Recently, the idea of registering a business in the virtual zone of Georgia has become very popular. A lot of foreign investors and entrepreneurs have sent me a lot of emails and have scheduled many consultation calls with me in this regard.
The main questions are always:
What are the advantages and disadvantages of getting the virtual zone status for a Georgian company?
What companies can benefit from the virtual zone status?
What are corporate tax, dividends, VAT and other taxation for a virtual zone company?
How can you get the status for your company?
What documents do you need to get the status for your company?
I will be answering all of these questions and more in this article so keep reading.
What is a virtual zone company in Georgia?
The Georgian authorities have been trying to attract foreign businessmen to invest in the country of Georgia which will create more jobs and help the emerging economy to keep developing. This is one of the reasons for creating the virtual zone in the country.
According to the Georgian tax code, virtual zone status is:
A license (authorization) to conduct business activities for any company in the IT sector, from independent companies to medium-sized enterprises in a virtual zone Georgia.
A Legal Person which carries out business activities in the IT field and has the corresponding status, becomes a person of virtual zone.
What business activity can benefit from Virtual Zone in Georgia?
Virtual zone activities include economic activities performed by the virtual zone owner, connected to creating information technologies (IT) in territory of Georgia. IT for these purposes is the process of research, development, design, support, elaborating, production, managing and implementation of computer and software products and computer appliances.
What businesses are Eligible to Become Person Of a Virtual Zone?
First, we should clarify the term — Person of a Virtual Zone is a legal person (legal entity) that carries out business activities in the IT field and has the corresponding status( status of a Virtual Zone). There are no strict requirements one should meet in order to be eligible to become a person of a virtual zone.
According to the definition of a Person of Virtual zone we can conclude that, a candidate, willing to become one should:
- Be the legal entity registered in Georgia (The most common form of the legal entity if Limited Liability Company (LLC)), however it is not legally important if the company owner is non-resident of Georgia;
- Carry out business activities in IT field;
- It is also important to have your business registered in the Revenue Service and have access to a corporate bank account in Georgian banks.
Besides formal requirements, the candidate should also consider that the tax benefits, which are the most attractive part of the whole status, only apply for clients based outside of Georgia (Clients in Georgia will be taxed at regular rates)
How to obtain the status of the Virtual Zone for your company?
The responsible authority in the country for granting the status of the virtual zone is LEPL Analytical Service under the supervision of the Ministry of Finance of Georgia.
There are a few steps you take to obtain the status:
- Register your legal entity – business;
- Registering and accessing the system using your name and password on Electronic Declaration system www.newzone.mof.ge
- Fill in and submit the online application;
After submitting the application entities interested in receiving virtual zone status will be granted one within ten workdays. You might be required to submit extra documents proving your business model, clarifying your products and suggested services, as well as labor contracts(agreements) with local staff (it is understandable, as the aim of creating Virtual Zone is to implement new jobs in the country)
Digital certificates confirming the membership of the virtual zone will be issued not later than the two-day period from the date of granting the status.
The status of the virtual zone is permanent once you obtain it, as long as the activities of the company are in accordance with the Georgian legislation. Getting a certificate is free and there are no annual license fees as well.
Registering LLC in the country of Georgia
Registering a Limited Liability Company is relatively easy compared to other European countries.
The state authority registering the legal entities and LLC included, is Public Service Hall. For the entity registration, you should refer to any branch of Public Service Hall or any territorial office of the National Agency of Public Registry and submit the application.
Fortunately, it is possible to register your company without personal presence: you can issue your trusted person with a power of attorney to be your representative.
Either ways there is a following list of documents required:
- Proof of identity document (passport);
- Duly certified agreement / bylaws signed by all the partners;
- Properly attested Power of Attorney and proof of identity document of the representative (if you are going to register the LLC personally);
- Legal address. If legal entity is registering at the address different from the one indicated in the ID card of director /partner / founder or representative and which is not the property of the above-mentioned persons, additionally the owner’s consent or a duly drawn up and approved contract to use this property (lease, rent, lending agreement, etc.) is required;
- A valid Email address and Georgian phone number;
The registry is accomplished at the same day of application or within one working day by your choice : service fee for the registration to be accomplished on the same day is 200 GEL and within 1 workday costs 100 GEL paid at the public service hall.
Tax Benefits of having a Virtual Zone company in Georgia
Virtual Zone status owner’s IT activities will not be subject of taxes under certain conditions:
Corporate Income Tax
Instead of ordinary 15% corporate income tax, the Virtual Zone company owner pays 0% for the income received through providing service abroad.
VAT (Value Added Tax)
The Virtual Zone status owner pays no VAT (instead of 18%) for service delivered abroad.
Export Tax in Georgia
Goods can be withdrawn from Georgian customs zone without paying Export fee
The business can be managed from anywhere
You do not have to be a Georgia resident or tax-resident in order to maintain the status of the Virtual Zone. The business must be registered on territory of Georgia, however it can be managed from anywhere else.
Tax on Dividends
For the Virtual Zone status owner only dividends which are distributed are taxed at 5%
Regulatory benefits of virtual Zone status owner :
Virtual zone status owners are free from any special regulations.
Plus that, there is no need for special licenses, permits and other regulatory documents to perform activities.
Limitations to Take into Account when registering your company As a virtual zone company
As attractive as it might seem, there are some loops you should take into account regarding the taxation of the Virtual Zone Person activities:
- 0% VAT and Corporate Tax applies only on income gained and delivered abroad. Revenue earned within Georgia (income generated through working with Georgian clients etc) is a subject of ordinary taxation — corporate income tax — 15%, VAT — 18 %.
- The salary you pay to your employees in Georgia is a subject of income tax (20%) and plus 2% for the mandatory contribution to the pension fund;
- Even though you are not legally asked to hire local staff, it is more likely to approve the application if your main team is staffed by Georgian members.
- Distribution of dividends to non-resident shareholders might be tricky.
It is worth mentioning that Georgia is participant of double taxation avoidance treaties, which helps to avoid double taxation between the participant countries.
To conclude, there are both :advantages and disadvantages of getting the virtual zone status for a Georgian company. The whole process can be tricky and there is a high chance of denial if you are not prepared correctly. To avoid all the mistakes you need a professional assistance.
Comment below if you have any question. You can order one of Nomad Entrepreneur services by submitting a request from here: Work with Nomad Entrepreneur
You Can read this article about My experience establishing a business in Georgia