A penalty with post factum rules – how fair is this approach and what IT companies don’t like about the Georgian legislation

Tbilisi (GBC) – For the past 11 years, the IT company “MC” has been active in the Georgian market, exporting digital products. M. K., the company’s managing director (the conversation was held under the condition of confidentiality), tells GBC that they also obtained the status of Virtual Zone Person (VZP) in order to enjoy tax benefits. He says the US government, the United Nations, the European Union, and other large customers are among the company’s clients. However, the tax incentives have recently become a source of tax “pressure” for the company after the Revenue Service fined it retroactively under new rules implemented following the audit.

According to the respondent, the company’s management has a strong desire to strictly follow any Georgian law; however, it is practically impossible to take into account the rules introduced post factum in advance.

“Having founded our company in Georgia and developing all our code in Georgia, we have always acted within the law. We were fined based on guidelines that were established after the start of our audit by the Revenue Services. We welcome new guidelines and want to abide by all relevant laws and policies of the Government of Georgia. However, it was impossible for us to do so, as the relevant guidelines or laws were not in place at the time of our audit” – says the managing director of the company.

He claims that the legislation governing Virtual Zone Persons was flawed from the start, allowing for abuses such as tax evasion and money laundering. The Georgian government is entirely correct in its desire to change this.

However, according to the managing director, honest companies that acted in the spirit of the law are currently suffering. This could have been avoided if, among other things, the authorities had not retroactively applied the new guidelines.

“This is especially painful as it affects a highly strategic sector (IT, as well as the knowledge economy in general), which is, rightfully so, an important policy priority for the Georgian government” – M. K. says.

According to him, first of all, the sector needs political stability and also stability in terms of regulation. If guidelines or laws change, companies must be notified in order to adapt their business processes to the new legal realities.

“First of all, new rules and policies should not be applied retrospectively. This creates a very unreliable environment for companies to operate in and sends the wrong message to potential investors and foreign companies considering investing in Georgia”– said the managing director of the company.

At the same time, the GBC respondent positively evaluates the steps already taken by the Georgian government to improve the regulations for the Virtual Zone Persons. In his opinion, in this way, abuse of power can be avoided, which should be evaluated positively.

Despite some positive government changes, the managing director does not see the possibility of expanding his business in Georgia at this time.

“Our business via this legal entity is on hold until the outcome of our court case, as well as the (hopeful) adoption of the new guidelines into law, which should finally present us with the required clarity and confidence to resume business ‘as normal’” – the managing director stated.

The respondent gives a special evaluation of the creation of the Association of Georgian Virtual Zone Persons and the effectiveness of its work in regulating issues of legal relations with the government.

“As a result of the Association’s efforts, significant changes have been made in methodological documents as well as in attracting the attention of the media, business ombudsman, and government bodies. We feel more confident about our prospects because of the Association’s efforts. However, we still remain in doubt pending relevant legislative processes to adopt the new guidelines into law. We hope the situation will be resolved soon so that we can confidently resume our business activities”– said the company’s managing director.

M.K. advised potential investors in this sector not to apply for this status until the relevant guidelines are written into the legislation.

For information, according to the data of the Revenue Service of the Ministry of Finance of Georgia, the companies with the status of Virtual Zone Persons paid more than 66 million GEL in the form of taxes to the budget of Georgia only in 2021, and about 1100 companies have been granted the status of Virtual Zone Persons.

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