designing, producing and introducing computer information systems, as a result of which software products are obtained.“

Article 99 of GTC (CIT exemption)

„p) profit (distribution of profit) earned from the supply of information technologies outside Georgia developed by a legal entity of a virtual zone.

As you can see, neither of the above articles make it as a necessary precondition that VZP has the business substance in Georgia. In other words, it is not required that the software product supplied by the company was actually developed on the Georgian territory.

The above cited wordings are the reason of widely spread opinion that VZP tax exemption can be enjoyed even without the business substance in the country.

As far as I know, during last 10 years since the VZP clause was introduced in the GTC, the above popular opinion was not challenged by the Georgian Revenue Service (GRS-Georgian tax and custom administration).

However, unfortunately such liberal approach has currently become stricter, applicable retrospectively:

In particular, a few weeks ago Georgian tax authorities have started contacting (by mail and/or via mobile calls) representatives of Virtual Zone Persons, asking them to provide proofs that the Information technologies supplied by them to foreign customers were developed on Georgian territory.

If VZPs are not able to provide the requested proofs, they are asked by GRS to correct the declarations (including past period, since 2018) and pay 15% corporate income tax. If they do not correct the past declarations and do not pay taxes retrospectively within the gives deadline, tax inspection might be initiated followed by tax assessments and penalties.

The legal ground for the new approach of GRS:

Besides the tax code and the decree of the Georgian government regarding VZPs, there is a „Law of Georgia on Information Technologies zones“ which provides some guidance regarding Virtual Zone Persons.

The article 6 of the mentioned law reads as follows:

Article 6 – Activities in the virtual zone

„Activities in the virtual zone shall comprise the economic activities of legal persons related to the production of ITs in the territory of Georgia.“

The above wording become a ground for the tax authorities to change the approach and claim the taxes back from VZPs if the software products supplied by them were not developed on the territory of Georgia.

Notably, software is considered to be developed on Georgian territory if the developer of such software was physically located in Georgia while doing the development, according to current unofficial opinion of GRS.

It seems that the main motivation for GRS to apply the above-mentioned approach (retrospectively) is that they did not see sufficient benefit for the country from incorporating VZPs in the country without business substance. More specifically: no or small amount of taxes paid in Georgia (in many cases even 5% dividend tax is not levied due to application of a relevant tax treaties), no local staffs hired, no contribution to strengthening the local currency (both, inbound and outbound transactions are made in a foreign currency without the exchange) and no knowledge brought to the country.

This point (lack of benefit) can be understood, however, in my opinion, this still should not become a reason of shifting burden of downside consequences of the unclear law to the taxpayers while such uncertainty was not in any way influenced by them.

The solution can be amending the tax code and clearly making the business substance as a necessary precondition for the VZP tax exemptions (if the government wishes so), without the retrospective effect, so that the businesses have enough information to make the correct business decision knowing in advance what will be the tax consequences if they operate VZPs in Georgia as a “letter box” entity.

What is wrong about the mentioned approach of GRS?

In addition to the moral aspects of the case, there are several legal grounds to challenge the correctness of the mentioned approach of the GRS, based on my personal opinion (arguments are listed in general, more details to be discussed individual bases):

  • The tax code does not mention anything about the business substance as a precondition for the tax exemption. Importantly, according to the hierarchy of Georgian law, the GTC supersedes “the law on information technology zones;
  • Even more, “the law of Georgia on information technology zones” stipulates that the taxation (including tax exemption) of VZPs is regulated by the Georgians tax code;
  • Even if we assume that the law requires the software to be developed on Georgian territory this still should not be literally understood as actually standing on the Georgian land while developing the software. The VZP, as a separate legal entity can hire sub-contractors outside Georgia for the certain project of software development. In this case, the software still can be considered as created in Georgian territory if the principle part of the operation is the Georgian legal entity which bears all risks regarding the project and is fully responsible with the client.
  • Lastly, from investment perspective, claiming the taxes back retrospectively due to the uncertainty of the law, will have the negative effect on long-built reputation of Georgia as an attractive investment destination at least for small and medium IT companies.

If the law would be clear, entrepreneurs would have enough information to make the rationale business decision regarding the company incorporation in Georgia clearly knowing in advance the potential tax consequences per each scenarios.

Notably, the arguments listed above are very general while in reality the analyses against the described approach of GRS is much more complex containing more details. Also, each case needs individual analyses based on their facts and circumstances.


Georgian tax administration has declared the new approach based on which number of Virtual Zone Persons are currently denied to enjoy CIT exemption, with retrospective effect. According to such opinion, VZP shall not qualify under the tax exemption on the profit earned from software provision if such software was not developed on Georgian territory, in other words, if the developer(s) of such software was not physically present in Georgia while working on the project.

The approach does not have very strong legal bases. Probably, results of tax disputes as a precedent will determine whether the current approach remains in force and affect VZPs retrospectively or not.

This information is worth considering if you own VZP even if GRS has not contacted you yet.


About the author: Gela Barshovi is an international and Georgian tax consultant and a managing partner of Tbilisi-based accounting/consulting firm TPsolution. Regarding any tax related services you can reach out to him at

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