Interview with Advocate Giorgi Zhuzhunasvhili from Just Advisors

We are thrilled to present an exclusive interview with advocate Giorgi Zhuzhunasvhili of Just Advisors, whose masterful advocacy was pivotal in defending a company in the landmark first judicial case that resulted in the complete removal of tax penalties for a Virtual Zone resident. The penalties, amounting to 34,709 GEL (including 19,432 GEL in principal tax, 9,737 GEL in fines, and 5,540 GEL in penalties), were levied by the Georgian Revenue Service between September 26, 2018, and May 1, 2021, on the grounds that the company—staffed solely by its director without additional employees—allegedly did not qualify for Virtual Zone tax benefits. In this interview, Giorgi offers an in-depth look at the dispute, reveals the strategies that secured this victory, and shares his insights on the future growth of Georgia’s IT sector.

 

 

When Did the Dispute Begin, and Were There Any Preconditions?

 

The dispute commenced on December 24, 2021, when the Audit Department of the Revenue Service issued a tax demand based on an inspection report. Dissatisfied with the ruling, the client sought our legal assistance, prompting us to file a formal complaint with the Revenue Service on January 10, 2022. This marked the official start of the tax dispute, which remains ongoing and is currently in the judicial phase. As for preconditions, our client was among those impacted by the Revenue Service’s extensive audits of Virtual Zone companies and Free Industrial Zone (FIZ) enterprises.

 

 

On What Grounds Did the Revenue Service Impose Fines on the Company?

 

The client served as the sole partner and director of a Georgia-registered company, single-handedly developing software for international clients without additional staff. Throughout this period, he remained a tax resident of Georgia. While the inspector did not contest the creation of IT products on Georgian soil, he argued that the lack of hired employees—beyond the director—disqualified the company from tax benefits. The auditor reclassified the founder’s dividend income as salary, leading to the imposition of income tax and a penalty for underreported amounts in the tax return.

 

At the time, these assessments reflected not only an individual inspector’s view but also the broader stance of the tax authority, underpinned by questionable interpretations in methodological guidelines.

 

 

Did the Ministry of Finance Fully Endorse the Revenue Service’s Position?

 

Prior to the Revenue Service’s final decision, the first methodological guideline on taxing Virtual Zone residents was issued. The dispute resolution body formally upheld our complaint in part, directing the Audit Department to review the case in light of this guideline. However, it was clear that a re-evaluation would yield no changes, as the guideline’s arguments aligned with the auditor’s position in the report. We thus appealed to the Dispute Resolution Council, where a similar pattern emerged: before our complaint concluded, the first guideline was revoked, and a new (“second”) guideline was approved on March 25, 2022. The Council mandated that the case be adjudicated under the new document.

 

Notably, the special legislation for Virtual Zone residents remained unchanged throughout. Nevertheless, the Revenue Service’s methodological guidelines conflicted not only with existing laws but also with each other. The first guideline imposed income tax on all dividend income, while the second limited taxation to an amount equivalent to the average professional salary in Georgia’s labor market. Deeming this interpretation flawed, we filed a lawsuit with the Tbilisi City Court.

 

 

What Was the Total Amount of Taxes and Penalties Imposed on the Company?

 

The Audit Department assessed the company with 19,432 GEL in income tax, a 9,737 GEL fine, and 5,540.55 GEL in penalties. As previously noted, the amount distributed to the founder as dividends—previously exempt from profit tax—was reclassified as salary, forming the basis for the income tax assessment.

 

 

What Were the Key Arguments That Proved Decisive in Winning the Case?

 

We encountered two significant challenges with Virtual Zone companies: firstly, the vague and incomplete wording of legislation regarding IT product creation in Georgia, and secondly, the tax authorities’ frequent overreach in interpreting the law.

 

The legislative ambiguities did not directly affect us, as the company’s founder resided and worked in Georgia. However, I believe this uncertainty fueled confusion, enabling the tax authority to impose taxes—often unjustly—on all Virtual Zone companies. The cornerstone of our case was the argument that a methodological guideline lacks the status of a binding legal act. Regrettably, the respondents wavered on this point, sometimes agreeing and sometimes denying it. It was evident to any impartial observer that both guidelines contradicted not only the Tax Code and special legislation but also the Law of Georgia on Entrepreneurs, restricting the partner’s right to distribute profits as dividends. Moreover, a critical question arose: if the guideline was mandatory, why was it not applied to us when the document made no such provision?

 

While the court deliberated, a third methodological guideline was approved, reflecting our case’s circumstances and recognizing the taxpayer’s entitlement to exemptions and profit tax relief. Prior to the ruling, we urged the Revenue Service to adhere to this guideline and rescind the tax demand, but our efforts were unsuccessful. Ultimately, the decision rested with the court.

 

 

What Role Did the Association Play?

 

The Association of Virtual Zone Residents took a keen interest in our case, preparing an amicus curiae brief that outlined the preconditions and context of the audits on Virtual Zone companies, alongside a legislative analysis that the court considered. The Association also shared vital written clarifications obtained from the Revenue Service. I must highlight that the Association’s role is essential in coordinating Virtual Zone companies and advocating for rational dialogue with government bodies. I am convinced that its efforts were instrumental in driving the changes we observe today, though such matters should not be governed by methodological guidelines. The unresolved questions surrounding Virtual Zone operations serve as a striking example.

 

 

As We Understand, the Appellate Court Upheld the First Instance Decision. Can You Confirm This?

 

Yes, the decision stands firm. The Appellate Court fully endorsed the lower court’s ruling. It is noteworthy that both respondents—the Revenue Service and the Ministry of Finance—challenged the decision, presenting conflicting positions.

 

 

How Will This Ruling Impact Other IT Companies with Virtual Zone Status in Georgia, Including Ongoing Disputes?

 

The Appellate Court clarified that this was the first instance of adjudicating tax disputes involving Virtual Zone companies, conferring a precedential status on the case.

 

The court explicitly ruled that the first and second methodological guidelines contravene the law and hold no legal weight against the taxpayer. While this follows from the legislation, its formal recognition in the judicial decision carries substantial significance.

 

Importantly, the judge provided clear guidance on the criteria taxpayers must meet to access benefits. However, I believe the question of what constitutes product creation in Georgia remains unresolved, particularly when viewed through the lens of the current methodological guideline.

 

Furthermore, I contend that in all disputes where the tax authority ties product creation in Georgia to the physical presence of employees, taxpayers should challenge the law’s lack of clarity and precision. This, in turn, represents an unlawful infringement on taxpayer rights by the tax authority’s exploitation of legislative ambiguity. The issuance of three contradictory mandatory methodological guidelines for inspectors underscores this misuse.

 

 

In Your View, What Should State Policy Look Like to Foster the Growth of This Sector, Including Regulation?

 

Tax law provisions, especially the criteria for accessing benefits, must be clear and accessible. Ambiguity and vagueness deter investors and impede the growth of every business sector. A unified and transparent policy is essential. In a state governed by the rule of law, legislation should be precise, well-defined, and specific, laying a solid foundation for economic development and prosperity.

 

The Association of Georgian Virtual Zone Persons extends its sincere gratitude to the Just Advisors team and personally to advocate Giorgi Zhuzhunasvhili for their outstanding work in protecting the rights of Virtual Zone residents.

 

Just Advisors is a proud partner of the Association, offering special legal support packages tailored for our members.

 

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