Accounting for Virtual Zone (VZ) Companies in Georgia: Key Considerations

Georgia's Virtual Zone (VZ) program offers substantial tax benefits to IT companies, attracting businesses involved in software development. While the status grants a 0% corporate tax rate on income from service exports, simply having VZ status does not guarantee exemption from scrutiny.

Having worked with over 100 Virtual Zone (VZ) companies and guided them through numerous audits, we’ve pinpointed the key considerations every VZ company must know. These insights are crucial for ensuring compliance and avoiding fines or penalties.

What is a Virtual Zone (VZ) Company?

The Virtual Zone status in Georgia aims to draw IT sector companies by offering tax advantages to businesses mainly engaged in software development and delivering services to international clients. A VZ company enjoys a 0% corporate tax rate (as opposed to 15%) on income earned from exporting IT services abroad.

Revenue Service Audits for Virtual Zone (VZ) Companies

Revenue Service audits are generally random, but larger companies are frequently the main targets. However, since LLCs are granted Virtual Zone (VZ) status to access specific tax benefits, the Revenue Service closely monitors VZ companies to verify their eligibility for these advantages. Although an LLC must complete a separate application process to gain VZ status and benefit from tax reductions, VZ companies can still participate in both regular business activities and those eligible for reduced tax rates. This increased scrutiny ensures that companies comply with the regulations and fully qualify for the benefits they receive.

In many cases, the Revenue Service becomes particularly interested in auditing VZ companies when they observe dividend distributions in company declarations.

For this reason, proper accounting and thorough documentation are essential to avoid potential issues and ensure full compliance with Georgian tax regulations.

Key Accounting Practices for Virtual Zone Companies in Georgia

Since the tax benefits apply only to income earned from exports, it's crucial to clearly document all revenue streams. Businesses should keep detailed records of all contracts, invoices, and bank transactions related to export services. This is especially important in cases where companies also conduct domestic business (selling to Georgian companies), which does not qualify for tax exemption.

Monthly Tax Filing Requirements

Even with the 0% corporate tax, VZ companies are required to maintain financial records, bookkeeping database and submit annual financial statements. Monthly reports can help ensure your company remains compliant throughout the year and is prepared for audits or inquiries from Georgian tax authorities, which are common for VZ companies that distribute dividends.

To prevent fines and penalties, here are some requirements you should be aware of.

Monthly Required Declarations

• Withholding Income Tax Declaration

• Profit Tax Declaration

• VAT Declaration (if the company is VAT-registered)

• Reverse Charge VAT Declaration (applicable if the company is not a VAT payer but purchases services from foreign-registered companies)

Annual Mandatory Financial Reporting

All LLCs in Georgia are required to submit their financial reports once a year to saras.gov.ge.

These are the required statements:

• Income Statements: Track revenue, especially from exports.

• Balance Sheets: Maintain an overview of assets, liabilities, and shareholder equity.

• Cash Flow Statements: Monitor the inflow and outflow of cash, particularly regarding foreign payments.

  
  

Access the complete guide on Mandatory Financial Reporting here.

Currency and Exchange Rate Management

The majority of VZ companies engage with international clients, leading to transactions involving multiple currencies. It is crucial to manage exchange rates and accurately record currency gains or losses. This can influence financial statements, especially cash flow management, since fluctuating rates might affect revenues and expenses.

VAT Considerations

Virtual Zone companies are not subject to VAT on services exported outside Georgia. However, VAT regulations apply if your company also offers services domestically within Georgia. Consequently, it is crucial to differentiate between transactions that are exempt from VAT and those that are taxable to prevent any penalties.

Employee Payroll and Benefits

If your company employs staff, payroll management must comply with Georgian labor laws. This includes calculating income taxes, pension fund contributions, and other benefits.

Leveraging Technology for Efficient Accounting

Cloud-based accounting software can greatly simplify the accounting process for VZ companies. By integrating tools that handle multi-currency transactions, invoicing, and tax reporting, companies can streamline operations, reduce errors, and enhance compliance.

Benefits of Outsourcing Accounting Services for VZ Companies

Delegating accounting services to specialists experienced in Virtual Zone (VZ) companies can conserve significant time and resources. These professionals remain informed about the most recent regulations, tools, and compliance necessities, guaranteeing:

• Accurate tax filings and optimized tax benefits for your company.

• Streamlined bookkeeping, specifically tailored to the needs of VZ companies.

• Effective risk management, particularly in preparation for audits and inspections.

  
  

By entrusting these critical tasks to specialists, VZ companies can focus on growth while ensuring compliance and reducing potential risks.

Georgia's Virtual Zone program provides substantial advantages to IT firms; however, correct accounting is crucial to preserving these advantages. By following best practices and utilizing specialized accounting services, VZ companies can enhance their financial management and maintain long-term compliance with Georgian tax regulations.