Another Tax Penalty: Tax Auditors Keep Pressing Virtual Zone?

Last time, we shared a success story where the Association successfully overturned unjustly imposed taxes. However, tax audits are not a one-time wave. They continue on an ongoing basis, creating additional risks for companies operating in the Virtual Zone. Let’s examine a recent case from February 20, 2025.

Parties to a tax dispute:

Plaintiff: LLC “—” (founder – an Estonian resident).

Defendant: Audit Department.

Company Fined 94,127.51 GEL: Details of the Tax Dispute

On February 20, 2025, a Virtual Zone company faced significant tax reassessments following a desk audit conducted by the Audit Department. The audit covered the period from January 1, 2020, to February 1, 2023, and resulted in a total amount due of 94,127.51 GEL, including:

Corporate Profit Tax: 43,793 GEL

Penalty: 24,463 GEL

Interest Charges: 25,871.51 GEL

Key Reasons for the Penalty:

No employees or subcontractors: The company was penalized for lacking employees, despite the nature of its business model.

Founder’s residency status: The company’s founder was not a Georgian resident during the audited period.

No recorded salary payments: Auditors retroactively assigned a salary to the founder and demanded corresponding tax payments.

Software product classification: Auditors ruled that software developed in Georgia could not be considered for corporate profit tax purposes due to the founder’s non-resident status.

The company is contesting the tax authority’s decision, citing violations of the Georgian Tax Code and an international double taxation avoidance treaty.

Financial Consequences for the Company:

While the appeal process is ongoing, the imposed fines exceed the company’s retained earnings, making further operations impossible.

The company has been forced to suspend its activities, halt new projects, and abandon expansion plans.

What Does This Mean for Virtual Zone Businesses?

This case is yet another confirmation that tax audits are not slowing down and pose a significant risk to Virtual Zone companies. The Virtual Zone remains under strict auditor scrutiny, and retroactive tax reassessments have become a reality.

The Association continues to fight for its members’ rights, advocating for transparency in tax policies and protection from unjustified claims.

We provide legal support and guidance to minimize tax risks for our members. If you are not yet a member—join us today!

Supporting the Association requires resources—your contribution helps us safeguard Virtual Zone businesses. Your support is an investment in a transparent and stable environment for IT companies in Georgia.

💡 Support our work – invest in the future of the IT sector!