1.5 Tax Regime
1.3.3 Taxation System and Tax Rates in Georgia
Legal Framework. The Tax Code of Georgia, adopted on June 13, 1997,[2] is the principal law on taxation policy and administration. Other legislation that regulate taxation include the Administrative Offences Code, the Criminal Code, bankruptcy legislation, customs legislation, the Law on the Road Fund of Georgia, and the Law on the Medical Insurance Fund of Georgia.
The taxation system in Georgia includes both national and local taxes; the latter are set by local authorities following guidelines and limits set forth in the Tax Code. Every taxpayer must register with their regional tax inspectorate and is given a tax identification number, which must be indicated on all tax documents.
Taxes Paid by Individuals, Individual Enterprises.
Income Tax. Income tax must be paid on wages and income earned from economic activity, including income received in non-monetary form. Physical persons, both resident and non-resident, individual enterprises, and entrepreneurs are subject to this tax. Under Georgian law, residents are physical persons in the territory of Georgia for more than 182 days during any 12-month period ending in a given tax year.
An individual enterprise is defined as an entity owned and managed by a single person, an enterprise run solely by family members, or a farm solely owned by an individual or members of that individual’s family. Physical person entrepreneurs are individuals who engage in entrepreneurial activity without first establishing themselves as legal persons (and in accordance with the entrepreneurs law). Physical person entrepreneurs and individual enterprises with annual gross income equal to or less than 24,000 GEL are subject to a presumptive tax in lieu of an income tax. The presumptive tax is described in the next section.
Georgian residents must pay income tax on gross income from all sources (Georgian and non-Georgian) received during the tax year, regardless of where the income was earned or paid, less allowable deductions.
Non-residents must pay income tax, but only on income received from Georgian sources. Non-residents who engage in economic activities through a permanent establishment are subject to profit tax on gross income received during the tax year from Georgian sources connected with the permanent establishment, less allowable deductions.
Taxable income is composed of the following:
· Salaries and wages
· Dividend, interest, and royalty payments
· Income from the lease or rental of property
· Income from the write-off of debts
· Income received from the supply of goods or performance of services
· Gains from the sale of assets
· Income received as a result of the restriction or closing of an entrepreneurial activity
· Income from the sale of shares in an enterprise
· Income in the form of insurance payments paid under agreements for the insurance or reinsurance risk in Georgia.
In addition to monetary wages, benefits are considered wage income and are taxable as part of gross income. Generally, benefits are included in income at the market price at the moment of receipt, reduced by any portion of the benefit paid by the employee. These include: use of an automobile for private service; gifts of goods or gratuitous performance of services; educational assistance to the employee or dependents; and employee expenses reimbursed by the employer.
Table 1.4.1.1 shows income tax rates. Income tax on dividends, interest payments, and payments to non-residents are withheld at the source of payment and are subject to different rates. Dividends and interest payments are taxed at the rate of 10 percent. Dividends and interest payments received by physical persons, taxed at the source of payment, are not subject to additional taxation. Further, taxes paid on the first 3,000 GEL of combined interest and dividends may be applied to reduce the taxpayer’s tax liability, assuming adequate documentation of the tax payment is provided.
Table 1.4.1.1: Income Tax Rates
|
Amount of taxable income during the tax year |
Tax rate |
|
Up to 200 GEL |
12% of the taxable income |
|
201 to 350 GEL |
24 GEL + 15% of the amount in excess of 200 GEL |
|
351 to 600 GEL |
46.5 GEL + 17% of the amount in excess of 350 GEL |
|
More than 600 GEL |
89 GEL + 20% of the amount in excess of 600 GEL |
Source: Tax Code.
Tax agents who withhold tax at the source of payment are required to:
· Transfer the tax to the budget when making payments to physical persons;
· When paying wages, issue to the physical person receiving the income (at his or her request) a statement with the person’s name, amount and type of income paid, and amount of tax withheld; and
· Within 30 days of the end of the tax year, present to the tax agencies and, if requested, to the person paid, a statement containing the person’s registration number, total income, and total amount of tax withheld during the year.
Physical person entrepreneurs and individual enterprises are required to submit income tax payments in three instalments, based on their income tax liability for the previous year. Instalments are applied against the taxpayer’s actual liability. Payments may be reduced if income in the current year is expected to be at least 30 percent less than income in the previous year. Taxpayers with no income from the previous year must make payments based on actual income during the previous quarter.
Tax payers[3] are required to submit returns before April 1st of the year following the reporting year. Before the income tax return due date, taxpayers may apply to the tax authorities for an extension of time to submit their returns. Taxpayers who cease entrepreneurial activity must submit a tax return within 30 days of the cessation of activities.
Profit Tax. Profit taxes must be paid by Georgian entities and foreign entities with permanent establishments in Georgia. Foreign entities that do not have permanent establishment presence in Georgia are taxed via a withholding tax at the source of payment, as stated above. Enterprises are defined as:
· Legal persons established according to the legislation of Georgia
· Corporations, companies, firms, and other entities established pursuant to the legislation of foreign states
· Branches and other separate units that are structural units of the entities indicated in the first bullet and that have their own balance sheet and a separate settlement or other account.
Georgian and foreign enterprises are distinguished by place of activity and management. A Georgian enterprise has its place of activity or management within the territory of Georgia, whereas a foreign enterprise has its place of activity or management outside the territory of Georgia. If there is more than one place of management or activity, or the place of management and activity do not coincide, then the predominant location should be used to determine the place of activity or management.
Individual enterprises and physical person entrepreneurs are subject to income tax (or presumptive tax), not profit tax. Branches and other units of an enterprise do not pay profit tax separately, but aggregate profit with the main enterprise, which pays the full profit tax.
Georgian enterprises are taxed on gross income, which includes all income regardless of its source or place of payment, less allowable deductions. The profit tax is a flat rate of 20 percent. Foreign enterprises are also subject to profit tax, the extent to which depends on whether the foreign enterprise is connected to a permanent establishment.
Foreign enterprises that conduct economic activity through a permanent establishment are subject to profit tax on gross income, less deductions, from Georgian sources connected to the permanent establishment. Foreign enterprises that do not conduct economic activities through a permanent establishment must pay profit tax on gross income from Georgian sources (no deductions are allowed), and the tax is withheld at the source of payment. However, non-resident taxpayers (including foreign enterprises) who receive certain types of income (e.g., insurance payments, royalties, management fees, income from works or services) may file a return and claim deductions as if this income was connected to a permanent establishment. The withholding rates for certain types of income are as follows:
· Dividend and interest payments—10 percent
· Insurance proceeds—4 percent
· Telecommunication and transportation services, shipments, and oil and gas transactions—4 percent
· Royalties, management fees, income from performing work or rendering services (except income earned as wages), income from leasing movable property, income from management, financial, and insurance services—10 percent
· Certain oil and gas profits—10 percent.
Foreign enterprises receiving profits from the sale of some stocks, assets, and property not connected to their permanent establishment must pay profit tax, with allowable deductions, on the income from these sales. Annex D provides a listing of profit tax exemptions as well as allowable deductions from gross income.
Table 1.4.1.2 summarizes the asset categories into which fixed assets subject to depreciation are grouped.
Table 1.4.1.2: Summary of Asset Categories
|
Group |
Types of Fixed Assets |
Percentage Depreciation |
|
1 |
Passenger automobiles, automobile and tractor equipment for use on roads, special instruments, miscellaneous accessories, computers, peripherals and equipment for data processing and storage. |
20 |
|
2 |
Automotive transport, trucks, buses, special automobiles and trailers, machines and equipment for all sectors of industry and the foundry industry, forging and pressing equipment, electronic equipment, construction equipment, agricultural machines and equipment, office furniture. |
15 |
|
3 |
Railway, sea, and river transport vehicles; power machines and equipment; turbine equipment; electric motors and diesel generators; electricity transmission and communication facilities; pipelines. |
8 |
|
4 |
Buildings and structures |
7 |
|
5 |
Assets subject to depreciation not included in other groups. |
10 |
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