Category: კატეგორიის გარეშე

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.

Our clients often ask about tax-free zones in Georgia. Those are referred to as Free Industrial Zones or FIZs. In this article, we will be discussing what are FIZs and how can foreign investors benefit from them. We will also be answering the frequently asked questions.

 

What is Free Industrial Zone (FIZ)?

FIZ is not some virtual zone, but rather represents specific areas on Georgian territory. Currently there are four FIZs. One is in Tbilisi, another one is in Poti, and a couple more in Kutaisi. FIZ can be established on practically any territory of Georgia (except for protected territories of Georgia as determined by the local law), if such territory’s space exceeds 10 hectares. Decision about establishment of FIZ is made by the Georgian government. FIZ have their own customs from which you can enter or exit the territory. Payments in all currencies (including EUR and USD) are allowed on FIZ territory.

 

What is the purpose of FIZs?

Purpose of FIZs is to attract foreign investors, foster economic growth of Georgia and aid technological progress. Significant tax benefits are offered to FIZ entities.

 

List of tax benefits

Entities operating in the FIZs are entitled to the following significant tax benefits:

Corporate income tax – represents 0% instead of ordinary 15%

VAT on operations performed within FIZ territory and foreign product exports – represents 0% instead of ordinary 18%

Property tax on FIZ territory – represents 0% instead of up to 1%

Import tax – represents 0% instead of 5% or 12%

 

Frequently asked questions

Our clients often ask the following questions regarding the FIZs:

Are there any practical impediments to operating in a FIZ?

Upon exporting products from FIZ to Georgian territory or vice-versa, 4% import/export tax is applied. This is because the government wants to encourage exports from FIZ to countries outside Georgia. This tax often acts as an unpleasant surprise for interested entities and makes it more expensive to operate in the FIZ.

Besides, investors who plan to operate in FIZ should know that there are difficulties in opening bank accounts for such entities. Georgian banks are often unwilling to open bank accounts for FIZ companies since they find it difficult to identify substance of bank transfers. However, our company will assist you in selecting better alternatives for obtaining tax benefits (e.g. Virtual Zone Entity status) and will provide all necessary accounting services in Tbilisi as well as other large regions of Georgia. We will also provide all relevant legal advice along with respective bookkeeping services.

 

Is it efficient for my company to operate in FIZ or are there any better alternatives?

The short answer is – it depends. If your business is manufacturing and export outside Georgia, then you may be entitled to significant tax benefits. However, if your business is provision of services or buying and re-selling products without any manufacturing, in this case there may be some disadvantages in operating in FIZ, including lack of possibility to obtain tax reliefs.

It should be noted that if your business is related to IT industry, you may find it more efficient to obtain “International Company” or “Virtual Zone Entity” status. Details of the statuses are discussed in separate articles in our blog.

Our company is eager to serve your best interests in obtaining the above-mentioned statuses and provide any necessary accounting services in Tbilisi. We also provide bookkeeping services in Batumi, Kutaisi, Poti, Telavi and other major cities of Georgia.