Category: კატეგორიის გარეშე

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.

Virtual Zone Company status is a special status assigned to companies in accordance with Georgian legislation. The status offers significant tax benefits to foreign investors. In this article, we will be discussing what exactly do businesses need to obtain the status and what are the key tax benefits.

We provide accounting services to entities from all industries, including those having the Virtual Zone Entity status.

 

What is Virtual Zone Entity status?

Companies holding this status are entitled to significant tax benefits. Namely, such entities are free from:

• corporate income tax on profits generated from services provided to entities outside Georgia
• VAT on services provided to entities outside Georgia
• Export taxes

To illustrate how exactly do the tax benefits work, let us discuss an example: ordinary corporate income tax rate (“CIT”) in Georgia represents 15%. Besides, upon dividend distribution, there is additional 5% dividend tax. If, for instance, company distributes EUR 1,000 as a dividend to a shareholder, the company would have to pay CIT and dividend tax in aggregate EUR 238.4 (1,000/0.85/0.95-1,000), however, if company has Virtual Zone Entity status, it will only have to pay EUR 52.6 dividend tax (1,000/0.95-1,000). In other words, on every EUR 1,000 dividend company saves EUR 185.8 in taxes (238.4-52.6), which means that on EUR 1,000,000 it would save 185,800 EUR in taxes.

 

Which companies are entitled to Virtual Zone Entity status?

Only IT companies are entitled to this status. These are companies representing information technology systems study, support, development, design, and implementation, which leads to creation of software products.

We should also note that tax relief applies only to exports. Providing services to local companies or individuals is not exempt from taxation and will be taxed.

 

Frequently asked questions

Our client companies frequently ask the following questions:

 

Whom should I approach to obtain Virtual Zone Entity status?

Status can be obtained by filling in the electronic declaration form on the webpage of Financial Analytical Service of Georgia: www.fas.ge

Our company provides all relevant legal, accounting, and bookkeeping services necessary to obtain and maintain the status.

 

What is the approximate time needed to obtain the status?

The response will be received no later than 10 business days after filling in the above discussed declaration and additional 2 business days are needed for the electronic certificate to be generated on the specially designated state portal (www.newzone.mof.ge).

Our company will provide all accounting services related to the status and will file respective tax declarations on your company’s behalf.

 

What else is needed to obtain the Virtual Zone Entity status?

In the legislation application guidance, it reads that to be entitled for tax benefits, it is necessary that company operates from Georgia, which, in practice, means that the product or service must be created in Georgia and company must also be using local work, including relevant profile work. For instance, if company has only hired accountant and administrator in Georgia, they cannot be regarded as relevant profile work. It is necessary to also hire local IT employees, such as developers.

 

What happens if company provides services both through exports as well as on Georgian territory?

Tax benefits only apply to portion of profits that are earned through exports. Therefore, the company should identify such portion, meaning that entity should calculate the share of tax-free profit from the aggregate profits. In case expenses cannot easily be allocated between exports and local revenues, legislation allows to allocate them in direct proportion to revenues. For example, if company earned a profit of EUR 400 thousand and generated aggregated revenues of EUR 2 million, of which EUR 1.5 million was from exports and EUR 0.5 million was generated locally, it can be deemed that tax-exempt profit comprises 75% (1.5/2), or EUR 300 thousand (400*75%), which can be distributed without paying corporate income tax, while the remaining EUR 100 thousand is subject to taxation.

 

Which is better for my company – Virtual Zone Entity status or International Company status?

Short answer is – International Company status is better.

International Company status is another status offered by Georgian legislation to IT companies. In case of International Company status, tax relief applies not only to corporate income tax, but also to personal income tax. However, obtaining International Company status is more complicated. More details on International Company status can be found in a separate article in our blog.

Our company provides all legal, accounting, and bookkeeping services necessary to obtain and maintain both statuses.