Georgia: a low-tax European country with much to offer investors

By Gela Barshovi, Tax Advisor and Managing Partner, TPsolution, Tbilisi, Georgia

Georgia, an Eastern European Country, was ranked 6^th in the World Bank Group’s 2019 “Doing Business” survey. This small country deserves this high position indeed as it offers excellent opportunities for investors.

Georgia’s easy regulations on starting a business, low tax rates, certain tax incentives, rich tax treaty network, possibilities for tax certainty, comprehensive transfer pricing rules, low wages, and strategic geographic location are an incomplete list of the reasons why multinationals should consider Georgia as the next destination for their business.

Ease of starting business

You need only one day and no capital to found a company in Georgia. No limitation applies to foreign shareholders and/or directors.  

Low corporate income tax rates

The corporate income tax (CIT) is only 15% in Georgia and, moreover, the so-called “Estonian CIT model” is applied in the jurisdiction. This means that tax is paid only upon the distribution of dividends by a company.

In other words, companies in Georgia do not pay any corporate income tax until the profit is distributed on the shareholders (except some cases when a transaction is deemed to be profit distribution). Therefore, if the company decides to re-invest the profit, no CIT is charged on the reinvested amount.

Notably, there is no special tax on return in Georgia. Capital returns fall under the general CIT rules and 15% tax is payable only after the profit is distributed.

The personal income tax rate, which amounts 20%, applies only to income obtained via Georgian sources. Non-Georgian source income of Georgian resident natural persons is totally exempt from personal income tax.  Article #104 of the Georgian tax code describes the tax on income obtained via Georgian source.

VAT

The VAT and VAT reverse charge rate is 18% in Georgia.

Both traditional and reverse VATs are payable only for business operations conducted in the territory of Georgia.

Article #166 of the Georgian tax code describes the operations conducted in the territory of the country. Reverse VAT is immediately deductible without a need of any payment if a taxpayer uses service/goods in taxable or in different operations that are exempt from VAT with the right of deduction.

Starting in 2020, the entire VAT system in Georgia will be amended and harmonized with the EU VAT rules. The process will facilitate trade relations between the EU and Georgian residents.

Withholding tax

The withholding tax rate for wages is 20% without deductions plus a 2% contribution to the pension fund in the name of a company while a 2% contribution is made by an employee.

Withholding tax on service remunerations is 10% in case of non-residents. Here, one important exception is that the payment to a non-resident natural person for renting a property used for non-living purposes bears a 20% withholding tax rate.

Withholding tax on service payments to Georgian resident non-registered natural persons is 20%. In addition, the 2%+2% contribution to pension funds applies.

Withholding tax on dividends is 5%. This is applicable in case of payment to residents or non-residents. In addition, a dividend recipient Georgian resident natural person is not taxed on this income.

Withholding tax on interest is 5% and applies to both residents and non-residents. In addition, a dividend recipient Georgian resident natural person is not taxed in such income.

Withholding tax on royalty payments is 5%; this is applicable to non-residents.

If a Georgian taxpayer makes payments for services, royalties, or interest to a tax-haven-based person, a higher, 15%, withholding tax rate is applicable.

Georgia’s rich tax treaty network

Georgia has signed double taxation treaties with 56 states so far, most of which are based on the old (2008 and older) OECD model.

Almost half of Georgia’s treaties provide exemptions to source taxation in Georgia on interest, dividends, and royalties.    

Multiple tax incentives

Georgia offers multiple tax incentives for corporations and natural persons, for example:

• “Virtual Zone Persons”
• “Free Industrial Zones”
• “Small business status”
• “Territoriality principle”
• Low tax on rental income
• Others

Some of them are described below.

If a Georgian company provides IT service abroad they can easily obtain “Virtual Zone Person certificate” and pay 0% corporate income tax for such income even in case of distributing dividends (full exemption).

There are several free industrial zones in the country where companies can register and pay almost zero tax.

Natural person entrepreneurs with annual income less than 500,000 Georgian Lari (about EUR 150,000 or USD 170,000) pay only 1% of their revenue if they obtain a certificate of  ‘small business status.’

The territoriality principle applies to Georgian resident natural persons. Any income received by Georgian resident natural persons from non-Georgian source is exempt from personal income tax in Georgia. For example, dividends received from a non-resident company or pension received from abroad are not taxed in Georgia.

If a resident or non-resident natural person rents out a residential property used for living purposes only, a 5% income tax rate is applicable. The only precondition for enjoying the low tax rate is to submit an application to the Georgian tax administration and request the right of low taxation.

It is possible to send the application without registration as a taxpayer if a person is taxed at source. In that case, 5% will be withheld at the source. Additionally, natural persons selling up to 4 apartments within 4 years are fully exempt from VAT.

Surplus income gained by natural persons from selling the residential property and the land attached to it or from selling a car is taxable at 5% as well.

Possibility of high tax certainty

The Georgian Tax administration has created guidelines (manuals) on hundreds of tax issues which could not be clearly interpreted in the Georgian tax code. The manuals are publicly available and ensure that taxpayers can check the approaches of tax authorities regarding certain tax cases.

Even if a case does not fall into any above-mentioned manuals, a person can apply for an advance tax ruling to a tax administration which costs approximately EUR 3000 (USD 3,300). It takes a few weeks to a couple of months to receive an official answer, which will be binding on tax authorities unless the law is changed.

Comprehensive transfer pricing ruling

Since 2013, Georgia has comprehensive legislation (tax code articles 126-129 and Ministry of Finance decree #423) on transfer pricing.

Most of important issues are clarified in either decree #423 or in guidelines created by the tax administration, which are more detailed and explain all the steps of transfer pricing analysis. When the Georgian transfer pricing legislation does not cover any transfer pricing issue, reference to 2010 OECD transfer pricing guidelines is made.

There are no substantial differences between Georgian and OECD transfer pricing approaches (only minor ones) except for a Georgian transfer pricing rule providing that transactions with a tax haven-based person are considered controlled transactions therefore falling within the scope of transfer pricing rules regardless the association of the parties.

Low wages and strategic geographic location

The average salary in Georgia is less than $400 per month and expenses for gas, electricity, and other utilities are considerably lower than in the EU. That is an additional reason for multinational companies to shift their manufacturing businesses here.

In addition, Georgia, bordering the Black Sea, represents a well-known silk road and a crossroad between Europe and Asia, which makes it a great location/hub for international trade. Europe, central Asia, the Middle East, and North Africa are easily accessible from the country.

This article describes only some of the advantages Georgia offers investors. The advantages are far greater as Georgia offers all conditions that deserve more attention from multinationals.