Georgia is a country in the southern Caucasus. It opens to the Black Sea in the west with the Great Caucasus Mountains in the north and the Lesser Caucasus Mountains in the south. The country is bounded to the north by Russia, to the south by Turkey and Armenia, and to the east by Azerbaijan.
Georgia is largely mountainous with diverse natural conditions. Local climate is of a transitional character from Asian to European.
On the basis of the socio-historical characteristics of the country,some scientists consider Georgia part of Europe. Georgian socio-political and cultural history can also be considered European.
Georgia’s borders run for 1771 km (310 km of which (17.5%) is coastline). As noted, the north of the country is occupied by the Greater Caucasus chain (with the highest point being Mt. Shkhara.
Georgia (Sakartvelo) is usually described as a democratic semi-presidential republic. The supreme legislative body is the unicameral parliament elected every four years.
The independent judiciary is represented by the Constitutional Court and separate courts sharing common jurisdiction.
The official language is Georgian. The Georgian language is distinct and is completely unrelated to Indo-European, Semitic or Turkic languages; indeed, the Georgian alphabet is one of only 14 existing alphabets in the world.
Membership of international organisations
Georgia is a member of several international organizations, including:
- The World Trade Organization (WTO)
- The United Nations (UN)
- The Organization for Security and Co-operation in Europe (OSCE)
- The International Monetary Fund (IMF)
- The Council of Europe
- The Organization of the Black Sea Economic Cooperation
- The Community of Democratic Choice
- The GUAM Organization for Democracy and Economic Development.
Economic background
The Gross Domestic Product (GDP) in Georgia was worth 14.32 billion US dollars in 2016. The GDP value of Georgia represents 0.02 percent of the world economy. GDP in Georgia averaged 7.46 USD Billion from 1990 until 2015, reaching an all time high of 16.51 USD Billion in 2014 and a record low of 2.51 USD Billion in 1994.
The economy of Georgia has made good progress since 1995, with the aid of assistance received from the World Bank and the IMF. In the past, Georgia suffered from a chronic failure to collect taxes on earnings. However, since 2004 the government has made great progress and has reformed the taxation code, improved tax administration and enforcement, and cracked down on corruption (including cronyism and nepotism).
Forms of business organisation
Under Georgian law, legal entities are divided into two broad categories: entrepreneurial legal entities and non-profit legal entities. Individuals may also conduct business as sole proprietors without establishing any separate legal entity. Companies are required to have their own name, management and registered offices. In addition to their legal address, entrepreneurial legal entities may submit to the registration authority information about an alternative legal address and emailaddress.
Companies established in Georgia are subject to Georgian law, but agreements concluded by Georgian companies can be governed by the law agreed to between the parties, unless otherwise determined by the Georgian Act of International Private Law. Foreigners can become a partner or be appointed as director of a Georgian company and they do not need a permit to do so. In case foreigner desires to become a partner in a company, that owns agricultural land, unofficial restrictions might apply.
Legal entities for carrying out business
The Georgian Entrepreneurs Act (1994) defines five types of legal entities that may carry out entrepreneurial activities:
- Limited liability company
- Joint stock company
- Cooperative
- Joint liability company
- Limited partnership
These entities can be categorized into two groups based on the type of liability: limited and unlimited liability. The first three listed above are limited liability in that their liability is limited to their property and shareholders’ liability is limited to the shareholder’s contribution to the share capital.
Limited liability company
The limited liability company is the most common form of business entity in Georgia. This is because limited liability companies have a less complicated organizational and management structure than the joint stock company and because of certain characteristics that are peculiar to limited liability companies. In contrast to other types of companies, the formalities required to establish and operate a limited liability company are much less complicated and expensive.
The most attractive characteristics of a limited-liability company are:
- It can be established by a single founder
- A founder can be a natural person or a legal entity
- There are no restrictions regarding the number of directors; it can be managed by a single
- Director or jointly by several directors
- There are no requirements regarding authorized and paid-up capital.
Companies owned by foreign investors
There are no specific regulations applicable to foreign individuals and foreign legal entities wishing to establish a company in Georgia. According to Georgian law, companies owned by foreign natural persons and foreign legal entities benefit from equal legal treatment and have the same right to establish business operations in Georgia by incorporating separate legal entities.
However, the incorporation of legal entities owned by foreign investors requires fulfillment of certain legal formalities. For example, foreign documents related to an investor must be notarized and certified with an apostle according to the Hague Convention 1964, or otherwise legalized.
Any type of enterprise permitted under Georgian law can be established by foreign investors without any restrictions, as long as they meet the normal legal requirements for establishing such an enterprise.
Representative offices and branches of foreign companies
An alternative approach for foreign investors is establishment of a branch or a representative office, rather than setting up a separate company. According to Georgian law, a branch or 20 representative office does not constitute a legal entity; it is simply an internal unit of the “parent” company. Therefore, a parent company bears full responsibility for the activities of its branch/ representative office. Since a branch/representative office is not a separate legal entity, the foreign company is liable to the employees and creditors of the branch/representative office for the actions of, and debts contracted by, its managers and agents on behalf of the branch/ representative office.
From a legal point of view, there is no difference between a branch and a representative office. But, in practice, representative offices are used to promote and supervise the business of the parent company. In contrast, a branch is actually used to carry out business activities.
Beneficial tax regimes
International Financial Companies, Special Trading Companies, Free Industrial Zone Enterprises, Special Trading Zones and Tourist Enterprises are special purpose entities that enjoy beneficial tax regimes.
Special tax rules related to an International Financial Company include:
- Exemption from corporate income tax on income received from financial transactions and provision of financial services, provided the income from the financial services is Georgian sourced and it does not exceed 10% of the company’s worldwide gross income
- Exemption from corporate income tax on gains received from the sale of investment securities issued by non-residents
- Exemption from corporate income tax on gains received from the sale of securities issued by an International Financial Company.
- Exemption from the obligation to withhold tax on interest payments
- The dividends received from International Financial Companies shall not be taxed at the source of payment
- Eligible for a general VAT exemption on financial operations and/or provision of financial services in Georgia.
Special Trade Company is an enterprise being granted a status of a special trade company for corporate income tax exempt purposes.
Special Trade Company is entitled:
- To re-export foreign goods from the customs warehouse
- To supply with and without status enterprises with foreign goods within customs warehouse
- To acquire foreign goods at price no less than customs value from no special trade status companies for further re-export and/or supply purposes within customs warehouse
- To receive income other than income from carrying out activities envisaged under listed above including: income exempt from profit tax (corporate income tax), income from supplying fixed assets used in economic activities for more than 2 years, income equal to the amount less than 1 mln Lari earned from Georgia source through tax year and 5% of customs value of foreign goods imported by the special trade company with exception of income exempt from profit tax and income from supplying fixed assets used in economic activities for more than 2 years.
Special Trade Companies must comply with the restrictions set out in the Georgian Tax Code related to allowed activities. In particular, Special Trade Companies are not allowed:
- To importing goods other than those intended for fixed assets;
- To acquire domestic goods on the territory of Georgia for their further supply purpose;
- To provide services to Georgian enterprise/natural person – entrepreneur or/and permanent establishment of a foreign enterprise;
- To own customs warehouse.
Special Trade Companies are exempt from corporate income tax (with exception of income received from supplying fixed assets used in economic activities for more than 2 years. Because of this, Special Trade Companies are a good choice for those who wish to use Georgia as their distribution hub from which to supply the region.
Free Industrial Zone enterprise is an enterprise established in accordance to the Georgian Law on “Free Trade Zones”.
Free Industrial Zone enterprise is obliged upon supply of goods to the taxpayer registered according to the Georgian legislation pay tax at 4% of income received/receivable (in case of free of charge supply – market value) from such supply by 15 of the month following the month of supply.
Upon purchase of goods (with the exception of the electricity, water and natural gas intended for local consumption and/or supply) from a taxpayer registered according to the Georgian legislation (except Free Industrial Zone enterprise) to pay tax at 4% of market value of purchased goods by 15% of the month following the month of purchase.
Not permitted operations of a Free Industrial Zone enterprise include the following:
- Purchase of services from the taxpayer registered according to the Georgian legislature (except Free Industrial Zone enterprise) except: security and/or property rental or lease services from an organizer and/or administrator of a Free Industrial Zone, transportation, communication, sewerage, audit and/or consulting services, financial operations and/ or financial services by licensed financial institutions fixed assets installation, and/or construction services, services defined by the Government of Georgia;
- Services provided to the company registered according to the Georgian legislature (except the free industrial zone enterprise).
Such companies are using following tax beneficial regime:
- Income of Free Industrial Zone Enterprise is exempt from corporate income tax;
- Free Industrial Zone enterprise is not obliged to withhold personal income tax at the source of payment;
- Supply of goods/services between companies operating in a Free Industrial Zone (including FIZ Enterprises) is exempt from VAT, but they cannot claim any input VAT;
- Interest and dividends paid by Free Industrial Zone Enterprise are not taxed and are not included in the recipient’s gross income;
- On services rendered by non-residents, FIZ Enterprises are not obliged to charge and pay.
Reverse Charge VAT
- Import of goods produced by FIZ Enterprise in a Free Industrial Zone into the economic territory of Georgia is exempt from Import Tax;
- Property of FIZ Enterprises, including land located in a Free Industrial Zone is exempt from property tax.
Special Trade Zone is an entity organizing trade in Georgia.
Special Trade Zone is obliged: to ensure accounting of the movement of the goods for the economic activities on the territory of the Special trade Zone, pay income/profit tax owed by person renting trade outlets and/or trading places for conducting activities in the Special Trade
Zone in accordance with the code, affix safety mark to goods in the territory if Special Trade Zone and make payments to their customers through a centrally managed cash machines.
Income received/receivable by the tenant of trade facility or/and trade space, located on the territory of Special Trade Zone as the result of goods sale, shall be taxed at the rate of 3% by the entity with Special Trade Zone status. Income derived on the territory of Special Trade Zone which has been taxed according to the above provision shall not be included in gross income of recipient and shall not be subject to further taxation.
The tax benefits envisaged for Special Trade Zone are following:
- For person who does provide goods solely on the territory of Special Trade Zone does not emerge an obligation of mandatory registration as VAT payer;
- Profit received by the Special Trade company within the allowed activities with the exception of profit received as the result of supply of fixed assets used by Special Trade.
Companies up to 2 years in economic activities is exempted from corporate income tax.
Tourist Enterprise is a legal entity that based on the certificate of status granted by the Georgian fiscal authorities, builds a hotel for the purpose to supply the assets/parts thereof to another person and then lease back from the latter. The status of Tourist Enterprise shall be granted to entity by the Georgia Revenue Service according to particular facility (hotel).
Tourist Enterprise is using following tax benefits:
- Benefit received by Tourist Enterprise in a form of goods/services supplied free of charge by the State is exempted from income tax
- Supply of the assets/part of the assets of hotel by tourist enterprise with the purpose to receive the hotel under the lease is exempted from VAT with input VAT right. If tourist enterprise receives the assets under the lease within 2 years from the supply the operation shall be exempted with input VAT right and the enterprise shall be entitled to file corrected return
- The supply of the hotel service free of charge for the period not exceeding 60 days by tourist enterprise or by a person that on the basis of contract is invited to operate and function the hotel.
INVESTMENT ENVIRONMENT
Investment opportunities and incentives
Located at the crossroads of Europe and Central Asia, Georgia is a bridge connecting several important economic regions with a total of 827 million people. It is a key link in the shortest transit route between Western Europe and Central Asia for transportation of oil and gas, as well as dry cargo.
The fundamental issues for the country’s progress are the formation of a financial sector, the dynamic development of financial markets and the creation of appropriate markets. Georgian investments are of huge importance. The long-term effects of foreign investment result in increased employment and increases in household income.
Georgia is developing its infrastructure and simplifying licensing and permits to ease constraints on business. The total number of required licenses and permits has been reduced by 84% since One of the reasons to invest in Georgia is the establishment of a Free Industrial Zone.
New enterprises
The Free Industrial Zone regime was introduced on 1 January 2008. In connection with the introduction, the Georgian Tax Code was amended to provide for three new types of entities: the International Enterprise, the Free Warehouse Enterprise and the International Finance Company.
THE TAX SYSTEM
INTRODUCTION
The system of taxes in Georgia consists of:
- State taxes, which are governed by the Tax Code of Georgia; and
- Local taxes, which are governed by the Tax Code of Georgia and established under local authority regulations.
The main taxes are as follows:
Direct taxes
- Corporate income tax
- Personal income tax
- Property tax
Indirect taxes
- Value added tax
- Import duty
- Excise duty
Other taxes and duties
Natural resources fees are regulated by the tax authorities and the Ministry of Environment of Georgia.
Duties on gambling are levied locally.
Incentives International Enterprise Special Trading Company International Finance
Company
Personal Income Tax
The rules for taxing employee salaries are determined by the government of Georgia
Income from selling securities issued by an International Finance Company is exempt Corporate.
Income Tax
Profit received from activities allowed in a Free Industrial Zone is exempt Profit received by Special Trading Companies from permitted activities. Profits earned from financial services are exempt;
Profits received from selling securities issued by an International Finance Company are exempt.
Value Added Tax
Supply of goods/services among enterprises of Free Industrial Zone are exempt.
Supply of foreign goods into the warehouse having the permission of warehouse activities is exempt from VAT with the right of VAT credit.
Customs duty
The importation of goods manufactured in a Free Industrial Zone is exempt.
Property Tax
Property located in a Free Industrial Zone is exempt from property tax.
Payment
Taxes and duties are assessed and payable in Georgian currency only.
Assessment
The tax authorities are authorized to make an assessment of the tax liability of every tax payer, tax agent, or other person liable to pay tax. The assessment is based on information contained in a taxpayer’s or tax agent’s tax returns, information concerning payment of a sum subject to withholding tax, and audit materials and other relevant information known to the tax authorities.
A tax payer is responsible for keeping documentation supporting the basis on which the registration of taxable objects and the filing of tax returns are carried out. Documents confirming receipt of revenues (profit), expenses incurred and paid (withheld) taxes must be kept for four years following the end of the relevant tax year (mentioned timeframe from 1 January 2017 is decreased till three years).
The tax authorities are entitled to carry out tax audits only in accordance with the Tax Code of Georgia. The tax authorities can adjust the amount of taxes due based on their tax review. They can also impose fines
CORPORATE TAX SYSTEM
Two models of CIT
From 1 January 2017 new model of CIT came into force in Georgia. Some entities are transferred to this model, while others are on the old model of CIT. All changes are given in details in the article “New model of CIT”.
Scope and extent
Corporate income tax is charged on the profits earned by a Georgian enterprise and profits derived by foreign enterprises carrying out their activities through a permanent establishment in Georgia and/or generating income from sources in Georgia.
Company residence
According to Georgian law, an enterprise is considered resident in Georgia if it is incorporated in Georgia or if it is deemed to have its main place of activity and/or its place of management in Georgia. All other enterprises are considered to be non-resident enterprises.
Taxable entities
The following persons are liable to corporate income tax:
- Georgian enterprises
- A foreign enterprise carrying out economic activities in Georgia through its permanent establishment
- A foreign enterprise deriving income from a source in Georgia
- Partnerships and other similar entities.
According to the Georgian Tax Code the following are not liable to corporate income tax:
- State-financed international and/or charitable organisations, except in respect of profits from economic activity
- Grants, membership fees and donations received by an organization
- Profits of the National Bank of Georgia
- Profits from the sale by the Patriarchy of Georgia of crosses, candles, icons, books and calendars used exclusively for religious purposes
- The part of profits gained from agricultural activity that is reinvested during three years from the end of the respective fiscal year
- Profits of an International Financial Company from the provision of financial services
- Profits from the sale of securities issued by an International Financial Company
- Profits received from selling free floating securities
- Income received by a non-resident from a Georgian source in respect of risk insurance and reinsurance
- Income received by a non-resident from leasing property situated in Georgia, other than the property of a Georgian permanent establishment
- Profit received from the sale of government or the National Bank of Georgia debt securities and interest profit from the above-mentioned securities and profit received from interest accrued on the funds deposited in the accounts at the National Bank
- Profits from activities allowed in a Free Industrial Zone by an International Enterprise
- Income of an investment fund received from the supply of financial instruments, performance of financial operations and/or provision of financial services, if the investment fund is an International Finance Company
- Income received by a Virtual Zone Legal Person, which are basically IT companies (that are engage in computer software creation) registered in Georgia, from the supply of IT produced products outside Georgia
- Reinvested earnings of medical establishments received from medical activities and applied towards the provision of material
- Profit received by Special Trading Companies from permitted activities, except for the profit received from sale of fixed assets used by the company for its economic activity for over two years.
Taxable income
The Georgian Tax Code levies corporate income tax on the worldwide profits of Georgian resident entities and on income sourced in Georgia and derived by foreign non-resident entities either through a permanent establishment or otherwise.
Gross income includes income from economic activities, interest income, royalties and rental income. Taxable income is calculated by adjusting accounting profits for non-taxable items and non-deductible items, and any other adjustments required by law.
Foreign enterprises having no permanent establishment in Georgia and generating income from sources in Georgia are subject to withholding tax at the source of payment.