Guide to Taxation and Investment in Guide to Taxation and Investment in Georgia 2016

Table of Contents

Business and Investment Environment 3

Taxation in Georgia 14

Tax & Legal contacts — Georgia 44

Office locations 45

2 Guide to Taxation and Investment in Georgia 2017

Business and Investment Environment

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Introduction rates. Georgia has ongoing IMF program Georgia is the aspiring economic center as a stand-by, if financial need emerges, of the Caucasus. It boasts years of robust considering the tensions in the country’s economic growth, liberal tax and labor major trade partners: Russia and Ukraine. legislation, business friendly practices, The government’s statement of the long low corruption, high security and openness term priorities and plans emphasize energy, to foreign investment. Georgia signed agriculture, regional trade. Georgia has the association agreement with the EU minerals, water, hydro power and gold in 2014 and an aspiration to join the EU will resources. Expansion of the financial guide future policy decisions. On February sector, hydropower, mining, apparel 2nd 2017, the European Parliament voted production, telecommunications, on-land in favor of visa-free travel for Georgian and sea transport services significantly citizens to the Schengen Area at the enhanced the country’s GDP. plenary session and the visa-free regime between Georgia and the EU will enter Georgia has a picturesque sea cost and two into force in April 2017. Georgia has state modern seaports allowing easy access to and private investment funds that welcome all the world’s marine centers. Georgia has foreign investments to implement large a track record of prudent macroeconomic scale projects in agriculture, tourism management, with low budget deficits and hydro energy generation. and low inflation. Georgia is a small open economy, not immune to the economic The World Bank rated Georgia as the 16th trends of the trading partners. On the positive easiest place in the world (among note, the cheaper local currency may facilitate 190 countries) to do business in 2017. exports. The Central Bank and the Ministry Heritage Foundation ranked Georgia 13th of Finance coordinate their efforts to (among 180 countries) for its economic counteract negative international trends freedom in 2017. Georgia has a Standard that led to the depreciation of the local and Poor and Fitch ranking of (BB-) currency. Georgia has large unemployment for the 2017 fiscal year. International and predominantly young population, which securities markets showed their confidence can be a benefit for the firms seeking to enter in Georgia by the oversubscribed the market. However, some skills upgrade purchase of the state bonds in 2011. may be needed for the local, entry level The state securities trade at about 450 hires. As in any transitional country, changes bps above the comparable US treasury and fine-tuning of policies are frequent

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Guide to Taxation and Investment in Georgia 2017

which may lead to confusion. Penalties for tax and that will allow Georgian market reforms to advance customs violations are strict and so is their in the right direction. enforcement. The Tax Code was simplified, but some The effective Tax Code of Georgia was enacted uncertainties remain. The Ministry of Finance from September 2010, uniting the tax and customs officials strive to limit the number of Tax Code legislation. Many consider that the introduction of amendments per year to a maximum of three a new Tax Code is the major step forward packages and establish clear rules of tax dispute.

Georgia country key facts Population 3.72 m (2016) Territory 69,700 square kilometers Autonomy Adjara Autonomy Republic, Abkhazia Autonomy Republic Neighbor states Azerbaijan, Russia, , Armenia Capital (pop. 1,113 000) Other main cities Kutaisi (pop. 147,900), Rustavi (pop. 126,000), Batumi (pop. 154,600) Currency (GEL) Language Georgian Stock Exchange Georgian Stock Exchange (GSE)

Official share index GSE Index

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Guide to Taxation and Investment in Georgia 2017

Deloitte in Georgia Legal Requirements for Establishing Deloitte provides services to Georgian clients a Company in Georgia and investors in Georgia from its office In order to establish an enterprise in Tbilisi. The firm offers accounting, statutory a number of documents must be submitted and international auditing, tax consulting to the National Agency of Public Register and legal services. The Georgian office of Georgia. The documents required of Deloitte is part of the Deloitte Touche are stipulated in the “Law on Entrepreneurs”, Tohmatsu global network. namely: Article of association or the charter, which includes: company name, legal form, We offer our clients locally oriented, individual legal address, official email address, main services with the background and resources activity, name, first name, date, place of birth, of an international organization. We have and place of residence of an entrepreneur the strength, knowledge and expertise and every founder of the partnership, to provide sound advice for any business company name and information needs, anywhere in the world. When you on its registration in case the founder call on us, you call on the resources is a legal person; representative authorities. of a strong local practice and an integrated global network. For a relatively new In addition to the above mentioned, marketplace, our experience is wide-ranging limited liability companies and limited and comprehensive. The scope of our services partnerships should submit information matches the needs of our clients. In this rapidly on the contributions made by each founder, evolving market, we have toremain flexible and their shares, accordingly; name, first and responsive to the needs of our clients. name, date and place of birth and address of each director, and each member Forms of Business Organization of supervisory council (if any); full information The main types of business organizations on the enterprise’s authorized representatives, in Georgia are general partnership, limited directors, procurators (if any). Limited partnership, Limited Liability Company, partnerships should also submit the list joint-stock company, cooperative. Foreign of limited partners as well as the list of general organizations can also pursue their business (personally liable) partners. interests using the registered branches and representative offices. An individual If the partner is a legal entity, the decision person can also conduct entrepreneurial of partners on founding a company activities as an individual enterprise. would also be needed.

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If the director of the company of the documents. The application is not the founding partner of the company, form must include: name of individual in this case his/her consent of becoming entrepreneur; first name and surname, the authorized representative would also place of residence, ID Number, the date be required for submission. of the submission of the document, signature and e-mail of an individual entrepreneur. Notarization of the registration application shall not be mandatory if the authorized Establishing a Branch of a Foreign persons sign it in person at the registration Company in Georgia authority or if the registration application First of all, the foreign company has been duly certified by the administrative should notify the National Agency authority. It should be taken into of Public Register of Georgia consideration that a document confirming of the intention to establish a branch. the contribution to the authorized capital The following documents are required is not required and a document certifying by the state authorities for the registration the title to the enterprise’s office premises of a branch: decision of the enterprise is required by the state authority. management on creating a branch, a copy of the enterprise’s and a branch’s statutes, The National Agency of Public Register decision on appointment of a branch manager of Georgia registers the enterprise within or warrant giving him a power of authority, one day after the date of submission copy of passport, consent of a Director who will of the documents. In case the state be appointed as the director of the Branch. authority fails to register the enterprise within the mentioned period, they provide Authorized Capital and Contributions a substantiated refusal or a reason of Partners to the applicant in order for the enterprise In terms of the Law “On Entrepreneurs”, to correct an error indicated by the state the authorized capital of a Limited Liability authorities within 30 calendar days after Company may be determined with any amount. submission of the application form. In order to register an individual enterprise A Joint-Stock Company is a company with an individual person must submit the authorized capital divided into shares. to the National Agency of Public Register The minimum nominal value of the authorized of Georgia an application. The state authority capital may be determined with any amount. registers the individual enterprise within The most frequent form of ownership one day after the date of submission in Georgia is a Limited Liability Company.

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Licensing and Compulsory Notification Exchange Controls to State Authorities Georgia has adopted a very liberal monetary The law of Georgia, #1775 on “Licenses policy that is investor friendly. There and Permits” adopted on 24 June 2005, are some legal restrictions for taking foreign that abolished the Law #1426 dated currency in or out of Georgia both in cash 14 May 2002, defines business activities and credit forms. A loan can be issued to be licensed by the corresponding state in a foreign currency to an individual agencies. It is prohibited to establish if the amount of the loan exceeds any license for an activity that is not provided GEL 100,000 (hundred thousand). In January by the abovementioned law. 2017, the president of the National Bank issued Orders N4/04 and N5/04 that Furthermore, the law enumerates the types enable commercial banks to issue loans of business activities which require notification and bank credits to individuals in the amount to the corresponding state agencies. of GEL 100,000 (hundred thousand) and below in foreign currency in case Acquisition of Real Estate in Georgia the borrower is not a citizen of Georgia. The transfer of title to immovable property is regulated by the Civil Code of Georgia The pursuant (which came into force on November to the Law on “The National Bank of Georgia” 25, 1997). Immovable property includes No. 24/04 dated April 7, 2011, controls land-plots with fossils (minerals), plants the monetary regulations in Georgia. and buildings. In terms of the Decree of the President In order to purchase immovable property of Georgia No. 363, dated September it is necessary to submit a legalized 16, 1995, all legal and physical entities (notarized) document indicating ownership are obliged to estimate all prices for products and an extract of the purchaser’s registration and services, prepare declarations in the National Agency of Public Register and calculations within the territory of Georgia. The seller and purchaser could of Georgia only in national currency, also submit an application for registration. which is Lari. Therefore, Georgian The title to agricultural land plots is granted currency is the only permitted instrument to citizens of Georgia and private legal entities for settlements within the territory registered according to Georgian legislation. of Georgia.

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Bank Accounts and Confidentiality that may be performed in any foreign of Bank Information in Georgia currency acceptable to the parties. Resident and nonresident entities of Georgia According to the Law of Georgia, #121 have a plenipotentiary power to open on Activities of Commercial Banks (dated and dispose of any accounts in national 23 February 1996), disclosure of confidential as well as any other foreign currency. account information is prohibited. In order to open foreign currency bank Suchinformation may be disclosed accounts the entities conducting their only on the basis of a Court decision. activities in Georgia are obliged to submit a document confirming their registration Investment Incentives with the National Agency of Public Register Object of Investment Activities of Georgia or the tax authorities. As for legal and Rights of Foreign Investors entities and their branches, in order to open The Law of Georgia “On Promotion an account they are required to submit and Guarantees of Investment” additional documents confirming their No. 473, dated November 12, 1996 registration and foundation. determines the legal grounds of making both foreign and domestic investments Cash may be transferred abroad without in Georgia and guarantees their protection. any limitation, provided there is a valid An Investment is any kind of property order by the nonresident owner of the bank or intellectual value or right to be contributed account instructing the bank of this transfer. and used in the entrepreneurial activity In order to transfer foreign currency abroad, made on the territory of Georgia for earning residents (entrepreneurs) are required of possible income. An Investor is any physical to indicate in the payment order the purpose or legal person, or international organization of operation and present the documents making investments in Georgia. A Foreign confirming the legality of the operation investor may be a citizen of a foreign country to be performed. (alien), a stateless person not residing in the territory of Georgia, a citizen of Georgia In the territory of Georgia payments permanently residing abroad, or a legal between residents and nonresidents person registered outside Georgia. are to be carried out in the national currency of Georgia, except for operations A foreign investor, whilst executing connected with export and import activities investment and entrepreneurship,

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is guaranteed and enjoys equal rights Compulsory Registration with the National to those granted a physical and legal Agency of Public Registry of Georgia person of Georgia. A foreign investor, A company registered in Georgia or any entity after payment of taxes and other mandatory carrying out economic activity in the territory charges is entitled to repatriate the earnings of Georgia should register with the legal (income) gained from investments entity of public law National Agency of Public as well as other funds abroad without Register of Georgia on a mandatory basis. any limitation. This right can be limited only The National Agency of Public Register by law, a Court verdict in case of bankruptcy, of Georgia shall assign an identification committing a crime and violation number to each taxpayer to be used of civil obligations. Besides, a foreign for all taxes, including customs tax. investor has the right to take abroad the property which he owns. Pursuant to the Tax Code, a taxpayer will be subject to payment of financial penalties Investment Protection in Georgia in case of performing activities without being Investment in Georgia is entirely registered with the state authorities. and unconditionally protected by the applicable law. Investment may be Law of Georgia on Accounting seized in cases directly specified by the law, and Financial Audit by the court decision or in case of emergency On 8 June 2016, Georgian parliament passed established by the fundamental law, provided a new Law on Accounting and Financial there is appropriate compensation thereof. Audit that will have a significant effect on the businesses environment, challenging Compensation to be given to the investor companies’ ability to quickly adopt to changes shall correspond to the real market value of the future with the least possible effect of the confiscated investment at the moment on their operations. of the deprivation. Compensation shall be given without any delay and shall account The new Law on Accounting and Financial for the losses incurred by the investor Audit classifies entities in 5 major categories. from the moment of deprivation until Entity should meet at least two of following the payment of the compensation. criteria to fall into categories 1-4.

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Category Total Assets (GEL) Operating Revenue (GEL) Employees I > 50 mln > 100 mln > 250 II < 50 mln < 100 mln < 250 III < 10 mln < 20 mln < 50 IV < 1 mln < 2 mln < 10 PIE Public interest entities including: commercial banks and credit institutions, microfinance and insurance companies, non-governmental pension funds, investment funds, nonbank depositories and credit unions, other companies, defined as PIE by the Georgian Government.

Size categories for the Group are determined based on the consolidated financial numbers using the same table above.

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Financial Accounting and Reporting Requirements Category Reporting Audit Management Full Other framework obligation report financial reporting obligation reporting require- and filing ments obligation PIE IFRS Yes*** Yes Yes Payments made to the state* Non-financial report** I IFRS Yes*** Yes Yes Payments made to the state* II IFRS for SME Yes*** Yes Yes None (Optional – IFRS) III IFRS for SME No No Yes None (Optional – IFRS) IV Defined No No Yes None by Agency

(Optional – IFRS, IFRS for SME)

* Payments made to the state is a mandatory report for entities, which perform oil and gas extraction and wood production from natural forest. ** Only those PIEs who fall under category I. *** Are not exempt from standalone audit even if they are subsidiaries of the audited group.

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Management Report •• Financial Statements All PIE, category I and II entities are obliged •• Management Report to prepare management reports. •• Statement on payments made to the state Management report shall include: •• Audit Opinion •• Review of the entity’s activities Other important requirements (development plans, share movements, risk assessment and management tools etc,); •• An entity shall prepare financial statements at least once a year and should disclose •• Corporate Governance Statement; the comparative numbers as well; (Obligatory for listed entities); •• PIEs shall publish financial statements •• Non-financial statement. (Obligatory (including consolidated financial for PIE’s which fall in category I). statements) at their webpages; PIE and enterprises of the first and second •• Where an entity / group after categories shall provide the management an end of the two successive reporting report to an audit firm for opinion. periods no longer meets at least two criteria Management report information can be from the size category table the size disclosed in financial statements of the entity. category of an entity / group shall change and requirements of a new category apply; Management report should include: review of the entity’s activities (development •• The entity shall be entitled to use only plans, share movements, risk assessment, a standard permitted for entities belonging management tools etc.) to a larger size category;

•• Entities that fall under PIE, category Filing and Publishing Financial Statements I and II are also obliged to have audit of their and Enforcement Dates financial statements done in accordance New regulation will enter into force from with the law even if they are part January 2017 for category I, II and PIE of the Group that has been audited; and from January 2018 for category III and IV. •• Financial statements Following statements should be filled and supporting documents should no later than October 1st following be maintained for 6 years after the reporting period: the end of the financial year.

13 Guide to Taxation and Investment in Georgia 2017 Taxation in Georgia

Taxation System Personal Income Tax The Tax Code of Georgia is the principal Tax Jurisdiction source of tax law and is referred Non-residents and tax resident individuals to as a normative act. The Tax Code has been are subject to Georgian income tax only amended several times since it was published on income received from Georgian sources. on December 22, 2004. With effect from January 1, 2011 the An individual is considered to be a resident adopted the new Tax Code of Georgia. While of Georgia for personal income tax purposes other laws may affect taxation, they may not if he or she is present in Georgia for more contradict the provisions of the Tax Code. than 183 days in any 12-month period Tax exemptions and concessions may be ending in a tax (calendar) year. granted only through amendments to the Tax Code. Tax issues cannot be regulated by other The personal income tax is imposed legislation, except for administrative offenses on wages and other forms of compensation (included in the Administrative Offense paid to employees as well as income Code), tax crimes (included in the Criminal earned by physical person, entrepreneurs Code), priority of tax obligations (included from their economic activities. in the bankruptcy laws), levies, and provisions pertaining to the Law “on Tax Liabilities Payers of income taxes are: and State Loans Restructuring”. •• employers (except free economic zone enterprise) who are paying wages Definitions of terms in the Tax Code (both in monetary or non-monetary The Tax Code contains a number forms) to physical persons or employees of definitions, many of them having in Georgia; a specific meaning that may differ from their common meaning, in some cases they •• physical persons entrepreneurs, are adopted from other laws by reference. organizations and permanent However, in some cases the definitions establishments who make payments of the terms used in Tax Code are not to physical persons who render services provided at all. Therefore, it is very important in Georgia and are not registered to understand and apply the terms as taxpayers at the tax agency; provided in the Tax Code correctly. •• Physical person, entrepreneurs and partnerships who are conducting entrepreneurial activity in Georgia.

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Taxable Income and Exemptions payments must, as a tax agent, withhold Resident individuals are taxable on their the income tax and pay it to the budget. domestic income, i.e., on income “received” Any person (individual entrepreneurs, from Georgian sources. Income is taxable foreign or Georgian companies) who irrespective of whether it is received in cash makes a payment to a physical person or in-kind. The following benefits received not registered at the tax agency as a tax by a resident individual are specifically payer for work performed and services excluded from the taxable base of personal rendered is required to withhold income tax income tax: dividends and interest received at the source of payment. from resident companies, which were previously taxed at the source of income. The following tax agents withhold income taxes at the source of payment: Physical Tax Rates person – entrepreneur who makes payments Unless other rates apply (for example, to physical persons working as employees for dividends and interest), income in his individual enterprise; a legal person of an individual person is taxed who makes payments to physical persons at the flat rate of 20%. working as employees; a physical or legal person paying pensions to physical persons, Income from renting out the residential with the exception of pensions paid under space to a person for only residential the state social security system; a resident purposes and not making any deductions legal person paying dividends to physical from this income shall be taxed at 5%. persons; a physical or legal person (except licensed financial institution) paying Income from sale of vehicle or a residential interest to physical persons; a physical apartment (house) with attached land or legal persons making payments to non- plot are taxed at 5%. residents; branches and other separate units of foreign companies. Payment of Income Taxes Generally, income taxes are withheld Profit Tax at the source from payments of wages, Tax Jurisdiction and Payers of Profit Tax dividends, interest, and some other Legal entities incorporated in Georgia types of payments to nonresidents. are normally treated as tax residents and The physical or legal person (including are taxable on their worldwide income. branches and other structural units Legal entities incorporated abroad of Georgian legal entities) making such are normally treated as foreign tax residents

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(“nonresidents”) and are taxable on income In conjunction with the reform, certain from Georgian sources or income from tax rules cease to apply to resident performing business activities thorough entities and PEs of nonresident entities their permanent establishment in Georgia. as from 1 January 2017, including the tax The profit tax is imposed on profits earned depreciation rules, the thin capitalization by Georgian and foreign enterprises. rules and the tax loss carryforward rules.

Branches of Georgian companies do not pay Objects of Taxation profit tax independently, but consolidate The new profit tax rules are effective their profit (or loss) with the main enterprise, as of 1 January 2017, however these rules which pays the total profit tax. do not apply to commercial banks, credit unions, insurance organizations, microfinance New Profit Tax Rules in force organizations and pawnshops until January from January 2017 2019. The new profit tax system apply only Georgia is actively looking for ways how to Georgian resident companies and PE to stimulate economic growth and attract of nonresident companies and the tax base more investments from foreign and local comprise both actual and deemed profit investors. Georgian government considered distributions, including the following: the Estonian 16 year experience with different •• Distributed profits; corporate model as one of the potential ways forward. •• Expenses incurred or other payments not related to economic activities; Following protracted negotiations •• Gratuitous supplies of goods/services and/ and discussions, the Georgian parliament or transfers of funds; and adopted and the president signed into law amendments and an addendum to the Tax •• Representation expenses that exceed Code in May 2016, which fundamentally the maximum amount defined reformed the profit tax regime for Georgian in the tax code. companies and permanent establishments (PEs) of nonresident companies. The profit Special rules apply to profits arising tax regime, under which companies are from transactions related to oil and gas, subject to tax on their annual taxable profits, under current agreements to engage is changed to a system where tax has to be in these activities that were concluded paid only if corporate profits are distributed, before 1 January 1998 in line with similar to the system adopted by Estonia. Georgian laws; these profits are be taxed

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according to the provisions and tax norms enterprise engaged in the same or similar that applied before 1 January 2017. activities, operating under the same or similar conditions. Tax Filing and Payment Due Dates The profit tax rate remained unchanged The following items also should be treated at 15%, however, to calculate the taxable as profit distributions: amount, the amount of a distribution •• Transactions carried out by an enterprise subject to taxation must be divided by 0.85. with related parties that are not In the case of a gratuitous supply of goods/ subject to profit tax and if the value services, the taxable amount shall be of the transaction agreed to between determined based on the market value the parties is different from the market of the goods/services. value and their interdependence affects the result of the transaction; The tax reporting period is a calendar month. Tax returns have to be filed, and tax paid, •• Cross-border transactions with related no later than the 15th day of the month parties, if the conditions established following the reporting calendar month. for such transactions do not comply with the arm’s length principle; and Items subject to tax •• Transactions carried out by an enterprise Distributed profits: Under the law, with a party exempt from income/profit amounts distributed to shareholders as tax (except for a budgetary organization), dividends in a monetary or nonmonetary if the value of the transaction is different form is considered taxable distributed profits. from the market value. However, an allocation of dividends received from foreign enterprises (with the exception If resident enterprises distribute dividends of entities resident in a low-tax jurisdiction) on or after 1 January 2017 from net profits is not considered to be distributed profits. that were subject to tax during the period between 1 January 2008 and 1 January 2017, Payments made to a nonresident enterprise, they have the right to offset the tax paid whether in a monetary or nonmonetary on the distribution against the profit tax form, from profits earned from a PE’s paid in the prior reporting period. The profit activities are treated as distributed profits tax credit should not exceed the tax paid of the PE. The profits attributable to a on the profit distribution, as envisaged PE is the profits that it would be possible in the Tax Code. The amount of tax credit is for the PE to generate as an independent calculated according to the following formula:

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A×B / (C-D), whereby: •• Payments made for the acquisition of a debt security issued by a person A – The amount of dividend subject resident in a low-tax jurisdiction, to distribution; or by a person exempt from profit B –The profit tax accrued and paid during tax under Georgia’s tax code; a reporting period from 1 January 2008 •• Payments of penalties/fines arising to 1 January 2017; from contractual relationships C – The net profit earned within a reporting or advance payments made to a person period from 1 January 2008 to 1 January 2017; resident in a low-tax jurisdiction, D – The value of shares/stakes or to a person exempt from profit of the enterprise transferred to its partner tax under Georgia’s tax code (except in exchange for dividends from the net profit a budgetary organization); earned by such enterprise during the time from 1 January 2008 to 1 January 2017. •• Capital contributions or payments for the right to participate in the equity Expenses incurred or other payments of a nonresident or a person exempt not related to economic activities: from profit tax under the tax code; The law provides a list of expenses that are •• Issuance of loans or payments made not be considered to be related to economic for the acquisition of a claim toward activities, which are treated as deemed a person resident in a low-tax jurisdiction, profit distributions, and the key categories or a person exempt from profit tax under of such expenses are the following: Georgia’s tax code (this rule will not apply •• Undocumented expenses; to commercial banks, credit unions, insurance organizations, microfinance •• Expenses that are not incurred organizations and pawnshops); and for the purpose of deriving profit, income or compensation; and •• Issuance of loans to a resident individual or a nonresident, or deposits of security •• Interest payments on loans at a rate higher for loans obtained by an individual than the annual threshold rate defined or nonresident from a third party, in which by the Georgia Minister of Finance. case the amount of the tax base is defined The new profit tax rules also set forth other by the amount of such loans (this rule types of payments that are subject to profit will not apply to commercial banks, tax as deemed profit distributions, and the key credit unions, insurance organizations, categories of such payments are the following: microfinance organizations and pawnshops).

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However, where actual payments are made •• Donations made to a charitable in relation to an acquired debt security, organization during a calendar year, which equity participation or claim transfer or, do not exceed 10% of the net profit derived in the case of loans/advance payments, during the previous calendar year; where a loan secured with a deposit •• Gratuitous transfers of goods or funds is paid off or goods/services are delivered that already have been taxed at source, and in exchange for the advance payments, the entity that was subject to tax on •• Gratuitous supplies of goods/services the deemed profit distribution is entitled or transfers of financial resources to claim an offset and refund of the profit to the government, municipalities or legal tax incurred in the reporting period entities under public law. ofthe deemed distribution. Representation expenses: The list of countries that shall be deemed According to the law, the maximum amount low-tax jurisdictions is defined by of representation costs incurred during a decree N615, issued by the government the calendar year shall be 1% of the income on29 December 2016. received during the previous year (1% of expenses incurred, if the expenses Gratuitous supplies of goods/ exceed the income); any excess costs shall be services and/or transfers of funds: treated as a deemed distribution of profits. According to the law, a supply of goods/ The maximum amount of representation services that is not made for the purpose costs incurred in the year of incorporation of deriving profit, income or compensation shall be 1% of expenses incurred are considered to be a gratuitous supply by the end of the current calendar year. that is subject to tax as a deemed profit distribution. A shortage of inventory or fixed Legal entities to whom new profit assets also are deemed to be a gratuitous tax rules do not apply supply of such goods at the time when Old profit tax rules will continue to apply the shortage is identified. to organizations, PSA contractors and to a person on profit gained in case of organizing The following are major exceptions a betting house in a systemic-electronic to the gratuitous supply of goods/services form. Herewith Commercial banks, credit rules, which are not be subject to profit tax: unions, insurance organizations, microfinance organizations and pawnshops will shift to new profit tax rules as from January 2019.

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Taxable Income representative expenses and losses Legal entities to whom new profit tax on the sale of property. rules do not apply are taxed on profit, which is determined as gross income Deductibility of Interest Expense from economic activities less allowable Any interest expense paid or incurred deductions, at a flat rate of 15 percent. by the taxpayer in the course of his business For Georgian enterprises gross income activities is generally deductible. However, includes all income, regardless of its source there are some interest deductibility or place of payment, except for income limitations. The interest expense paid and/or specifically exempt under the Tax Code. payable (using the accruals method) on credit (loan) did not exceed 24 % of the credit (loan) Deductible Expenses per annum is deductible. The Tax Code allows some expenses incurred in the course of economic activities to be Depreciation and Amortization Allowance deducted from gross income earned from The Tax Code provides general rules such activities. Expenses not connected with for the calculation of depreciation charges economic activities, personal expenses, and and the deductibility of fixed assets for entertainment expenses are not deductible corporate income tax purposes. The tax (unless entertainment is considered legislation gives a taxpayer an option either to be the taxpayer’s economic activity to deduct depreciation charges calculated and the expenses are connected therewith). on fixed assets over a period of time or fully In addition to the limitations of deductibility deduct the cost of purchase (production) provided in the Tax Code, the norms issued of such assets immediately. by the Ministry of Finance of Georgia also limit the extent of business trip expenses. In the event that the taxpayer employs the above mentioned right in respect of fully The Tax Code provides rules and limitations deduction of cost of fixed assets, it should relating to specific deductions. A list of some continue to use the same method in the specific allowable deductions is as follows: future during five years, for all purchased interest subject to limitations, doubtful or produced fixed assets for the corporate debts, insurance reserve funds, scientific income tax purposes. Taxpayers are entitled research, depreciation of fixed and intangible to deduct from gross income the full assets, repairs, insurance payments, purchase or production cost of a purchased prospecting and extraction of resources, or produced fixed asset in the year when taxes and fines subject to limitations, they were put into exploitation.

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Generally, depreciation allowances are (with exceptions described below) are permitted for all capital assets, including grouped into asset categories depending fixed and intangible property, except for land, on the type of asset and depreciated art (including but not limited to paintings, at the rates stipulated by the Tax Code. jewelry and antiques), museum items, Depreciation charges are determined for historical objects (except for buildings), each group rather than for each individual biological assets and any other assets that asset within the group. The depreciation are not subject to wear and tear. In addition, on buildings and structures are charged a fixed asset with a value lower than individually, so each building or structure 1,000 GEL is not subject to depreciation. is considered as a separate group. Such assets should be fully deducted from gross income in the accounting year when Assets subject to depreciation are they are purchased or produced. categorized into five groups. Groups of fixed assets are subject to depreciation, To compute depreciation expense for the depreciation rates are shown tax year, fixed assets subject to depreciation in the following chart:

Group # Types of Fixed Assets Depreciation Rate 1 Motor cars; motor-and-tractor equipment for the use on 20 roads; office furniture, movable parts of motor transport; trucks, buses, special motor vehicles and trailers; machinery and equipment for all sectors of industry and the foundry industry; black smith and pressing equipment; construction equipment; agricultural vehicles and equipment. 2 Special tools, stock and equipment; computers, peripheral 20 devices and equipment for data processing; electronic devices. 3 Railway, maritime and river transport vehicles; power vehicles 8 and equipment; thermo technical equipment turbine-powered equipment; electric engines and diesel generators; electricity transmission and communication facilities; pipelines. 4 Building and structures 5 5 Assets subject to depreciation not included in other groups 15

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In accordance with the Tax Code, taxpayers capitalized and depreciated in accordance are allowed to use an accelerated depreciation with the provisions of the Tax Code. method for asset groups 2 and 3, provided The maximum deduction for repair that the accelerated depreciation rates do not expenses is 5 percent of the balance exceed the rates specified for these groups, of each asset group at the end of the tax more than twofold. year, provided adequate documentation of the expenses is provided. Any repairs Expenses related to intangible assets incurred that exceed 5 percent are should be deducted in the form added to the balance of the asset group of depreciation (amortization) charges and depreciated. However, if an entity uses in proportion to their limited useful life. a 100% depreciation deduction method, If it is impossible to determine the useful then repair expenses should be deducted life of an intangible asset, such an asset in full from taxable gross income. should be depreciated at the rate of 15%. Intangible assets should be recorded As we have mentioned above, expenses as a separate group. Expenses related that do not increase the standard (normative, to the purchase or production of intangible original) performance of fixed assets assets should not be included in the value are considered to be general expenditure. of intangible assets subject to depreciation, As such, these expenses do not represent provided that they were deducted from repair expenses for taxation purposes the taxable income (profit) of a taxpayer. and therefore can be deducted in full from gross income. Deductibility of Repair Expenses The Tax Code provides a deduction The limitations on Carrying Forward for expenses incurred in connection of Losses with the repair of fixed assets. Repairs, In accordance with the Tax Code, legal entities which neither add material value to whom new profit tax rules do not apply to the asset, nor significantly prolong are entitled to carry forward prior year losses its life, but keep it in an efficient for a period of up to five years and set off operating condition, are considered losses against gross income of future periods. repairs for tax legislation purposes. Conversely, repairs that are in the nature Further, a taxpayer can elect a 10-year loss of replacements, to the extent that they carry forward period, where the statute slow deterioration and significantly of limitation is increased from 5 to 11 years. prolong the life of the property, must be A 10-year carry forward period can still be

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changed to a 5-year carry forward period a document if it has a date and amount when the losses carried forward are used up. of the transaction, reflects the requisites of the parties to the transaction and contains The Tax Code limits the loss carry forward a description of the transaction, there if it occurs: should be at least two identical copies of any such document. A taxpayer is required •• In the period of using status to keep primary accounting documents of the international financial company for at least three years following the year by the financial institution; when the document was issued. •• In the period of using status of international company by the free industrial zone’s Cash method enterprise; Using the cash method of accounting a taxpayer is required to record income •• In the period of using status of special upon its actual receipt, regardless of when trading company by the Georgian the income was earned. Expenses are enterprise. recorded when payment is made rather Tax Accounting Rules than when the expense was incurred. The Tax Code requires that legal entities should maintain accurate records of their Accruals method income and expenses under a cash Contrary to the cash method, the general or an accrual method of accounting. rule under the accruals method of accounting However, the taxpayer must use the same requires a taxpayer to record income when method for both financial and tax it is earned (a moment of supply of goods/ purposes, and be consistent in using service) regardless of when it is actually the chosen method throughout the tax year. received. Expenses are recorded when The taxpayer has to record all transactions incurred rather than when the expense connected with its activities. At the same is paid. time, the contents of a transaction, its subject, amount and the titles of parties Taxation of Nonresidents of Georgia participating in this transaction are Tax Jurisdiction over Nonresidents to be described completely and clearly Foreign enterprises may also be subject in the primary reporting documentation. to profit tax in Georgia. The extent to which a foreign enterprise is subject to profit tax Any primary accounting document depends on whether it conducts its activities for taxation purposes is considered to be through a permanent establishment or not.

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Taxation of Nonresident’s Permanent If a foreign enterprise or non-resident Establishment in Georgia physical person carries out entrepreneurial Foreign enterprises carrying out economic activity in Georgia through an intermediary, activities through a permanent establishment agent or broker having professional status in Georgia are subject to profit tax defined by the Georgian legislation who ondistributed income received from Georgian is not authorized to conduct negotiations sources relating to the activities performed or sign agreements (contracts) on behalf by its permanent establishment. of this foreign enterprise or non-resident physical person, then the activities of such Permanent Establishment (PE) an intermediary, agent or broker do not Pursuant to the Tax Code a permanent create a permanent establishment of establishment of a foreign enterprise or non- this foreign enterprise or non-resident resident individual in Georgia is recognized as physical person in Georgia. a defined location on the territory of Georgia, through which they fully or partially carry out The possession of securities and shares an entrepreneurial activity, including activity in capital, ownership of property conducted through an authorized person. on the territory of Georgia by a foreign enterprise, if other features of a permanent The following are specifically considered establishment do not exist, cannot be to create a permanent establishment: regarded as a basis for the creation construction sites, assembly or building of a permanent establishment. facilities, and the exercise of controlling activities connected with such facilities; The fact of execution of an agreement installations or sites, drilling equipment or by a foreign company, which envisages ships used for surveying of natural resources, the joint activity of parties to the contract as well as the exercise of controlling activities being performed, fully or partly, connected with such facilities; a permanent on the territory of Georgia, cannot be base where a non-resident physical person regarded as a basis for the creation carries out entrepreneurial activity; place of a permanent establishment. of management of a foreign enterprise, branch, representative office, department, The mere fact of the assignment by a foreign bureau, office, agency, workshop, mine, enterprise of its staff for employment pit, other place for extraction of natural in another enterprise or organization resources, any other separate unit or place on the territory of Georgia, if other features of such enterprise’s activity. of a permanent establishment do not exist,

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does not lead to the creation of permanent activities. The responsibility to register establishment, if such employees will act on a permanent establishment of a foreign behalf of that enterprise and protect the rights enterprise lies with the tax authority, which is of the enterprise where they are assigned. responsible for creating the relevant registry. The procedure for running the registration An establishment of a Georgian enterprise and a registry is developed by the Ministry in Georgia is not considered a PE of foreign of Finance of Georgia. company if it is used only to do the following: store or demonstrate goods or products Taxation of Income Not Related belonging to the foreign enterprise; keep to a Permanent Establishment a stock of goods or products belonging Foreign companies not engaged to the foreign enterprise only for the purpose in economic activities through a permanent of their processing by another person; establishment are subject to withholding purchase goods or products or collect tax on gross income from Georgian sources. information for the foreign enterprise; No deductions from this income are allowed, any other activities that are preparatory and the tax is withheld at the source or auxiliary in nature coming from the of payment. However, the Tax Code allows interests of the foreign enterprise; on behalf non-resident taxpayers who receive certain of a foreign company for the preparation types of income to file a return and claim any and/or merely signature of loan agreements, deductions allowable as if this income was contracts for the supply of goods or which connected with a permanent establishment. have the nature of technical services. The following withholding tax rates normally A permanent establishment of a foreign apply to the following items of income from enterprise in Georgia is considered as Georgian sources payable to nonresidents, such from the time of its registration with provided that such income is not attributable the tax agency, providing it with relevant to a nonresident’s permanent establishment authority or commencing of representational in Georgia:

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Income from Georgian Sources Current Tax Rate Dividends 5% Interest 5% Oil and gas subcontractors 4% International telecommunication and transportation services 10% Royalties 5% Management fees 10% Income received in the form of wages 20% Payments to non-residents of other Georgian source service 10% related income not connected to their PE in Georgia

If a non-resident is registered in an offshore •• Dividends Income – dividends or low tax jurisdiction, interest, royalty from a resident entity; and service fee payments will be subject •• Royalty Income – royalties received to withholding tax at the rate of 15%. from a resident entity;

Dividends are subject to withholding tax •• Income from Immovable if they are paid to individuals or foreign Property – income from the sale entities. It should be mentioned that dividends of immovable property located in Georgia; paid to Georgian legal entities are exempt •• Other Income – some other types from withholding tax at the source of payment of income. and dividends received by entrepreneurial legal entities should not be included Taxation of Cross-Border Transactions in their taxable gross income. Outbound Transactions Since resident entities are taxable on their Georgian Source Income worldwide income in Georgia and may also For profit tax purposes, the following be taxable by foreign states on their income income types are treated as received derived from sources or from carrying from Georgian sources: on business in such states, the same income is potentially subject to double taxation. •• Interest Income – interest on debt obligations In terms of domestic tax law, profit tax paid issued by a resident entity or permanent outside Georgia is credited upon payment establishment of foreign company; of tax in Georgia. Excess foreign tax credit

26 Guide to Taxation and Investment in Georgia 2017

may neither be offset against resident treaties concluded by the former Soviet taxpayer’s Georgian tax liabilities on any Union, except for Japan. domestic source income, nor can they be carried forward or backward. The Double tax treaties with Saudi Arabia, Lebanon and Oman await ratification. Double Tax Treaties There are initiated negotiations with Jordan, Georgia has double tax treaties Montenegro, Vietnam, Iraq, Argentina, with 54 countries, which generally Indonesia, Malaysia, Mexico, Albania, Columbia, follow the OECD or UN Model Tax Moldova, Mongolia, Morocco, New Zealand, Convention on Income and on Capital. Peru, the Philippines, Tajikistan, Uruguay, Brazil, Georgia does not honor the double tax Cuba, Ecuador, Canada and South Africa.

Country Project Maximum tax rates applicable duration for PE in the country of source purposes Dividends Interests Royalties Austria(2) 6 months 0% / 5% /10% 0 0 Azerbaijan 6 months 5%/10% 5%/10% 5% / 10% United Arab Emirates 6 months 0 0 0 Belgium 9 months 5% / 15% 5% / 10% 5% / 10% Bulgaria 9 months 5% / 10% 5% / 10% 5% / 10% 12 months 0% / 15% 0 0 Germany 6 months 0% / 5% /10% 0 0 Denmark 6 months 0% / 5% / 10% 0 0 Spain 6 months 0% / 10% 0 0 Estonia 9 months 0 0 0 Turkey 12 months 5% / 10% 5% / 10% 5% / 10% Turkmenistan 6 months 5% / 10% 5% / 10% 5% / 10% India 90 days 5% / 10% 5% / 10% 5% / 10% 9 months 5% 5% / 15% 0 Iran 12 months 5% / 10% 5% / 10% 5%

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Country Project Maximum tax rates applicable duration for PE in the country of source purposes Dividends Interests Royalties Italy 6 months 5% / 10% 0 0 Ireland 6 months 0% / 5% /10% 0 0 Japan 12 months 5% / 15% 0%/10% 0%/10% Qatar 6 months 0 0 0 Lithuania 9 months 5% / 15% 5% / 10% 5% / 10% Latvia 6 months 5% 5% 5% / 10% Luxemburg 6 months 0% / 5% /10% 0 0 Malta 6 months 0 0 0 Netherlands 6 months 0% / 5% / 15% 0 0 Poland 6 months 5% / 10% 5% / 10% 5% / 10% Portugal 9 months 5% / 10% 5% / 10% 5% Rumania 9 months 5% / 8% 5% / 10% 5% Greece 9 months 5% / 8% 5% / 8% 5% Singapore 6 months 0 0 0 Slovenia 6 months 5% 5% 5% Armenia 6 months 5% / 10% 5% / 10% 5% France 6 months 0% / 5% / 10% 0 0 Uzbekistan 6 months 5% / 15% 5% / 10% 5% / 10% Ukraine 12 months 5% / 10% 5% / 10% 5% / 10% 12 months 0% / 5% 0 0 Finland 6 months 0% / 5% / 10% (2) 0 0 Kazakhstan 6 months 5% / 15% 5% / 10% 5% / 10% Switzerland 6 months 5% / 10% 0 0 China 6 months 0% / 5% / 10% 5% / 10% 5% Czech Republic 6 months 5% / 10% 5% / 8% 0% / 5% / 10% Slovakia 6 months 0 5% 5%

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Country Project Maximum tax rates applicable duration for PE in the country of source purposes Dividends Interests Royalties Bahrain 6 months 0 0 0 Norway 6 months 5/10% 0 0 Egypt 6/183 days 5% / 10% 5% / 10% 5% / 10% Serbia 9 months 5% / 10% 5% / 10% 5% / 10% San Marino 6 months 0 0 0 Kuwait 6 months 0%/5% 0 5% / 10% Croatia 9 months 5% 5% 5% Sweden 12 months 0%/10% 0% 0% 12 month 5% / 10% 5% 5% Iceland 6 months 5% / 10% 5% 5% Cyprus 9 months 0 0 0 Korea 9 months 5% / 10% 5% / 10% 5% / 10% Liechtenstein 9 months 0 0 0

Value Added Tax of any imported goods is equal to their value Objects of Taxation in terms of the customs legislation of Georgia, In terms of the Tax Code, the object of VAT including the value of transportation taxation is a taxable transaction or a taxable or other auxiliary services attributable import. A taxable transaction is a supply to such imports, plus any custom duties of goods/services, including those supplied and excise taxes imposed on importation. or rendered on a gratuitous basis, if they are considered to be carried out in the territory VAT Rates of Georgia. Taxable transactions do not include The VAT rate applicable in Georgia supplied goods/services outside Georgia. is 18%, referred to as the standard rate, which is applied to most goods/services. A taxable import is an import of goods. Certain transactions are exempt from For the importation of goods, VAT taxation. There are two types of exempted is chargeable on the customs value transactions: transaction exempted with of the goods imported. The customs value or without the right to recover input

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VAT. The export of goods is exempted of services or the place of management with the right to recover input VAT, or the location of a permanent establishment while import of certain medicine, passenger of the recipient of services, assuming cars, publications, mass media and baby that the services are directly related products are exempted without the right to such permanent establishment. to recover input VAT. Thementioned provision of the tax law is applicable to supply of intangible assets, Time of Taxable Transaction consulting, legal, accounting, engineering, Pursuant to the Tax Code, a VATable advertising and staffing services, as well transaction occurs at the time of a supply as telecommunication, radio and television of goods (services) and in the case broadcasting, data processing, electronically of a supply of goods involving loading, provided services, and other similar services. the time of loading. However, it should not be later than the time when VAT Invoice compensation was paid to a supplier VAT payers making taxable supply are of goods/services in advance. required to issue a VAT invoice to customers no later than 30 calendar days after the If goods or services are supplied on a regular customers’ notice. The VAT invoice is a strict or a continuous basis, the time when a tax reporting document approved by the Ministry invoice for any part of such a transaction of Finance of Georgia that confirms the was issued or payment was made should fact of carrying out of VATable transaction. be deemed to be the time of the supply A tax invoice is issued in electronic form. of goods or services, but no later than the last working day of the reporting month. VAT Administration Remittance Place of Taxable Transaction VAT on domestic supplies A taxable transaction for VAT purposes is and the importation of goods/services a supply of goods (rendering of services) is administered by the taxauthorities. that is performed on the territory of Georgia. Any taxable person should assess the amount According to the Tax Code, if the recipient of VAT to be remitted to the budget and supplier of services are located by reducing (“crediting”) its output VAT liability in different countries, the place of supply (VAT collected on outward taxable supplies) for VAT purposes includes the following: with input VAT credit (VAT incurred on inward a place of registration of the recipient taxable supplies and import supplies).

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VAT Credit VAT are less than 20% of total turnover Any input VAT incurred by a taxable person of the previous tax year. The recoverable on inward domestic supplies and imported VAT is adjusted by the end of each calendar supplies is creditable against its output VAT year in proportion to the exempt supplies, liabilities, provided the such input VAT was with the right to reclaim input VAT in total incurred for taxable imports and taxable turnover of the respective calendar year. transactions where the goods or services are used or to be used for the purposes If exempt supplies without the right of the taxpayer’s economic activity, even to reclaim input VAT are more than 20% of total if they are not included in production costs. turnover of the previous tax year, input VAT is recoverable only in the last reporting period In case VAT taxpayers have taxable of a tax year, in proportion to the exempt transactions and VAT exempt transactions supplies with the right to reclaim input VAT in accordance with the Tax Code, the VAT in total turnover of this calendar year. credit is determined in accordance with the amount of goods (services) which It should be noted that VAT credit is not were usedin the taxable transactions. allowed if it was paid out for: charity, social and entertainment events; goods / services If such differentiation is impossible, the VAT are used to produce VAT exempt goods / credit is determined on the basis of the ratio services; on an electronic tax invoice that of the exempt supplies, with the right was not reported to a tax agency. to reclaim input VAT to the total turnover of the month. VAT creditable on the ratio Tax Refunds basis should be adjusted pursuant Since export supplies are exempt with VAT to the December tax return of the current input right, any taxable person making supplies year, when the exact ratio of annual taxable for use or consumption outside of Georgia and exempt turnover must be determined. may claim as a credit its input VAT incurred in connection with exported supplies. Although If fixed assets are used in exempt the excess credit is refundable, in fact, VAT transactions both with or without the right refunds are difficult to obtain in Georgia. to reclaim input VAT, and the input VAT cannot be directly attributed to these transactions, A surplus of the VAT creditable over the VAT in this case the input VAT is recoverable assessed in the reporting period can be in full in the first reporting period, if exempt offset against the future tax liabilities or be supplies without the right to reclaim input refunded within one month period.

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VAT Refund Procedures Excise tax is imposed on wine, beer and for Foreign Nationals liquors (whiskey, vodka, etc.); cigarettes and Foreign nationals are entitled to claim other tobacco products; cars; natural gas, oils, a VAT refund paid on goods purchased oil distillates, and other products produced in the territory of Georgia at the time from oil and bituminous minerals. Excise tax ofthe export of the goods out of Georgian rate for electronical communication services borders, provided that the goods is 8% of the amount of taxable transaction. are exported within 3 months after This rate may be reviewed and changed the purchase and the value of the goods per within 0% to 8% range for each calendar year one receipt exceeds GEL 200 (excluding VAT). by the Government initiative. International calls received in mobile and home phones To receive the tax refund, foreign individuals are subject to GEL 0.15 and GEL 0.08 have to submit to the tax authorities a receipt per minute respectively. in the form officially approved by the Ministry of Finance of Georgia. The refund procedures, Time of Taxable Transaction a list of goods subject to VAT refund, In respect of the production of the excisable and criteria for sellers to be entitled to issue goods in Georgia, the time of a taxable the receipts are determined by the Ministry transaction is considered to be the time of Finance of Georgia. of a supply (transfer) of goods. In the case of import, the tax point is deemed to be Excise Tax the time of import. The moment of supply General Rules of goods is deemed to be the time All physical and legal persons producing of a taxable transaction in respect excisable goods in the territory of Georgia, of the excisable goods subject to stamping. or importing excisable goods are subject to excise taxes. For the excisable goods Excise Stamps produced or manufactured in the territory Under domestic tax law, the mandatory affixing of Georgia from raw materials supplied of excise stamps is required for the imported by customers, the producer of the goods and locally produced alcoholic beverages is subject to excise taxes. designated for consumption in Georgia, including beer, with a strength of higher Since excise duty is an indirect tax, than 1.15 degrees (other than beverages any excise duty paid in connection of 50 grams and less as well as those bottled with exported items produced in Georgia in vessels of 10 liters and more), and tobacco may normally be refunded to the exporter. products except for pipe tobacco.

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According to the Tax Code, it is prohibited land tax and property tax of individuals to supply and import the excisable goods and enterprises. without excise stamps under a free circulation regime into the territory of Georgia. Local self-government bodies are entitled The tax authorities controlling excise within their authority to establish payments shall seize unstamped imported local taxes in the respective territory goods and provided for the sale of excise within the maximum limit stipulated goods in accordance with the established by the Tax Code. procedure. From the moment of seizure the goods are deemed to be state property. Property Taxes Property Tax of Physical Persons In case goods are imported or/and supplied Individual persons’ taxable object without excise stamps (due to loss, destruction, of the property tax (except for land) etc., except for force major circumstances), includes fixed assets used for economic the goods are considered to be imported or/ activities, immovable property (building and supplied and shall be taxed in accordance or a part of it) and construction in progress, with the legislation of Georgia. In case also yachts (motor boats), helicopters, of failure to import goods during six months airplanes and vehicles under Code 8703 after having received the excise stamps, of the National Commodity Nomenclature an importer is required to return them. of Foreign Economic Activities.

Failure to return excise stamps within The property tax rates are differential the mentioned period shall be deemed and are based on the amount of annual as an import or supply of the excisable income of the individual person, regardless goods subject to excise stamping in the of his/her tax residency status, from territory of Georgia and shall be taxed sources in Georgia and outside the country. accordingly. In the following period when Property tax rate is between 0.05- 0.2% importing the excisable goods marked with of the fair market value of the property non-returned excise stamps, the amount that is located in Georgia if the individual’s of taxes due must be calculated pro rata family worldwide income will be from GEL to the amount of actually imported goods. 40,000 to GEL 100,000 during the reporting calendar year. If, however, such annual Local Taxes income will exceed GEL 100,000 the tax rate The property tax is a local tax and comprises will be between 0.8-1 percent.

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The individual is required to submit similar property listed on the balance the tax return before the 1st of November sheet of an organization and utilized for following the reporting calendar (tax) year economic activity are, unless specifically and pay the tax to the tax authorities exempt, subject to property tax at a flat before 15th of November of the same year. 1 % rate of the average annual net book value of the property. In order to arrive Property Tax of Georgian enterprises at the taxable base, the net book Payers of property tax, other than physical value of immovable property recorded persons, include Georgian enterprises, in the balance sheet of a company and foreign enterprises engaged at the beginning and end of the year in economic activity in Georgia through 2017, which were purchased before permanent establishments, organizations the year 2000, between 2000-2004 whose property or part of property and in 2004 should be multiplied by 3, is used for economic activity. For foreign 2 and 1.5 respectively. However these enterprises, property tax is imposed only coefficients are not applicable to the state on property located in Georgia. owned companies and to a Georgian company if the company records its The fixed assets, investment property, immovable property based on revaluation uninstalled equipment and construction method and the financial statements are in progress that are listed on the balance audited by an audit company that is included sheet of the enterprise, as well as in the list published by the Government.

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Land Tax that requires a license for the use of natural Physical and legal persons, who are owners resources (except for land) owned by the state or users of state owned land plots, including as well as persons engaged in the timber land used for agricultural and non-agricultural industry are subject to a fee for the use purposes, are subject to land tax. The land of natural resources. tax depends on the quality and location of land and is not based on the taxpayer’s The fee is imposed on the volume of natural economic results. resources (such as minerals and timber) extracted, and the tax rates are based on The base maximum annual rate for the the resources extracted. Pursuant to the Law non-agricultural land amounts to GEL 0.24 of Georgia “On Fee for the Use of Natural per one square meter. The tax must be Resources”, some types of activities are calculated by multiplying the annual base granted a 70 % reduction in the fee rate. tax rate by the territorial coefficient and the land area. The differentiation of the land tax Fee on Gambling Business by territorial coefficient is made in accordance The fee on gambling is paid by persons with location and zones of the land plot. that carry out entrepreneurial activities by organizing lotteries, operating casinos, Tax returns should be submitted and other gambling business and are granted by a physical person and legal entity no later permits and/or licenses to carry out such than 1st of November and 1st of April activities by virtue of the Georgian legislation. of reporting year respectively. Tax Filing and Payment Due Dates Other Taxes Dates for the submission of tax returns Fee for the Use of Natural Resources depend on the type of tax. Below is a summary Physical and legal persons (including branches of the due dates for the submission of returns of foreign companies) engaged in any activity for four national taxes:

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Profit Tax Profit Tax Annual for entities for entities Month Personal taxed under taxed under VAT Excise Income “old” profit “new” profit tax regime tax regime January 15th 15th 15th February 15th 15th 15th March 31st 31st 15th 15th 15th April 15th 15th 15th May 15th 15th 15th June 15th 15th 15th July 15th 15th 15th August 15th 15th 15th September 15th 15th 15th October 15th 15th 15th November 15th 15th 15th December 15th 15th 15th

Before the due date of filing income, A taxpayer may apply in writing profit or property tax return a taxpayer for an extension of a deadline for tax may apply to the tax authorities with payment. Even if the extension is granted, the a request to extend deadlines for submitting taxpayer will still be subject to fines for late of the returns. If the taxpayer pays payment from the original due date of the tax. the expected advance tax due to the time the extension is requested, the deadline Below is a summary of the tax payment for submitting the tax return will be extended due dates for four national taxes: for three months.

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Personal Income Tax Under Under Month Employment Entrepreneur’s “old” “new” VAT Excise Income income regime regime January Withheld 15th 15th 15th February Withheld March Withheld 15th 15th 15th April Withheld May Withheld 31st 31st 15th 15th 15th June Withheld 15th 15th 15th July Withheld 31st 31st 15th 15th 15th August Withheld 15th 15th 15th September Withheld 31st 31st 15th 15th 15th October Withheld 15th 15th 15th November Withheld 31st 31st 15th 15th 15th December Withheld 15th 15th 15th

Transfer Pricing Rules value should be taken into account. The Georgian tax legislation contains Tax authorities can compare the conditions comprehensive transfer-pricing rules of transactions between related persons and there are specific provisions and the transactions of persons in the Tax Code that are aimed at regulating who are not related. taxation of transactions between related persons. The tax authorities may allocate Georgian transfer pricing rules generally income and expenses between related follow OECD transfer pricing principles and parties based on principles that would apply to cross border transactions between: have applied in transactions between a Georgian company and a related foreign independentpersons. company; or a Georgian resident company and an unrelated foreign company registered According to Georgian tax legislation in low tax jurisdiction/offshore country. transactions between related parties can be “controlled” by the tax authorities According to the Instructions a taxpayer andthe principle of fair market should maintain contemporaneous transfer

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pricing documentations and submit them regarding market prices, information to the tax authorities upon their request submitted by taxpayers to the tax within 30 calendar days. administration and any other reliable information to determine the market Georgia recognizes five pricing methods price of goods (services). for evaluating whether prices are at arm’s length: comparable uncontrolled Customs Duties (independent) price; resale price; cost The Tax Code regulates the taxation plus; net profit margin; and profit split. of the import and export of goods. These pricing rules are based on the OECD Customs duties are payable upon the release transfer pricing methods. of goods by Customs officials. In accordance with the Tax Code, the following fees Related Persons are paid on the importation of goods: Persons are recognized as related if special relations that exist among them may Import tax affect the conditions or economic results Goods transferred through the customs of their activities or activities of persons of Georgia are subject to customs tax represented by them. at the rates 0%, 5% or 12%. The customs tax depends on the type of goods The tax authority is authorized to make being imported. a reasonable written decision on the use of the market price for taxation purposes VAT if the parties involved in the transaction Goods imported into Georgia are subject arerelated persons, except for cases when to VAT in accordance with the Tax Code. their relationship does not affect results The rate of VAT is 18 percent of the value of such transactions. of the imported goods.

Market value Excises Georgian Tax Legislation provides various Excise tax is applicable to goods rules to be employed by the tax authorities transferred through Georgian customs for defining the market value (price) in accordance with the Tax Code. of supplied services/goods. Export of goods The tax agency is also entitled to utilize state In terms of the Tax Code, the export authorities’ official sources of information of goods from the territory of Georgia

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is exempt from VAT and excise tax and services to and by an MEP participant with VAT and excise input rights. in connection with the BTC project are exempt from VAT with input VAT rights. Taxation of Activities Related In addition to that, imports and acquisitions to Major Export Pipeline (MEP) of goods, works and services are subject On 18th of November 1999 to 0% VAT. If by some reasons a contractor the Governments of Georgia, Azerbaijan incurs a VAT charge, it has the right to recover and Turkey signed the Host Government it through an offset against other taxes. Agreement Between and Among Georgia, Azerbaijan and Turkey Relating The MEP participant should obtain to Transportation of Oil In and Beyond a VAT exemption confirming VAT exemption the Territories of Georgia, Azerbaijan from the tax authorities of Georgia. and Turkey through the BTC Pipeline. Pursuant to Articles 1 and 2.2 of the Agreement, The VAT exemption certificate serves as proof Appendix 1 on “Host Government Agreement for charging no VAT. A person to whom Between and among the Government supply is being made should present of Georgia and the MEP Participants”, a copy of its exemption certificate in order is an integral part of the Agreement. to avoid VAT charge. The certificate should be submitted to the customs authorities Profit Tax to avoid VAT on import of goods. The profit tax of an MEP participa¬nt consists of a Base Profit Tax at a fixed rate of 15% Other Taxes and Profit Tax Surtax. Profit Tax Surtax Under the Host Government Agreement is calculated based on the amount of oil on BTC, no taxes are imposed on or withheld transported through the MEP. with payments to any contractor in connection with project activities MEP Participants should submit their profit and any other contractor in connection tax return (drawn up exclusively in US dollars) with MEP activities and contractors for each calendar year to the tax authorities don’t have tax compliance or filing obligations before April 1 of the following reporting in connection with MEP activities. calendar year. MEP Participants are entitled to import Value Added Tax into or export or re-export from Georgia According to the Host Government free of taxes and restrictions, whether Agreement, supply of goods, works in its own name or on its behalf,

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all equipment, materials, machinery, tools, tax and other similar payments are due from vehicles, spare parts, supplies, petroleum, MEP Participants and their foreign employees fuels and lubricants to be used in connection with respect to such foreign employees. with the MEP and all other goods (other than natural gas), works, services Production Sharing Regime or technology necessary or appropriate Legislative Framework for use in connection with the MEP. Under the production sharing regime an investor is granted by the Georgian Foreign employees of MEP Participants, Government the exclusive right contractors, each family member of foreign to the exploration, development employee or contractor and MEP Participant and production of mineral resources from on behalf of any such foreign employee, the subsoil area for a certain period of time. contractor or family member are entitled The investor guarantees the development to import into or export or re-export from of such mineral deposits at his own or her Georgia free of taxes and restrictions, own risk and expense. By committing to share whether in its own name or on its behalf, the production of the mineral resources all goods, works, services or technology with the State under the terms and conditions for its own use and personal consumption of Production Sharing Agreement (PSA), or for the use and personal consumption the investor becomes entitled to a share of such employees, contractors of the extracted production. The PSA and family members; provided, however, mechanism is commonly used in Georgia. all sales by these foreign employees within Georgia of any such imported PSA Tax Regime goods to any other person will be taxable, Petroleum taxation in Georgia is governed and, in the case of sales of automobiles, by two legislative acts: the Tax Code furniture and professional tools of Georgia and the Law “On Oil and Gas” and instruments, will result in liability #1892, dated April 16, 1999. The Tax Code for customs import tariff, in accordance does not contain a separate chapter with Georgian laws. stipulating the taxation under PSAs and the term “PSA” is not used. However, Personal income tax of foreign employees the Tax Code includes rules for the taxation is calculated only on their income earned of oil and gas operations. The term “oil as a direct result of their employment and gas operations” is defined by the Law in Georgia and only if such employee spent “On Oil and Gas” and among others more than 183 days in Georgia. No social includes the exploration and production

40 Guide to Taxation and Investment in Georgia 2017

of oil and gas within the area specified is applied and their activities do not lead in the PSA and License, and activities to the creation of a permanent establishment. connected with such operatio¬ns Under the Tax Code, certain transactions (gathering, treating and storage conducted in accordance with the Law of produced oil and gas on the area). “On Oil and Gas” are exempt from taxation:

•• Import of machinery, means Tax benefits which may be employed of transportation, spare parts and materials by the parties of a PSA are set out used for oil and gas operations conducted in the Tax Code. Equipment or structure, according to the Law “On Oil and Gas”, drilling equipment or ships used for surveying as well as supply of goods (works, services), natural resources as well as the performance required for oil and gas operations of controlling activities related thereof are by investors and operating companies deemed to create a permanent establishment in compliance with PSA specified by the of a foreign company which is party to a PSA, Law “On Oil and Gas” and/or licenses issued which leads to profit tax liabilities calculated for carrying out oil and gas transactions, at the general profit tax rates. However, this are exempt from import tax and VAT provision of the Tax Code of Georgia does without the right to recover input VAT. not apply to non-resident subcontractors of the parties of PSA carrying oil and gas •• Import and/or supply of oil products operations. Such subcontractors are subject necessary to perform oil and gas to taxation at the source of gross income. transactions specified by the Law “On Oil A reduced rate of withholding tax of 4% and Gas” are exempt from excise tax.

41 Guide to Taxation and Investment in Georgia 2017

•• Property needed for oil and gas operations There are currently three free industrial is exempted from property tax. zones in Georgia. Companies incorporated in the zones and having status of the FIZ •• Land plots used for performing oil and gas enterprise will enjoy tax concessions transactions determined by the Law as additional incentive, their activities would “On Oil and Gas” (if not used for other be subject to simplified currency regulations purposes) are exempt from land tax. and license/permit-related procedures.

Free Industrial Zone FIZ enterprise in case of supply of goods As part of efforts to attract international to a Georgian registered entity (except investment capital and investors searching another FIZ enterprise) is required to pay a tax for a high rate return, the Government of 4 % from the revenue received/receivable of Georgia decided to create the free as a result of the supply of the goods industrial zones (FIZ) in Georgia. The FIZ (in case of gratuitous supply – fair value). offers extended tax benefits as well as The tax should be paid before the 15th day operational simplicities to the companies of the month following the reporting calendar based in the zone. Businesses registered month. FIZ enterprise should also pay the tax in the zone would benefit from relatively within the same deadline if a Georgian cheap and skilled Georgian labor, lower taxes, registered entity supplies FIZ enterprise with and easy access to the sea. goods (except the electricity, water and gas for local consumption and production). According to the law of Georgia “on Free Industrial Zone”, the industrial zone Special Trading Company is the variety of free zone envisaged Special Trading companies are introduced by the customs legislation of Georgia, to encourage the development of trade where the additional conditions and tax transit function within Georgia. Special exemptions are applicable. However the Trading Company is an enterprise that law provides the list of activities and import for the purpose of exemption from profit of goods that are prohibited in FIZ. tax envisaged under the Tax Code of Georgia has been granted the status of special Investors can approach the Ministry trading company. A foreign entity that of Economic Development of Georgia renders its economic activities in Georgia with applications to gain the right through its permanent establishment to operate in the FIZ. has the right to be granted the status

42 Guide to Taxation and Investment in Georgia 2017

of a Special Trade Company and register of the international financial companies is a separate permanent establishment only to serve the offshore companies in the least in case the permanent establishment renders costly way, they benefit from certain tax the activities of the special trading company exemptions as provided in the Tax Code. envisaged by the Tax Code. Tourist enterprise Special Trading Company status is obtained The status of the tourist enterprise from the tax authorities of Georgia. is introduced to encourage development The Minister of Finance of Georgia of tourism sector of Georgia. Tourist determines the rules of granting a status enterprise is a legal entity which builds to a special trading company. hotel, supplies hotel assets/part of assets to another person in order to return A Special Trading Company has the right them in the form of rent and makes to re-export foreign goods from the customs the building operation as a hotel according warehouse, to execute the supply to the conditions of tourist enterprise of foreign goods in the customs warehouse as envisaged by Georgian legislation. to a company having the status of Special Trading Company and to those not having Tourist enterprise status for each hotel the status; and purchase for no less than is obtained from the tax authorities the customs value the foreign goods of Georgia. The tax authorities are authorized for the purpose of later re-export and/ to demand collateral, the amount or supply, from a company not having of the collateral should not exceed 18% a status of a Special Trading Company of the value of the supplied assets.

International Financial Company The Georgian Government sets the rules An International Financial Company for granting, functioning and cancelling is a financial institution that on the basis of the of the status to the tourist enterprise, application by its authorized representative is as well as the minimal amount of the area granted the status of an international financial of the building to be used as hotel rooms corporation and a certificate proving this status according to the local self-governing bodies is issued. Moreover, an international financial and other requirements. The tourist company is established outside the free enterprise enjoys certain tax exemptions industrial zone. As the primary objective as provided in the Tax Code.

43 Guide to Taxation and Investment in Georgia 2017 Tax & Legal contacts — Georgia

Georgia, Tbilisi Georgia, Tbilisi Georgia, Tbilisi John Robinson Tax & Legal Department Tax & Legal Department Managing Partner Giorgi Tavartkiladze Giorgi Khurodze [email protected] Director Head of Law Practice [email protected] [email protected]

44 Guide to Taxation and Investment in Georgia 2017 Office locations

Russia Armenia Kazakhstan Moscow Yerevan Aktau 5 Lesnaya St. Business Center Renaissance Aktau Hotel Moscow, 125047 “Imperium Plaza” 9 microdistrict, 1st floor Tel.: +7 (495) 787 06 00 4/7, Amiryan St., 7th floor Aktau, 130000 Fax: +7 (495) 787 06 01 Yerevan, 0010 Tel.: +7 (7292) 70 10 82\83 Tel.: +374 (10) 52 65 20 St. Petersburg Fax: +374 (10) 52 75 20 Almaty “Gustaf” Business Center 36 Al Farabi Ave. 38 Sredniy prospect, Azerbaijan Almaty, 050059 bldg. 1, Lit. K Baku Tel.: +7 (727) 258 13 40 St. Petersburg, 199004 Business Center Fax: +7 (727) 258 13 41 Tel.: +7 (812) 703 71 06 “Landmark“ Fax +7 (812) 703 71 07 96 Nizami St. Astana Baku, AZ1010 Business Center Ufa Tel.: +994 (12) 404 12 10 “Astana Tower” Business Center Fax: +994 (12) 404 12 11 12 Samal Microdistrict, “Aleksandrovskiy passage” 11th Floor 20 Karla Marksa St. Belarus Astana, 010000 Ufa, 450077 Minsk Tel.: +7 (7172) 58 03 90/ Tel.: +7 (347) 226 72 92 Business Center “RAM” 58 04 80 Fax: +7 (347) 226 72 93 51A K. Tsetkin St., 13th floor Fax: +7 (7172) 58 04 81 Minsk, 220004 Yekaterinburg Tel.: +375 (17) 309 99 00 Atyrau 1A Borisa Eltsina St. Fax +375 (17) 309 99 01 “Renaissance Atyrau Hotel”, Ekaterinburg, 620014 3rd floor Tel: +7 (343) 311 12 48 Georgia 15B, Satpayev St. Fax: +7 (343) 311 12 49 Tbilisi Atyrau, 060011 36A Lado Asatiani St. Tel.: +7 (7122) 58 62 40 Yuzhno-Sakhalinsk Tbilisi, 0105 Fax: +7 (7122) 58 62 41 Business Center “Sfera” Tel.: +995 (32) 224 45 66 78 Chekhova St. Fax: +995 (32) 224 45 69 Yuzhno-Sakhalinsk, 693000 Tel.: +7 (4242) 46 30 55 Fax: +7 (4242) 46 30 56

45 Guide to Taxation and Investment in Georgia 2017

Kyrgyzstan Turkmenistan Uzbekistan Bishkek Ashgabat Tashkent Office 906, 9th floor 54, Turkmenbashi Ave. Business Center “Inkonel” 19 Razzakov St. Ashgabat, 744017 75, Mustakillik Ave. Bishkek, 720040 Tel.: +993 (12) 45 83 19 Tashkent, 100000 Tel.: +996 (312) 39 82 88 Tel.: +998 (71) 120 44 45 Fax: +996 (312) 39 82 89 Ukraine Fax: +998 (71) 120 44 47 Kyiv Tajikistan 48, 50A, Zhylyanska St. Dushanbe Kyiv, 01033 Business Center S.A.S. Tel.: +38 (044) 490 90 00 24a, Ayni St., office 307 Fax: +38 (044) 490 90 01 Dushanbe, 734012 Tel.: +992 (44) 600 62 00 Fax: +992 (44) 600 62 01

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Guide to Taxation and Investment in Georgia 2017

which may lead to confusion. Penalties for tax and that will allow Georgian market reforms to advance customs violations are strict and so is their in the right direction. enforcement. The Tax Code was simplified, but some The effective Tax Code of Georgia was enacted uncertainties remain. The Ministry of Finance from September 2010, uniting the tax and customs officials strive to limit the number of Tax Code legislation. Many consider that the introduction of amendments per year to a maximum of three a new Tax Code is the major step forward packages and establish clear rules of tax dispute.

Georgia country key facts Population 3.72 m (2016) Territory 69,700 square kilometers Autonomy Adjara Autonomy Republic, Abkhazia Autonomy Republic Neighbor states Azerbaijan, Russia, Turkey, Armenia Capital Tbilisi (pop. 1,113 000) Other main cities Kutaisi (pop. 147,900), Rustavi (pop. 126,000), Batumi (pop. 154,600) Currency Georgian Lari (GEL) Language Georgian Stock Exchange Georgian Stock Exchange (GSE)

Official share index GSE Index

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