The information mentioned in the article is in accordence with the tax code of Georgia (consolidated version 15/07/2020)
While natural persons have to pay income tax, companies are liable to profit tax (or “corporate income tax”) in Georgia. From 1 January 2017, Georgia has switched to a new CIT (corporate income tax) system. Georgian government considered the Estonian 16 year experience with different corporate model as one of the potential ways forward and adopted changes to the country’s tax laws to introduce a new system of levying income tax on business. The changes fundamentally reformed the profit tax regime for Georgian companies and permanent establishments of nonresident companies. The profit tax regime, under which companies are subject to tax on their annual taxable profits, is changed to a system where tax has to be paid only if corporate profits are distributed, similar to the system adopted by Estonia.
Profit tax payer is:
- Resident enterprise;
- Non-resident enterprise carrying out the business in Georgia through permanent institution and/or receiving income from the source of Georgia.
Object of profit taxation
The object of profit taxation of a resident enterprise and of a non-resident enterprise conducting business in Georgia through a permanent establishment (on the basis of the activity of its permanent establishment, disbursements made/expenses paid by the non-resident enterprise, or the permanent establishment) shall be:
- a) Distributed profit;
- b) Costs incurred or other payments not related to economic activity;
- c) Free delivery of goods/services and/or transfer of funds;
- d) Representation expenses paid in excess of a limited amount determined under the tax code of Georgia.
The profit tax rate is 15%, but the amount subject to profit taxation shall be calculated by dividing the sum of a disbursement made/expense paid according to the object of taxation by 0.85.
Distributed profit is a profit distributed by an enterprise to its partner as a dividend in a monetary or non-monetary form. Under the tax code of Georgia the following items also should be treated as profit distributions:
- Any operation performed by an enterprise with a related party (who is not subject to profit tax) if the price of a transaction concluded between them is different from its market price and their relation affects the outcome of the transaction;
- Conduct of a controlled transaction if the established conditions for the transaction fail to satisfy the market principle;
- Any operation performed by an enterprise with a person exempt from income tax/profit tax (except for a budget organisation, the Legal Entity under Public Law – the Deposit Insurance Agency and the National Bank of Georgia) if the price of a transaction concluded between them is different from its market price.
Costs incurred or other payments not related to economic activity
The law provides a list of expenses that are not be considered to be related to economic activities, which are treated as deemed profit distributions, and the key categories of such expenses are the following:
- Costs that are not documented;
- Costs the purpose of payment of which is not to gain profit, income or compensation;
- The interest paid for a credit (loan) above the annual interest rate established by the Minister of Finance of Georgia;
- Costs paid by a person (except for a special trade company) for purchasing foreign goods from a special trade company in the amount exceeding the customs value of the goods, except for the costs not related to payments to the special trade company.
- Payments made to purchase debt securities issued by a person registered in a country with preferential tax treatment, as well as by a person exempt from profit tax;
- Contractual penalties and/or other fines paid to a person registered in a country with preferential tax treatment, as well as to a person exempt from profit tax which were incurred on the basis of contractual relations;
- Advance payments to a person registered in a country with preferential tax treatment, as well as to a person exempt from profit tax;
- Granting of a loan to a person registered in a country with preferential tax treatment, as well as to a person exempt from profit tax and/or payments made to purchase a claim against that person.;
- Loss incurred due to the transfer of the right to claim to and/or the denial of the right to claim for a person registered in a country with preferential tax treatment, as well as a person exempt from profit tax;
- A contribution made to the capital of a non-resident, as well as of a person exempt from profit tax, and/or a payment made to purchase a share/equity (except for a share/equity placed on a foreign recognised stock exchange);
- Granting of a loan to a natural person or a non-resident (except for the purchase of loan securities placed on a foreign recognised stock exchange).
- Securing of a loan obtained by a partner natural person or a partner non-resident from a third person with the funds deposited to a bank account. In such a case, the sum of an object of profit taxation shall be the amount of funds deposited to the bank account for securing the loan.
Free delivery of goods/services and/or transfer of funds
According to the law, a supply of goods/ services that is not made for the purpose of deriving profit, income or compensation are considered to be a gratuitous supply that is subject to tax as a deemed profit distribution. A shortage of inventory or fixed assets also are deemed to be a gratuitous supply of such goods at the time when the shortage is identified.
The following cases of free delivery of goods/services and/or transfer of funds shall not be subject to profit taxation:
- A donation made to a charity organisation during a calendar year not exceeding 10 % of the net profit gained by the organisation during a previous calendar year;
- Free delivery of goods or services, or transfer of funds that are taxed at source;
- Free delivery of goods or services, and/or transfer of funds to the state, a municipality or a legal entity under public law;
- Free provision of immovable property to a charitable organisation if the property recipient organisation does charitable work in relation to persons with disabilities from childhood and/or persons with severe and persistent disabilities for at least three previous calendar years.
The amount of representation expenses to be incurred during a calendar year shall be limited to 1 % of the income gained during a previous calendar year, and to 1 % of the expenses incurred if the expenses exceed the income gained.
The amount of representation expenses incurred during the calendar year of an enterprise establishment shall be limited to 1 % of the expenses incurred before the end of the current calendar year.
Links to main legislative acts of Georgia: