Introduction

According to the order of the head of the Revenue Service N33544 of December 29, 2022, the methodical instruction was approved on the taxation of virtual zone IT company in Georgia.

The methodological reference explains the rules related to granting and canceling the status of virtual zone IT companies, as well as defines the tax obligations and rights within this status. We will discuss here the main examples given in the approved order.

Example 1:

The creation of information technologies by a virtual zone IT company is carried out by one hired person (programmer) and a person hired on the basis of a service contract (programmer). A person fulfills the obligation of a tax agent in relation to the taxes carried out in accordance with the rules established by the tax legislation of Georgia, in particular, he withholds the tax at the source of payment and pays it to the budget. The person supplies information technologies only outside of Georgia.

Evaluation:

According to the Tax Code and the Law of Georgia on “Information Technology Zones”, as a result of information technology activities, a software product should be created, which will have a form and, accordingly, will be available on the market in the form of goods or services. Based on the objectives of the legislation on information technology zones, software products should be considered as ready-made software developed for a wide range of users, as well as software intended for specific categories of users.

Software products are considered to be created if their creation is substantially performed directly by the employee(s) and/or resident founder(s), including the possibility that the virtual zone IT company purchases services to create the software products.

Taking into account that in the considered example, the virtual zone IT company has both a hired person employed in the relevant profile section (programmer), as well as one person hired on the basis of a service contract (programmer), it will be considered that the information technologies, which were provided outside the country, were essentially created in the territory of Georgia. Accordingly, the distribution of the net profit received by it to the founders for the purpose of tax relief in the profit tax will be exempted from the profit tax.

Example 2:

A virtual zone IT company is established by a physical person. Information technologies are created on the territory of Georgia directly by the resident founder and their delivery is carried out outside Georgia. The company does not have a person working for hire with the relevant profile section. The shareholder natural person receives income only in the form of dividends.

Evaluation:

Considering that the founder of the company is a resident of Georgia, the place of business of the company is Georgia, and the company creates information technologies, it will be considered that its activity complies with the requirements of the Law of Georgia “On Information Technology Zones”, as well as the requirements of the Tax Code, and in the case under consideration, the requirements established for the use of the tax relief are fulfilled.

Example 3:

The company’s activity is development/development of products and software tools in the field of information technology. Namely, architecture and layout design, creating applications for different devices and operating systems and designing and projecting databases and peripheral integration tools. The company carries out its activities through hired person/persons. And the created product is delivered only to persons registered outside of Georgia.

Evaluation:

Acceptance of the software as a result of the described activity implies a complex and multi-step process of software development. Due to this circumstance, it is possible that specific work performed in this process (for example, written code) may be removed or not included in the final product due to changes in the concept or other characteristics of the final software product in the later stages of development. Therefore, for getting tax relief, the purpose of the activity should be considered as the main circumstances, in particular, the provision of information technologies should mean the study, support, development, design, production, and/or implementation of computer information systems if the purpose of this activity is to create a software product.

In the part of the provision of the service in question, it will be considered that the supply of information technologies created by the company, as a virtual zone IT company, is carried out outside the borders of Georgia, which is the basis for the use of tax relief established by Tax Code, because:

– The company’s activities are carried out through the hired person/persons;
– Creation of information technologies by the company;
– The company’s clients (recipients of services) are outside Georgia.

Example 4:

The company’s activity is the electronic provision of services defined by it using various hardware and software.

Evaluation:

The legislation of Georgia does not define the concept of a software product and the regulations related to its creation. At the same time, the Law of Georgia “On Copyright and Neighboring Rights” recognizes the concept of a computer program, according to which a “computer program” is a set of instructions in words, codes, schemes or other machine-readable forms, which allows to operate a computer to achieve specified results. The term includes computer program design preparatory material.

As in “computer program,” software generally refers to a program or set of programs that contains instructions necessary for the computer itself to operate or instructions to perform other tasks. Software is independent from hardware (computer devices) and it is through it that computers can be programmed.

In order to comply with the activity within the status of a virtual zone IT company, it is important that the company’s activity implies the implementation of such activity in the field of computer information systems, which is used in the development of software. Accordingly, if the company’s activity is limited to the electronic provision of services defined by the company using various hardware and software, the purpose of which is not to create a software product, the profit from such activity will not be considered as a profit from the supply of information technologies, and therefore, its distribution cannot be subject to the tax relief prescribed by the Tax Code.

Example 4:

The company’s activity is the electronic provision of services defined by it using various hardware and software.

Evaluation:

The legislation of Georgia does not define the concept of a software product and the regulations related to its creation. At the same time, the Law of Georgia “On Copyright and Neighboring Rights” recognizes the concept of a computer program, according to which a “computer program” is a set of instructions in words, codes, schemes or other machine-readable forms, which allows to operate a computer to achieve specified results. The term includes computer program design preparatory material.

As in “computer program,” software generally refers to a program or set of programs that contains instructions necessary for the computer itself to operate or instructions to perform other tasks. Software is independent from hardware (computer devices) and it is through it that computers can be programmed.

In order to comply with the activity within the status of a virtual zone IT company, it is important that the company’s activity implies the implementation of such activity in the field of computer information systems, which is used in the development of software. Accordingly, if the company’s activity is limited to the electronic provision of services defined by the company using various hardware and software, the purpose of which is not to create a software product, the profit from such activity will not be considered as a profit from the supply of information technologies, and therefore, its distribution cannot be subject to the tax relief prescribed by the Tax Code.

Example 5:

In 2020, a legal entity created a software product, which in the same year was provided to clients operating outside of Georgia under a license. In exchange for said license, customers pay a monthly license fee. This legal entity received the status of a virtual zone IT company in 2021.

The transfer of the mentioned software for temporary use is not a one-time process that limits the contractual obligation of the legal entity to its clients, but further support services are an integral part of the software transfer agreement. In turn, this service implies (1) constant availability of the software transferred under the license and timely response to emerging defects and (2) conducting work for software improvements and updates. The counterparties are not contractually granted any right to independently modify or transform the temporarily transferred product.

The service of further support of the software product is the most important component of the use of this product, as the economic activity of the legal entity’s clients and, accordingly, the income of this entity itself essentially depends on its faultless operation.

As a result of the changes made to the software by the legal entity, the support costs have a significant share in the total operating costs of the company.

Evaluation:

One of the stages of software development is the post-release support, development, and servicing of a software product, which is typically performed by software developers. This phase may include the detection and elimination of various errors, process updates, software updates, and other similar activities that ensure the error-free operation of the product and its further development.

Since the further support and service of the software product is an important component of the use of this product, it will be considered that the income received by the legal entity in exchange for the license to use the such product after receiving the status is received in exchange for the information technologies provided after receiving the status.

Accordingly, in this case, the tax relief established by the Tax Code will be applied to the profit received in exchange for information technologies delivered outside of Georgia by the legal entity after receiving the status of the software product created before the status of the virtual zone IT company.

Example 6:

The entity of the virtual zone, which is established by individuals in the territory of Georgia, creates information technologies, for which it uses the individuals hired in Georgia with the appropriate profile.

In addition, the virtual zone IT company provides the information technologies created by him in the territory of Georgia, both in the territory of Georgia and outside its borders. The work of the employees who serve to provide information technology both in the territory of Georgia and outside it is not separated.

The annual net profit of the virtual zone IT company was 1,000,000 GEL, and the annual financial income was 2,500,000 GEL. The received income consists of the income received from the delivery of information technologies created on the territory of Georgia outside of Georgia (2,000,000 GEL) and on the territory of Georgia (500,000 GEL).

The person fully distributed the received net profit to the founding natural persons.

Evaluation:

Taking into account that in relation to the virtual zone IT company, the tax relief in the profit tax is established only in the part of the profit (profit distribution) received from the supply of information technologies outside the territory of Georgia, and at the same time, the person may receive income from the supply of the information technology created by the company in the territory of Georgia, in order to take advantage of the tax relief in the profit tax, the company must to identify profits exempted from profit tax. It is important to calculate the specific share of the exempted profit in the total profit. For this purpose, if the expenses incurred by the person cannot be attributed to a specific income, the calculation of the exempted profit can be carried out in accordance with the specific share of the income received from the delivery of information technology outside of Georgia in the total profit. However, if in a particular case it is possible to use another more accurate and reasonable method, the company is entitled to calculate the amount of profit exempted from profit tax using such method. Based on the provisions of the Tax Code, in order to identify the amount of profit exempt from profit tax, it is considered that this amount is given first when distributing the dividend by the company. In this case, if there is no possibility of using another more accurate and reasonable method:

Profit exempted from profit tax is 800,000 GEL (1,000,000 *2,000,000/2,500,000).

Taxable profit – 200,000 GEL (1,000,000 *500,000/2,500,000).

In addition, since the distribution of profit received by the virtual zone IT company from the delivery of information technologies created on the territory of Georgia outside of Georgia is exempted from profit tax, the said profit will be considered as distributed in the first place. Accordingly, the company is liable for profit tax on the distributed profit in the amount of 200,000 GEL.

Example 7:

The virtual zone IT company is the sole founder of the resident legal entity (LLC “A”). On the other hand, the virtual zone IT company is established by 2 physical persons. LLC “A” fully distributed the net profit of 100,000 GEL to the founder.

Evaluation:

The legal entity of the virtual zone, which has been granted the relevant status for the purpose of exemption from profit tax, will be considered as a person exempted from profit tax as part of the relevant activity.

Taking into account that the tax benefit in the profit tax for the virtual zone IT company is established for the profit (profit distribution) received by it from the delivery of the software product outside Georgia, the benefit will not be applied to the further distribution of the dividend received and accordingly, it will be taxed with the profit tax in the manner established by the tax legislation.

Thus, when distributing the net profit received by LLC “A” as a dividend to a virtual zone IT company, will not be considered exempt from profit tax.

Accordingly, the distribution of the net profit received by LLC “A” in the form of dividends to the virtual zone IT company will not be subject to income tax.

However, the subsequent distribution of the dividend received by the virtual zone IT company to the shareholder natural persons is considered an object of taxation with the profit tax, which is not exempted from the profit tax.

Taxation of income received from a virtual zone IT company at the source

The virtual zone IT company, in the cases provided by the Tax Code, is obliged to withhold the tax from the source of payment when making the relevant payment.

Example 8:

The virtual zone IT company creates information technologies on the territory of Georgia and provides them only outside Georgia. The founders of the company are natural persons. In addition, the company has employees who create information technologies in the territory of Georgia. The company distributed the net profit in the amount of 100,000 GEL, and also paid a salary in the amount of 20,000 GEL.

Evaluation:

For income tax purposes, distributions of profits based on the Tax Code are exempt from profit tax.
Regarding the dividend issued, the virtual zone IT company is obliged to tax the dividend (100,000 GEL) paid to the individual in accordance with the tax code at the rate of 5% of the amount paid at the source of payment and to carry out the relevant tax reporting. In addition, the virtual zone IT company is also obliged to fulfill the obligation of the tax agent in relation to the paid salary (20,000 GEL).

Conclusion

According to the order of the head of the Revenue Service N33544 of December 29, 2022, the methodical instruction on “Virtual Zone IT company Taxation” the previous methodological guidelines have been revoked and we should be guided with the new one.

For more information or/and questions regarding the Virtual Zone It Company Taxation please contact us, we are always ready to help you.

Introduction

According to the order of the head of the Revenue Service N33543 of December 29, 2022, the methodical instruction on taxation of  Free Industrial Zone Enterprise was approved.

The methodical reference explains the rules of activity of the Free Industrial Zone Enterprise, including the permitted and prohibited activities, and the rules for using tax benefits, as well as defines the tax obligations and rights within this status.

Example 1

A non-resident enterprise in a free industrial zone carries out activities allowed for a Free Industria Zone Enterprise (production of perfumery products) through a permanent establishment registered in this zone.

The permanent establishment of the non-resident enterprise has transferred the profit received from its activities in cash to the non-resident enterprise.

Evaluation:

For the purposes of extending the tax relief in the profit tax, it is essential that the Free Industria Zone Enterprise carries out the permitted activities in the free industrial zone and distributes the profits received from the permitted activities in the free industrial zone, therefore, the established tax relief cannot be extended to the activities of the Free Industria Zone Enterprise outside the free industrial zone.
Taking into account the above-mentioned legal norms and the fact that a non-resident enterprise through a permanent establishment in a free industrial zone carries out the activities allowed for a Free Industria Zone Enterprise, the benefit established in the profit tax by the non-resident enterprise attributed to its permanent establishment will be applied to the deduction of profit attributed to its permanent establishment according to Tax Code.

Example 2

The Free Industria Zone Enterprise provided advertising services to the non-resident enterprise and distributed the profit from the said operation as a dividend to the shareholders.

Evaluation:

According to Tax Code of Georgia, profits received by the Free Industria Zone Enterprise from the activity permitted in the free industrial zone is exempted from profit tax. The tax relief can be used only in the case and for the services that will be determined by the resolution of the Government of Georgia.

Taking into account that the government of Georgia has not determined the list of types of services to be provided by the Free Industrial Zone Enterprise to non-residents and, accordingly, the list of activities allowed in the free industrial zone, therefore, the established tax relief cannot be applied to the advertising activities

Example 3

The Free Industria Zone Enterprise purchases goods outside of Georgia, assembles the purchased goods in the territory of Free Industrial Zone, and then sells the said goods in and outside Georgia.

Evaluation:

Taking into account that the free industrial zone is a type of free zone provided for by the Customs Code of Georgia, and according to the customs legislation of Georgia, it is possible to consider the free zone as permitted, for example, the importation, storage and export of the same goods from the free industrial zone, including any kind of without going through the processing or production process, therefore, the established tax relief will be applied to the activities of Free Industrial Zone Enterprise.

Example 4

The Free Industrial Zone Enterprise purchases goods outside Georgia and then sells them outside Georgia, so that the goods do not fall under the free zone procedure.

Evaluation

In this case, considering that the Free Industrial Zone Enterprise does not bring goods into the free zone procedure, bring goods into the free industrial zone, and take the same goods out of the zone, the activities carried out by it cannot be considered as permitted activities in the free industrial zone, and the tax relief cannot be applied to such activities.

Example 5

The Free Industrial Zone Enterprise purchased the goods from a legal entity registered under the legislation of Georgia, which does not represent the Free Industrial Zone Enterprise.

Evaluation

The use of the market price by the Free Industrial Zone Enterprise for the purposes of the 4% tax on the goods delivered to it by an entity registered under the legislation of Georgia is an obligation established by the Tax Code, and not a right. The tax should be determined from the market price of the goods.
In addition, the Free Industrial Zone Enterprise is obliged to submit to the tax authority the tax calculation for the taxable operations carried out no later than the 15th of the month following the reporting month.

Taxation of income received from the Free Industrial Zone Enterprise at the source

1. In some cases, the income received from the Free Industrial Zone Enterprise is subject to taxation by the person receiving the income, and in some cases, such income is not taxed by the person receiving the income either. In particular:

a) the dividend received from the Free Industrial Zone Enterprise in the free industrial zone is not taxed at the source of payment and will not be included in the collective income of the recipient of this dividend;

Example 6

The conditions are the same as in Example 3 and Example 4.

Evaluation

Considering that the activity carried out by the Free Industrial Zone Enterprise cannot be considered as an activity allowed in the free industrial zone, the dividend paid from the profit obtained from such activity will be taxed at the source of payment according to the general rule established by the legislation.

b) The interest received from the Free Industrial Zone Enterprise in the free industrial zone is not taxed at the source of payment and will not be included in the collective income of the person receiving this interest.

2. When paying salary to a resident employee of Free Industrial Zone Enterprise, it is not required to withhold tax at the source of payment.

3. According to the Resolution N291 of the Government of Georgia of June 15, 2017, the rule of income tax is regulated for the individual resident of Georgia hired by the Free Industrial Zone Enterprise. And the manner of taxation of wages paid to a non-resident natural person of Georgia hired by the Free Industrial Zone Enterprise is determined in accordance with the tax legislation of Georgia.

4. The employee is obliged to pay income tax on the income (salary) received as a result of employment by a resident of Georgia as a result of employment at the Free Industrial Zone Enterprise, no later than the 15th day of the month following the reporting month. In addition, he is obliged to submit the annual income tax declaration to the tax authority every year, until April 1 of the year following the reporting year.

5. The Free Industrial Zone Enterprise can, with the consent of the hired person, voluntarily fulfill the obligations of tax calculation, withholding, and payment in the budget according to the established procedure. He must notify the tax authority in advance about the assignment of tax agent functions. In addition, the measures of responsibility defined by the Code, including tax sanctions, are not applied to the performance of this function.
In such a case, the subject of tax liability is considered to be the employee, on whose behalf the Free Industrial Zone Enterprise fulfilled the obligation to pay income tax.

Example 7

The Free Industrial Zone Enterprise has paid salaries to both resident and non-resident physical persons of Georgia working for hire in the enterprise.

Evaluation

In accordance with the Tax Code and the Resolution of the Government of Georgia N291 of June 15, 2017:

a) The Free Industrial Zone Enterprise is obliged to perform the function of a tax agent in relation to the salary paid to non-resident natural persons working for hire in the enterprise – to withhold the relevant tax at the source of payment and transfer it to the budget, and no later than the 15th of the month following the reporting period, to submit a declaration to the tax authority regarding the taxation of the taxes carried out.

b) A resident natural person working for hire in a Free Industrial Zone Enterprise is obliged to fulfill his tax obligation in relation to the income (salary) received as a result of hired workers in a Free Industrial Zone Enterprise – to pay income tax every month, no later than the 15th of the month following the reporting month and by April 1 of the following year to submit the annual income tax declaration to the authority.

Example 8

The non-resident legal entity provided services to the Free Industrial Zone Enterprise. In accordance with the Tax Code, the income received by a non-resident is classified as income received from a source in Georgia.

Evaluation

In the case under consideration, the Free Industrial Zone Enterprise is obliged to perform the function of a tax agent – to withhold the relevant tax at the source of payment and transfer it to the budget, and not later than the 15th day of the following month of the reporting period, to submit a declaration to the tax authority regarding the taxation of the performed taxes.

Taxation of Free Industrial Zone Enterprise property

1. According to the Tax Code, property in the free industrial zone is exempt from property tax according to the relevant taxation object.

2. The tax relief does not apply to the land plot (or its part) transferred by a person to another person by lease, usufruct, rent, or in any other such form and/or to the buildings and structures (or their part) transferred by the enterprise/organization in the same form, except in the case, When real estate is transferred by a higher education institution established by the state and the transferred real estate is used in higher education activities and/or for providing services related to higher educational activities.

3. According to the Tax Code, the property includes taxable property and land.

Example 9

The enterprise registered in the free industrial zone of Poti has built and put into production a car mechanical components enterprise, which includes a workshop, warehouse, office, and canteen, on a selected 2000 m2 plot of land in the mentioned area.

Evaluation

The Free Industrial Zone Enterprise will benefit from property tax relief, in accordance with the Tax Code.

Example 10

The organizer of the Kutaisi Free Industrial Zone built buildings and equipment on the territory of 230,000 square meters designated for the Kutaisi Tiz.

Evaluation

The organizer of the free industrial zone will benefit from the property tax (taxable property and land) benefit, in accordance with the Tax Code.

Example 11

The organizer of the Kutaisi Free Industrial Zone leased the building and the land attached to it to the Free Industrial Zone Enterprise.

Evaluation

According to the Tax Code, the organizer will not be able to benefit from property tax relief on the said property and land plot.

Conclusion

According to the order of the head of the Revenue Service N33543 of December 29, 2022, the methodical instruction on taxation of  Free Industrial Zone Enterprise the many previously unknown topics were answered.

For more information or/and questions about the taxation of  Free Industrial Zone Enterprise please contact us, we are always ready to help you.

1. INTRODUCTION

The profit tax rate in Georgia is – 15%.

The following shall be subject to profit taxation:

1. Distributed profit;
2. Costs incurred or other payments not related to economic activity;
3. Free delivery of goods/services and/or transfer of funds;
4. Representation expenses paid in excess of a limited amount determined under the Tax Code of Georgia;

The amount subject to profit taxation is calculated by dividing the sum of a disbursement made/expense paid according to the object of taxation determined by 0.85.

2. DISTRIBUTION OF PROFIT

The following shall be deemed as a distribution of profit:

1. Any operation performed by an enterprise with a related party (who is not subject to the new Estonian model profit tax) if the price of a transaction concluded between them is different from its market price and their relationship affects the outcome of the transaction;

2. Conduct a controlled transaction if the established conditions for the transaction fail to satisfy the market principle;

3. Any operation performed by an enterprise with a person exempt from income tax/profit tax if the price of a transaction concluded between them is different from its market price.

3. NON-ECONOMIC COSTS / PAYMENTS

Costs not related to an economic activity shall be:

1. Costs that are not documented;

2. Costs the purpose of payment of which is not to gain profit, income or compensation;

3. Costs paid for goods/services purchased from a natural person having the status of a micro business, except when the income gained from the delivery of goods/services by a person having this status is taxed under the general rule, or when a consignment note/a document of a form determined by the Minister of Finance of Georgia is issued upon the supply/purchase of goods;

4. The interest paid for a credit (loan) above the annual interest rate established by the Minister of Finance of Georgia;

5. Costs paid by a person for purchasing foreign goods from a special trade company in the amount exceeding the customs value of the goods, except for the costs not related to payments to the special trade company.

4. NON-ECONOMIC COSTS / PAYMENTS

The following shall be subject to profit tax:

1. Payments made to purchase debt securities issued by a person registered in a country with preferential tax treatment, as well as by a person exempt from profit tax;

2. Contractual penalties and/or other fines paid to a person registered in a country with preferential tax treatment, as well as to a person exempt from profit tax, which was incurred on the basis of contractual relations;

3. Advance payments to a person registered in a country with preferential tax treatment, as well as to a person exempt from profit tax;

4. Granting of a loan to a person registered in a country with preferential tax treatment, as well as to a person exempt from profit tax and/or payments made to purchase a claim against that person;

5. Loss incurred due to the transfer of the right to claim to and/or the denial of the right to claim for a person registered in a country with preferential tax treatment, as well as a person exempt from profit tax.

6. A contribution made to the capital of a non-resident, as well as of a person exempt from profit tax, and/or a payment made to purchase a share/equity (except for a share/equity placed on a foreign recognized stock exchange.

7. Granting of a loan to a natural person or a non-resident (except for the purchase of loan securities placed on a foreign-recognized stock exchange).

5. TAX RECOVERY

1. If payment was affected (a sum was actually received) as a result of providing debt securities purchased or the right to participate in the capital (shares/interest), or satisfying a demand, a company may set off and recover a sum of the previously paid profit tax in the amount of a profit tax calculated according to the sum paid within the accounting period of the actual receipt of the sum.

2. If a loan granted/advance payment was repaid, or goods/services were received in return for the advance payment, a company may set off and recover a sum of the previously paid profit tax in the amount of a profit tax calculated according to the sum repaid within the accounting period for repayment of the loan/advance payment or actual receipt of the goods/services, or according to the amount of compensation for the goods/services received.

6. FREE TRANSFER & REPRESENTATION EXPENSES

1. Delivery of goods or services not intended to gain profit, income or compensation shall be considered free delivery;

2. Shortage in the inventory and/or assets at the moment of its identification shall be considered as free delivery of the good;

3. The amount of representation expenses to be incurred during a calendar year shall be limited to 1 % of the income gained during a previous calendar year, and to 1 % of the expenses incurred if the expenses exceed the income gained. The amount of representation expenses incurred during the calendar year of an enterprise establishment shall be limited to 1 % of the expenses incurred before the end of the current calendar year.

7. CONCLUSION

In this article, we discussed the significant main topics of the profit tax in the Tax Code Of Georgia.

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1. Introduction to Cryptocurrency Taxation in Georgia

Due to the growing interest in cryptocurrencies, the Georgian tax agency has issued a public decision regarding cryptocurrency taxation and delivery of computing speed (capacity) operations in Georgia.

The public decision explains:

A)  VAT taxation of the supply of crypto assets (exchange operation in national or foreign currency);

B)  Taxation of income received as a result of the supply of crypto assets;

C)   VAT taxation of the calculated speed (capacity) delivery operation for obtaining a crypto-asset and the issue of deducting the amount of   VAT on the goods/services purchased for the said delivery operation.

2. Rationale and legal basis of the public decision on Cryptocurrency Taxation

For the purpose of this public decision, a crypto-asset is a digital asset that is stored and exchanged electronically over a single, decentralized, peer-to-peer network, requires no trusted intermediary, and operates with distributed registry technology (Distributed ledger software), which uses cryptographic methods. A crypto-asset is a digital expression of value, it is issued and exchanged through a decentralized consensus mechanism, without a central credible issuer and a supervisory / controlling body, and ownership of it is confirmed by cryptographic methods.

Each unit of cryptocurrency has a market value, it can be issued, owned, transferred to another and divided into parts, it can be bought and sold. At the same time, crypto-assets are not a legal means of payment, nor is electronic money in accordance with Georgian law.

Mining a crypto-asset involves the creation of new structures (blocks) to ensure the functioning of the crypto-active platform, as a result of which the person carrying out this activity (miner) is rewarded with a crypto-asset. This is done on two basic principles: the miner creates a new cryptocurrency in his block (according to a specific algorithm) and this block is confirmed by other miners and / or the miner receives a reward for the executors of transactions. The amount of such a reward can be predetermined, calculated by an algorithm, or determined by the free market. Crypto activity or mining activities require specific equipment and / or software, as well as internet access. The fast and efficient implementation of this activity, among other factors, depends on the appropriate computational speed. Computing speed (power) is a unit of measurement of the power through which a computer performs an operation.

Georgian legislation does not provide any legal definition of cryptocurrency or digital currency. The European Central Bank report published in February 2015 (digital currency schemes – a further analysis) defines digital currency as a digital expression of value not emitted by the central bank, credit or e-money issuer, which, in some cases, may Be used as an alternative to money.

The Ministry of Finance of Georgia shares the above definition of digital currency established by the European Central Bank, which also includes crypto-assets.

It should also be noted that in exchange for cryptocurrency among the members of the relevant virtual community, it is possible to carry out transactions for the purchase of goods and services, and it is actually used as a means of payment. It is also possible to exchange crypto-assets for national or foreign currency.

One of the main principles in the Georgian tax legislation (Regulation on the transfer of ownership of money) is to exclude money supply/transfer of ownership of money from the VAT area, which includes the content of the money alternative – Crypto-asset Delivery / Crypto-asset Ownership Transactions.

A)  Therefore, in accordance with Article 13, Part 2 and Article 16, Part 2 of the Tax Code of Georgia, the supply of crypto-assets (exchange of crypto-assets in national or foreign currency) and the transfer of ownership of it is not a VAT-taxable transaction.

Updated 11.01.2021: As a result of the changes in the VAT gate, which came into force in 2021, it was directly written in the Tax Code that the transfer of ownership of money, as well as cryptocurrency (crypto-asset), is the provision of services and not the delivery of goods.

Article 104 of the Tax Code of Georgia defines the list of types of income that are considered as income from a source in Georgia for income / profit tax purposes.

It should be noted that none of the provisions of Article 104 of the Tax Code directly attributes the income received from the supply of crypto-assets to the income received from a source in Georgia.

In addition, it should be noted that a cryptocurrency does not have a physical form, is not located in a specific location, is not deposited in any account with a financial institution, and it is usually impossible to identify its issuer. Also, it is practically impossible to determine the place (territory) of the operation, because the supply of cryptocurrency and its exchange in another currency is carried out in the virtual space, between members of the virtual community, therefore, Income received does not belong to income received from a source in Georgia.

B) Based on the above, on the basis of Article 79, 82, Part 1, Subparagraph “f” and Article 104 of the Tax Code of Georgia, income received by a natural person from the supply of crypto-assets is exempt from income tax.

According to Tax Code of Georgia supply of goods and/or service within the framework of economic activities on the territory of Georgia is a VAT taxable transaction. If the persons receiving and delivering services are in different countries than the place of registration or place of management or the location of the permanent establishment of the person receiving the services if the services are directly related to that permanent establishment are considered as the place of service delivery. This provision also applies to services such as electronic services.

Delivery of computing speed (capacity) meets all the conditions of electronically rendered service, as the aforementioned service is performed automatically, electronically – using information technologies and requires minimal human intervention.

Ca) If the recipient of the electronically rendered service is a person registered outside of Georgia, he/she does not have a place of management or a permanent establishment in Georgia directly related to the received service, according to Article 166, Part 1, Subparagraph “di” of the Criminal Code. For those purposes, the operation of supply of calculated speed (capacity) for obtaining crypto-assets (electronic services) shall be considered outside the territory of Georgia and shall not be subject to VAT in accordance with Article 161, Part 1, Subparagraph A of the Tax Code.

In addition, according to Article 174, Part 2, Subparagraph “ag” of the Tax Code, the amount of VAT paid or payable on goods/services purchased for the provision of the mentioned services outside the territory of Georgia is considered subject to deduction.

Cb) if the recipient of the electronically rendered service is a person registered in Georgia or has a place of management or permanent establishment in Georgia directly related to the received service, for the purposes of VAT, according to Article 166, Part 1, Subparagraph “di” of the Tax Code; In order to obtain cryptocurrency, the transaction of supply of computed speed (capacity) (electronic service) shall be considered as performed on the territory of Georgia and in accordance with the first part of Article 161 of the Criminal Code, shall be considered as a transaction subject to VAT.

In addition, according to Article 174, Part 2, Subparagraph “a” of the Tax Code, the amount of VAT paid or payable on the goods / services purchased for the provision of the said services is subject to deduction. 

This public decision from the government applies only to cryptocurrency taxation of Individuals and not companies or another similar types of entities in Georgia. The Georgian government announced the development of cryptocurrency taxation regulations in 2023.

3. Conclusion

According to tax agency public decision and Georgian legislation: 

In addition, the service provider has the right to deduct the amount of VAT paid or payable on the goods/services purchased for the provision of these services.

Georgia has a very attractive cryptocurrency taxation regime for Individuals. Georgian Tax legislation creates a preferential tax environment for those engaged in cryptocurrency activities. This public decision sets out the country’s general approach to cryptocurrency activities, which of course is entirely understandable given that the country’s goal is to become a regional IT hub, although many issues in the legislation still need to be clarified. If you are engaged in and want to start a cryptocurrency activities business in Georgia, you can write us your questions and we will provide you with qualified advice to minimize your tax risks.