This article was first published by International Tax Review. See International Tax Review | Home
According to Gela Barshovi, Chief Auditor of Transfer Pricing at the Georgia Revenue Service, Georgia’s tax legislation offers a number of high-value incentives for IT corporations operating in the country and offers IT services to foreign customers.
Georgia ranks 9th in the World Bank Doing Business rankings for 2017.
One of Georgia’s greatest advantages in terms of doing business is the country’s simple bureaucratic procedures for launching a business, its low level of corruption and, most importantly, the country’s beneficial tax system.
The Georgian government’s policy to attract foreign investment means the country’s tax legislation offers several tax incentives.
For example, the new corporate income tax system that entered into force in 2017 allows Georgian companies (with only a few exceptions) to pay corporate income tax after the distribution of dividends. In other words, if those companies reinvest their profit, they do not pay tax for the reinvested amount. While this represents an enticing tax benefit when setting up a business in Georgia, the country provides an even better tax system for IT companies.
VIRTUAL ZONE PERSON
According to Article8 of the Georgian Tax Code (GTC), a Virtual Zone Person (VZP) is a legal entity operating in the IT sector, having obtained a certificate that proves this status.
A company with VZP status enjoys the advantage of paying no corporate income tax in Georgia on the revenue derived from providing information technology services (i.e. web development and application building etc.) to non-residents in accordance with Article 99 of the GTC.
In addition, once a VZP status has been obtained, a company is then able to enjoy the tax benefits for as long as they continue to offer foreign IT services.
HOW TO OBTAIN A VZP CERTIFICATE?
The process of obtaining VZP status is both very easy and fast, making the process much more attractive to prospective IT companies.
A limited liability company represents the most popular legal form in Georgia and it takes only one day to register as one, which is possible with zero capital and costs h100 ($39). This status allows a company to apply for a VZP certificate using the tax authority’s online platform and after submitting proof that the LLC operates in the IT sector. Usually the authority prefers to receive three years of evidence of operating in the IT sector, but this is not compulsory, especially for newly registered companies seeking to obtain the certificate. Nevertheless, companies are usually issued with a certificate within 10 business days.
The important benefit of such a certificate is the high tax certainty. Once the tax authority issues the certificate, it will no longer be withdrawn if a company meets the main criterion of providing IT service abroad.
PAYMENT OF VAT
The tax benefits afforded IT companies are not restricted to direct taxes, however. Articles 160 and 161 of the GTC state that VAT is payable in Georgia only for operations taking place within its territory. Provisions within Article 166 of the GTC further state that VAT cannot be charged when IT services are provided to non-residents, as this is classed as being carried out outside the territory of Georgia. HOW
MUCH AND WHICH TAXES ARE TO BE PAID IN TOTAL?
An IT company that performs services outside of Georgia after having obtained the VZP certificate will pay withholding tax on dividends, which amounts to 5%, according to paragraph 1 of Article 130 of the GTC.
In addition, 20% of the withholding tax has to be paid upon the payment of salary to employees, as well as a property tax of up to 1% of the average book value of a company’s assets.
Georgia’s network of 55 income tax treaties with most European and many non-European states also provides an additional blanket of protection for taxpayers from double taxation risk. Those treaties are mostly based on old versions of the OECD model tax convention (2008 and older).
Overall, an IT company choosing to operate in Georgia to service its foreign clients will not only save taxes, but will also enjoy tolerant regulations, simple procedures, low costs, a very low level of corruption and be able to take advantage of the available labor trained within the sector.
