Court Victory and IT Sector Growth: Virtual Zone Association in the Media Spotlight

On July 9, 2025, Shorena Kopaleishvili, Chair of the Georgian Virtual Zone Residents Association, discussed a landmark court victory by an IT company, a member of our association, in a dispute with the tax authorities during an interview on Business Formula (Formula TV). This precedent, along with the IT sector’s contribution to Georgia’s economy, has garnered significant media attention.

In this article, we analyze the key points of the interview, the significance of the court decision, and the association’s next steps.

Court Victory: A Precedent-Setting Ruling for Virtual Zone Companies

The media spotlight focused on how the support of the Georgian Virtual Zone Residents Association enabled its member to secure the cancellation of fines and taxes imposed by the Revenue Service. The IT company, a member of the association, prevailed in both the court of first instance and the appellate court. The legal proceedings began in late 2021 amid widespread tax audits of Virtual Zone companies, triggered by the company’s lack of employees with “specialized” qualifications working from Georgia. A portion of the income received as dividends was unlawfully reclassified as salary, leading to tax assessments and penalties. With the association’s active support, including the submission of an amicus curiae opinion, and collaboration with leading lawyer Giorgi Zhozhuashvili from Just Advisors, the company successfully overturned all additional tax assessments and fines.

This ruling marks a significant milestone for all companies with Virtual Zone status, strengthening their protections when utilizing virtual zone tax benefits.

Key Court Clarifications

In the interview, Shorena Kopaleishvili highlighted several critical clarifications from the court that will impact all Virtual Zone companies. The court ruled:

• Guidelines Lack Normative Force: The court established that the Revenue Service’s guidelines are internal departmental instructions and do not constitute normative legal acts. They cannot be used to impose taxes, restrict benefits, or establish other obligations. The court emphasized that tax obligations can only be set by parliamentary laws, as stipulated in Article 67 of the Constitution. This aligns with the association’s long-standing position that only laws carry legal weight, not departmental interpretations.

• Protection of Entrepreneurial Freedom: The court recognized that the Revenue Service’s requirement for employees with specific “profiles” or a minimum number of staff violates the principle of entrepreneurial freedom, enshrined in the Constitution and international law. Companies, including LLCs, are entitled to independently determine their internal structure and staffing levels.

• Clear Criteria for Virtual Zone Benefits (VZP): The court confirmed three main criteria, fully consistent with the association’s position: (1) creation of an IT product, (2) the product must be developed by a company with VZP status, and (3) the product must be supplied outside Georgia. In this case, the Revenue Service did not dispute the company’s creation of an IT product or its compliance with the criteria but still raised a claim due to the absence of employees with specialized qualifications.

This ruling challenges the ambiguous practices applied by the Revenue Service since 2021, including the reclassification of dividends and staffing requirements. The decision establishes a robust precedent, enabling other VZP companies to contest claims based solely on guidelines and demonstrating the effectiveness of the association’s support in such disputes.

Significance for Virtual Zone Companies

The court decision has far-reaching implications for all VZP companies:

• Strengthened Legal Protection: Companies can now cite this precedent to challenge tax audit outcomes or assessments, particularly those related to staffing requirements or income reclassification. The success of the association’s member confirms that such support can lead to the complete cancellation of unjustified taxes and penalties.

• Transparency and Predictability: The court’s affirmation that tax obligations must be based solely on parliamentary laws enhances legal certainty and reinforces the association’s advocacy for transparent and predictable legislation.

• Support for Ongoing Disputes: Some VZP disputes remain active, and this ruling provides a solid legal foundation for them. The association continues to offer professional advisory support to its members.

Trends and Prospects for the IT Sector: Media Interest

Growing media attention, including from Business Formula, underscores the economic significance of the IT sector. Shorena Kopaleishvili highlighted several key trends:

• Revenue Growth: In the first quarter of 2025, the IT sector’s annual revenue reached 266 million GEL, a 70% increase compared to the previous year, though it has not yet surpassed the record set in 2023. The contribution of Virtual Zone companies, particularly through income tax on salaries, is particularly notable.

• Rising IT Service Prices: The wave of IT specialist migration that began in 2022 has stabilized, with no significant increase in workforce numbers in 2025. As Shorena Kopaleishvili noted, revenue growth is likely driven by rising prices for IT services rather than an influx of new professionals.

• Market Diversification: VZP companies are expanding into new international markets, including the Middle East, Asia, and Scandinavia, beyond traditional markets in Europe and the U.S. Alongside this, there is a rise in foreign direct investment (FDI) in the information and communications sector, signaling strong interest in Georgia’s IT ecosystem.

• Ongoing Challenges: Despite progress, legislative gaps remain. The association actively supports the development of clear legislation necessary for the sector’s long-term sustainability. The stabilization of tax practices in 2024–2025, partly due to court rulings, has created a more predictable environment, fostering the attraction of international IT companies. The association’s work, including in legal proceedings, plays a pivotal role in this process.

Next Steps for Members

If you are facing an audit or wish to ensure compliance with VZP criteria, contact us at info@viz.ge or by phone at +995 511 238 466 / +995 511 230 446—we provide tailored support.

For those not yet members of the association, we encourage you to join to receive timely updates and professional services.