Tbilisi (GBC) – When it comes to establishing an IT company, choosing the right jurisdiction is crucial for any business owner. In this direction, different countries offer different and unique benefits or concessions, but there are also drawbacks.
It can be safely said that countries are actively competing with each other to offer the best tax, economic, social, and other important conditions to companies working in the IT field.
Georgia in the international ratings
If we rely on public sources, the list of the best countries for creating IT companies is changing, because they are constantly trying to offer something new to companies. Also, these ratings are part of the marketing process, although we can more or less single out advanced jurisdictions in this direction, with appropriate justification.
It should be noted here that Georgia has been in the top positions in these rankings for years.
According to the rating, companies prefer the following jurisdictions: Cyprus, Romania, Georgia, Hong Kong, Estonia, the United Arab Emirates, Singapore, Gibraltar, Poland, and Turkey.
It is quite good news for the acceleration of the growth of the economy of Georgia, when the country, with its potential, positions itself next to the EU countries in one of the fastest-growing and most promising fields. However, continuous development is probably necessary so that the country does not lag behind modern trends, responds to the demands of the sector and the challenges facing it, and increases Western (and not only) investment flows in the Georgian market.
The essence of benefits established for VZPs
Georgia is a small country located at the junction of Europe and Asia. We can consider the location an important advantage compared to other countries. In addition, the country offers IT companies a favorable tax regime. For example, instead of the standard 15% profit tax, 0%–5%. The tax rate on distributed dividends is 5% for individuals. There is also a discount in the part of VAT (18%) if the companies provide services or products abroad; the founder doesn't need to be a resident of Georgia to be granted this status, and no additional license is required to carry out information technology activities, etc.
In addition, Georgia has a business-friendly environment and a simple and efficient incorporation process. The country is also known for its low bureaucracy, which makes it easy for entrepreneurs to start and run a business.
In this direction, preferential regimes such as Virtual Zone and International Companies are very attractive for investors. However, judging by the statistics of IT companies registered in Georgia, the Virtual Zone has an unrivaled status not only in Georgia but also throughout the region. Obtaining the mentioned status in Georgia has been possible since 2011 when the Law of Georgia on Information Technology Zones will be adopted. This news gave great impetus to many IT companies and their representatives to start their activities in Georgia.
Georgia has become a favorable location for companies in the information technology sector, with more than 1.200 organizations granted Virtual Zone Person status within our jurisdiction and enjoying the benefits offered by this status.
IT, including the contribution of the VZP sector to the economy
This, in turn, implies the greatest economic benefits for the state. For example, according to Galt & Taggart's review of Georgia's economy and sectors, which was published in March, the income from the export of IT services reached 1.77 billion GEL in 2023, which is 4 times higher than in 2021. Rapid growth was caused by tax incentives and the relocation of companies in Georgia.
As a result, between 2021 and 2023, the number of employees in the IT sector quadrupled, and average salaries doubled. According to 2023 data, 14.164 people were employed in IT companies, and the average salary was 7.192 GEL.
The same Galt & Taggart analysts note in their review that labor costs account for 60% of sector revenues. Accordingly, the income from IT exports is mainly distributed to the employees, which contributes to the growth of consumption. High salaries in the IT sector create a prerequisite for the formation of the middle class.
Although it is difficult to determine how much of this statistic is the share of companies with Virtual Zone status, according to various calculations, this indicator is not less than 50%.
For a clearer comparison, today more than half of the employed (including self-employed) population of Georgia comes from agriculture, and the share of agriculture in the country's economy is only a few percent. Economist Vakhtang Charaia explained in the Public Broadcaster's "Gadatskvetileba" program on March 6 that if winemaking and viticulture employ about 200.000 people directly and indirectly in Georgia, and about 14.000 specialists in the IT sector, the incomes of these 14.000 people exceeded the incomes of 200.000 citizens employed in winemaking. Thus, according to Charaia, the country should take important steps in those directions, the development of which will create more wealth in the country, including in the direction of the IT sector.
Another interesting indicator can be cited: in 2021–2023, the economy of Georgia grew by 9.7%. In this indicator, the contribution of the IT sector is quite impressive and amounts to 1.3 percentage points. This is only 0.1 percentage points behind the contribution of the trade and transport sectors (1.3 percentage points). Here you will know that in the growth of the economy, 0.9 percentage points come from the manufacturing industry, 0.6 percentage points - from financial activities, 0.6 percentage points from electric energy, and 3.5 percentage points from other sectors taken together.
It should also be noted that the majority of these companies are representatives of European companies and investors.
What is happening elsewhere, and what do we have to fix?
The status of a Virtual Zone Person, it can be safely said, is unique not only in the region but also in the world. Its analog is not found in the legislation of any country. By the way, based on the need to develop the IT sector and increase the ranking and competitiveness of Armenia as a country with a developed IT sector in the region, in 2014 the Law "On State Support of the Information Technology Sector" was adopted. The Armenian government has given tax incentives to IT startups and exempted them from the corporate tax rate of 18%, as well as reduced the income tax to 10% from 20%. Nevertheless, there is not much interest in this jurisdiction from the business side.
Therefore, we can confidently say that Georgia, with its potential, competes convincingly with a number of advanced European states, while it undoubtedly maintains its leading position in the region.
However, there are also a number of factors that more or less hinder the attraction of even more companies. In this regard, political instability and the vagueness of tax legislation are highlighted, which deprives businesses of the opportunity to make their activities predictable.
In the global race to lead the fintech revolution, Georgia has every opportunity to play a leading role in shaping the future of the region's IT industry. All the more so since there are already best practices for benefiting from preferential regimes.
