The Virtual Zone Certificate Is Only the Start: How to Protect the Tax Exemption
RIGHTSIDE INSIGHTS · VIRTUAL ZONE · TAX RISK · 2026
A certificate is a door, not a verdict. The real tax question begins when a Virtual Zone company distributes profit and must explain what it created, where it created it and to whom it supplied it.
Why a once-simple story became a dispute
Georgia introduced Virtual Zone Person (VZP) status to encourage software development. The Tax Code exempts qualifying profit from supplying information technologies created by a VZP outside Georgia. For years, many owners saw the certificate and foreign customers as enough to claim the benefit. TPsolution’s account of the disputes describes a stricter Revenue Service approach beginning around 2021: the authority asked companies to show that the technology was actually developed in Georgia and, in some cases, sought tax for earlier distributions.
The legal texts were read differently. The Tax Code identifies the qualifying profit; Article 6 of the Law on Information Technology Zones speaks of IT production in Georgia. The source author argued that a company could create software through a wider contractor model and that a new, restrictive interpretation should not be applied retrospectively to unclear law. The Revenue Service focused on the activity carried out on Georgian territory. These were competing legal interpretations, not settled facts about every taxpayer.
What the certificate does not prove
The certificate confirms that the company has VZP status. It cannot prove that a later consulting contract created software, that a foreign invoice concerns an eligible product, or that every unit of distributed profit came from exports. That is why a tax review looks at software specifications, development records, staff and contractor arrangements, customer agreements, invoices and accounts. A company that never documents its technical work may struggle even if the underlying work was genuine.
The distinction between developing software and using software matters. A firm that builds a platform and licenses it with substantive support can have a VZP question to analyse. A firm that uses an existing platform to perform unrelated online services does not turn those services into software creation merely because the delivery is digital.
The 2022 methodical guidance changed the practical discussion
The Revenue Service issued a methodical instruction in December 2022. It explains the authority’s reading of the existing law through examples. It does not itself rewrite the Tax Code. Its scenarios cover employee and contractor development, a founder who writes the software, multi-stage development, online services that do not create a software product, licensing with ongoing support, a mix of domestic and foreign customers, dividend income received from a subsidiary and withholding on payroll and dividends.
The instruction brings welcome detail, yet it does not answer every border case about geographically dispersed teams. An older TPsolution analysis describes uncertainty over how much local presence, work and compensation would be sufficient. Later commentary describes more flexible practice around genuine developer remuneration and Georgian tax withholding. Neither a historical strict stance nor a broad promise of remote qualification is safe to present as an automatic rule. The current facts, current guidance and any individual ruling control.
Practical example. A Georgian VZP has two products. Its developers built one in a documented Georgian operation and sell it abroad. The other is bought from a third party and resold locally. The two streams cannot be placed in a single exempt bucket. Contracts, payroll and project accounts should let the company identify the first stream’s qualifying profit.
Before distributing profit, create an evidence trail
- Describe each software product and the development or support performed by the VZP.
- Record who did the work, under which agreement, where they worked and how they were paid. Comply with withholding and payroll reporting where required.
- Keep the foreign customer contracts, invoices and proof of delivery or access.
- Identify revenue and costs for domestic, foreign, qualifying and non-qualifying activities; use a reasoned allocation for shared expenses.
- Model the dividend, salary, VAT, foreign contractor and property-tax consequences separately from the profit-tax exemption.
If earlier returns were filed on a different interpretation, do not amend them solely because of a phone call or an online summary. Review the written request, legal periods, evidence and available procedural rights with an adviser. Where significant future distributions depend on a difficult fact pattern, an advance ruling can provide much stronger certainty than a certificate alone.
General information as of October 2026. The result for a particular taxpayer depends on the current law, supporting documents and the facts of the activity.