Tbilisi (GBC) – In connection with the millions of GEL fines imposed by the tax authority on Virtual Zone Persons in the past years, "the Association of Georgian Virtual Zone Persons" applied to the court in parallel with the consideration of cases by the tax authorities and sent a message to the Office of the Business Ombudsman of Georgia to get an opinion on one of the cases. Virtual Zone Persons do not agree to pay the imposed fines and surcharges and demand clearer legislation that will not give the parties the opportunity for ambiguous interpretation.

The Business Ombudsman of Georgia reviewed the application of the Association and practically agreed with the claims of their companies. The office of the Business Ombudsman presented its opinions in writing to the interested party. A small excerpt of this opinion, which we offer unchanged, follows:

"As the Association explains in the statement sent to the Business Ombudsman, from 2021, tax audits were carried out in the Virtual Zone by the State Revenue Service. During the tax audit, it was considered that the Information Technologies provided by the companies were not created in the territory of Georgia. Accordingly, such supply was considered a taxable operation with profit tax and along with the profit tax, the companies were charged a fine and surcharge, in accordance with Articles 275 and 272 of the Tax Code of Georgia.

The companies disagreed with the amounts charged by the tax audit and appealed the charge first to the Disputes Review Board of the State Revenue Service (as a result, the companies were released only from the fine charged), and then to the Disputes Review Board at the Ministry of Finance of Georgia, which did not satisfy the companies' appeal. After that, the Virtual Zone Persons continue the tax dispute in court.

In accordance with Clause B of Article 2 of the Law of Georgia "On Information Technology Zones", a Virtual Zone Person is a legal entity that carries out information technology activities and has been granted the appropriate status. And, according to point "C" of the same article, information technology refers to the study, support, development, design, production, and implementation of computer information systems, as a result of which software products are obtained. For reference, these terms are defined identically in the 35th and 36th parts of Article 8 of the Tax Code of Georgia.

According to the first paragraph of Article 3 of the same law, the issues related to the taxation of the Virtual Zone Persons are regulated in accordance with the Tax Code of Georgia.

According to Article 99 of the first part of the Tax Code of Georgia, subsection "P", the profit  obtained by the delivery of information technology created by a legal entity of the Virtual Zone outside of Georgia is exempt from profit tax (profit distribution).

In other cases, the object of taxation with the profit tax of the Virtual Zone Persons is:

- Distributed profit;

Analyzing the specified legal norms, in order for a Virtual Zone Person to be exempt from profit tax, three conditions must be met at the same time:

- The person must be registered as a legal entity in Georgia and must have the status of a Virtual Zone Person;

- Information technology must be created by the legal entity of the Virtual Zone;

- Information technology must be delivered outside of Georgia.

It should be emphasized that the Tax Code of Georgia, which is superior to other legislative acts in terms of taxation, does not establish any other additional requirements for the use of tax relief for a Virtual Zone Person, including the number of employees that such companies must hire and in what amount they should pay them a salary (moreover, this requirement is not specified in any other legislative and sub-legal normative acts regulating the activity of a Virtual Zone Person).

It should also be taken into account that, due to the specificity of its activity, such a business is not tied to the implementation of its activities from a specific place (unlike many other businesses). Technologies are created by the developer remotely, from any place. According to the Tax Code of Georgia, the tax benefit, as mentioned above, is tied to a legal entity, which must be registered in Georgia and have a status, while the obligation of the developer acting on behalf of this legal entity to be in the territory of Georgia in the process of creating information technologies is not explicitly established.

Although Article 6 of the Law of Georgia "On Information Technology Zones" defines what is included in the activity in the Virtual Zone (economic activity carried out by a legal entity aimed at the creation of information technology in the territory of Georgia), we think that the absence of such a limitation in the tax code is due to uncertainty. And it allows for ambiguous interpretation of the legislation, especially when the majority of Virtual Zone Persons are foreign investors.

It is clear that it is very important for Georgia to have an attractive investment environment, for which along with the reduction of administrative barriers and restrictions, the creation of fair competition conditions and the infrastructure promoting business development, it is necessary to have a favorable tax environment for the investor and a transparent and predictable legal system. Based on the above, the presence of such norms in the Tax Code of Georgia, which are somewhat vague and allow for different interpretations, is a prerequisite for making investments in the country. This is what the main principles (predictability and simplicity) of tax policy of the Organization for Economic Co-operation and Development (OECD) are talking about, according to which tax rules should be simple and understandable so that taxpayers know what to expect. A simple tax system makes it easier for individuals and business entities to understand their obligations to the state. As a result of all this, the business will make more optimal decisions.

Accordingly, we believe that the preconditions for exempting Virtual Zone Persons from tax sanctions based on Part 7 of Article 269 of the Tax Code of Georgia are also present.

In accordance with Article 6, Paragraph 3, Sub-Clause "E" of the Law of Georgia "On the Business Ombudsman of Georgia" and Article 16 Prima of the Code of Administrative Procedure of Georgia, we consider it appropriate to take into account the above-mentioned circumstances and evaluations when considering the complaint of an LLC and other Virtual Zone Persons in the system of general courts of Georgia." It is stated in the conclusion of the office of the business ombudsman of Georgia.

The Association of Georgian Virtual Zone Persons (https://viz.ge/) is ready to share more information regarding the position of Business Ombudsman with interested parties.

It should be noted that despite the negative processes that have been carried out on companies with this status, the interest in this preferential regime still remains, which is confirmed by the information provided to the Association by the Ministry of Finance of Georgia. In particular, in the period from January 1, 2021, to September 9, 2022, the status of  Virtual Zone Person was granted to 192 companies, and the granting of the status is being discussed in relation to 144 companies.

· 192 companies were granted the status of Virtual Zone Person;

· No company refused to grant the status of a Virtual Zone Person;

· The status of a virtual zone person was canceled for 34 companies;

· The granting of the status is being discussed in relation to 144 companies.

Source: Ministry of Finance of Georgia, Financial and Analytical Service.

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 taxes to the budget of Georgia only in 2021, and about 1100 companies have been granted the status of a Virtual Zone Person.