Tax system in Georgia offers many significant benefits to investors and is designed to attract foreign investments. There are six broad types of taxes in the country:
Besides, there are several special tax statuses, which provide significant benefits to investors. These benefits include, but are not limited to:
Our company provides accounting services in Tbilisi and Batumi and offers expert advice on all aspects of the tax system in Georgia.
Georgia in on “Estonian Model of Profit Tax”, meaning that companies in Georgia do not pay profit tax unless they distribute profits and pay dividends to shareholders. Unless company pays dividends, profit tax is zero.
Under Georgian tax law, when dividends are distributed, the company is required to pay both income tax and dividend tax. The income tax rate stands at 15%, while the dividend tax rate is 5%. For example, if a company distributes a 100 GEL dividend, the owner would receive a net amount of 80.75 GEL, which is calculated by multiplying 100 by 85% (100% – 15% profit tax) and by 95% (100% – 5% dividend tax).
However, no profit tax is paid on the return of invested capital to shareholders. Whether taxes apply or not depends on the nature of the distribution – a capital return differs from a dividend distribution. It’s important to recognize the difference between these two: when distributing invested capital, the company does not owe income or dividend taxes. For instance, if an owner withdraws 100 GEL from invested capital, unlike with dividends, the company does not pay 19.25 GEL in taxes, so the full 100 GEL is received by the owner without any deductions.
Dividends – represent the distribution of a company’s profits. These are the earnings the company has generated through its operations, often accumulated over time. When distributing profits, the company is obligated to pay both income and dividend taxes as previously mentioned.
Invested capital – refers to the equity contributed by the owners. Unlike accumulated profits, invested capital represents the funds provided by the owners when the company was established or afterward. When a company returns this capital, no income or dividend tax is due.
Profit tax rate applicable to entities holding International Company Status is 5% instead of standard rate of 15%. Additionally, profit tax rate applicable to entities holding Virtual Zone Entity status is zero for portion of profits generated from services provided to foreign entities.
Most companies in Georgia are subject to VAT of 18% on their taxable turnovers (revenues). VAT is paid monthly. It is mandatory to register as a VAT payer if entity’s taxable turnover for the last 12 months exceeds 100,000 GEL. On the other hand, entities can take credit on the VAT they have paid to their suppliers (“input VAT”). To be able to take credit for the input VAT, entity itself must be registered as a VAT payer. Entities can voluntarily register as VAT payer even if their taxable turnover is less than 100,000 GEL in the last 12 months and therefore it is not mandatory for them to register as VAT payer.
Notably, VAT does not apply to some revenues, including, but not limited to:
Reverse-charge VAT (RC VAT) is a type of VAT that is paid on services purchased from foreign providers. Typically, VAT is reported and paid by the service provider, not the service recipient. However, in the case of RC VAT, it is the responsibility of the service recipient to file the tax returns and settle the RC VAT. This is due to the fact that the service providers are based abroad, and as a result, local tax authorities cannot collect taxes directly from them. Consequently, the obligation to declare and pay RC VAT falls on the service recipient. However, a company can take credit for the paid RC VAT and can use it to offset its other tax liabilities. To be able to take credit for RC VAT, entity must be voluntarily or mandatory registered as a VAT payer. To encourage foreign inflows, in accordance with Georgian Tax Code, entities, which source their revenues from exports, are privileged in that they can take credit for input VAT, regardless of the fact that they do not pay VAT on revenues generated from exports.
PIT in Georgia is 20% of gross compensation paid to employees. For example, if an employee is paid 100 GEL net, PIT is 25 GEL, which is calculated by dividing 100 GEL by 80% (“gross-up”) and then multiplying the amount by 20%.
Additionally, there is a pension scheme operated by the state. Mandatory pension contribution by employer is 2% on its employees’ gross salaries. In addition, 2% is contributed by the employees themselves. However, depending on their age, not all employees are involved in the pension scheme in Georgia. While pension contribution is not classified as “tax”, it is an important component in deriving the total cost of employment in Georgia.
For instance, in a scenario where a company pays an employee a salary of 100 GEL, employers are required to pay a 20% Personal Income Tax (PIT) on salaries and benefits, along with a 4% pension contribution, where 2% is covered by the company and 2% by the employee. As a result, the company’s total salary expense, including taxes, is calculated by dividing 100 GEL by 98%, by 80% and multiplying by 102%. Thus, when an employee participates in a pension scheme and the company pays a net salary of 100
GEL, the company must also contribute an additional 30.12 GEL for PIT and pension contributions. Of this amount, 25 GEL accounts for PIT, while 5.102 GEL is allocated to the pension contribution.
Personal income tax rate applicable to entities holding International Company Status is 5% instead of standard rate of 20%.
The related concept to personal income tax is the “Small Business Status”, which can be applied to individual entrepreneurs. If an individual holds such status, the income tax applied to such individual is 1% instead of standard rate of 20%. In addition, involvement in the pension scheme is not mandatory for individual entrepreneurs regardless of their age.
An Individual Entrepreneur can attain this status provided their business activities do not fall under the “prohibited activities”, which disqualify them from Small Business Status. Such prohibited activities include medical services, architecture, legal work, consulting services, etc. A comprehensive list is accessible on the Legislative Herald of Georgia’s website.
To qualify for Small Business status, an individual’s revenue must not exceed 500,000 GEL. If revenue surpasses this threshold for two consecutive years, the individual will lose their status. In instances where revenue exceeds 500,000 GEL in non-consecutive years, the individual must pay a 3% income tax instead of the usual 1%. This 3% tax applies from the month the limit is exceeded until the end of that calendar year.
For instance, if a company allocates a net amount of 100 GEL for employee compensation, the total salary expense, including PIT, amounts to 125 GEL (100 divided by 80%). However, if the company pays this amount to an Individual Entrepreneur, the individual will only owe 1.25 GEL (125 multiplied by 1%) in taxes, resulting in a net payment of 123.75 GEL (125 multiplied by 99%). Consequently, the status holder benefits by receiving an additional 23.75 GEL compared to a regular employee due to the tax savings from the PIT. Additionally, the status holder does not have to pay any pension contributions.
Property tax is 1% on average accounting balance sheet value of properties and equipment owned by a company. The average balance is derived by adding the beginning of the year accounting balance to year-end balance of properties and equipment and dividing the result by two. Unlike VAT, property tax is paid annually. The tax authority has a right to calculate taxes from market value, instead of accounting balance value if it is proved that the market value is different from the balance sheet accounting value by more than 10%. Effectively, this means that property tax is calculated from market value of property (unless the difference with accounting balance value is less than 10%, in which case accounting balance value can be used). The tax authority has the right challenge the balance sheet value used by entity for the purposes of deriving property tax. The only exception is when an entity has chosen an accounting policy to record its property and equipment at market value (over historical value accounting policy choice) and has its financial statements audited by an external auditor. If the latter two criteria are satisfied, then the tax authority will not challenge the accounting value of the property and equipment used by the company to calculate its property tax.
It should be noted that, unlike other property tax, the land tax is not based on the book value or market of the land. It is calculated based on the space of land owned by company. There are different land tax rates in different regions of Georgia. Therefore, if a company owns multiple lands in different regions of Georgia, the applied taxes will be different based on the different locations.
Import tax rates can be 12%, 5% or 0% depending on the type of goods imported. This tax is applied when an entity imports products from abroad and such products cross Georgian customs. The detailed list of products by the applied tax rates (12%, 5% or 0%) is presented in the Tax Code of Georgia.
Excise is paid by an entity if it produces, imports or exports certain products, which are called “excisable goods”. Products subject to excise include, but are not limited to alcoholic beverages, tobacco, petroleum products, motor vehicles, natural gas. Excise tax rates are variable by product types.
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