The face of Virtual Zone in Georgia

Computer technologies and Internet play an important role in global business and lives of ordinary people. These spheres are currently the most promising for investors; everyone knows about such IT corporations as IBM, Microsoft, and Apple. These are flagmen of development of innovative technologies that directly influence lives of people around the world.

In Georgia, IT sphere now is at an initial stage of development. Therefore, to improve the situation in this sector and also to increase its international positions, the country management decided to create information technological zones with a special regime of taxation. By reducing taxes to a minimum, authorities of Georgia had significantly increased the level of its attractiveness for foreign IT companies. The latter can now open their branches with more benefits, create program products and everything related to information technologies.

Except low taxes, an increased interest to Georgian jurisdiction among companies of IT sector is stipulated by easy registration and business making, low fees for bank services, and of course a high level of confidentially, which is due to the fact that Georgia does not belong to participants of the system of automatic exchange of information.

Virtual zone in Georgia

A virtual zone is not a certain territory where loyal taxation regime is applicable. This status is assigned to companies that deal with IT and obtained a special certificate.

A status of a person of virtual zone was introduced in Georgia by the law “On information technological zones”, which was adopted by the Parliament on 15.12.2010. The law came into force on 1 January 2011. Its main purpose is to create an alluring environment for companies that lead economic activity in IT sphere.

The law views information technologies as anything related to research, support, development, design, production and implementation of computer information systems, as result of which software products are made.

In the first year of the new law, the status of virtual person was assigned to 18 companies: “Alta Software”, “Iber Info”, “Aracode”, AutoIT, “Lemondo”, “Center for Development of E-Commerce in Georgia”, “Leantex”, “IT Novations”, “Azry”, “63 bit”, “EM consultations and software EMCoS”, YK Resources, “Е-live International”, “Tecom”, “Softgroup Solution”, Georgian Software Solutions, API Georgia Ltd, Center for IT Development.

Subject to the new law, all companies that obtained the status “Person of virtual zone” are exempted from payment of the following taxes:

• tax on income from selling the products outside Georgia (standard tax rate is 15%);
• VAT at exporting products abroad (standard rate is 18%).
• exported IT products are neither subject to customs duties.

If a person of virtual zone realizes his products to other companies registered in Georgia, even if these are representatives of foreign companies, he must pay the abovementioned taxes at standard rates but only from the income obtained from such deals.

Beside tax benefits, persons of virtual zone are exempted from obligation to issue licenses, permissions and other approvals.

Persons of virtual zone should only pay:

• tax on dividends – 5%, but only if distribution of income takes place. The tax is paid when dividends are transferred to the shareholder’s account;
• income tax from salary of employees of a company – 20% and from residents 2% for the mandatory saving contribution to the Pension Fund. Meanwhile, the Georgian legislation does not oblige companies to hire people. Usually computer companies hire people from other countries, and transfer them payments to accounts in foreign banks.

Procedure of obtaining the status of “person of virtual zone” in Georgia

The benefit of Georgia among neighbor countries and CIS is a low level of red-tape. To register a company here, one does not have to stand long queues or wait for admission. In Georgia, a legal entity can be established easily in one day in the House of Justice. Still, the following issues should be considered before starting:

• company must have a real legal address. Verification of an address is a rental agreement or a notarized consent of a property owner for using address. An address can be assigned to any property, the main requirement is that address must be real;
• all registration documents are submitted in Georgian, therefore an interpreter should be brought around;
• it is advisable to be present in the House of Justice during submission of documents, but also it is possible to register under a notarized power of attorney for a third party.

The registration procedure itself includes the following stages:

1. Choosing the name and the form of ownership of the legal entity. Most often, limited liability companies are established for making business in Georgia.
2. Preparation of constitutive documents and assignment of director. If not available currently, the typical form of by-law will be provided in the House of Justice. Regarding requirements to director, he can be either resident or not. If necessary, there can be even two directors in a company: resident and non-resident, which later helps to solve issues related to business.
3. Submission of application and constitutive documents. A company can be registered within 1 working day. The price of such accelerated procedure makes 200 lari (approx. 80 US dollars).If documents are necessary the next day, the fee is only 100 lari.
4. Upon registration of a company, a taxpayer account should be opened on the site of the tax service http://rs.ge. This is necessary for tax reporting, tracking tax payments and dates of payments, and observing changes in the tax legislation.
5. Upon registration of a company in the tax service, an application for status of a person of virtual zone can be filed. This is made on the site http://newzone.mof.ge. In the right corner you should enter login and password that were obtained during the registration of the account on the site of the tax service. Then, in a special field you should enter the email to receive the certificate. Subject to legislation, a decision on provision of status of virtual zone person is taken within 10 working days since submission of an application. Another 48 hours are necessary to obtain the certificate itself. The certificate exists only in electronic form and is available when logging in at http://newzone.mof.ge.
6. Open a corporate account in a Georgian bank. Bank of Georgia and Silk Road Bank work with foreign clients best of all.

Important issues when organizing business of IT companies Georgia

Low taxes and absence of red-tape issues are important factors that stipulate the attractiveness of business in the Georgian jurisdiction. These are only a few benefits that become available for IT companies registered in Georgia:

• officially the staff of the company may include only one director and no one else. It is still recommended that Georgian would be the director, this will promote communication with state authorities when needed;
• a company may be managed remotely, due to different forms of banking offered by Georgian banks when opening a corporate account. Meanwhile, fees for cashier-operating services in local banks are much lower than in EU banks, also they do not have a requirement on the minimum balance;
• Georgia concluded 55 agreements on avoidance of double taxation, owing to which non-residents mаy avoid taxes provided that they have a certificate of tax residency of their country;
• Russians are much interested in registration of IT companies in Georgia, but an agreement on avoidance of double taxation was not signed with Russia. Therefore, to avoid extra expenses i such cases it is recommend to put income on payment card VISA or MasterCard issued by a Georgian bank. As Georgia is not a member of CRS, information on bank accounts and cash flows will not become available for Russian tax bodies, and cash from the international bank card can be withdrawn at any ATM worldwide;
• companies with the status of virtual zone person can make business and pay minimum taxes only with non-residents. Therefore, money for their products and services will arrive from foreign banks in foreign currency – this should be considered when opening a corporate account;
• a certificate of virtual zone person is valid for 1 year. After 1 year, a certificate must be re-issued.

If you wish to register an IT company in Georgian jurisdiction or have any questions regarding the status of virtual zone person, please contact us at [email protected]. We will help you to increase the effectiveness of your business.