Virtual Zone Status — Who Qualifies and How
The Tax Code defines a virtual zone person as a legal entity that carries out information technology activity and has been granted the respective status. Information technology, under the Code, means the study, support, development, design, production and implementation of computer information systems, as a result of which software products are obtained. These two definitions together draw the boundary: the status helps a crypto business only where the company actually creates and supplies a software product, not where it merely trades cryptocurrency.
A virtual zone person is an enterprise: the Code treats as an enterprise legal entities created under Georgian legislation, foreign formations and their permanent establishments, and associations — forms carrying out economic activity or created for that purpose. The procedure for granting the status is set by other normative acts, while the tax effect is defined precisely by Article 99 of the Code.
The Exact Conditions of the Profit Tax Exemption
Sub-paragraph „zh“ of the first part of Article 99 states verbatim: exempt from profit tax is the profit (distribution of profit) received from the supply, outside the borders of Georgia, of information technologies created by a legal entity of the virtual zone. Three conditions follow from this formula: the beneficiary must be a virtual zone legal entity; what is supplied must be information technologies created by that entity itself; and the supply must take place outside Georgia. All three must hold simultaneously — the failure of any one removes the exemption.
On the distribution of dividends, Article 99 adds a sequencing rule: for the purpose of identifying the exempt amount, it is deemed that, when distributing a dividend, the enterprise first pays out that exempt amount. For a crypto business this means that where a company has both exempt IT-supply income and other income — for example, from trading cryptocurrency — the order of distribution is decisive and must be reflected precisely in the tax reporting.
Cryptocurrency and VAT — What the Code Says
Towards value added tax the Code takes two clear positions. Article 160 provides that money (other than a collectible item), as well as cryptographic currency (crypto-asset), is not treated as goods. Article 160-1 provides that the transfer of ownership over money, and equally over cryptographic currency (crypto-asset), is not treated as the provision of services. Consequently, the exchange of cryptocurrency as such is neither a supply of goods nor a provision of services for these purposes.
The distinction matters because these norms cover only the transfer of ownership over cryptocurrency. Where a company writes software, supplies IT services or carries on other activity, those operations acquire their own assessment and their taxation is governed by the corresponding provisions of the Code. Separating crypto and IT flows in the accounts is therefore essential.
The International Company — a 5 Percent Alternative
Where a business model does not fit the virtual zone conditions, the Code offers another instrument — international company status. This is a Georgian enterprise carrying out activities defined by a resolution of the Government of Georgia and deriving income only from those activities; the status is granted by the Government. The profit tax rate of an international company is 5 percent; income from employment within it is likewise taxed at 5 percent; and a dividend paid by it is not taxed at source and is not included in the recipient’s aggregate income.
The taxable amount is determined by dividing the amount of expense/cost incurred, according to the object of taxation, by 0.95. Where a defined expense is incurred in Georgia, the company may reduce the taxable amount by that expense. If the company starts an activity not defined by the Government’s resolution, the status is cancelled from 1 January of the year in which that activity began. In addition, such a company is exempt from tax on property (other than land) where the property is intended for or used in the permitted activity, and it cannot be created in a free industrial zone.
Frequently Asked Questions
Does the virtual zone exempt profit from trading cryptocurrency?
No. The exemption covers only profit from the supply, outside Georgia, of information technologies created by the virtual zone legal entity. Income from trading cryptocurrency or from other sources does not fit that formula.
What happens when a dividend is distributed?
Under Article 99, the exempt amount is deemed to be paid out first upon distribution — which is why the precise separation of exempt and taxable flows is decisive.
Is exchanging cryptocurrency subject to VAT?
Cryptographic currency is not goods, and the transfer of ownership over it is not a service, so an exchange as such does not fall within those objects.
What is the difference from an international company?
An international company is taxed at 5 percent and its dividend is not taxed at source; the status is granted by the Government and covers only defined activities. The virtual zone exemption fully exempts IT-supply profit but strictly limits the scope of activity.
How We Help on Legal.ge
The Legal.ge team helps crypto and IT companies choose the right tax status: we analyse your income streams against the conditions of Article 99, prepare the documentation for virtual zone or international company status, organise the separation of exempt and taxable parts in the reporting and defend your interests in dealings with the revenue service. Contact us to assess which regime fits your business model.