In the world of international business, finding the right location can significantly impact your bottom line. Georgia, nestled at the crossroads of Eastern Europe and Western Asia, has emerged the opportunity center, thanks to its enticing taxation system inspired by the Estonian model. Further, we delve into the facets of Georgia’s favorable tax environment and explore the key classifications designed to cater to the Information Technology (IT) sector.
Georgia’s Soft Taxation System
Georgia’s tax system stands out for its simplicity and transparency. IT specialists, in particular, can relish the status of a small business, which comes with a low income tax rate of just 1%. This fairly low rate extends to a broad range of activities beyond IT. The terms “virtual zone” and “international company” have been meticulously designed to offer preferential treatment tailored to the unique needs of IT companies.
The Small Business Advantage
Since July 1, 2018, Georgia introduced a groundbreaking 1% income tax rate for small businesses. This paradigm shift was a game-changer, affecting approximately 120,000 individual entrepreneurs earning up to 500,000 lari annually. Prior to this, the tax rate for small businesses was 5%, targeting sole proprietors who earned 100,000 lari or more during the same period. Moreover, the regulatory authorities introduced simplified reporting, making it more accessible for entrepreneurs to benefit from this system.
To secure this small business status, entrepreneurs must register as individual businesses, submit applications through the Revenue Service of Georgia’s website, and complete the entrepreneur’s information card. This process also entails specifying the nature of your business activities. Monthly declarations can also be submitted online.
Once approved, entrepreneurs can download their certificate from the Revenue Service’s website, and tax payments can be made either through the service portal or their bank. Importantly, all income assessment and tax payments should be conducted in lari, according to the Central Bank of Georgia’s exchange rate.
To qualify, businesses need to meet two fundamental conditions:
- Annual income up to 500,000 lari.
- Engagement in approved business activities.
It’s essential to note that if business’s income exceeds the specified threshold within two years, the tax rate will be adjusted to 3%, and they may lose their small business status. The standard income tax rate for individual entrepreneurs, outside of the small business status, is 20%. Certain types of activities, such as real estate sales, gambling, consulting, legal, and accounting services, do not qualify for this preferential tax treatment.
The Appeal of the Virtual Zone
Georgia’s forward-thinking approach introduced the concept of a “virtual zone” in 2010, with the goal of stimulating the information technology sector and attracting international investors. The virtual zone status caters specifically to companies that develop and market software to customers located outside of Georgia.
Recent changes in virtual zone status requirements include the need to provide a list of projects completed over the past three years, simplifying resident employee conditions, and adjusting rules for licensed software development. The tax rates for virtual zone companies are highly appealing:
- Corporate Tax: 0%
- Value Added Tax (VAT): 0%
- Dividend Tax: 5%
- Income Tax (on employees’ salaries): 20%
The path to virtual zone status is well-defined, starting with the registration of an LLC at the House of Justice, gaining access to the tax office, submitting an application to the Ministry of Finance of Georgia, obtaining a certificate of a virtual zone resident, and transferring it to the tax service. A vital part of the process is opening a multi-currency settlement account for the company in a bank of your choice.
Unlocking the International Company Status
The international company status is accessible to enterprises registered in Georgia, engaging in activities specified in Government Decree No. 619, issued on October 8, 2020. These activities include software and computer game creation, computer programming, consulting, administration, IT asset management, and website development and support.
To qualify for international company status, the enterprise must meet the following conditions:
- Conduct the primary activity within Georgia.
- Income from other permitted services should not exceed 2% of the total income.
The international company status can be awarded to Georgian enterprises and representatives of foreign companies paying taxes and establishing residency in Georgia. However, this status is not applicable to companies operating within the free industrial zones, where businesses enjoy preferential tax conditions.
The tax rates for international companies are as follows:
- Corporate Tax: 5%
- Income Tax (on employees’ salaries): 5%
- Dividend Tax: 0%
- Property Tax: 0%
International companies can further reduce their taxable base by accounting for salaries paid to Georgian citizens and research and experimental work costs related to authorized services. It’s important to note that a pension contribution of 4% is mandatory for full-time employees who are Georgian residents.
Ease of Doing Business
Georgia has positioned itself as a top destination for international business ventures. Its tax-friendly environment and ease of doing business have attracted a diverse range of enterprises and investors. Regardless of nationality, all entrepreneurs benefit from the same favorable business conditions. Similar benefits with more favorable conditions are available in the Belarusian Hi-Tech Park. You can find out more here.
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