Investment Knowledge:
Tax Basics
With the introduction of the new Tax Code in January 2005, Georgia launched a relatively straightforward tax system with low tax rates. The tax legislation consists of the Constitution of Georgia, international agreements ratified by the Parliament of Georgia and the Tax Code. Generally, international agreements will prevail over domestic legislation. In addition, the Georgian Ministry of Finance is entitled to issue instructions that should comply with the Georgian Tax Code.
Corporate Income Tax (CIT)
• CIT applies to legal entities, including foreign entities earning income from source in Georgia. It is currently rated at a flat 15%
• Interest, dividend and the majority of service income of foreign entities earned without a Permanent establishment (PE) in Georgia is taxed at source by a 10% withholding tax (WHT)
• The majority of business related expenses can be allowed against CIT taxable income.
Interest income of entities (except banks) is taxed at 10% WHT
Interest expenses are deductible up to24% per annum
• RE assets/shares contributed to a legal entity in exchange for at least 50% shares is not taxable supply. The value of the contributed assets in the hands of the legal entity is the same as the value in the hands of the contributor
• No depreciation can be recognized on land. Expenses on land are only be allowed when it is sold
• Buildings used in economic activity can be depreciated at 5% rate using the declining balance method of depreciation. Alternatively, full depreciation on real estate assets (excepta land) can be recorded in the period when exploitation of the asset is started
• 5% of annual capital expenditures can be allowed against taxable income
• The gain from the revaluation of real estate assets is not taxable/deductible. In addition, revaluation does not change the tax basis of the respective assets
• Losses can be carried forward up to five years
• Construction or controlling activities conducted in Georgia leads to PE status there. PE can be organized as an affiliated branch or a subsidiary of a foreign company
• The income of a PE of a foreign entity is taxed in the same manner as the income of a Georgian entity, i.e. at 15% rate of taxable income
• A registered PE in Georgia serves as a point of attraction for the income of aforeign company generated in Georgia without its PE therein
• There is no branch remittance (ordividend tax) applicable to the payment of an after-tax profit to a head office
• Head office costs can be re-charged to a Georgian branch office
• Any gain received from the sale of shares of a Georgian entity represents income generated from a Georgian source
• A gain received from the sale of shares of a foreign entity represents income generated from a Georgian source if at least 50% of the value of the shares is derived from property assets located in Georgia
• An entity incorporated abroad will be regarded as a Georgian entity if it is managed from Georgia
• There are no thin capitalization rules in Georgia
Property Tax (PT)
• PT is imposed on buildings at the rate of 1% of its average annual net balance sheet value
• PT is also applied to buildings under construction
• PT on non-agricultural land is imposed at 0.24 GEL per sqm multiplied by aregional coefficient
• Individuals do not pay PT on leased out property until January 1st 2009
Value Added Tax (VAT)
• The supply of goods and services performed on Georgian territory is subject to VAT at a rate of 18%. The import of goods is also subject to VAT.
• No VAT is chargeable to an entity for the supply of goods and services conducted in Georgia if the amount of taxable transactions in any 12 month period exceeds GEL100,000
• The supply of land is not subject to VAT, but the supply of buildings located in Georgia does attract VAT
• VAT on purchases (input VAT) is creditable against VAT on sales (output VAT) subject to a special VAT invoice
• Extra VAT can be offset against other tax liabilities or reclaimed back from a state budget
• VAT is accounted for on an accrual basis
• Reverse VAT is imposed by a VAT tax payer on a VAT taxable service or royalty payments to a foreign entity
• The contribution of assets into the capital of an entity as well as the supply of assets within an organizational restructuring are exempt from VAT
Personal Income Tax (PIT)
• PIT applies to individuals, including individual entrepreneurs
• PIT is rated at a flat 25%, but it has been reported that it may be reduced to 15%
• The gain from the sale of real estate assets (including the sale of shares in real estate companies) as well as rental income is subject to 12% PIT provided that the gain/income is not received from entrepreneurial activity. After January 1st 2011 the rate will go up to a regular rate
• The gain from the sale of real estate assets/shares held for at least two years is exempted from PIT provided that this gain is not received from entrepreneurial activity
• Interest and dividend incomes of individuals is taxed at source at a 10% rate (WHT) and are not subject to any further taxation
• Interest expenses are deductible up to 24% per annum
• Real estate assets/shares contributed to a legal entity in exchange for at least 50% shares in it is not a taxable supply. The value of the contributed assets in the hands of the legal entity is the same as the value in the hands of the contributor
• The gain from the receiving of real estate assets/shares by an individual as a result of the liquidation of a legal entity or reduction of its capital is not taxable
• No depreciation can be recognized on land. Expenses on the land may only be allowed when it is sold
• Buildings used in economic activity can be depreciated at 5% per annum using the declining balance method of
• depreciation. Alternatively, full depreciation on RE assets (except land) can be recorded in the period when exploitation of the asset has started.
• The gain from the revaluation of real estate (unrealized gain) is not taxable/deductible. In addition, revaluation does not change the tax basis of the respective assets
• The income received by Georgian resident individuals from foreign sources is no longer taxable in Georgia
Customs Tax (CT) and Excise Tax (ET)
• Goods imported to Georgia are subject to customs tax and custom duty
• The majority of goods are taxed at a zero rate CT, with 5% or 12% CT applying to the remainder.
• Customs duty is an immaterial amount and is charged on each customs clearance procedure
• Excise tax is not a relevant tax for real estate operations as goods imported or produced for real estate needs are not normally excisable goods.
Double Taxation Treaty between Netherlands and Georgia
• Applies to residents of Georgia or Netherlands or both with regard to taxation of income (PIT and CIT in
• Georgia)
• The gain/income from the sale/letting of real estate assets located in Georgia is taxed in Georgia; however, the sale of shares in a Georgian company, including shares in a real estate company made by a NL resident is exempted from taxation in the case of Georgia.
• No Georgian CIT or PIT applies to the service, interest and royalty income received by a NL resident in Georgia
• Dividend tax is lowered to zero if the NL resident contributes more than USD 2 million equivalent in Euros and holds at least 50% of shares in a Georgian resident entity paying dividends
• The gain from the sale of shares in an entity, the value of assets of which is mainly derived from real estate assets located in Georgia, is not taxed therein.
