International Aspects of Georgia’s Tax Legislation
Georgia is a developing, low-cost country with a growing economy and a stable, attractive tax system. This article provides a brief analysis and overview of certain international aspects of Georgia’s tax legislation, specifically– the rules of residence and permanent establishment, the country’s tax base, withholding tax rates, anti-avoidance rules, transfer pricing and tax treaty policy.
A natural person becomes a resident of Georgia for a fiscal year if they spend at least 183 days in the country during any 12 months that expire in this year. In addition, if a Georgian citizen is not a resident of any country in a particular year, they are considered a resident of Georgia if they request so.1
Corporations are considered to be residents of Georgia if their management and/or incorporation is carried out in this country.2
The definition of permanent establishment in the Georgian local tax legislation differs to some extent from the one provided by the OECD or UN.
Georgia’s general definition of permanent establishment (PE) is a certain place (not necessarily fixed) where a non-resident entity fully or partially carries out its economic activity.3 An exception to the rule refers to foreign entities providing services that fall into the scope of the Georgian law on oil and gas.4 Such companies are exempted from PE obligation.
Another significant deviation from the OECD is the definition of a dependent agent PE within Georgian legislation: the agent creates PE in the country if its control by a non-resident entity lasts for more than three months unless the following criteria are met:
• A person holds the status of professional agent, broker or mediator under the relevant legislation.
• A person is not entitled to conduct negotiations or sign on behalf of non-resident principle.5
In other words, even if an agent is not entitled to sign contracts and/or conduct negotiations, the possibility of the creation of a PE still remains if that person does not officially hold the status of professional agent, broker or mediator.
However, the local definition of PE is fully reliable only if a treaty does not exist with the residence country of a foreigner, otherwise the treaty overrides and only the provisions of this article more extenuating than a treaty definition of PE will be applicable.
Resident corporations are taxable on their worldwide income. Non-resident ones and natural persons pay taxes on Georgian sources of income only.6
In January of 2017, a new corporate income tax system was introduced. It envisaged that the tax is due only at the moment of profit distribution to shareholders or in equivalent situations of such distribution.7
WITHHOLDING TAX RATES
Interest, dividend and royalties paid to nonresidents are subject to 5% withholding tax. On payments for other services, a 10% tax is due.8 The rate is 15% if the abovementioned payments (except dividends) are made to offshore-based nonresidents.9
FOREIGN TAX CREDIT
Article 124 of the GTC says that if a Georgian company receives profit independently from a Georgian source, when the profit is taxed, a tax credit is available on the tax paid abroad up to the amount of which would have been paid if the source were Georgian.
Georgia has several anti-avoidance rules: general and specific. The general rule is prescribed in Article 73 of the GTC that enables a tax inspector to change qualification of a transaction based on its substance.
Notably, the substance over form principle is not frequently used by Georgian tax authorities. For example, to the author’s knowledge, a loan has never been qualified as a capital contribution by them so far.
The most notable specific anti-avoidance rules are Transfer Pricing, higher withholding tax rates on payment to offshore-based entities (both discussed in different sections of the article) and limitation deductibility linked with non-resident entities.
Payment for a service provided by a nonresident is deductible based on cash method, only after the actual payment is carried out.
Georgia does not apply the rule of thin capitalization and limitation of interest deduction based on EBITDA. Only limitation of interest deduction is set by the decree of the Finance Ministry disallowing deduction of more than 24% of the annual interest. In addition, that limitation does not refer to the companies operating within the financial sector.
Transfer pricing legislation in Georgia has been effective since December 2013. It is regulated by Articles 126-1291 of the Georgian Tax Code and the decree of the Finance Ministry dated December 18, 2013, #423. The legislation is mostly consistent with the OECD transfer pricing guideline 2010, but with minor deviations:
The required minimum involvement in the shares for considering associated persons is 50%.
Transfer pricing applies not only to the transactions between associated entities, but transitions between a Georgian resident and an offshore-based person, regardless of their association.
If such information is available, comparable financial results are searched from the same year in which a transaction took place rather than the average of the previous few years.
Georgia does not have any safe harbor rules regarding Transfer Pricing and does not apply a simplified approach on intra-group services yet. TP documentation has to be provided by a taxpayer within 30 days upon the request; no special penalty applies to non-provision of such documentation, although shifting of the burden of proof is the result in the situation.
In addition, the decree makes reference to the 2010 OECD guidelines regarding the Transfer Pricing topics that are not regulated by it (for example, cost-contribution arrangement).
No MAP and APA are applicable in the country as of today. However, it is expected that those rules will be activated shortly.10
TAX TREATY POLICY
Georgia is a contracting state with 55 tax treaties being in effect today. The distribution rules on dividend, interest and royalty differ among the treaties.
Approximately30 treaties allocate taxing rights to Georgia with regard to interest and royalty payments (when a source is Georgia). The number is about 45 in the case of dividend payments. However, in that case, the taxing right depends on the percentage of shares non-residents hold in a Georgian company and the amount of capital contributions made by them.11
Those treaties limit Georgia’s taxation usually up to 10%. However, as highlighted above, domestic tax rates on such payments are 5%. Therefore, the 10% limitation does not have any effect and 5% is applied anyway.
Georgia still does not apply the Authorized OECD Approach (AOA) in Article 7 of its treatises. Most treaties imply the wording similar to the previous or 2008 version of the OECD model convention.
In other words, in many situations, permanent establishment is not considered a separate independent entity for tax purposes, but cost allocation takes place between the head office and PE without mark-up.
Besides, Article 14 – ‘Independent Personal Services’ - is included in most or all treaties. In its domestic legislation, Georgia applies limited force of attraction. However, most of the treaties signed by the country limit the application of the rule.
Georgia’s tax system is one of important factors among several which make the country an attractive destination for foreigner investors. One of the main attractions is that the legislation is relatively simple and provides a considerable number of incentives and minor withholding tax rates. In addition, the country has a rich tax treaty network and lenient anti-avoidance rules. Lastly, there is the possibility of advance tax ruling which ensures certainty for tax payers.
1Georgian Tax Code (GTC), Art. 34
2GTC, Art. 22 (Original version in Georgian language)
3GTC, Art. 29. Par. 1
4GTC, Art. 29. Par. 3
5GTC, Art.29. Par. 4 and 5
6Resident natural persons are exempted from taxation on foreign source income. See GTC, art 82. Par. 1, sub. par. “u”
7See article 97 of GTC.
84% applies on payments to nonresidents engaged in oil and gas transactions. See article 134 par. 1. Sub. par. “d”.
9This is the same rate as corporate income tax rate in Georgia.
10However, advanced tax ruling system (except TP issues) is very active in the country which guaranties certainty to tax payers.
11For instance, see article 10 of Georgia-Germany treaty