Category: კატეგორიის გარეშე

Virtual Zone Company status is a special status assigned to companies in accordance with Georgian legislation. The status offers significant tax benefits to foreign investors. In this article, we will be discussing what exactly do businesses need to obtain the status and what are the key tax benefits.

We provide accounting services to entities from all industries, including those having the Virtual Zone Entity status.

 

What is Virtual Zone Entity status?

Companies holding this status are entitled to significant tax benefits. Namely, such entities are free from:

• corporate income tax on profits generated from services provided to entities outside Georgia
• VAT on services provided to entities outside Georgia
• Export taxes

To illustrate how exactly do the tax benefits work, let us discuss an example: ordinary corporate income tax rate (“CIT”) in Georgia represents 15%. Besides, upon dividend distribution, there is additional 5% dividend tax. If, for instance, company distributes EUR 1,000 as a dividend to a shareholder, the company would have to pay CIT and dividend tax in aggregate EUR 238.4 (1,000/0.85/0.95-1,000), however, if company has Virtual Zone Entity status, it will only have to pay EUR 52.6 dividend tax (1,000/0.95-1,000). In other words, on every EUR 1,000 dividend company saves EUR 185.8 in taxes (238.4-52.6), which means that on EUR 1,000,000 it would save 185,800 EUR in taxes.

 

Which companies are entitled to Virtual Zone Entity status?

Only IT companies are entitled to this status. These are companies representing information technology systems study, support, development, design, and implementation, which leads to creation of software products.

We should also note that tax relief applies only to exports. Providing services to local companies or individuals is not exempt from taxation and will be taxed.

 

Frequently asked questions

Our client companies frequently ask the following questions:

 

Whom should I approach to obtain Virtual Zone Entity status?

Status can be obtained by filling in the electronic declaration form on the webpage of Financial Analytical Service of Georgia: www.fas.ge

Our company provides all relevant legal, accounting, and bookkeeping services necessary to obtain and maintain the status.

 

What is the approximate time needed to obtain the status?

The response will be received no later than 10 business days after filling in the above discussed declaration and additional 2 business days are needed for the electronic certificate to be generated on the specially designated state portal (www.newzone.mof.ge).

Our company will provide all accounting services related to the status and will file respective tax declarations on your company’s behalf.

 

What else is needed to obtain the Virtual Zone Entity status?

In the legislation application guidance, it reads that to be entitled for tax benefits, it is necessary that company operates from Georgia, which, in practice, means that the product or service must be created in Georgia and company must also be using local work, including relevant profile work. For instance, if company has only hired accountant and administrator in Georgia, they cannot be regarded as relevant profile work. It is necessary to also hire local IT employees, such as developers.

 

What happens if company provides services both through exports as well as on Georgian territory?

Tax benefits only apply to portion of profits that are earned through exports. Therefore, the company should identify such portion, meaning that entity should calculate the share of tax-free profit from the aggregate profits. In case expenses cannot easily be allocated between exports and local revenues, legislation allows to allocate them in direct proportion to revenues. For example, if company earned a profit of EUR 400 thousand and generated aggregated revenues of EUR 2 million, of which EUR 1.5 million was from exports and EUR 0.5 million was generated locally, it can be deemed that tax-exempt profit comprises 75% (1.5/2), or EUR 300 thousand (400*75%), which can be distributed without paying corporate income tax, while the remaining EUR 100 thousand is subject to taxation.

 

Which is better for my company – Virtual Zone Entity status or International Company status?

Short answer is – International Company status is better.

International Company status is another status offered by Georgian legislation to IT companies. In case of International Company status, tax relief applies not only to corporate income tax, but also to personal income tax. However, obtaining International Company status is more complicated. More details on International Company status can be found in a separate article in our blog.

Our company provides all legal, accounting, and bookkeeping services necessary to obtain and maintain both statuses.

International company status is available to foreign investors and can offer significant tax benefits to the qualifying entities. In this article we will be discussing the exact benefits of holding this status and will be answering the frequently asked questions. Our company will provide all necessary legal and accounting services needed to obtain and maintain this status.

 

What is International Company Status?

This status entitles entities to significant tax benefits. These are:

• Instead of personal income tax rate of 20%, the company pays 5% – for example if an employee has net EUR 1,000 monthly salary, instead of paying EUR 250 in taxes (1,000/80%-1,000) company, which has the status, only pays EUR 52.6 (1,000/95%-1,000)
• Instead of corporate income tax (profit tax) rate of 15%, the company pays 5%
• Instead of VAT (value-added tax) rate of 18%, the company pays 0% on exports

Due to the above listed tax advantages, it is worth knowing whether your company would be eligible for the status.

Our company offers bookkeeping services and files all relevant tax declarations.

 

What companies are eligible for International Company Status?

The status can be obtained only either by IT or maritime industry companies. To be eligible for the status, company must have a minimum of 2 years’ experience in the field. However, if entity has more than 50% shareholder company, which has 2 years’ experience, this satisfies the law requirement.

It should be noted that it is not mandatory that 100% of company’s revenues be generated from the relevant industries (IT and maritime), however other sources of revenues shall not exceed 2% it total during calendar year.

Our company will carefully consult you on the International Company Status application process and will file the application form on your behalf. After obtaining the status, we will provide all necessary accounting services. Our bookkeeping services also include all relevant tax declarations filing.

 

Frequently asked questions

Our clients often ask the following questions regarding the International Company Status:

If I establish an IT company which will provide services on the local (Georgian) market and more than 98% of revenues will be generated from IT services, will I be eligible for the status?

The short answer is – no.

It is not sufficient that your company’s revenues are generated from IT services. There is one more important criterion, which is not specifically mentioned in the state decree, however can be found in the application form. The additional requirement is that more than 98% of revenues must be generated from exports. In other words, to be eligible for the status, company must provide services to entities outside Georgia. Revenues generated from local entities shall not exceed 2%.

 

If my company does not have more than 2 years’ experience in the allowed fields (IT or maritime), however its owners (who happen to be individuals) have the relevant experience, will I be eligible for the status?

The short answer is – no.

The reason is that the state decree specifically mentions that shareholder company, and not shareholder individual, must have a minimum of 2 years of relevant field experience.

 

If you are a business owner, distributing dividends is important subject for you to consider. You may have questions such as: what taxes do I have to pay upon distributing dividends? When it is the most appropriate time to pay dividends? What is the difference between paying dividends and paying the invested capital?

This article provides useful information on what factors should you consider before you decide on distributing dividends.

 

What taxes do I have to pay upon distributing dividends?

In accordance with Georgian tax legislation, upon dividend distribution, company must pay income tax and dividend tax. Income tax rate is 15%, while dividend tax rate is 5%. For instance, if company decides to distribute 1,000 GEL dividend, the company’s owner will receive net proceeds of 807.5 GEL (1,000*85%*95%), while the remaining 192.5 GEL will be paid to Georgian Revenue Services.

 

When is it the most appropriate time to pay dividends?

Often, company owners make mistake by assuming that they can pay dividends and then reinvest it in the company if the latter needs the money. At a first glance, this might seem a valid approach, however, in this case, the company has to pay the above discussed taxes upon distributing dividends, which means that if the owner distributed 1,000 GEL dividend and therefore paid 192.5 GEL as taxes, in case company needs the money, the owner will only be able to invest back 807.5 GEL, since the paid taxes will not be returned. As a result, the company will have smaller amount of funds available to fund its projects. Therefore, distributing dividends is only appropriate when a company does not have such short-term plans and projects that would require reinvestment of the issued dividends in the near future. Otherwise, the company will have smaller funds available upon reinvesting the paid dividends.

 

What is the difference between paying dividends and paying the invested capital?

Often, company owners make mistake by assuming that the company will be taxed upon any distribution to shareholders. However, whether tax applies or not depends on the substance of distribution – dividend distribution is different from invested capital distribution. The distinction between these two types of distributions is crucial – upon invested capital distribution, a company does not pay income and dividend taxes. For instance, if a company’s owner decides to distribute 1,000 GEL from the invested capital, unlike dividend distribution, the company will not have to pay 192.5 GEL as taxes and 1,000 GEL will be fully paid to the owner, without any tax deductions.

To better understand the distinction between invested capital and dividend, we analyze each of them below.

Dividend – represents distribution of company’s profits. Company has earned profit as a result of its operations. These profits are usually accumulated over years. Dividend represents distribution of these accumulated profits. When company distributes profits, it must pay profit and dividend taxes as discussed above.

Invested capital – represents equity invested by the owners. Unlike accumulated profits, invested capital represents funds invested in a company by its owners upon the company’s establishment or after the establishment. When company distributes invested equity, it does not pay neither profit nor dividend tax.