Legal & Taxes

Three-Year Tax Exemption for Innovative Start-ups in Georgia

In this article we explain who can apply for the exemption, and review the taxation of tech companies in Georgia.

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Tax Exemption in Georgia

What It’s All About

The introduction of the initiative that will absolve the innovative companies from taxation over the period of three years was conditional upon the need for further development of an innovative ecosystem of the country, explained Kobakhidze. It includes enhancing Georgia’s global presence and boosting its scientific capabilities. The government already works on the project and “will soon table the relevant legislation,” he said.

Proceeding from the targeted aims, the government identified three main fields that can benefit from the new policy: the development of artificial intelligence, advancements in phage technology, and innovations in agriculture.

“First, in today’s world, without the development of artificial intelligence, it is impossible to take a decent place in the global competition. In response to this new reality, a special scientific group will be created to work on the implementation of artificial intelligence in education, healthcare, agriculture, and other areas;

The following key area is phages. As you know, Georgia is a pioneer in these technologies and has almost a century of experience in phage research. Today, when the demand for phages is significantly increasing worldwide, Georgia can offer the world essential technological products in this direction;

Finally, agro-technologies — the largest part of the population of Georgia are employed in the agricultural sector. The agency aims to create new scientific and technological products to help Georgian farmers increase productivity and competitiveness,” Irakli Kobakhidze.

Additionally, Kobakhidze noted that the status of a small and medium-sized innovative company will be re-determined, and companies with this status will be able to deduct 500% of their Research and Development (R&D) expenses from the taxable profit base and get 30% of the R&D expenses back as a grant.

According to GITA, the process of implementation of the new policy is not yet established. The details on the practical implementation of the initiative will be announced in Summer, 2024

Another Grant Opportunity

However, GITA announced it’s another recurrent Incubator project and explained the process the companies accepted to the project will undergo. 

Stage 1: Founder Market Fit

40 start-ups will be selected, and the founders will undergo active training, coaching, and mentoring for 2 months.

Stage 2: Minimum Viable Product (MVP) Stage

About 20 companies that successfully passed the first part will move to the MVP stage, which is 4 months long.  They will work on creating minimal-cost products, market testing, and building relationships with clients.  Each company will receive a grant of 50,000 GEL to cover the costs of developing an MVP.

Stage 3: Market Entry

This 6-month-long mentored stage will focus on achieving Traction – the evidence of the company’s growth and acceptance in the market.  This stage will be granted on 150 000 GEL.

Georgia’s Tax Policies of the IT

IT companies in Georgia are subject to several taxes, including corporate income tax, VAT, payroll taxes, etc. However, even before the initiatives we discussed above, the Georgian government created a taxation system specifically beneficial for IT companies. 

Virtual Zone Person

The “Virtual Zone” designation represents a distinct tax status available to specific categories of IT companies. Though, this status provides tax advantages exclusively for services or products offered to clients residing outside Georgia.

If your revenue stems from Georgian business operations, particularly in software development, encompassing SaaS (Software as a Service) or subscription-based software, and your clientele primarily consists of non-Georgian entities or individuals not residing in Georgia, you qualify for Virtual Zone status. This designation grants access to perks such as a 0% corporate income tax rate and 0% VAT.

International Company

In the dynamic landscape of Georgian business, companies gained an opportunity to obtain another status that will benefit them when it comes to taxations – the international company. Georgian enterprises seeking this esteemed status must undergo a qualification process, demonstrating a minimum of two years’ proficiency in IT-related activities, ranging from software development and website hosting to system administration, and online delivery services. The permitted activities cater to the modern demands of the global economy.

The allure of international company status extends beyond the realm of business activities to encompass significant tax benefits. Annex No 3 of the law outlines specific expenses eligible for deduction, including salary expenditures for Georgian citizens and costs associated with scientific-research, design, and experimental-construction services. These deductions serve to mitigate the tax liability on international companies, potentially reducing the distributed profit taxable by profit tax by up to 20% or more. Such strategic tax planning not only fosters a favorable business environment but also incentivizes investment in innovation and local employment. Ultimately, these measures contribute to Georgia’s broader economic objectives, promoting sustained growth and prosperity within the global marketplace.

Wrapping Up

The Georgian government, in general, is highly invested in developing the country’s IT sector. They ease the taxation systems for international IT companies, making their residence in Georgia beneficial for both the companies and the country itself. The recent initiative on tax exemption will promote local IT start-ups, allowing them to develop and reach the global level of services.

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