Landmark Ruling: First Full Fine Removal for Virtual Zone Company in Georgia

Tbilisi City Court delivered a groundbreaking decision, fully granting the claim of a Virtual Zone resident — a member of the Association — that challenged tax penalties amounting to 34,709 GEL. This precedent-setting case is a significant milestone for Georgia’s IT industry, reinforcing the right of such companies to tax benefits without unwarranted restrictions.

Case Overview

The company, which develops software for international clients, faced scrutiny from the Georgian Revenue Service for the period spanning September 26, 2018, to May 1, 2021. The tax authority imposed penalties totaling 34,709 GEL (comprising 19,432 GEL in principal tax, 9,737 GEL in fines, and 5,540 GEL in late fees), arguing that the absence of employees other than the director violated the conditions for tax exemptions.

However, the court ruled that the company’s operations were entirely compliant with Georgian law, including the Law on Information Technology Zones and the Tax Code, and that the Revenue Service’s demands, based on methodological guidelines, were unconstitutional.

The Role of the Association and Just Advisors

The Association of Virtual Zone Residents of Georgia played a crucial role in securing this victory by steadfastly advocating for IT companies. It supported its member by submitting an expert opinion to the court, asserting that the lack of hired staff does not negate the company’s entitlement to tax benefits.

Additionally, the Association worked tirelessly to challenge restrictive methodological guidelines, successfully advocating for the inclusion of business-friendly recommendations in the latest version. This effort proved pivotal, shifting the case’s trajectory and contributing to the favorable outcome.

Legal representation

Legal representation was provided by the team at Just Advisors, with advocate Giorgi Zhuzhunasvhili leading the charge. His arguments were instrumental: the team demonstrated that the Revenue Service’s methodological guidelines lack legal authority and cannot override rights enshrined in the Tax Code. Giorgi emphasized that the court’s reasoning heavily relied on the Georgian Constitution, which safeguards entrepreneurial freedom.

The ruling clarified that tax benefits for Virtual Zone companies cannot be curtailed by methodological references. Moreover, the court confirmed that developing IT products in Georgia, even without additional staff, fully meets legal requirements. It also cited administrative procedure principles, noting that the tax authority cannot base decisions on inadequately investigated facts, providing further grounds for overturning the contested actions.

Significance of the Ruling

The court nullified all disputed actions by the tax authority and ordered the Revenue Service and the Ministry of Finance to reimburse the plaintiff for the court fees paid.

This case marks the first instance in Georgian judicial history where a Virtual Zone resident successfully had all tax penalties lifted, bolstering confidence in the judiciary and fostering a more supportive environment for the IT sector’s growth in Georgia.

Conclusion

The court annulled all contested acts of the tax authority and ordered the Revenue Service and the Ministry of Finance to reimburse the plaintiff for the court fees paid.

This ruling sets a vital precedent for Georgia’s IT sector, demonstrating that Virtual Zone companies’ rights can be robustly defended. The success owes much to the Association’s advocacy and the expert legal work of Just Advisors, particularly Giorgi Zhuzhunasvhili. The court’s decision paves the way for a more transparent and equitable landscape for innovative businesses in Georgia.

In the coming days, we will offer an exclusive interview with advocate Giorgi Zhuzhunasvhili from Just Advisors, who will provide detailed insights into legal and tax matters.