Category: კატეგორიის გარეშე

Micro Business status is associated with significant tax benefits in Georgia. Therefore, investors are often interested in the subject. In this article, we will be discussing exactly what are the tax benefits, who can obtain the status, in which cases does an investor lose the status and what are the pros and cons of the status compared to an LLC.

 

What are the exact tax benefits of the Micro Business status?

Micro Business status holders are exempt from personal income tax (PIT), which usually comprises 20%. Besides, participation in state pension scheme is voluntary. The pension scheme is only applicable to Georgian residents. Therefore, we will continue our discussion excluding the pension scheme effect.

Let’s compare taxation of Micro Business status holder to taxation of an ordinary employee. For example, if a company pays net 1,000 GEL to an employee, this means that its total salary expense, including the PIT, equals 1,250 GEL (1,000/0.8). Now let’s see what happens if the company pays the budget allotted for the employee compensation to a Micro Business status owner instead. In this case, the individual (the status owner) does not pay PIT and will receive the full payment of 1,250 GEL. Simply put, the status owner receives 250 GEL more (1,250 – 1,000) due to PIT tax saving compared to an ordinary employee.

 

Who can obtain the Micro Business status?

Often investors assume that registering as an Individual Entrepreneur is enough to receive the tax benefits in Georgia, however Individual Entrepreneur should also obtain Micro Business status from the Revenue Service of Georgia.

Our company offers all necessary accounting services associated obtaining the status.

Individual Entrepreneur can obtain the status in case his/her business activities are not one of the, so called, “prohibited activities”, meaning activities in case of which Micro Business status is not available. Such activities include medical, architecture, legal, notary, consulting, audit etc. The full list is available on the webpage of Legislative Herald of Georgia.

It should be noted that, despite being exempt from PIT, Micro businesses are required to submit income tax returns no later than 1^st April of every subsequent year.

 

In which cases does an individual lose Micro Business status?

The status is lost if an individual’s revenue for a calendar year exceeds 30,000 GEL. Status is also lost if Revenue Services conducts stock-take and finds that individual’s inventory balance exceeds GEL 45,000. Besides, the status is lost if an individual registers as a VAT payer.

What are the pros and cons of Micro Business status?

Apart from significant advantages associated with the tax reliefs discussed above, Micro Business status has some disadvantages compared to an LLC (Limited Liability Company). Micro Business status owner is personally responsible for business liabilities. For example, if a business owes 100,000 GEL to suppliers (or banks) and is unable to pay, the creditors are entitled to request payment directly from the individual’s private property. In case of LLC, on the other hand, creditors can only request repayment from the company’s assets and not from the private property of the business owner.

Small Business status is associated with significant tax benefits in Georgia. Therefore, investors are often interested in the subject. In this article, we will be discussing exactly what are the tax benefits, who can obtain the status, in which cases does an investor lose the status and what are the pros and cons of the status compared to an LLC.

 

What are the exact tax benefits of the Small Business status?

Small Business status entitles an individual to only 1% personal income tax (PIT) instead of standard 20%. Besides, participation in state pension scheme is voluntary. The pension scheme is only applicable to Georgian residents. Therefore, we will continue our discussion excluding the pension scheme effect.

Let’s compare taxation of Small Business status holder to taxation of an ordinary employee. For example, if a company pays net 1,000 GEL to an employee, this means that its total salary expense, including the PIT, equals 1,250 GEL (1,000/0.8). Now let’s see what happens if the company pays the budget allotted for the employee compensation to a Small Business status owner instead. In this case, the individual (the status owner) will pay only 12.5 GEL (1,250*1%) in taxes and will receive net payment of 1,237.5 GEL (1,250*99%). Simply put, the status owner receives 237.5 GEL more (1,237.5 – 1,000) due to PIT tax saving compared to an ordinary employee.

 

Who can obtain the Small Business status?

Often investors assume that registering as an Individual Entrepreneur is enough to receive the tax benefits in Georgia, however Individual Entrepreneur should also obtain Small Business status from the Revenue Service of Georgia.

Our company offers all necessary accounting services associated obtaining the status.

Individual Entrepreneur can obtain the status in case his/her business activities are not one of the, so called, “prohibited activities”, meaning activities in case of which Small Business status is not available. Such activities include medical, architecture, legal, notary, consulting, audit etc. The full list is available on the webpage of Legislative Herald of Georgia.

As an additional requirement, to obtain Small Business status, an individual’s revenue should not exceed 500,000 GEL. If such revenue exceeds 500,000 GEL for two consecutive years, individual will lose the status. If in some years, but not in consecutive years, individual’s revenue exceeds 500,000 GEL, then he/she must pay 3% income tax instead of 1%. Individual will be taxed by 3% starting from the month of exceeding the limit, up to the end of the calendar year.

 

In which cases does an individual lose Small Business status?

As discussed above, the status is lost if an individual’s revenue exceeds 500,000 GEL for each of two consecutive years.

Besides, the status is lost if an individual was penalized for violation of rules of use of cash terminal or if he/she conducted the called “prohibited activities” discussed above.

 

What are the pros and cons of Small Business status?

Apart from significant advantages associated with tax reliefs discussed above, Small Business status has some disadvantages compared to an LLC (Limited Liability Company). Small Business status owner is personally responsible for business liabilities. For example, if a business owes 200,000 GEL to suppliers (or banks) and is unable to pay, the creditors are entitled to request payment directly from the individual’s private property. In case of LLC, on the other hand, creditors can only request payment from the company’s assets and not from the private property of the business owner.

Taxation of crypto assets is a very popular topic in the modern world. Ministry of Finance of Georgia published a decision in June 2019 which shed some light on the approach to taxation of crypto assets. We provide all relevant accounting services in Tbilisi, Batumi, and other large cities of Georgia to more than 350 clients and this article provides answers to the questions frequently asked by our clients regarding crypto-currency taxation.

 

I own a company which sells crypto in USD, EUR, or other currencies, should I pay VAT (value-added tax) on my revenues?

The short answer is – no.

In accordance with the state decision, from taxation perspective, crypto assets are considered equivalent to cash alternatives. Therefore, sale of crypto assets represents equivalent of currency-exchange operation. As a result, as exchange of USD in EUR would not be subject to VAT, similarly trade of crypto assets in exchange for USD, EUR or even other crypto currencies is not taxable by VAT.

 

My company owns crypto mining hardware and earns crypto assets, would my revenue be subject to VAT?

To answer this question, we should distinguish between two scenarios:

1. Company itself earns crypto currencies from mining; or
2. Company rents out its mining hardware to third parties and earns rent income from the transaction

In the first scenario, when company itself earns crypto assets from mining, its revenues are not taxable by VAT.

In the second scenario, when company rents out its mining hardware to third parties and these third parties are the ones who earn crypto currencies, the company’s revenues would be subject to 18% VAT if it rents out the mining hardware within the borders of Georgia i.e., to entities registered in Georgia. However, if company rents its mining hardware outside Georgia, i.e. exports services to foreign counteragents, then its revenues would not be subject to VAT. This is because, in accordance with the state decision, renting out mining hardware qualifies for “provision of computing power” and is therefore taxable by VAT in case of local revenues and is exempt from VAT in case of exports.

 

Would I have to pay PIT (Personal Income Tax) on employee salaries if I pay them in crypto assets?

The short answer is – yes.

Even though the state decision does not specifically mention the taxation of salaries paid in crypto assets, from other parts of Georgian Tax Code, it can easily be deducted that the salaries paid in crypto are subject to PIT. Furthermore, any compensation of employees in any non-cash assets, for instance compensation by food, clothes or literally any other non-cash items are subject to PIT. Besides, similarly to ordinary salary payments in cash, salary payments in crypto assets are subject to mandatory pension payments (not applicable to foreign employees). For instance, if you transfer compensation in cryptos equivalent to USD 1,000 to employee’s crypto account, then your company must pay USD 301 to the state (1,000/80%/98%*102% – 1,000), out of which USD 250 represents PIT paid to Revenue Service of Georgia and USD 51 represents pension contributions paid to Pension Agency of Georgia. If this was not the case, companies would have a room to manipulate and avoid paying taxes simply by paying salaries in crypto instead of local currencies. Note that pensions are only applicable to citizens of Georgia and are not applicable to foreign employees. Therefore, it is important to file all relevant tax declarations. Our company provides accounting services in Tbilisi, Batumi, and other large cities of Georgia. One third of our clients are foreigners.

It should be noted that in Georgia, the only legal form of payment is Georgian Lari. Therefore, when we discuss payments in cryptocurrencies, we always mean payments through intermediaries, that convert the cryptocurrencies in Georgian Laris and transfer the equivalent Georgian Laris to the receiver.

 

My company earns profits by crypto trading, do I have to pay profit and dividend taxes upon distributing dividends?

The short answer is – yes.

In accordance with Georgian legislation, most companies pay profit taxes only upon distributing dividends and are free from taxation in case of reinvestment. This is also true for crypto trading companies. For example, if company has earned USD 1,000 in profits and the owner would like to extract dividends, then the company must pay USD 192.5 in profit and dividend taxes (1,000 – 1,000*85%*95%), and the remaining USD 807.5 (1,000*85%*95%) represents net dividend after taxes received by the owner.