Category: კატეგორიის გარეშე

International company status is available to foreign investors and can offer significant tax benefits to the qualifying entities. In this article we will be discussing the exact benefits of holding this status and will be answering the frequently asked questions. Our company will provide all necessary legal and accounting services needed to obtain and maintain this status.

 

What is International Company Status?

This status entitles entities to significant tax benefits. These are:

• Instead of personal income tax rate of 20%, the company pays 5% – for example if an employee has net EUR 1,000 monthly salary, instead of paying EUR 250 in taxes (1,000/80%-1,000) company, which has the status, only pays EUR 52.6 (1,000/95%-1,000)
• Instead of corporate income tax (profit tax) rate of 15%, the company pays 5%
• Instead of VAT (value-added tax) rate of 18%, the company pays 0% on exports

Due to the above listed tax advantages, it is worth knowing whether your company would be eligible for the status.

Our company offers bookkeeping services and files all relevant tax declarations.

 

What companies are eligible for International Company Status?

The status can be obtained only either by IT or maritime industry companies. To be eligible for the status, company must have a minimum of 2 years’ experience in the field. However, if entity has more than 50% shareholder company, which has 2 years’ experience, this satisfies the law requirement.

It should be noted that it is not mandatory that 100% of company’s revenues be generated from the relevant industries (IT and maritime), however other sources of revenues shall not exceed 2% it total during calendar year.

Our company will carefully consult you on the International Company Status application process and will file the application form on your behalf. After obtaining the status, we will provide all necessary accounting services. Our bookkeeping services also include all relevant tax declarations filing.

 

Frequently asked questions

Our clients often ask the following questions regarding the International Company Status:

If I establish an IT company which will provide services on the local (Georgian) market and more than 98% of revenues will be generated from IT services, will I be eligible for the status?

The short answer is – no.

It is not sufficient that your company’s revenues are generated from IT services. There is one more important criterion, which is not specifically mentioned in the state decree, however can be found in the application form. The additional requirement is that more than 98% of revenues must be generated from exports. In other words, to be eligible for the status, company must provide services to entities outside Georgia. Revenues generated from local entities shall not exceed 2%.

 

If my company does not have more than 2 years’ experience in the allowed fields (IT or maritime), however its owners (who happen to be individuals) have the relevant experience, will I be eligible for the status?

The short answer is – no.

The reason is that the state decree specifically mentions that shareholder company, and not shareholder individual, must have a minimum of 2 years of relevant field experience.

 

If you are a business owner, distributing dividends is important subject for you to consider. You may have questions such as: what taxes do I have to pay upon distributing dividends? When it is the most appropriate time to pay dividends? What is the difference between paying dividends and paying the invested capital?

This article provides useful information on what factors should you consider before you decide on distributing dividends.

 

What taxes do I have to pay upon distributing dividends?

In accordance with Georgian tax legislation, upon dividend distribution, company must pay income tax and dividend tax. Income tax rate is 15%, while dividend tax rate is 5%. For instance, if company decides to distribute 1,000 GEL dividend, the company’s owner will receive net proceeds of 807.5 GEL (1,000*85%*95%), while the remaining 192.5 GEL will be paid to Georgian Revenue Services.

 

When is it the most appropriate time to pay dividends?

Often, company owners make mistake by assuming that they can pay dividends and then reinvest it in the company if the latter needs the money. At a first glance, this might seem a valid approach, however, in this case, the company has to pay the above discussed taxes upon distributing dividends, which means that if the owner distributed 1,000 GEL dividend and therefore paid 192.5 GEL as taxes, in case company needs the money, the owner will only be able to invest back 807.5 GEL, since the paid taxes will not be returned. As a result, the company will have smaller amount of funds available to fund its projects. Therefore, distributing dividends is only appropriate when a company does not have such short-term plans and projects that would require reinvestment of the issued dividends in the near future. Otherwise, the company will have smaller funds available upon reinvesting the paid dividends.

 

What is the difference between paying dividends and paying the invested capital?

Often, company owners make mistake by assuming that the company will be taxed upon any distribution to shareholders. However, whether tax applies or not depends on the substance of distribution – dividend distribution is different from invested capital distribution. The distinction between these two types of distributions is crucial – upon invested capital distribution, a company does not pay income and dividend taxes. For instance, if a company’s owner decides to distribute 1,000 GEL from the invested capital, unlike dividend distribution, the company will not have to pay 192.5 GEL as taxes and 1,000 GEL will be fully paid to the owner, without any tax deductions.

To better understand the distinction between invested capital and dividend, we analyze each of them below.

Dividend – represents distribution of company’s profits. Company has earned profit as a result of its operations. These profits are usually accumulated over years. Dividend represents distribution of these accumulated profits. When company distributes profits, it must pay profit and dividend taxes as discussed above.

Invested capital – represents equity invested by the owners. Unlike accumulated profits, invested capital represents funds invested in a company by its owners upon the company’s establishment or after the establishment. When company distributes invested equity, it does not pay neither profit nor dividend tax.

Companies operating in any industry or market segment may need to obtain loans from banks. At this stage, many questions may arise, such as: what information do I have to present to the bank to obtain a loan? What collateral is needed for a bank loan? Is it better to take GEL loan, USD loan or EUR loan? What is the effective interest rate?

This article answers the above questions and provides useful information on bank loans and their characteristics.

 

What information do I have to present to the bank to obtain a loan?

In order to obtain loans from banks, the following information is often required:

• Information about revenues, which shall be provided by the company’s accountants and which is often verified through web-page operated by the Georgian Revenue Services (RS.ge);
• Information about the company’s expenses, which shall be provided by the company’s accountants;
• Bank statement, which reflects the cash turnover on the company’s bank accounts, typically for a period of a minimum of past several months;
• Company’s balance sheet, which reflects the company’s assets, liabilities and equity.
• Other relevant information that bank may need in the process of assessing the company’s solvency.

 

What collateral is needed for a bank loan?

Bank typically needs certain collateral to approve a loan. Collateral is the property that a company pledges as a guarantee for loan repayment. For instance, if you decide to take a loan to buy an office for your company, typically the bank would request the subject office to be pledged as a collateral for the loan. An alternative way would be to pledge a different property owned by the company as a collateral. In case the company fails to repay the loan, the bank would be entitled to possess the pledged collateral and sell it to cover the loan. Value of the property, which is intended to be pledged as a collateral, should typically be higher than the loan amount. For instance, if the property value is 100,000 GEL, bank may be able to only issue 80,000 GEL loan. This is necessary since, in case loan is not repaid by the borrower and the pledged property is to be sold to repay the loan, the selling process may take significant amount of time. To accelerate the sale, the bank may be forced to sell it for a discount to market value and price it at the so-called “liquidation value”. Another reason why the collateral value shall exceed the loan amount is that the bank assumes certain risks e.g. property devaluation risk.

 

Is it better to take GEL loan, USD loan or EUR loan?

As in the most cases, the answer to this question is – “it depends”. Both approaches – taking GEL denominated loan and taking foreign currency denominated loan – have its pros and cons as discussed below: key advantage of foreign currency loans (USD/EUR) is that they carry typically less interest rate as compared to GEL loans. For instance, USD denominated loan may carry interest rate of 8%, while GEL loan interest rate may be as high as 16%. The reason for this is that USD and EUR currencies are more stable, and GEL is less stable, which is natural and is caused by the fact that Georgia’s economy is less strong compared to that of the USA or EU.

On the other hand, key disadvantage of foreign currency denominated loans is that the borrower assumes exchange-rate risk, if, of course, its revenues are not earned in the same foreign currency as the loan itself. For instance, if company takes 100,000 USD loan when USD-GEL exchange rate is three to one (3/1) and in several months the exchange rate becomes three and a half to one (3.5/1), then in GEL terms, loan amount increases by 50,000 GEL and 100,000 USD is no longer 300,000 GEL as it was at the date of loan issuance, but instead is 350,000 GEL now.

 

What is the effective interest rate?

In accordance with Georgia’s law, any bank is obliged to let the borrower know the information about the effective interest rate. Typically, the effective interest rate exceeds the nominal interest rate. For instance, if a bank approves company 1,000 GEL loan with 10% nominal interest rate and 2% up-front loan issuance fee, the company will receive 980 GEL as net proceeds from the bank as opposed to the approved loan amount of 1,000 GEL. The 980 GEL is derived after subtracting 2% commission from the approved loan of 1,000 GEL i.e. 20 GEL. Therefore, the effective interest rate is calculated from the 980 GEL net proceeds which leads to higher interest rate as compared to the nominal interest rate. In other words, loan issuance fee increases the effective interest rate. Besides, sometimes banks have other fees and commissions as well, which cause the effective rate to be higher at say 10.5% or 11%.