A joint appeal by the Association and Kreston Georgia to the Parliament of Georgia

On July 27, 2022, Shorena Kopaleishvili, the chairman of the Association of Georgian Virtual Zone Persons, and the Association’s partner, Davit Papiashvili, the managing partner of Kreston Georgia, appealed to Davit Songhulashvili, the chairman of the sector economy and economic policy committee of the Georgian Parliament.

The main topic of the letter was the fact that the approach to the law adopted 10 years ago was suddenly changed, and in 2021, companies were massively fined under this law by the Tax authorities.

Unfortunately, business hasn’t yet received a definitive answer to two major questions:

1. Why did such a rigid change in approach occur after ten years of no communication with business, which had the most negative impact on each business and the country’s income?

2. Why are companies being massively penalized retrospectively when there was no situational guidance on the subject at the time and the legal record is still ambiguous?

Because of this vague law, so many foreign companies were unjustly fined and many investors were forced to leave Georgia. This led the Association to address the parliament with a proposal of legislative initiative – to create a clear law. 

The arguments of the Association are based on the opinions of specialists, lawyers,  and experts in the field. Shorena Kopaleishvili, the chairman of the Association, cited all the arguments where all the inconsistencies were plainly apparent in her appeal, with the support of Kreston Georgia.

It should be noted that the Tax Code (which has superiority over other normative acts) establishes three prerequisites:

1. Information technologies must be created; 

2. It must be created by a legal entity with the status of “Virtual Zone Person”; 

3. Information technologies must be delivered outside of Georgia.

The justification of the chairman of the Association, Shorena Kopaleishvili, is important to state that the Tax code does not say “created by a legal entity on the territory of Georgia” and only says “created by a legal entity”. That is, the code does not state that information technology must be created on the territory of Georgia as a prerequisite for tax exemption.

Moreover, it is determined that for the purposes of taxation in the Tax Code, only the Tax Code’s definition is used, and not the terms or concepts in other legislation, which completely excludes the possibility of using the norms of other legislation, whereas the Tax Code clearly establishes the three preconditions for tax relief.

Furthermore, based on the most recent version of the norm and methodical references approved by the Revenue Service, it is still unclear how much of the product should be manufactured in Georgia or what part of the total cost should be incurred in Georgia. To be more specific, the existing record of the Law does not reflect the fact that the employee of the virtual zone enterprise must be located directly in Georgia and sell information technologies from there, and the tax benefit will be extended only to persons hired in Georgia with the relevant profile.

Besides, it is clear that the Revenue Service’s approaches are not well-established, as the agency has changed its position on two major issues mentioned earlier,  several times in recent months. However, prior to the change in the latter approaches, several companies were fined specifically on the latter grounds (including using the 40% threshold), indicating the lack of a uniform approach and practice in the revenue service.

First and foremost, this issue should be regulated by adjusting legal norms and establishing clear definitions in the law so that the parties do not have to interpret the law in the future. This was the reason why the Association approached Davit Songulashvili, as the chairman of the sector economy and economic policy committee of the legislative body of Georgia. The Association with its partner organizations is not going to stop until the final result is achieved.