Georgia’s soft laws on beginning a business within the country or relocating the prevailing one, low tax rates, various tax treaties network, low wages, and strategic geographic location are an incomplete list of the explanations why many foreigners consider Georgia as the most favorable destination for their business. The country is found between Europe and Asia that creates attention-grabbing conditions for businesses. Within the following article, we are going to discuss the fundamental taxes that an expat as a private will come upon furthermore because of the terms of business-related taxes.
Taxation System in Georgia
According to the World Bank, Georgia ranked as the third least Tax Burden Country worldwide, with simply 9.9% total rate.
Georgia has established Double Taxation avoidance Agreements with fifty-six countries and offers an extremely helpful taxation system to people and legal entities.
The country has low tax rates, a clear legal system, and legislation that gathers taxes and customs underneath one code.
There is no social insurance, payroll, capital gains, inheritance, or wealth tax. At this moment, there are six flat taxes in Georgia with favorable rates:
- Personal Income Tax – 20% (paid from the employee’s salaries)
- Corporate Profit – 15% and 0% on several foreign-based profit;
- Import Tax – 0% 5% or 12%
- Value other Tax (VAT) -18% and exemptions enclosed
- Property Tax – up to 1 percent.
- Excise Tax – solely on a number of kinds of products, like tobacco, alcohol, oil, gas, and mobile communication services.
The collection of taxes and management of the tax environment is provided by the Georgian Revenue Service. it’s extremely vital that each one tax administration procedures are provided on-line and might be managed simply by the taxpayers.
According to the Economic Liberty Act, the Georgian government has no power to extend the rates of national tax (except excise tax) or variety of taxes without a legitimate referendum, that makes the taxation system even a lot more stable.
Tax Residency rule in Georgia and Territorial Taxation
The foremost important benefit of turning into Georgia’s tax resident and refusing tax residency in another jurisdiction is to prevent oneself from being double-taxed among international jurisdictions.
Becoming a tax resident in Georgia provides a chance for individuals to enjoy tax exemptions and save their expenses globally.
Tax Residency of Natural Persons (individuals)
The general rule of the individual tax residency is provided within the article 34th of Georgia’s tax code: a person that has actually spent 183 or additional calendar days within a year shall be a tax resident throughout the tax year when his/her stay reaches period of 183 days.
The law doesn’t require that 183 days should be spent uninterrupted. An individual can leave the country and come back anytime, thus, one isn’t essentially required to spend 183 or more days during a specific year (e.g. 2021) — those days spent in Georgia ought to finish in this year.
To clarify: if someone spent 173 days of his stay in Georgia in 2019 and solely ten days (for example in January) in 2020, he/she becomes a tax resident within the country just for the year 2020 and not 2019. Therefore, the purpose of the stay within the country isn’t an obstacle.
Another way of gaining Georgian tax resident status is to be a high net worth individual. As an example, persons who either own property with the worth of over three million (GEL) or have an annual income of over 200.000 (GEL) are applicable for the natural person tax residency and therefore a lot of liberal residency rules.
Tax Residency of Legal Entities
Companies become Georgian tax residents automatically whereas registering in Georgia. The Georgian tax code provides the definition of a “resident company” that is basically an equivalent to a similar “Georgian enterprise”. Therefore, we can say that a legal entity is a Georgian tax resident in two cases: 1) if it’s registered in Georgia or 2) it has a place of business management in Georgia.
Territorial Taxation in Georgia
Very often the Georgian territorial taxation system is misunderstood. The concept of territoriality is being taxed solely on income received from a Georgian source. However, the term “Outside Georgia source Income” from the tax code needs additional clarifying.
Not every income paid from abroad is considered as “Outside Georgian source Income”. Article 104 of the Georgian tax code, lists the kinds of revenue considered as Georgian source income. Based on this list we are able to outline the exemptions from the taxation that are thought-about as income source outside Georgia:
• personal financial gain (for example salary) paid by an employer outside of Georgia;
• Interest paid by non-residents operating abroad;
• Pensions received from outside the territory of the country;
• Dividends received from a non-resident legal entity etc.
For example, if someone works from Georgia, provides services remotely and gets paid for such activity, he/she will be taxed with personal income tax as the activities are done in Georgia.
Corporate taxation in Georgia
The corporate taxation (CIT) is barely 15% in Georgia and, moreover, Georgia uses the “Estonian CIT model”. This suggests that tax is paid solely upon the distribution of dividends by a corporation. Companies don’t pay corporate taxation on preserved and reinvested profits. Companies are taxed on revenues derived from Georgian sources.
Surplus, non-resident enterprises who gain income by carrying out economic activities in Georgia are subject to corporate tax with relation to their Georgian-source financial gain.
Tax Incentives for Legal Entities
Georgia legislation offers a good vary of tax incentives and benefits for the Georgian tax resident companies:
Georgian legal entities aren’t subject to corporate taxation on the profits they gain through offshore (foreign) subsidiary corporations as dividends. The exception here are the subsidiaries registered in tax-havens;
Virtual Zone corporations
If a company registered within Georgia provides IT service abroad they can acquire a Virtual Zone Person status and specific certificate which can lead them to pay 0% corporate taxation for providing IT services abroad from Georgia and even just in case of distributing dividends. Read more regarding the virtual zone companies in our article.
Free Industrial Zones
Currently, four Free Industrial Zones (FIZs) operate in Georgia’s four cities where corporations can be registered and experience minimum taxes.
Free Industrial Zones in Georgia offer enticing tax exemptions like the following: If a corporation produces a product for export in FIZ, it’s free from all taxes except the 20% personal income tax, that is paid from each individual employee’s regular payment.
Special Trade corporations
According to the Tax Code of Georgia, if a corporation produces a product supposed for export, it will issue a license for the “Internal processing Regime“. This license can assure the company with a right to import raw materials without import/customs tax and VAT on such materials. However, if a number of the end products are sold at intervals the territory of Georgia, the company will have to be compelled to pay import and VAT of raw materials that were used to make those goods ( ones sold in Georgia)
Incentives for individuals
There are several tax exemptions qualified to individuals. Implications of the bulk of the taxes build individual economic activity simply and provide a spread of industries a lot of freedom to develop carried services.
Small Business status
Individual entrepreneurs with an annual turnover of less than five hundred thousand (GEL) could register as a small business and become candidates for a 1% turnover tax. The rate will increase to three percent if annual turnover exceeds 500.000 GEL.
The exception applies to specific economic activities.
0% Ownership Tax
There is no property ownership tax in Georgia. No ownership taxes on real estate is one among the key aspects of investment profit.
0% Personal Income Tax on Non-Georgian Source Income
The territoriality principle applies to Georgian tax resident natural persons. Financial gain received from non-Georgian sources is exempted from 20% income tax. This income is calculated and separately from Georgian-based financial gain. As we have already mentioned under “Territorial Taxation”, not every foreign income counts as non-Georgian sourced and one must be very careful and detailed oriented while sorting out the incomes.
5% Taxation on Rental Income
A resident or non-resident individual can own and rent out a residential property that’s used for living purposes and be taxed with solely a 5% taxation. The sole precondition for enjoying the plus of the low rate is filing an application to the Georgian tax authorities and requesting it to be applicable for the low taxation.
No VAT on Selling Four Flats Within Four Years
There are further tax incentives among the Georgian legislation relating to the sale of residential properties.
The VAT rate in Georgia is 18% that is applicable to merchandising products and providing services inside the territory of the country. However, the VAT rate doesn’t apply to natural persons (owners) who sell out to four residences within four years.
Exemptions for Cryptocurrency Resellers
According to the public declaration of the ministry of finance of Georgia, a financial gain obtained by natural persons from reselling cryptocurrency exempt from taxation with income tax. Transactions whereas reselling cryptocurrency are also non-taxable;
Low Taxation on Interests Dividends
In accordance with the Georgian tax legislation, interest financial gain earned from bank deposits and savings aren’t subject to personal income taxation.
The income tax rate for dividends and interest is as low as 5%. In addition, Georgian residents (natural persons) who receive a dividend don’t seem to be taxed .
To sum up, the tax regime in Georgia is softer than most countries in Europe. The Republic of Georgia has established tax policies through reforms that offer businesses a chance to develop the economy and facilitate growth by reducing tax costs. Georgia enforced a progressive approach towards investment operations too through the taxation system and moved to the next level. Meanwhile, it’s important to hold a Georgian tax residence in order to enjoy the entire package of benefits. As any place within the world, you would like reliable native guidance on local taxation. For that purpose, contact our team.