Significant Tax Incentives for Innovative Businesses

What Businesses Need to Know

The modern global economy is driven by innovation, technology, and rapidly growing startups. Georgia’s new Law on Innovation aims to support innovative activity, encourage research and development, and offer businesses valuable tax incentives.

What is Innovation?

According to the law, innovation is defined as a usable, new, or significantly improved product, process, or service that has economic, scientific, or social value.

The following are considered forms of innovation:

• Innovative product – A new or significantly improved product, beyond mere aesthetic changes.
• Innovative process – A new or improved method of production or service delivery.
• Organizational innovation – Changes in management structures or methods that improve efficiency;
• Innovative marketing – New approaches to product design, packaging, or promotion;
• Innovative activity – Activities aimed at creating new or improved products, services, or processes.

The law differentiates between various entities engaged in innovative activities and specifies the tax incentives to which they are entitled.

Legal Status of an Innovative Startup

An innovative startup is a business entity registered under Georgia’s Law on Entrepreneurs that engages in innovation-oriented activities related to products, processes, or services. To be eligible for this status, a company must satisfy all of the following criteria:

• Develop an innovative product, process, or service;
• Have received at least GEL 100,000 in investment or GEL 150,000 in government grants within the last two years;
• Generate revenue and incur expenses primarily from innovative activities;
• Have no tax debt, not be listed in the debtors' registry, not be subject to insolvency proceedings, and not be undergoing liquidation.

Note: A company cannot simultaneously hold the status of an international company or a virtual zone entity. If innovative startup status is granted to a company that already holds one of these statuses, the previous status is automatically revoked.

Duration of Status: 1 year, renewable for up to 10 years.

Tax Incentives for Innovative Startups

Innovative startups are entitled to the following phased tax incentives:

• Years 1–3: Salaries are exempt from personal income tax (within limits set by the government);
• Years 4–6: Personal income tax and profit tax are each set at 5%;
• Years 7–10: Personal income tax and profit tax are each set at 10%.

Innovative Small and Medium Enterprises (SMEs)

The status of an innovative SME may be granted to a business entity registered under the Law on Entrepreneurs if it meets the following conditions:

• Spends at least GEL 100,000 annually on research and development (R&D), which must account for at least 5% of its annual revenue;
• Additionally, meets at least one of the following criteria:

1.  Owns a patent or registered software and allocates resources to its development;
2. Purchases R&D services from a certified research organization or another entity with innovative status;
3.  Records R&D expenses in accordance with government-approved R&D Expense Guidelines;

• Have no tax debt, not be listed in the debtors' registry, not be subject to insolvency proceedings, and not be undergoing liquidation.
• Is classified as a third or fourth-category enterprise pursuant to Georgia’s Law on Accounting, Reporting, and Auditing.

Duration of Status: Indefinite, with annual compliance verification required.

Tax Incentives for Innovative SMEs

•  In the case of dividend distribution, the taxable base for profit tax may be reduced by up to three times the amount of R&D expenses;
•  If profits are reinvested, the company may become eligible for additional government support mechanisms.

Companies Providing Research & Development Services

This status may be granted to companies that:

• Are registered as business entities in Georgia;
• Derive at least 80% of their income from scientific or engineering R&D services;
• Have no tax debt, not be listed in the debtors' registry, not be subject to insolvency proceedings, and not be undergoing liquidation.
• Are registered as business entities in Georgia;
• Derive at least 80% of their income from scientific or engineering R&D services;
• Have no tax debt, are not listed in the debtors’ registry, are not undergoing insolvency, and are not in liquidation.

Duration of Status: Indefinite, with annual compliance confirmation required.

Tax Incentives:

• Personal Income Tax: 5%
• Profit Tax: 5%

Procedure for Obtaining Status

1. The company applies along with supporting documents to Georgia’s Innovation and Technology Agency (GITA);

2. GITA reviews the application and forwards it to the Ministry of Economy and Sustainable Development;

3. The Government of Georgia grants the status based on the Ministry’s recommendation;

4. The status becomes effective on the first day of the month following the Government’s decision.

The government may request a share of income generated from a funded innovative project for up to 7 years following the financing, not to exceed 5% annually.