Tax Ruling
On behalf of a member of the Association, the company “W” (registered in February 2020, the status of a resident of the virtual zone of the Republic of Georgia was obtained in March 2020) initiated correspondence with the tax inspectorate within the framework of a paid tax conclusion Tax Ruling.
January 20, 2022 - The state duty in the amount of 10,000 GEL has been paid and a statement has been written on the main issues:
LLC “W”; is a developer company aggregating software development and support for several projects. In addition, the company supports bilingual systems, customization and support of CRM systems, carries out activities on web design, SEO and SMM. The company uses various development and technical support teams, hosting services, server capacities and other necessary infrastructure for the implementation of projects both on the territory of Georgia and abroad to create software products.
Coordination of the work of project teams, marketing and sales management is carried out by the director of the company working in its office in Tbilisi. At this stage, the company has several contracts with contractors outside Georgia, namely for technical support services, marketing services, consulting and legal services. All the company’s clients are non-residents of Georgia.
Please inform me:
- data on mandatory taxes for the company in the payment of wages, for services, as well as in the distribution of net profit
- whether the company’s activities correspond to the status of a resident of the virtual zone of the Republic of Georgia
- if not, in what part, indicating the norms of legislation.
Since January 2022, the applicant twice received the request for clarifications from Revenue Service by duplicating questions, which give the impression that there is the bureaucracy and the delay in the deadline for issuing an official report and also since the creation of the Virtual Zone Status in 2011 there is no understanding of the regulations of companies with a special status by the tax service.
On June 15, 2022, a preliminary the advance was signed by the head of the Revenue service, according to which, the company with the status of a Virtual Zone Person of Georgia is recognized with a profit tax exemption, although the company has clearly indicated the absence of IT specialists in staff, absence of direct development of IT products in the country and purchase of IT services from a foreign company in the interests of the Georgian project.
Among the arguments of the RS are:
The Tax Code of Georgia indicates: "Created by a legal entity" and not specified "Created on the territory of Georgia." The focus is also on the legal entity and not the physical person - the programmer. Nowhere in the Tax Code of Georgia is there a reference to the precondition for exemption from profit tax, the fact that information technology must be created on the territory of Georgia, especially since the law does not stipulate whether or not to create on the territory of Georgia depends on the location of the main developer - physica person.
In other words, in its preliminary decision, the Revenue x Service of Georgia completely contradicts the argument, according to which hundreds of companies with the status of a Virtual Zone have been fined for the amount of dividends distributed by the Tax Audit Department.
Download documents:
> Tax ruling for a company request 20.01.2022.pdf
Stories of Affected Investors
Since 2021, after a sudden unjustified change in the approach of the tax service to the taxation of persons of the virtual zone, several dozen companies in respect of which audits and additional tax assessments were conducted will appeal these decisions to one degree or another.
The vast majority of cases are settled administratively in the relevant departments of the revenue service. Some cases are also appealed to the Dispute Resolution Council of the Ministry of Finance of Georgia.
We are publishing official documents related to the verification of these companies in the public domain with the consent of representatives of the affected companies. We need to show that these inspections are extensive in nature and are aimed at violating the rights of foreign investors.
Cases of affected investors
Case 1 - Company “V”. A fine of more than GEL 160,000
Company "V", registered in September 2019, was granted the status of a virtual zone person by the Ministry of Finance of Georgia in October 2019. The beneficiaries of the company are Russian citizens; the director is a Georgian citizen. The company operates predominantly by the founders.
According to the results of the tax audit, in June 2021 the company was requested to pay 160,188 GEL, which included a profit tax of 94,444 GEL, a fine of 48,566 GEL, and interest of 13,804 GEL.
The Tax Inspectorate complaint filed in July 2021, was rejected. Reason - the taxpayer did not submit evidence of the creation of any product on the territory of Georgia.
Case 2 - Company "W". A fine of more than GEL 580,000
Company "W", registered in 2018, the status of a virtual zone person was granted by the Ministry of Finance of Georgia in 2018. The beneficiary of the company, the founder, and the only one - a citizen of Slovakia. Until 2020, the activities of the company were carried out individually by the founder.
According to the results of the tax audit, the company received a request to pay 586,899 GEL in the summer of 2021, which included: tax - 338,653 GEL, fine - 169,326 GEL, and interest - 78,920 GEL.
The appeal filed with the Tax Inspectorate was dismissed in July 2021. Reason - the taxpayer failed to provide evidence of the creation of any product on the territory of Georgia.
The request to cancel the illegal result of the tax audit was dismissed in November 2021. The taxpayer's claim is currently being considered in the second instance.
Case 3 - Company "T". A fine of more than GEL 140,000
Company "T", registered in July 2019, was granted the status of a virtual zone person by the Ministry of Finance of Georgia in December 2019.
Beneficiary of the company - German citizen.
The activities of the company are predominantly carried out by the founders personally.
In December 2021, according to the results of the company's tax audit, the company was required to pay 144,468 GEL in taxes, including: tax - 81,975 GEL, fine - 40,988 GEL, interest - 21,505 GEL.
The Tax Inspectorate rejected the complaint in February 2022. Reason - the taxpayer did not provide any evidence of the product on the territory of Georgia.
Case 4 - Company "T". A fine of more than GEL 100,000
Company "T", registered in February 2017, the status of a virtual zone person was granted by the Ministry of Finance of Georgia in February 2017. The beneficiary and director of the company is a Latvian citizen.
The activities of the company were predominantly carried out by the founder personally as a software developer. In 2019-2020 The activities of the company were suspended.
According to the results of the tax audit in December 2021, a request for payment of the amount of 100,000 GEL (including profit tax, penalty and interest) was submitted to the company. Reason - the taxpayer did not provide any evidence of the product on the territory of Georgia. The request to cancel the illegal result of the tax audit is currently being considered (from January 2022).
Case 5 - Company "A". A fine of more than GEL 40,000
Company "A", registered in November 2017, was granted the status of a virtual zone by the Ministry of Finance of Georgia at the end of 2017. At the time of registration, the beneficiary, and director of the company is a Russian citizen. The company's activities were mainly carried out outside Georgia as a developer and partner responsible for the sale of the product by the owner.
In 2021, according to the results of the tax audit, a request for payment of 44,000 GEL was submitted, including profit tax, fine, and interest. Reason - the taxpayer did not present any evidence of the production on the territory of Georgia. Currently, the Ministry of Economy of Georgia is considering a request to cancel the results of the illegal audit.
Case 6 - Company "G". A fine of more than GEL 134,000
Company "G", registered in October 2017, was granted the status of a virtual zone by the Ministry of Finance of Georgia in November 2017. The beneficiary and director of the company is a Latvian citizen.
The activities of the company were mainly carried out as a manager by the owner outside Georgia and also by the employee on the territory of Georgia.
In August 2021, according to the results of the tax audit, a request for payment of 134 847.96 GEL was submitted, including 75 346 GEL profit payment, fines, and interest. Reason - The taxpayer could not provide any evidence of production on the territory of Georgia.
Currently, the Ministry of Economy of Georgia is considering the request to cancel the illegal results of the tax audit.
Case 7 - Company “D”. A fine of more than GEL 350,000
Company “D”, registered in April 2019, was granted the status of the Virtual Zone Person by the Ministry of Finance of Georgia in April. The beneficiary and director of the company is a citizen of Armenia. The activities of the company were carried out mainly outside of Georgia without hiring developers in the country.
In June 2021, based on the results of a tax audit, the company was required to pay an amount of GEL 355,247.56, including: tax in the amount of GEL 201,309, a fine of 50% of the tax amount - GEL 100,655 and penalties of GEL 53,283.56. The reason - the taxpayer did not present any evidence of the creation of the product on the territory of Georgia.
Currently, a request is being considered to cancel the unlawful result of a tax audit based on a complaint from company representatives.
Case 8 - Company “Y”. A fine of more than GEL 43,000
Company “Y”, registered in December 2015, was granted the status of the Virtual Zone Person by the Ministry of Finance of Georgia in December 2015. The beneficiary and director of the company is a citizen of Georgia.
The activities of the company were carried out mainly outside of Georgia without hiring developers in the country.
In December 2021, based on the results of a tax audit, the company was required to pay an amount of GEL 43,643.64, including tax in the amount of GEL 23,772, a fine of 50% of the tax amount - GEL 11,886, and penalties of GEL 7,985.64. The reason – the taxpayer did not present any evidence of the creation of the product on the territory of Georgia.
Currently, a request is being considered to cancel the unlawful result of a tax audit based on a complaint from company representatives.
Case 9 - Company “I”. A fine of more than GEL 34,000
Company “I”, registered in September 2018, was granted the status of the Virtual Zone Person by the Ministry of Finance of Georgia in October 2018. The beneficiary and director of the company is a citizen of Russia. The activities of the company were carried out mainly outside of Georgia without hiring developers in the country.
In December 2021, based on the results of a tax audit, the company was required to pay an amount of GEL 34,709, including: tax in the amount of GEL 19,432, a fine of 50% of the tax amount - GEL 9,737 and penalties of GEL 5,540. The reason – the taxpayer did not present any evidence of the employment of persons in this field on the territory of Georgia.
In March 2022, a complaint was filed against the unlawful decision of the tax inspection at the Ministry of Finance of Georgia.
Case 10 - Company “D”. A fine of more than GEL 29,000
Company “D”, registered in February 2018, and was granted the status of the Virtual Zone Person by the Ministry of Finance of Georgia also in February 2018. The beneficiary and director of the company is a citizen of Georgia. The activities of the company were carried out mainly outside of Georgia without hiring developers in the country.
In June 2021, based on the results of a tax audit, the company was required to pay an amount of GEL 29,947.50, including: tax in the amount of GEL 19,966.00, a fine - GEL 9,982.50 and penalties of GEL 7,280.30. The reason - the distribution of dividends, not the payment of salaries.
A complaint was filed against the unlawful decision at the Ministry of Finance of Georgia.
Case 11 - Company "G". A fine of more than GEL 45,000
Company "G", registered in September 2019, was granted the status of a Virtual Zone Person by the Ministry of Finance of Georgia in October 2019. The founder of the company is a German citizen and a resident of Cyprus, the director of the company is a citizen of Georgia. The activities of the company are mainly carried out outside Georgia.
In December 2021, according to the results of the tax audit, the company was required to pay GEL 45,777, including: GEL 28,513 in taxes, a fine of 50% of the tax amount of GEL 14,257 and a interest of GEL 3,008. The reason - the taxpayer did not present any evidence of persons employed in the field and for the creation of the product.
In March 2022, a complaint against the illegal decision of the Tax Inspection was filed in the Dispute Resolution Board of the Georgian Revenue Service. The complaint was partially upheld.
Case 12 - Company "V". A fine of more than GEL 400,000
Company "V", registered in February 2019, has been granted the status of a Virtual Zone Person by the Ministry of Finance of Georgia also in February 2019. The founder of the company is a German citizen; the director of the company is a citizen of Georgia. The company's activities are mainly carried out outside Georgia.
In December 2021, according to the results of the tax audit, the company was required to pay the amount of 447,706.78 GEL, including: 252,308 GEL tax, 50% tax amount 126,254 GEL and interest 69,144.78 GEL. The reason - the taxpayer did not provide any evidence of the product on the territory of Georgia.
In March 2022, the Dispute Resolution Board of the Georgian Revenue Service filed a complaint against the illegal decision of the Tax Inspection. The complaint was partially upheld.
Case 13 - Company "Q". A fine of more than GEL 27,000
Company "Q" registered in January 2019, has been granted the status of a Virtual Zone Person by the Ministry of Finance of Georgia in January 2019. The founder of the company is a German citizen. The company's activities were mainly carried out outside Georgia.
In June 2021, according to the results of the tax audit, the company was required to pay GEL 27,200.43, including: GEL 17,546, a fine of 50% of the tax amount - GEL 8,773 and interest - GEL 881.43. The reason - the taxpayer has not provided any evidence of the product on the territory of Georgia.
Case 14 - Company "TS". The fine of more than GEL 40,000