Income Tax in Georgia

Taxes on personal income

Resident individuals are exempt from tax on income that does not have a Georgian source.

Personal income tax rates

Personal income is subject to a flat tax rate of 20%.

Special tax regimes

Individuals with annual turnover of less than 30,000 Georgian lari (GEL), no employees, and who register as a micro business will be exempt from tax on their business income.

Individual entrepreneurs with annual turnover of less than GEL 100,000 may register as a small business and pay 5% tax on their turnover. The rate reduces to 3% if the individual documented expenses (excluding salaries) exceed 60% of their sales.

Income determination

The gross taxable income of a resident individual is any income received in the form of salary, from economic activity not related to employment, or from other activities.

Employment income

The following payments or benefits received from an employer would be treated as taxable income (not exhaustive):

· Per-diems and accommodation expenses received in excess of norms established by Georgian Ministry of Finance.
· Use of an automobile of any type for private use.
· When receiving loans at an interest rate lower than the rate established by the Finance Minister, the difference between the established and actual interest rates.
·  Goods or services sold or transferred free of charge by employer to employee.
·  Accommodation.
· Assistance for education of an employee or their dependants (excluding training programs directly related to performance of the employee's duties).
·  Life and health insurance premiums.

Capital gains

The profit received from sale of a vehicle and an apartment (house) with attached land plot is subject to tax at a 5% rate.

Rental income

Personal income tax (PIT) at 5% is applicable to the rent income of an individual.

Individual – Residence

An individual is recognised as a tax resident of Georgia if one was actually located in Georgia for 183 days or more in any continuous 12-month period ending in the current tax year.

The status of resident or non-resident is established for each tax period. In addition, the days according to which the person was considered a resident during the previous tax period are not considered when establishing residency for the following tax period.

Tax administration

Taxable period

The tax year in Georgia is the calendar year.

Tax returns

The following individuals are required to submit individual income tax declarations to the tax authorities at their place of registration before 1 April (for income received in the previous calendar year):

·  Resident individuals, including foreign individuals with Georgian tax residency, for whom income is not taxed at the source of payment in Georgia.
·   Non-resident individuals with Georgian-source income not subject to taxation at the source of payment.

Taxes on corporate income
Resident enterprises are subject to CIT on worldwide income.

Non-resident enterprises carrying out economic activities in Georgia through a permanent establishment (PE) are subject to CIT with respect to its Georgian-source income.

The CIT rate is a flat 15%.

Non-resident enterprises earning income from Georgian sources, other than through a PE, are subject to withholding taxes (WHTs).

New CIT system

From 1 January 2017, Georgia has switched to a new CIT system. The new system represents the adoption of the Estonian model of CIT to the Georgian tax system. As such, retained profits are no longer taxable until they are distributed. The new regime is not aimed to exempt the profits from taxation, but is designed to defer the taxation moment. Consequently, taxpayers no longer need to determine taxable gross income and allowable deductions in order to arrive at the taxable profits, but rather a standard CIT rate of 15% is applicable to the grossed-up value of the following transactions:

·  Profit distribution.
·  Costs incurred not related to economic activity.
·  Free of charge distributions.
·  Over limit representative expenses.

Note that commercial banks, credit unions, insurance companies, microfinance organisations, and pawn shops will be affected by the new CIT regime after 1 January 2019.

Distributed profit

Distributed profit encompasses distribution of profits by an enterprise to its partner as a dividend in a monetary or non-monetary form.

Distribution of dividends between Georgian legal entities and distribution of dividends received from a foreign enterprise (except for a person registered in a country with preferential tax treatment) are not subject to CIT.

Distributed profit of a PE of a non-resident enterprise shall be a deemed distribution of profits attributable to the PE for its activities. A PE shall be allotted a profit it might have gained as an independent enterprise conducting the same or similar activity and being in the same or similar conditions.

Costs incurred not related to economic activity

Costs not related to economic activity shall be:

· Non-documented expenses.
· Expenses, the purpose of which is not to gain profit, income, or compensation.
·The interest paid for a credit (loan) above the annual interest rate established by the Minister of Finance of Georgia (i.e. 24%).

Certain transaction are deemed as non-business expense, which, inter alia, include:

· Payments for acquisition of shares/interest of a non-resident enterprise or contributions made in the capital of a non-resident enterprise.
·Granting of a loan to a natural person or a non-resident.

Certain transaction with persons registered in the countries with preferential tax regimes are also subject to immediate taxation of CIT.

Free of charge delivery of goods/services and/or transfer of funds

Free of charge delivery of goods/services and transfer of funds will be subject to CIT. Additionally, shortage of inventory and/or fixed assets will be considered as free of charge supply at the moment of its revealing and will be taxed accordingly by CIT.

Representative expenses

Representative expenses exceeding the specific limit will be subject to CIT. The limit determined for these purposes is 1% of the company’s total revenues derived or expenses incurred in the previous calendar year, whichever is greater.

Old CIT system

Commercial banks, credit unions, insurance companies, microfinance organisations, and pawn shops are continuing to operate under the old CIT system until 1 January 2019.

Under the old system, CIT in Georgia is applied to taxable profit at a rate of 15%. Taxable profit is defined as gross income minus deductible expenses.

Corporate residence

A resident enterprise is any legal entity that is established under the laws of Georgia or has its place of effective management in Georgia.

Permanent establishment (PE)

The domestic definition for a PE essentially adopts the definition for PE found in the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention.

Local legislation provides the definition for economic activity to be any activity undertaken with the intent to gain profit, income, or compensation, regardless of the results of such activity, unless otherwise provided by the tax code.

Income determination

Under the new CIT system, the income is recognised as per international financial accounting standards.

Under the old CIT system, taxable income is determined as the difference between the gross income of a taxpayer and the relevant deductions granted under the Georgian tax code.

Inventory valuation

A taxpayer is required to record the value of goods produced or acquired as the outlays (except for depreciation charges) or the purchase price in tax accounting. Furthermore, the taxpayer shall include the storage and transportation expenses in the value of such goods.

A taxpayer is entitled to record the cost of inventory using the individual accounting method, the average weighted cost method, or first in first out (FIFO).

Capital gains

The Georgian tax code does not define any separate tax for capital gains. Capital gains are taxable as normal business income at the general CIT rate.

Dividend income

Dividends received by local legal entities (except for sole enterprises and entrepreneur partnerships) are not subject to taxation at source and shall not be included in gross income.

Dividends received by non-resident enterprises from resident enterprises are subject to WHT at source.

Interest income

Resident legal entities and PEs of non-residents that received interest income that was taxed at source in Georgia are entitled to a credit on tax paid to the state budget.

Interest income received from a licensed financial institution is not subject to WHT at source, and it should not be included in the gross income of a recipient unless the recipient is another licensed financial institution.

Rent/royalty income

Rent and royalty income received by resident companies and/or PEs of non-resident enterprises should be taxed by CIT upon its distribution in the form of dividends if the taxpayer is under the new CIT system. Under the old CIT system, such income should be included in the taxable gross income of the enterprises.

Foreign income:

Resident legal entities are subject to CIT on their worldwide income. Under the new CIT system, foreign income is subject to CIT at 15% upon its distribution in the form of dividends. Taxes withheld abroad can be offset against CIT charged on distribution of foreign income.

Tax administration

The tax departments under the MoF are responsible for tax administrative matters in Georgia.

Taxable period

The tax year is the calendar year in Georgia.

Tax returns

The new CIT regime shifts from annual reporting to a monthly reporting practice.

CIT returns should be submitted on monthly basis before the 15th day following the month when the taxable transaction took place. As a result, the quarterly advance payment rule is abolished for companies subject to the new CIT system.

A CIT return should be submitted before 1 April of the year following the reporting period for companies under the old CIT system.

Payment of tax

CIT is due on a monthly basis before the 15th day following the month when the taxable transaction took place for companies working under the new CIT regime.

In case a transaction was taxed with CIT and then the amount (part of the amount) remitted on this transaction was returned back to the taxpayer, the latter may set off and recover a sum of the previously paid CIT in proportion of the returned amount. This, inter alia, relates to:

· If the participation in a foreign entity was disposed of or contribution into the capital of foreign entity was returned.

· When a loan granted was repaid.

Under the old CIT system, CIT is paid in advance in four equal instalments, before 15 May, 15 July, 15 September, and 15 December. The advance instalments are estimated according to the previous year’s annual tax. A taxpayer with no prior-year CIT obligation is not required to make advance payments.

Final payment is due by 1 April of the year following the reporting period. Excess CIT payments may be offset against other tax liabilities.

Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.

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