The Tax Code of Georgia (the Tax Code) was amended in July 2019 to provide specific taxation benefits for international companies. Nevertheless, until today Georgian legislation did not prescribe the criteria for qualifying as an international company and enjoying benefits that the Tax Code exceptionally grants to them.
On 8 October 2020, the Government of Georgia introduced Ordinance N 619 (the Ordinance) that sets out the procedure to obtain the status of international company, determines permitted activities that the international company can carry out and provides the list of expenses spending of which may reduce the payable corporate income tax.
This note sets out the main tax benefits offered under the Tax Code to international companies, explains the general requirements relating to services that the international company has to perform and describes the procedure that applies to acquisition of this status by the enterprises.
It should be noted, that retained or reinvested profits are exempted from corporate income tax since January 2017, when the country adopted a taxation model similar to one in effect in Estonia. Accordingly, corporate income tax applies only to distributed profits.
- Taxation Benefits for International Companies
There are number of benefits that the international companies enjoy in Georgia in terms of taxation:
- Income tax payable by employees of the international company are reduced from 20% to 5%.
- Corporate income tax levied on distributed profits is reduced from 15% to 5%.
- Dividends distributed by the international company are not subject to a 5% withholding tax and they shall not be included in the gross income of the recipient.
- The international company is exempt from property (except land) tax if the property is intended or used for performance of activities allowed by the Ordinance.
Moreover, the international company may reduce the payable corporate income tax by an amount equivalent of the expenses that it incurred (a) for paying the salaries of its employees who are Georgian citizens; or (b) in relation to scientific research and development projects.
- Permitted Activities for the International Company in Georgia
According to the Ordinance the company enjoying the status of international company shall conduct only those activities that are precisely determined by it. The Ordinance provides a detailed list of these activities, which can be grouped into two general fields: (i) rendering IT services and (ii) rendering commercial and technical services related to ship-building and navigation. Some examples of the IT services that the Ordinance identifies include software development, computer programming, supply of digital products, software maintenance services, web-design, web-hosting.
International companies may receive income from other activities only if the net income received by such activities does not exceed 2% of the total income earned from the permitted activities in one calendar year. Otherwise, the status of an international company may be revoked.
- Requirements and Procedure of Obtaining the Status of International Company
According to the Tax Code, an international company is a Georgian enterprise that carries out activities determined by the Ordinance and earns income solely from these activities.
In order to qualify as an international company, the enterprise shall be incorporated in Georgia and it or each of its shareholder companies that own more than 50% of shares shall have 2-year experience in performing activities determined by the Ordinance. The company that is representative of the foreign enterprise shall also qualify if the foreign enterprise has 2-year experience in performing the relevant activities. The enterprise applying for the status of an international company shall conduct the prescribed activities in Georgia. Moreover, the company shall have proper human resources with respective qualifications and shall make the necessary operational expenditures.
The company shall file application to the LEPL Revenue Service of the Ministry of Finance of Georgia (the Revenue Service) for obtaining the status of an international company. The application can be submitted electronically. The application shall include:
- Registration details (identification number, name, legal form);
- Legal and factual address of the company;
- List of the activities determined by the Ordinance which it performs;
- Place of rendering the services;
- Date and signature.
The applicant shall provide information/documentation proving the performance of the activities prescribed by the Ordinance. The Ordinance does not establish any specific requirements in this respect. The documents necessary to be filed will be assessed on case by case basis.
The Revenue Service reviews the application within 10 days. If the application is presented in accordance with the Tax Code and the Ordinance, the Revenue Service submits it to the Ministry of Finance of Georgia which then sends all the provided documents to the Government of Georgia. The Government of Georgia makes the final decision on granting the status of an international company to the applicant.
So far, the Tax Code and the Ordinance do not set out any fees that may be applicable to the registrations of international companies.
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As noted above, the Tax Code envisaged the notion of an international company since 2019. Adoption of the Ordinance by the Government of Georgia reinforces Georgia’s efforts to capitalize on its regional appeal and provides perfect opportunity for businesses to move their regional headquarters or their global activities to Tbilisi, Georgia.