DBI Georgia 2011.BDO

DOING BUSINESS IN GEORGIA 2011

DOING BUSINESS IN GEORGIA 2011 May 2011

INTRODUCTION The aim of this publication, which has been prepared for the exclusive use of BDO Member Firms and their clients and prospective clients, is to provide the essential background information on setting up and running a business in Georgia. It is of use to anyone who is thinking of establishing a business in Georgia as a separate entity, as a branch of a foreign company, or as a subsidiary of an existing foreign company. It also covers the essential background tax information for individuals considering coming to work or live permanently in Georgia. This publication describes the business environment in Georgia and covers the most common forms of business entity and the taxation aspects of running or working for such a business. For individual taxpayers, the important taxes to which individuals are likely to be subject are dealt with in some detail. The most important issues are included, but it is not feasible to discuss every subject in comprehensive detail within this format. If you would like to know more, please contact the BDO Member Firms with which you normally deal, who will be able to provide you with information on any further issues and on the impact of any legislation and developments subsequent to the date mentioned below. Founded in Europe in 1963, the BDO network has grown to be the fifth largest in the world — it now has 1082 offices in 119 countries, with almost 47 000 partners and staff providing professional auditing, tax and consulting services on every continent. BDO’s special skills lie in applying local knowledge, experience and grasp of the international context to provide an integrated global service. In BDO, common operating and quality control procedures are not a constraint on innovation and independence of thought, but the starting point. It is a vigorous organisation committed to total service. BDO’s reputation derives from consistently offering imaginative and objective advice within the client’s time constraints. BDO Member Firms take pride in their clients’ success and in their relationships with them. It is a personal relationship that combines the benefits of professional knowledge, integrity and an entrepreneurial approach with an understanding of a client’s business and an ability to communicate effectively. This ensures the highest-quality objective professional service, tailored to meet the individual needs of every client, whether they be governments, multinational companies, national or local businesses, or private individuals. Service provision within the international BDO network of independent member firms (‘the BDO network’) is coordinated by Brussels Worldwide Services BVBA, a limited-liability company incorporated in Belgium with its statutory seat in Brussels. Each of BDO International Limited (the governing entity of the BDO network), Brussels Worldwide Services BVBA and the member firms is a separate legal entity and has no liability for another such entity’s acts or omissions. Nothing in the arrangements or rules of the BDO network shall constitute or imply an agency relationship or a partnership between BDO International Limited, Brussels Worldwide Services BVBA and/or the member firms of the BDO network. BDO is the brand name for the BDO network and for each of the BDO member firms. Doing Business in Georgia 2011 has been written by the Georgian member firm of BDO. Its contact details may be found at the end of this publication. The publication is up to date to 1 February 2011. © Brussels Worldwide Services BVBA, February 2011 Brussels Worldwide Services BVBA Boulevard de la Woluwe 60 1200 Brussels Belgium Tel: +32 2 778 0130 Fax: +32 2 778 0143 bws@bwsbrussels.com http://www.bdointernational.com

Contents 1. THE BUSINESS ENVIRONMENT ...................................................................................... 1 GENERAL INFORMATION .................................................................................................. Geography ........................................................................................................ History ............................................................................................................. Government and political powers ............................................................................ Population and language ....................................................................................... Currency .......................................................................................................... Membership of international organizations ................................................................. Time, weights and measures .................................................................................. Economic background ........................................................................................... Reforms ........................................................................................................... Infrastructure .................................................................................................... BUSINESS ENTITIES ....................................................................................................... Forms of business organisation ................................................................................ Legal entities for carrying out business ..................................................................... Limited-liability company ...................................................................................... Joint-stock company ............................................................................................ Entities with unlimited liability .............................................................................. Companies owned by foreign investors ...................................................................... Representative offices and branches of foreign companies .............................................. LABOUR RELATIONS ...................................................................................................... Foreign employees ..............................................................................................

1 1 1 2 2 3 4 4 4 5 5 5 5 5 6 7 8 8 8 9 9

2. FINANCE AND INVESTMENT ........................................................................................ 11 BANKING AND LOCAL FINANCE........................................................................................... 11 EQUITY MARKET ........................................................................................................ 11 COMMODITY EXCHANGE MARKET ........................................................................................ 12 ACCOUNTING AND AUDIT REQUIREMENTS ................................................................................ 12 Accounting and annual financial reporting ................................................................. 12 Statutory audit of financial statements .................................................................... 12 Development of the accounting and auditing profession ................................................ 12 Accounting software ........................................................................................... 12 Foreign exchange policy ....................................................................................... 13 INVESTMENT OPPORTUNITIES AND INCENTIVES ........................................................................... 13 New enterprises................................................................................................. 13 Special incentives for new enterprises ..................................................................... 13 3. THE TAX SYSTEM .................................................................................................... 15 INTRODUCTION ......................................................................................................... 15 Direct taxes...................................................................................................... 15 Indirect taxes ................................................................................................... 15 Other taxes and duties ........................................................................................ 15 Payment .......................................................................................................... 15 Assessment....................................................................................................... 15 Appeal procedures.............................................................................................. 15 Anti-avoidance principle ...................................................................................... 16 4. TAXES ON BUSINESS ................................................................................................ 17 CORPORATE TAX SYSTEM ................................................................................................ 17 Scope and extent ............................................................................................... 17 Company residence ............................................................................................. 17

Taxable entities ................................................................................................ 17 Taxable income ................................................................................................. 18 Deductions ....................................................................................................... 18 Capital gains..................................................................................................... 19 Dividends, interest and royalties ............................................................................ 19 Withholding tax ................................................................................................. 20 Losses ............................................................................................................. 20 Avoiding double taxation ...................................................................................... 20 Transfer pricing rules .......................................................................................... 20 Thin capitalisation ............................................................................................. 21 Controlled foreign company rules ........................................................................... 21 General anti-avoidance rule .................................................................................. 21 Tax rate .......................................................................................................... 21 Returns and payments ......................................................................................... 21 SPECIAL TAX REGIMES ................................................................................................... 21 General principles .............................................................................................. 21 MICRO BUSINESS ........................................................................................................ 22 Granting and cancellation of the status .................................................................... 22 Tax benefits and compliance ................................................................................. 22 SMALL BUSINESS ........................................................................................................ 22 Granting and cancellation of the status .................................................................... 22 Tax benefits and compliance ................................................................................. 23 VALUE ADDED TAX ...................................................................................................... 23 Taxable persons ................................................................................................. 23 Non-deductible input VAT..................................................................................... 23 Taxable activities............................................................................................... 24 Time of supply .................................................................................................. 24 Place of supply of goods, services and imports............................................................ 24 Special rule for VAT taxation of imports ................................................................... 24 Exempt supplies ................................................................................................ 25 VAT exempt transactions without the right to reclaim VAT ............................................ 25 Standard rate ................................................................................................... 26 VAT exempt transactions with the right to reclaim VAT ................................................ 26 Reverse-charge VAT ............................................................................................ 26 VAT registration ................................................................................................ 26 VAT returns and payment ..................................................................................... 27 VAT refunds for foreign nationals ........................................................................... 27 5. TAXES ON INDIVIDUALS ............................................................................................ 28 INCOME TAX ............................................................................................................ 28 Territoriality and residence .................................................................................. 28 Structure of income tax ....................................................................................... 28 Exempt income .................................................................................................. 28 Taxation of employment income............................................................................. 29 Taxation of personal business income ...................................................................... 29 Income from a business ........................................................................................ 29 TAXATION OF INVESTMENT INCOME ...................................................................................... 29 Dividends ......................................................................................................... 29 Interest ........................................................................................................... 30 Royalties and rent .............................................................................................. 30 Capital gains..................................................................................................... 30 Other income .................................................................................................... 30 Deductions and allowances ................................................................................... 30 Tax rate .......................................................................................................... 30 Withholding taxes .............................................................................................. 30

RETURNS AND PAYMENTS ............................................................................................... 31 Returns ........................................................................................................... 31 Quarterly reporting ............................................................................................ 32 Payment .......................................................................................................... 32 INHERITANCE AND GIFT TAX ............................................................................................. 32 WEALTH TAX ........................................................................................................... 32 6. OTHER TAXES........................................................................................................ 33 PROPERTY TAX ......................................................................................................... 33 Taxpayers ........................................................................................................ 33 Rates .............................................................................................................. 33 Returns and payments ......................................................................................... 34 Exempt property ................................................................................................ 34 EXCISE DUTIES .......................................................................................................... 35 Tax rate .......................................................................................................... 35 Tax returns and payment ..................................................................................... 35 IMPORT DUTY .......................................................................................................... 36 Taxable entities ................................................................................................ 36 Taxable object .................................................................................................. 36 Tax rate .......................................................................................................... 36 Assessment and payment ...................................................................................... 36 Exemptions ...................................................................................................... 36 NATURAL RESOURCES TAX .............................................................................................. 36 GAMBLING DUTY ........................................................................................................ 37 7. SOCIAL SECURITY CONTRIBUTIONS............................................................................... 38

DOING BUSINESS IN GEORGIA 2011

THE BUSINESS ENVIRONMENT

General information Geography 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. It is the subject of permanent argument whether Georgia and its neighbours Armenia and Azerbaijan are in Europe or Asia. On the basis of the socio-historical characteristics of the country, some scientists consider Georgia as part of Europe. In fact Georgian socio-political and cultural history can also be considered as European. Local climate is of transitional character from Asian to European. Georgia’s borders run for 1970.8 km (315 km of which (16%) is coastline). The north of the country is occupied by the Greater Caucasus chain (highest point - Mt. Shkhara, 5068 m), which includes the Great Caucasian Range (the main watershed) and Gagra, Bzipi, Kodori, Svaneti, Egrisi, Racha, Lomisi, Kartli and other ranges. The extreme four points are: to the north - Mt Aibga (650 m), to the east - the source of the Agrichai river (left confluent of the Alazani River), and the sources of the Iori and the Psou rivers to the south and west respectively. The geographical centre of the country is Imereti, in the Kharagauli district. History Georgia is a land filled with magnificent history and unparalleled natural beauty. Archaeologists found the oldest traces of wine production (7000-5000 BC) in Georgia. It has made a valuable contribution to the development of world culture and civilisation. From ancient times the indigenous population - the Georgian tribes – were well known for their original and highly developed culture. The first Georgian states of Kolchis (Lasika) and Iberia (Kartli) were formed between the sixth and fourth century BC. In the early 4th century Georgia adopted Christianity, only the second nation in the world to do so officially, and Orthodox Christianity, in combination with a unique language and alphabet, have proved to be key factors in preserving Georgia’s separate identity for so many centuries. Christianity was introduced into Georgia in the first century, and became the official national state religion in the mid fourth century with the evangelism of St Nino of Cappadocia. The Georgian cross is recognisable, for it was said to be forged by St Nino with grape vines and her own hair. The grape and the vine thus hold important places in Georgian symbolism. The conversion to Christianity meant that Georgians would have a historical cultural leaning to the West instead of to the Islamic states in the region (Turkey and Persia to the south). Nonetheless, Georgian culture stands at the crossroads of civilisations. Its culture and tradition is the product of the influence of its neighbours and of its own unique civilisation. In 1783, the King of Eastern Georgia signed the Treaty of Georgievsk with Russia, by which Russia agreed to take the kingdom as its protectorate. In 1801 Russia began the piecemeal process of unifying and annexing Georgian territory. So Kartli and East Georgia become part of the Russian Empire in 1801, followed by Western Georgia in 1812. After World War I, the democratic Georgian Social Democratic Republic seceded in 1918 from Russia and proclaimed its independence (after the break-up of the shortly lived Democratic Federative Republic of Transcaucasia), under the leadership of the Social Democrat Noe DOING BUSINESS IN GEORGIA 2011 May 2011

DOING BUSINESS IN GEORGIA 2011

Zhordania. In 1920 Georgia annexed Adjara. In 1921, Georgia was invaded and conquered by the Red Army. The Bolsheviks proclaimed the Georgian Soviet Socialist Republic, which joined Transcaucasia in 1922 and with Transcaucasia the USSR the same year. In 1990 Zviad Gamsakhurdia of the Round Table-Free Georgia became Chairman of the Supreme Council of Georgia. This council declared the Republic of Georgia 1991 independent from the USSR. Georgia became a presidential parliamentary republic under president Gamsakhurdia. The same year the regions of Abkhazia and South Ossetia seceded from Georgia. This secession was not recognised internationally and in 1992 Georgian rule over South Ossetia was restored. In 1992 Georgia abolished the presidency and at the end of 1992 Eduard Shevardnadze became Chairman of the Parliament. In 1995 the presidency was restored and Shevardnadze was elected president as the candidate of the centrist Sakartvelos Mokalaketa Kavshiri (Citizens’ Union of Georgia, SMK). After surviving assassination attempts in 1995 and 1998 then-President Shevardnadze consolidated his leadership and declared an ambitious reform agenda. The political status of the breakaway provinces of Abkhazia and South Ossetia remained unresolved, however. Russian peacekeepers along with UN observers were stationed in Abkhazia. Following the seriously flawed parliamentary elections in 2003, public pressure led to the resignation of Shevardnadze in the so-called Rose Revolution. The 2004 presidential elections led to a landslide victory by Mikheil Saakashvili of the New National Movement. Following the Russo-Georgian war in 2008, South Ossetia and Abkhazia declared independence with Russian support, but their independence is not recognised internationally. Government and political powers Georgia (in Georgian, 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 President of Georgia controls the internal and external affairs of the country. He is the supreme representative in foreign relations and Supreme Commander-in-Chief of the military. The President is directly elected for a five-year period. In 2009, Mikheil Saakashvili was reelected for a second term as President. The parliament of Georgia is the supreme representative body of the country. The parliament determines the basic directions of internal and foreign policies and controls the government’s activity within the constitutional framework. The Georgian parliament consists of 75 members elected by majority vote and 75 members elected by proportional representation. The government consists of the President and the Cabinet, whose members are three State Ministers and sixteen other Ministers, headed by a Prime Minister, currently Nika Gilauri. The Cabinet is the supreme executive authority, which ensures overall implementation of the internal and foreign policies. The Cabinet is appointed by the President. Population and language According to Georgia’s most recent official census, the population of Georgia was 4 485 700 in 2002. The estimated population in 2010 was 4.43 million. Between 1989 and 2002, the population decreased by 15.8%, with a rate decrease of 23.6% among urban population and 13.4% in rural areas.

DOING BUSINESS IN GEORGIA 2011 May 2011

DOING BUSINESS IN GEORGIA 2011

The population decrease was caused by several factors: existence of non-controlled territories, low birth rate, high rate of mortality, increased emigration, and the departure of soldiers and their families from ex-soviet military bases in the territory of Georgia. In 2009 the overall growth rate was 3.8‰. About 52.7% of the population was classified as urban; Tbilisi, the capital and the largest city, had more than 1.1 million inhabitants, or approximately 26% of the national total. The capital’s population grew by 5% between 2000 and 2010, mainly because of migration from rural areas. Kutaisi, the second largest city, has a population of about 190 000. In 2009 Georgia’s birth rate was 14.4 per 1000; the death rate 10.6 per 1000. Life expectancy at birth was 78 years for women and 70 for males. The infant mortality rate was 14.9 per 1000 live births. The average family size in 2002 was 3.5. In the 1990s and 2000s, the Georgian population was aging slowly; the proportion aged under 19 decreased from 29% to 25% and the proportion over 60 remained unchanged – 18%. Georgia is an ethnically diverse state. Georgians comprise 84% of the population. The ethnic minorities are represented by Azeris (7%), Armenians (6%), Russians (1.5%), Ossetians (0.9%– in the controlled territories), and Abkhazians (0.1% – in the controlled territories). Yezids, Greeks, Kists and Ukrainians are among the smaller ethnic groups. With regard to religion, 88.6% of the population is Christian, including 83.9% orthodox. 9.9% of the population is Muslim. The Georgian language is in its own language group, completely unrelated to Indo-European, Semitic or Turkic languages, and one of the existing 14 alphabets in the world is the distinct Georgian alphabet. Georgian is the official language of Georgia. The number of extant languages spoken in Georgia is 12. Currency The currency of Georgia is the lari, (GEL), which entered into circulation in 1995. One lari consists of 100 tetri. Bank notes come in denominations of one, two, five, 10, 20, 50, 100, 200 and 500 lari; coins are one, two, five, 10, 20 and 50 tetri, and one and two lari. At the time of going to press (end of May 2011), the exchange rate of the lari against the euro and the US dollar was quoted as EUR 1 = GEL 2.39397 and USD 1 = GEL 1.6774, respectively. ATMs, generally accepting MasterCard, Visa, Cirrus and Maestro cards, are plentiful in cities and most towns. All kinds of payments (shopping in stores and markets, paying restaurant, hotel and other services) are made in GEL. Most companies prefer payment in cash, but paying with credit cards is also available. The most popular foreign currencies are the US dollar and Euro. Russian roubles are also used in the occupied territories of Georgia. Foreign currency, including US dollars, Euros and Russian roubles can be exchanged at special exchange shops in the streets of large towns. Currency other than USD, EUR and RUR can be exchanged in the banks. There are no restrictions on the import or export of local currency. Foreign currency of more than GEL 30 000 must be declared on arrival by visitors, and the export of foreign currency is limited to the amount declared. Monetary transfers are provided by Western Union and large banks.

DOING BUSINESS IN GEORGIA 2011 May 2011

DOING BUSINESS IN GEORGIA 2011

Membership of international organizations Georgia is a member of several international organisations, 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) Georgia, Ukraine, Azerbaijan and Moldova (GUAM) Black Sea Economic Development (BSEC).

Time, weights and measures Standard Time is 4 hours ahead of Greenwich Mean Time (GMT+4 hours). Georgia uses the metric system of weights and measures and the Celsius scale of temperature. Economic background The economy of Georgia has made good progress since 1995, with the aid of assistance received from the World Bank and the IMF. Georgia has in the past suffered from a chronic failure to collect taxation on earnings; however, the state has made great progress and has reformed the taxation code, improved tax administration and enforcement, and cracked down on corruption (including cronyism and nepotism) since coming to power in 2004. Georgia's economy maintained Gross Domestic Product (GDP) growth of close to 10% in 2006 and 12% in 2007, based on strong inflows of foreign direct investment (FDI), and robust Government spending. The 2008 conflict with Russia and the world economic crisis caused a reduction in the GDP growth rate. In 2009 GDP decreased by 4%. Foreign loans and assistance of several billion dollars in total prevented further deterioration as a result of the crisis, and avoided a large budget deficit.

Source: the National Statistics Office of Georgia (http://geostat.ge).

DOING BUSINESS IN GEORGIA 2011 May 2011

DOING BUSINESS IN GEORGIA 2011

The balance of trade is sharply negative. In 2009 imports exceeded exports by 2 billion dollars. The trade deficit was largely reduced by money remittance from abroad. The volume of money transfers amounted to 766.5 million dollars. According to 2009 figures, the major import partners are: Turkey (18%), Ukraine (9.6%) and Azerbaijan (8.6%) while major export partners are: Turkey (20%), Azerbaijan (15%) and Canada (10.3 %). The stability of the Georgian economy is mainly dependent on FDI. During 2004-2009 the volume of FDI amounted to 6 360 million dollars. In 2009 major investment fields were real estate (22.4 %), industry (21.2%), construction (16.0%), transport and communication (15.0%). Reforms Intensive reforms were implemented from 2005-2010. As a result, Georgia was recognised as the number one reformer by the World Bank. In addition, according to official international ratings, Georgia occupies the following positions:    

Ease of Doing Business, 2010 – 11th position (112th in 2005) Economic Freedom Index, 2010 – 26th position (99th in 2005) Global Corruption Barometer, 2009 (EU, Selected Countries & Georgia) – 7th position Bertelsmann Transformation Index, 2010 – 42th.

Infrastructure Georgia has an extensive road and rail network. The highway network has been more than doubled in the last decade; the process of modernising the infrastructure has continued during the last five years. The capital, Tbilisi, has an international airport with two terminals, which services both internal and foreign-airline flights. There are also minor international airports in Batumi and Kutaisi (and the biggest airport in the Caucasus is currently under construction in Poti). The international telephone area code of Georgia is 995 and the national area code of Tbilisi is 32. Emergency services can be reached by dialing the following numbers: ambulance 033; police 022; fire services 011. Three major mobile telephone operators are available on 900 MHz and 1800 MHz frequencies with 4G. High-speed internet access and wireless networks are available throughout the country. The power supply is 220V AC with standard European plugs and sockets.

Business entities Forms of business organisation Pursuant to Georgian legislation, 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, registered offices and bank accounts. Companies established in Georgia are subject to Georgian law, but agreements concluded by Georgian companies can be governed by the law agreed between the parties unless otherwise determined by Georgian Act of International Private Law. No permit is required for foreigners to become a partner or to be appointed as director of a Georgian company. The legal address must be local to ensure the delivery of official correspondence. Legal entities for carrying out business The Georgian Entrepreneurs Act (1994) defines five types of legal entity that may carry on business:

DOING BUSINESS IN GEORGIA 2011 May 2011

DOING BUSINESS IN GEORGIA 2011

 Limited-liability company (შეზღუდული პასუხისმგებლობის საზოგადოება – shezghuduli pasukhismgeblobis sazogadoeba)  Joint-stock company (სააქციო საზოგადოება – saaktsio sazogadoeba)  Cooperative (კოოპერატივი – kooperativi)  Joint-liability company (სოლიდარული პასუხისმგებლობის საზოგადოება – solidaruli pasukhismgeblobis sazogadoeba) and  Limited partnership (კომანდიტური პასუხისმგებლობის საზოგადოება –komandituri pasukhismgeblobis sazogadoeba). These entities can be categorised into two groups based on the type of liability - limited and unlimited liability. The first three have limited liability, their liability being limited to their property. Shareholders’ liability is limited to their contribution to the share capital. Limited-liability company This is the most common form of business entity in Georgia. The reason for this is its flexible organisational and management structure and other characteristics that are peculiar to a limited-liability company. In contrast to other types of company, the formalities required to establish and operate a limited-liability company are much less complicated and expensive. The advantages of a limited-liability company are as follows:  It can be established by a single founder  A founder can be a natural person and/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. Day-to-day management is carried out by a director or board of directors. The company is governed by the shareholders’ meeting, which resolves on the most significant issues related to the company’s activities. A director is an authorised representative of the company, and is entitled to sign an agreement, represent the interests of a company before third parties and perform other executive activities. However, the members may restrict the power of a director: for instance in order to create a charge on the company, or make some major investments such as a merger and acquisition, a director (or board of directors) must obtain the consent of the members’ meeting. The detailed relations between the members and a director (or board of directors) can be determined by the company’s statutes. The most significant advantage of this type of company is that the members do not bear personal liability for the activities of the company. No requirements exist regarding the nationality or residence of shareholders and company directors. Furthermore, they do not require a work permit or insurance number. However, shareholders and company directors need to obtain a residence permit in order to stay in Georgia. The procedures for obtaining a residence permit are very simple. In order to be incorporated, a company must register with the Entrepreneurial Registrar at the local tax office. Incorporation involves state and tax registration. The statutes of a company do not have to be submitted to the Entrepreneurial Registrar for authorisation. The statutes of a limited-liability company define the rules for managing the company and determine the relations between the company and its shareholders and directors. The directors are not liable to creditors of a company. However, the Georgian Entrepreneurs Act provides that the directors must manage a company in good faith. If they breach this duty resulting in loss to the company, then the directors are fully and jointly liable to the shareholders for that loss. DOING BUSINESS IN GEORGIA 2011 May 2011

DOING BUSINESS IN GEORGIA 2011

Pursuant to the Georgian Entrepreneurs Act, a limited-liability company must have an authorised share capital. However, there is no obligatory minimum capital and at the same time capital contributions are not payable during the registration procedures. Thus, the members can freely determine the amount of the authorised share capital. It should be pointed out that the Entrepreneurial Registrar does not divulge information about shareholders or the amount of authorised share capital. A change of members is not the subject of compulsory registration at the Entrepreneurial Registrar. Shareholders receive dividends and have voting rights pro rata to their proportion of the share capital. However, shareholders may determine different proportions for the distribution of dividends and allocation of voting rights that might not correspond to their actual shareholdings. Usually it takes one day to register a limited-liability company. Joint-stock company A joint-stock company is normally used when funds are to be raised from the general public, for example, on the Georgian Stock Exchange. The characteristics of a joint-stock company are very similar to those of a limited-liability company. For instance, it can be established by a single shareholder; no restrictions exist regarding the number, nationality and residence of the directors/shareholders; its shareholders are not personally liable for the debts incurred by the company. The shareholders can be natural persons or legal entities. According to the Georgian Entrepreneurs Act, a joint-stock company must have an authorised share capital that in turn is divided into certain classes of share. As in the case of a limited liability company, there is no mandatory minimum amount of authorised share capital for a joint-stock company. The shareholders are entitled to determine a minimum authorised share capital. There is no compulsory requirement for share capital to be paid up at the time of incorporation. Capital contributions in kind are possible. Shares may have a par value determined by the shareholders. If shares have been issued at above par value, the premium is referred to as ‘emission capital’. Unless otherwise determined by the company’s statutes, there are two main classes of share – ordinary and preference shares. The latter have no voting rights and receive a fixed dividend. A holder of one ordinary share has one vote at the members’ meeting and is entitled to dividends. However, this rule may be changed by the statutes. It should be pointed out that the statutes also define the procedures for receiving the dividend and may determine a nominal value for the shares. Apart from the aforementioned two classes of shares, the shareholders may introduce other classes of shares but this must be defined in the statutes. If a joint-stock company has more than 50 shareholders, an independent registrar must maintain a register of shareholders. In other cases, a company itself may perform the registration of shareholders. The transfer of shares in a company with more than 50 shareholders must be performed according to the rules set out in the Investment Securities Market Act. This Act defines certain mandatory procedures for this transfer to be undertaken. The management structure of a joint-stock company is very much like that of a limited liability company. A director or the board of directors represent(s) and manage(s) the company. However, certain issues can be resolved only with the prior consent of the shareholders’ meeting. The list of such issues is contained in the Entrepreneurs Act. In particular, the shareholders’ meeting must approve the amount of dividend distributions, and any increase and decrease of share capital. In addition, the company’s statutes can extend that list of issues. The shareholders exercise their rights in the members’ meeting. DOING BUSINESS IN GEORGIA 2011 May 2011

DOING BUSINESS IN GEORGIA 2011

In certain circumstances, the management structure of a joint-stock company must include a supervisory board. This is the case where the shares of the company are traded on the stock exchange, or if it is licensed by the Financial Monitoring Agency, or if it has more than 100 shareholders. In other cases a supervisory board is optional. A supervisory board has at least three and no more than 21 members. The powers and authority of a supervisory board are determined by legislation and the company’s statutes. Usually it takes one day to register a joint-stock company. Entities with unlimited liability The second group of enterprises consists of entities with unlimited liability: the joint responsibility company and the limited partnership. These enterprises can be established by at least two persons. Members of a joint-liability company are personally, jointly and fully liable for the liabilities of the company and have no ceiling to their liability. A limited partnership is hybrid since it has two kinds of partners: general partners, who are personally liable, and limited partners, whose liability is limited to a certain pre-determined sum, the so-called ‘guarantee sum’. Limited partners may not participate in the management of the partnership. However, they are entitled to receive profit shares. It should be pointed out that local and foreign-owned companies (limited and unlimited liability companies) may carry on any business activities as long as they are not prohibited by law. There is no compulsory requirement for the companies to define the field of their activities in their statutes. Companies owned by foreign investors There are no specific requirements for foreign individuals and foreign legal entities wishing to establish a company in Georgia. According to Georgian legislation, 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. The incorporation of legal entities owned by foreign investors requires the fulfillment of certain legal formalities. For instance: documents concerning an investor and received from abroad must be notarised and certified with an apostille according to the Hague Convention 1964 or legalised. Any type of enterprise envisaged by Georgian law can be established by foreign investors without any restrictions, as long as they meet the normal legal requirements. Representative offices and branches of foreign companies An alternative approach for a foreign investor is to open a branch or a representative office rather than set up a separate company. According to Georgian legislation, a branch and representative office do not constitute legal entities but rather an internal unit of the ‘parent’ company. Therefore, a parent company bears full responsibility for the activities of its branch/representative office. From a legal point of view, there is a difference between a branch and a representative office. Representative offices are used to promote and supervise the business of their parent companies. In contrast, a branch is used actually to carry out the parent company’s business in Georgia. Since a branch/representative office is not a separate legal entity, the foreign company will be 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 a branch/representative office.

DOING BUSINESS IN GEORGIA 2011 May 2011

DOING BUSINESS IN GEORGIA 2011

Labour relations Employment relations are not subject to comprehensive and sophisticated regulations. The Georgian Employment Code is very liberal and enables employers and employee to design a flexible structure of relations between them. According to the Georgian Employment Code, there are two kinds of employment relations: individual relations between an employer and employee based on an individual employment contract, and collective relations between trade unions and an employer based on the collective employment agreement. However, collective agreements are not common in Georgia, and individual contracts are the main type of employment relationship. The Employment Code does not prescribe a mandatory minimum wage. Wages, salaries, and compensation conditions are determined by employment agreements. Unless otherwise specified in the employment agreement, working hours must not exceed 41 hours per week. The Employment Code defines official holidays. It should be pointed out that work performed during official holidays is deemed as overtime. Employees are entitled to an annual paid leave of 24 working days and also to annual unpaid leave of 15 days. The parties to an employment agreement may determine different rules regarding annual leave but these rules must not adversely affect an employeeâ&#x20AC;&#x2122;s entitlement. There is no legal definition of what constitutes an adverse affect. In general, employees are entitled to take annual leave after expiration of 11 months of working. However, the parties to the employment agreement may agree on different rules, and employees may be entitled to take leave before expiration of the aforementioned period. The Georgian Employment Code grants employees the right to strike for no more than 90 days. Legislation determines a list of occupations that are not entitled to be engaged in strikes, such as judges. Employees do not receive salaries for the period of strikes and lockouts. Disputes between employers and employees may be resolved by ordinary courts. There are no special labour courts in Georgia. Foreign citizens may work in Georgia without any restrictions. They do not need to apply for working visas. Foreign employees Visa requirements Georgian legislation regarding visa requirements is very liberal. Citizens and residents of the countries listed in Table 1 below, who intend to stay in Georgia longer than 360 days, do not need to obtain a visa:

DOING BUSINESS IN GEORGIA 2011 May 2011

DOING BUSINESS IN GEORGIA 2011 Table 1 ANDORRA ANTIGUA & BARBUDA ARGENTINA AUSTRALIA BAHAMAS BAHRAIN BARBADOS BELIZE BOTSWANA BRAZIL BRUNEI DARUSSALAM CANADA CHILE COSTA RICA CROATIA

EU MEMBER STATES ICELAND ISRAEL JAPAN KOREA KUWAIT LIECHTENSTEIN MALAYSIA MAURITIUS MEXICO MONACO NEW ZEALAND NORWAY OMAN PANAMA

QATAR ST KITTS AND NEVIS SAN MARINO SAUDI ARABIA SEYCHELLES SINGAPORE SOUTH AFRICA SWITZERLAND THAILAND TRINIDAD & TOBAGO UNITED ARAB EMIRATES UNITED STATES URUGUAY VATICAN CITY

Citizens of these countries staying in Georgia for a period longer than 360 days have to apply for a residence permit. Foreigners with a residence permit may freely leave and enter Georgia without a visa even after expiry of the 360-day period. Foreigners entitled to enter Georgia without a visa must still obtain one if they intend to work in Georgia and they are entering the country for the first time. However, a visa is not required if a foreigner gets a residence permit. In this case, a foreigner may stay in Georgia longer than 360 days without a visa and work freely without restrictions. Residence permit Georgian legislation provides for temporary and permanent residence permits. A temporary residence permit is granted for a period no longer than six years. However, it may be prolonged upon expiry each year. Certain documents are required for obtaining a residence permit, such as bank statements and any other documents proving the purpose of staying in Georgia. Types of visa A diplomatic visa is given to members of the diplomatic corps, personnel of international organisations, foreigners entering Georgia for diplomatic purposes, etc. This type of visa is given for a period of 360 days. A student visa is given on the basis of a request of educational entities and its duration corresponds to the period of the relevant study course. Ordinary visas are given to tourists, foreigners invited by local legal entities and natural persons, and foreigners entering Georgia for medical treatment. The duration of ordinary visas is 360 days. Work visas are given to administrative-technical personnel of diplomatic missions, employees of international organisations and their family members, etc. The duration of work visas is 360 days.

DOING BUSINESS IN GEORGIA 2011 May 2011

DOING BUSINESS IN GEORGIA 2011

FINANCE AND INVESTMENT

Banking and local finance Banking in Georgia is regulated under the National Bank of Georgia Act, in force from 13 October 2009. The central bank of Georgia is the National Bank of Georgia (საქართველოს ეროვნული ბანკი - Sakartvelos Ervonuli Banki), which is one of the key public institutions and carries out economic functions as prescribed by law. Under Georgian law, the supervision of commercial banks is the responsibility of the National Bank of Georgia. The aim of banking supervision is to ensure stable functioning of the banking system through controlling local commercial banks and local branches of foreign banks, minimising the probability of occurrence of systemic risks in the banking system and thus maximally protecting the bank depositors’ and other creditors’ funds as well as upholding the principles of competition in the banking system. Currently, the banking system consists of several types of credit institutions:  Commercial banks  Credit institutions  Subsidiaries and branches of foreign banks. The minimum capital required for establishing a bank is GEL12 million and must be paid up fully in cash. There are currently 19 commercial banks and 49 credit institutions operating in Georgia. However, the leading role in financing the economy is played by the commercial banks. The banking system has been developing rapidly in recent years, increasing trust in banks and the national currency. A growing amount of deposits and foreign investments have contributed significantly to the Georgian economy. However, the tense conditions in 2008 in the country and the global financial crisis also affected the banking sector. Increased risks and liquidity deficit reduced banking activity, resulting in reduced credit levels. During 2010 the credit ratio increased significantly in comparison with the previous year and was over GEL6 billion by the end of 2010. The three leading fields contributing to lending were trade, industry and construction.

Equity market The Georgian Stock Exchange (GSE) is the only organised securities market in Georgia. It is located in the capital city of Tbilisi. Designed and established with the help of USAID and operating within the legal framework drafted with the assistance of American experts, the GSE complies with global best practice in securities trading and offers an efficient investment facility to both local and foreign investors. The automated trading system of the GSE can accommodate thousands of securities that may be traded by brokers from workstations on the GSE floor or remotely from their offices. As of 1 January 2009, 157 companies were traded on the GSE, with total market capitalisation of USD 327 million and average daily turnover of USD 2,465. As at 1 January 2009, the shares of JSC Bank of Georgia were included in the Tier-A listing of the Georgian Stock Exchange, while shares of four joint-stock companies - Teliani Valley (WINE), Caucasus Energy & Infrastructure (NRGY), Liberty Consumer (GTC) and Kazbegi (KAZB) were included in the Tier-B listing.

DOING BUSINESS IN GEORGIA 2011 May 2011

DOING BUSINESS IN GEORGIA 2011

Commodity exchange market There was no commodity exchange market in Georgia until 2010. From July 2010 a commodity exchange market started operating in Tbilisi, and the first deal was made in November 2010.

Accounting and audit requirements Bookkeeping and financial reporting in Georgia are mainly regulated by the Accounting and Reporting Act and the Enterprises Act, as well as by other subordinated legislation. Bookkeeping and financial reporting are conducted in accordance with International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS). Accounting and annual financial reporting Accounting records have to be kept so that it is possible to enable any person qualified in accounting to clearly identify the financial situation of the company and transactions made during the accounting period, and to ascertain both the beginning and the sequence of each transaction. Books must be kept in the Georgian language and in Georgian currency. The accounting records and all relevant mandatory documentation must be retained for six years. The information in the accounting records is confidential as regards outside users; only the tax authority and auditors have access to the information, as well as other state institutions in circumstances directly prescribed by law. The reporting period is normally 12 months. Statutory audit of financial statements Companies in general are not required by law to have their financial statements audited, but companies quoted on the GSE and certain other companies must submit their financial statements to independent audit. These companies are:      

Banks Insurance companies Specified state funds Stock and commodity exchanges Securities and investment institutions Other persons annually specified by the government.

Development of the accounting and auditing profession All the largest international audit firms are represented in the Georgian market, and they also have the dominant position in servicing large companies. About 50 local audit firms operate in the largest cities of Georgia, mostly in Tbilisi. Unlike the large networks, local firms rarely provide business consulting. However, prices for the provision of services by local firms are generally significantly lower. Accounting software All computerised accounting is allowed, provided only that the law is not violated. Foreign and local accounting software packages are used; local packages are tailored to the needs of Georgian accounting systems and are generally used by companies, but foreign accounting software packages are also in use.

DOING BUSINESS IN GEORGIA 2011 May 2011

DOING BUSINESS IN GEORGIA 2011

Foreign exchange policy Exchange-rate flexibility is an important cushion against real shocks, given that Georgia is not an optimal currency area. The National Bank of Georgia does not have a fixed exchange rate policy. Therefore, the NBG aims gradually to increase the flexibility of the exchange rate. As exchange rate uncertainty increases, the private sector will be able to protect itself against exchange risk by the development of foreign-exchange hedging instruments (swaps, forwards, futures and options). Liquid and efficient short-term interbank money and government securities markets will help market interest rates to emerge, thus providing important information for pricing hedging instruments.

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 countryâ&#x20AC;&#x2122;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 will result in increased employment and increases in household income. There are numerous aspects to take into account when analysing the investment climate in Georgia. The World Bank called Georgia the worldâ&#x20AC;&#x2122;s fastest growing economy in 2007 and the 2008 report assigns Georgia the 18th place in the list of countries where doing business is easiest. Georgia is developing its infrastructure, and simplifying licensing and permits to ease constraints on business. The total number of required licences and permits has been reduced by 84%. One of the reasons to invest in Georgia is the establishment of a free industrial zone. New enterprises 1 January 2008 heralded the introduction of the Free Industrial Zone regime. In connection with this, the Georgian Tax Code was amended to provide for three new types of entity: the International Enterprise, the Free Warehouse Enterprise and the International Finance Company. Special incentives for new enterprises See Table 2 below.

DOING BUSINESS IN GEORGIA 2011 May 2011

DOING BUSINESS IN GEORGIA 2011 Table 2 Incentives

International Enterprise

Free Warehouse Enterprise

Personal Income Tax

The rules for taxing employee salaries are determined by the government of Georgia

Profit Tax

Profit received from activities allowed in the free industrial zone is exempt

Profits from the reexport of goods from the free warehouse are exempt

Value Added Tax

Supply of goods/services among enterprises of the free industrial zone are exempt

Providing goods to a taxable person in the free warehouse is free of VAT

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

International Finance Company Income from selling securities issued by an International Finance Company is exempt Profits earned from financial services are exempt; Profits received from selling securities issued by an International Finance Company are exempt

DOING BUSINESS IN GEORGIA 2011 May 2011

DOING BUSINESS IN GEORGIA 2011

THE TAX SYSTEM

Introduction The system of taxes in Georgia consists of:  State taxes, which are regulated by the Tax Code of Georgia; and  Local taxes regulated 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. Gambling duties are levied locally. Payment Taxes and duties are assessed and payable in Georgian currency only. Assessment The tax authorities are authorised to make an assessment of the tax liability of every taxpayer, tax agent, or other person liable to pay tax, on the basis of 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. The taxpayer is responsible for keeping the documentation on the basis of which the registration of taxable objects and the filing of tax returns is carried out, as well as documents confirming receipt of revenues (profit), incurred expenses and paid (withheld) taxes for six years following the end of the tax year concerned. The tax authorities are entitled to carry out tax audits only in accordance with the Tax Code of Georgia, and on the basis of a tax review to adjust the amount of taxes and to impose fines. Appeal procedures Taxpayers have the right to appeal against an assessment or administrative document issued by the tax authorities within 20 days of receipt of order to the Ministry of Finance, with supporting documentation, or to the courts. If a taxpayer chooses to appeal to the Ministry, the dispute may be resolved in the first instance by the Revenue Services or may be escalated to the Disputes Resolution Council under the Ministry of Finance of Georgia. DOING BUSINESS IN GEORGIA 2011 May 2011

DOING BUSINESS IN GEORGIA 2011

Decisions taken by the Revenue Services of the Ministry of Finance regarding tax issues may be appealed by taxpayers to the Disputes Resolution Council under the Ministry of Finance, or to the court, within 10 days of receipt of the decision. The appeal must be reviewed by the Council within 20 days. Taxpayers may appeal decisions taken by the Disputes Resolution Council under the Ministry of Finance to the court within 10 days of receipt of the decision. Anti-avoidance principle The Georgian tax authorities have the right to inspect taxpayersâ&#x20AC;&#x2122; financial documents, accounting books, reports, expenses, financial assets, securities, and other assets, calculations, tax returns, and other documents related to the assessment and payment of taxes in connection with their economic activity in case the taxable base differs from existing reality, and recalculate the real tax base. To determine tax liabilities, the tax authorities have the right to use a substance over form approach and requalify a transaction in accordance with the real facts if its form does not accord with the substance.

DOING BUSINESS IN GEORGIA 2011 May 2011

DOING BUSINESS IN GEORGIA 2011

TAXES ON BUSINESS

Corporate tax system 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 legislation, an enterprise is considered to be 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 charitable organisations, except in respect of profits from economic activity  Grants, membership fees and donations received by an organisation  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  Retained profits earned from agricultural activities applied for agricultural purposes (until 1 January 2014)  Profits of an International Financial Company from the provision of financial services  Profits from the sale of securities issued by an International Finance 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 except for the property of a Georgian permanent establishment  Interest from government and National Bank loan securities  Profits of a Free Warehouse Enterprise from the re-export of goods from the free warehouse  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 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 incentives to employees. DOING BUSINESS IN GEORGIA 2011 May 2011

DOING BUSINESS IN GEORGIA 2011

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. Deductions All expenses related to the derivation of taxable income are deductible. There are expenses with limited deductibility and others that are wholly disallowed. Expenses with restricted deductibility include:  Representative expenses, limited to 1% of gross income collected during a tax year  Interest payable, limited to the annual rate stipulated by the Minister of Finance of Georgia  Charitable donations, limited to 10% of net taxable income. Expenses not related to the company’s business activities are generally not deductible. This type of expenditure includes:     

Entertainment expenses Expenses incurred by a natural person for his or her own purposes Expenses related to income earned from lotteries, gambling and games of chance Expenses related to the derivation of exempt income Expenses on the purchase of goods/services from Micro Business.

Tax depreciation The Georgian Tax Code specifies two methods of depreciation of intangible or fixed assets: Straight-line method: the straight-line method applies only to intangible assets. Expenditure on intangible assets is deductible by way of depreciation over the useful life of the asset, with a zero residual value. Where it is deemed impossible to define the useful life of intangible assets, depreciation is taken at a rate of 15% under the reducing-balance method (as with tangible assets in group 5). Reducing-balance method: all tangible fixed assets are depreciated under the reducingbalance method. Depreciable fixed assets are classed in five groups. The effective rates are shown in Table 3 below:

DOING BUSINESS IN GEORGIA 2011 May 2011

DOING BUSINESS IN GEORGIA 2011 Table 3 Group number

Fixed Assets

Passenger cars, traction equipment for use on roads; office furniture, automotive transport rolling stock; lorries, buses, special motor vehicles and trailers; machinery and equipment for all sectors of industry; forging and pressing equipment; construction equipment; agricultural vehicles and equipment

Special tools, inventory and equipment; computers, data processing peripheral devices and equipment; electronic devices

Railway, sea and river transport vehicles; power vehicles and equipment; thermal technical equipment; turbine equipment; electric engines and diesel generators; electricity transmission and communication facilities; pipelines

Buildings, constructions.

Depreciable assets not included in the other groups

Depreciation rate (%)

Â Capital gains Georgia has no separate capital gains tax; capital gains generated in Georgia are included in gross income and subject to corporate income tax at the standard rate of 15%. Gains are calculated as the difference between the cost of acquisition and the proceeds of disposal. Dividends, interest and royalties Dividends Dividends distributed by Georgian companies (to a natural person or a foreign enterprise) are subject to 5% withholding tax at the source of payment (unless in the case of a non-resident a relevant tax treaty stipulates otherwise). Dividends paid to Georgian enterprises or to permanent establishment through which foreign enterprises carry out activities are not taxed at the source of payment. Interest According to the Georgian Tax Code, interest paid by the permanent establishment of a nonresident or by a resident, or on their behalf is subject to taxation at source at the rate of 5% of the payable amount, if the source of payment is in Georgia. Interest received from licensed financial institutions is not taxed at source and not included in the gross income of the person receiving the interest. Interest from free floating securities is not taxed at source and not included in the gross income of the person receiving the interest. Interest paid to the government is not taxed at source.

DOING BUSINESS IN GEORGIA 2011 May 2011

DOING BUSINESS IN GEORGIA 2011

Withholding tax Royalty and other income received by a non-resident company without a permanent establishment in Georgia are subject to taxation at source at the rate of 15%, 10% or 4%. The 4% rate applies to income received by non-resident subcontractors carrying out oil and gas operations prescribed by the Oil and Gas Act. 10% applies to income from international telecommunications services and income from international shipping services (unless a relevant tax treaty stipulates otherwise). Table 4 shows withholding rates in the three years from 2010. Table 4 Tax rates

2010

2011

2012

Dividends

5%1

Interest

4%/10%

4%/10%/15%

Other income 1

To be reduced to 3% from 1 January 2013

Losses Losses may be carried forward for up to five years and set against profit of future periods. This period can be prolonged to 10 years upon application, but in this case the statute of limitation will be prolonged to 11 years. Avoiding double taxation To prevent double taxation of income, Georgian tax legislation allows for credit to be given for profit tax paid outside Georgia against Georgian tax on foreign-source income. The total amount of credit cannot exceed the Georgian tax that is or would have been due on that income under Georgian law. Georgia has signed and ratified more than 25 agreements with other countries to avoid double taxation regarding taxes from income and property taxes (see Appendix). In order to claim treaty benefits, resident or non-resident persons have to submit the relevant forms, as follows:  Declaration by a Georgian tax agent of payments to non-residents and tax withheld on this income  Self-certification of residence status by a non-resident  Claim by a non-resident for repayment of taxes paid/withheld in Georgia  Application by a non-resident for the issue of a certificate of taxes paid in Georgia  Certificate of taxes withheld to be completed by the resident withholder  Certificate of taxes paid by a non-resident in Georgia – to be completed by the tax authorities  Application by a resident taxpayer for a certificate of residence  A certificate of residence – to be issued by the tax authorities. Transfer pricing rules Transfer pricing rules apply to transactions between related parties, whether they are residents or non-residents. The tax authorities can adjust transfer prices according to arm’s length principle if within a transaction between related parties goods are sold or services are provided not at arm’s length. DOING BUSINESS IN GEORGIA 2011 May 2011

DOING BUSINESS IN GEORGIA 2011

Thin capitalisation From 2011, thin capitalisation rules are introduced. A general safe-harbour debt-equity ratio of 3:1 applies; where there is a greater ratio, the interest corresponding to the excess of debt will not be deductible. The rules apply only where the interest expense represents 20% or more of taxable income and where the company has turnover of at least GEL 200 000. Financial institutions are exempt. Controlled foreign company rules Georgia has no CFC rules. General anti-avoidance rule Georgian legislation contains no general anti-avoidance rule. Specific statutory provisions exist aimed at particular types of avoidance. Tax rate The current standard rate of corporate income tax on all taxable income is 15%. Returns and payments Returns Georgian-resident companies must file corporate tax returns by 1 April following the taxable year, which is the calendar year. Upon liquidation of a legal person, the liquidation commission or the taxpayer is required to notify the tax authorities immediately in writing. Within a period of 15 days of making a decision on the liquidation of a legal person, the liquidation committee must file a tax return with the tax authorities. Payment of tax Companies are required to make payments on account of corporate tax, based on their taxable income in the previous year, according to the following schedule:    

Not later Not later Not later Not later

than 15 May – 25 % than 15 July – 25 % than 15 September – 25 % than 15 December- 25 %.

The balance remaining, if any, is due by 1 April of the following year. Where payments on account exceed the final liability, the company may claim a repayment or apply to have the excess credited against other tax liabilities. A company that had no taxable income (profit) during the previous tax year, either because it incurred a loss or was not trading, is not required to make any payments on account.

Special tax regimes General principles Individuals may obtain a special status of Micro Business and individual entrepreneurs - the status of Small Business. Upon obtaining these statuses they become eligible for certain simplified accounting rules and tax exemptions. The rules for assigning and cancelling the status of Micro Business and Small Business and issue of the certificates are established by the Minister of Finance of Georgia.

DOING BUSINESS IN GEORGIA 2011 May 2011

DOING BUSINESS IN GEORGIA 2011

Micro Business Granting and cancellation of the status Based on the application filed to the Georgian tax authority (GTA) according to the place of registration, the status of micro business can be assigned to an individual who:  Conducts economic activities independently without hiring employees  Receives annual gross income up to GEL30 000  Undertakes activities that are not banned for Micro Business and defined by the government  Maintains inventory balance up to GEL 45 000. If any of the above requirements for Micro Business are violated, the status of Micro Business is cancelled for the current tax year. The status of Micro Business is cancelled if an individual with a status of Micro Business applies to the GTA for cancellation of the status of Micro Business or for acquisition of the status of Small Business. Within 30 days of the cancellation of the status of Micro Business the income of an individual accrued from the time of cancellation will be taxed:  According to the rules applicable to taxation of Small Business, if the status of Small Business is obtained  According to the rules applicable to standard personal income taxation. Tax benefits and compliance Micro Business is exempt from personal income tax. Micro Businesses must keep all primary tax documentation. An individual files a personal income tax return and pays tax accrued from the time of cancellation of the status of Micro Business within 30 calendar days from cancellation of the status.

Small Business Granting and cancellation of the status Based on the application filed to the GTA according to the place of registration, the status of Small Business can be assigned to an individual entrepreneur who:    

Receives annual gross income from economic activities up to GEL 100 000 Maintains an inventory balance up to GEL 150 000 Is not a registered VAT payer Undertakes activities that are not banned for Small Business as defined by the Government  Uses a cash machine and has not been penalised for not using the latter more than 3 times during a calendar year.

The status of Small Business is cancelled for the current tax year if any of the above requirements are violated. Furthermore, the status of Small Business is cancelled if an individual entrepreneur applies to the GAT for cancellation of Small Business. An individual entrepreneur may re-obtain the status for the year following the 12 calendar months from cancellation of the status, if the individual entrepreneur:  Has received total gross income up to GEL100 000 during the 12 calendar months following the cancellation of the status

DOING BUSINESS IN GEORGIA 2011 May 2011

DOING BUSINESS IN GEORGIA 2011

 Is not registered as a VAT payer in the year following the 12 calendar months from the cancellation of the status. Tax benefits and compliance A Small Business is liable for personal income tax at a rate of 5% of total gross income. The applicable personal income tax rate can be reduced to 3% if the Small Business:  Has documentary proof of expenses related to earning 60% of total gross income received  Conducts activities only within the territory of the Special Trade Zone. Small Businesses may benefit from the following simplified accounting rules:  Expenses records to be kept only in the form of a special register according to the rules defined by the Minister  All primary tax documentation to be kept. Upon cancellation of the status of a Small Business an individual entrepreneur:  May record the balance of inventory in the respective document at its market price but only up to GEL 30 000. This document is a proof of inventory expenses  Must include the value of the balance of inventory in the gross income  May credit the VAT on the balance of inventory if they register for VAT and the documents that must accompany the VAT recovery exist. The Small Business tax compliance rules are the same as for individual entrepreneurs, with the exception of a Small Business operating in the territory of the Special Trade Zone. As for Micro Business, the tax obligations (except for property tax compliance) of a Small Business operating in the territory of this Zone will be fulfilled by the Special Trade Zone Organiser. An individual entrepreneur files a personal income tax return and pays tax accrued up to the time of cancellation of the status of Small Business within 30 calendar days from cancellation of the status. A Small Business is liable to make personal income tax advance payments by the 15th day of the month following each quarter. Furthermore, a Small Business has no obligation to withhold taxes on salary payments of an amount not exceeding 25% of its gross income and on compensation payments for received services.

Value added tax Taxable persons Taxable persons are persons who are registered for VAT or carry out a taxable or temporary import of goods, or non-resident persons making a supply of services in Georgia without registration. In the normal way, VAT paid (input VAT) may be credited against the VAT invoiced on deliveries of goods and services provided (output VAT). A person is registered as a taxpayer no later than the second day following submission of the application to the tax authorities. Non-deductible input VAT A taxable person is not entitled to deduct input VAT in respect of:  Passenger cars  Payments for charity, social and entertainment events and representative expenses

DOING BUSINESS IN GEORGIA 2011 May 2011

DOING BUSINESS IN GEORGIA 2011

 Payments for supplies used to produce VAT exempt supplies, irrespective of whether or not the further supply thereof is anticipated  Tax invoices that do not allow for the identification of the supplier  Tax invoices not submitted to the tax authorities within one calculating period of the end of the VAT reporting period1 for taxpayers performing quarterly submission. For taxpayers performing monthly submission, within three calculating period of the end of the VAT reporting period. Taxable activities As a general rule, value added tax is imposed on all supplies of goods and services, including gratuitous supplies, which take place in Georgia, and on the importation or temporary importation of goods into Georgia. Time of supply The time of a taxable transaction is the time of supply of goods/services. Place of supply of goods, services and imports Place of supply of goods Where a supply of goods involves the transportation of goods, the place of supply is the location of goods when transportation begins. In other cases, the supply of goods takes place at the time of their transfer to the customer. In the case of a supply of electricity or thermal energy, gas or water, the place of supply is where the goods are received. In the case of export of these commodities from Georgia, the supply is considered to take place in Georgia. Place of supply of services Where a service is directly related to immovable property, the place of supply is where the property is located. If the supplier and the customer are in different countries, the place of supply is where the customer is registered or being managed or the location of the permanent establishment of the person, which receives the services, where the service is directly related to this permanent establishment. In other cases, the place of supply is where the services are actually rendered. Place of importation The place of importation of goods into the territory of Georgia is the place in which the customs procedure for the release of goods into free circulation is completed. Special rule for VAT taxation of imports If person is a VAT payer and their declared and paid VAT exceeds GEL 200 000 (except for VAT paid on import operations) during the last 12 calendar months, the taxpayer will be subject to a special rule for the VAT taxation of imports. Under this rule, abovementioned persons are not required to pay and claim back VAT on import operations. Furthermore, taxpayers are entitled to refuse this regime and stick to the standard regime for the taxation of imports, if they apply to the tax department with such a request in writing.

The reporting period is currently a month. Taxpayers will move to quarterly submission in steps until 1 January 2013 DOING BUSINESS IN GEORGIA 2011 May 2011

DOING BUSINESS IN GEORGIA 2011

Exempt supplies VAT exempt supplies are not subject to VAT taxation. Where a taxpayer makes such supplies they may or may not be entitled to reclaim input VAT deduction. VAT exempt transactions without the right to reclaim VAT The following types of supply are exempt from VAT without the right to reclaim input VAT:  Financial services  The supply and/or import of national or foreign currency  Imports of goods transferred to the state and/or social organisations of Georgia for the alleviation of natural calamities, accidents or catastrophes, or as humanitarian aid, and/or the importation of goods under grant agreements by a donor or a beneficiary of a grant  Imports of machinery, means of transport, spare parts and materials for the conduct of oil and gas transactions as envisaged by the Oil and Gas Act, as well as the supply of goods (works, services) necessary for the conduct of oil and gas transactions by investors and operating companies commensurate with the agreements specified by that Act and/or licences issued for the conduct of oil and gas transactions  Supplies of crosses, candles, icons, books, and calendars by the Georgian Patriarchate, which are used exclusively for religious purposes  Urban and inter-regional transportation (except for taxis) supplied at prices and tariffs regulated by the state  Educational services supplied by educational institutions; imports of computer engineering, equipment and chemicals necessary for scientific and educational activities  Medical services, care services rendered to children in children’s homes, or the ill, disabled or elderly, the provision of goods/services under the Public Procurement Act within the limits of healthcare programmes envisaged by the annual Budget Act  The supply or import of goods: books, newspapers and journals, printed music (including electronic supplies)  Arts and sports training services supplied to natural persons under the age of 16, also childcare services supplied at pre-school institutions;  The permanent or temporary importation of goods intended for the official use of foreign diplomatic and equivalent representative offices; the temporary or permanent importation of personal effects and household items for the personal use of foreign citizens and their families engaged in the oil and gas extraction industry in Georgia; the temporary importation of goods into Georgia in order to comply with obligations envisaged by the international agreements of Georgia, namely, the construction of the Baku-Tbilisi-Jeyhan and Baku-Tbilisi-Erzurum pipelines  The initial supply of agricultural products (except for eggs) by persons engaged in agricultural activities before industrial processing thereof (before changing their nomenclature code)  The supply or importation of baby food and infant hygiene products marked as such upon wholesale/retail supply thereof  The supply and/or import of diabetic bread marked as such upon wholesale /retail supply thereof  The importation and/or supply of passenger cars  The importation of goods funded through beneficial credits raised by foreign states and/or international organisations and intended for the rehabilitation of the energy

DOING BUSINESS IN GEORGIA 2011 May 2011

DOING BUSINESS IN GEORGIA 2011

     

sector and/or the supply of construction, assembly, repair, restoration, testing-design and/or geological examination services Imports or supplies of natural gas to electrical power generators Lotteries, casinos, games of chance and prize-games Supplies between enterprises in a Free Industrial Zone and the supply of goods to a taxable person in a Free Warehouse Supplies of land Supplies of shares owned for participation in a partnership (not assigning property), except where property is passing to the individual ownership of the member in exchange for the shares Supplies of property by a partnership to its members, provided that the members are individual persons only, the membership has not changed since establishment, and the partnership is not a VAT payer.

Taxpayers can apply not to use the exemption without the right to reclaim input VAT. In that case the exempt supplies will turn into taxable supplies and the taxpayer will have the right to reclaim input VAT. This option becomes affective from the first day of the reporting period following the submission of the application, and is valid for 12 calendar months for all transactions. Standard rate The standard rate of VAT is 18%. VAT exempt transactions with the right to reclaim VAT These include in particular:          



Exports Supplies intended for the official use of diplomatic representative offices International shipping activities Transfers of gold to the National Bank of Georgia Organised bringing of foreign tourists into the territory of Georgia by tour operators and supplies of tourist services packages to them Supplies of natural gas to thermo electric power stations Supplies within the point of sale without customs duty Supply of assets under a reorganisation Contributions of assets to the capital of a legal entity/partnership A supply of all the assets of an enterprise or an independently operating unit of the enterprise by a VAT payer to another VAT payer within a single transaction. In this case both parties must notify the Georgian tax authorities in writing within 15 days of the supply Free of charge supplies of goods/services to the state or local self-governing bodies.

Reverse-charge VAT Services supplied to a tax agent in the territory of Georgia by non-residents who are not registered as taxable persons in Georgia are subject to reverse-charge VAT. The VAT is accounted for by the tax agent, who has a Taxpayer Identification Number. VAT registration Persons are required to register for VAT where:  They carry out an economic activity and their total amount of taxable turnover during a period of 12 successive calendar months exceeds GEL100 000. An application for DOING BUSINESS IN GEORGIA 2011 May 2011

DOING BUSINESS IN GEORGIA 2011

registration must be filed no later than the second day after turnover exceeds this threshold  They produce and/or import excisable goods during the course of their economic activity (excluding the importation and/or supply of passenger cars). The person concerned must register for VAT before the supply of excisable goods takes place  As a result of a non-recurring transaction in the course of their economic activity, and/or during a single day, the value of a taxable transaction exceeds GEL100 000. The person concerned must register for VAT before the supply takes place. The VAT taxable period is normally a quarter*. Taxable persons whose taxable turnover during the last 12 months did not exceed GEL100 000 may apply for deregistration no earlier than one year following registration for VAT. VAT returns and payment A taxable person must pay the excess of output VAT over deductible input VAT when filing the return. If input VAT exceeds output VAT, taxable persons may apply for a refund. A taxable person must file a VAT return to the tax authorities for each reporting period no later than the 15th day of the month following the reporting period in question. VAT refunds for foreign nationals Foreign nationals are entitled to claim a refund for the VAT paid for goods purchased in Georgia upon removal thereof from the territory of Georgia. The VAT is refunded against a special receipt issued by an authorised retailer of goods. The VAT is refunded only where:  The goods are removed from the territory of Georgia within a period of 45 calendar days following their purchase and  The value of purchased goods specified in a single receipt exceeds GEL 200 exclusive of VAT.

The reporting period is currently a month. Taxpayers will move to quarterly submission in steps until 1 January 2013

DOING BUSINESS IN GEORGIA 2011 May 2011

DOING BUSINESS IN GEORGIA 2011

TAXES ON INDIVIDUALS

Income tax Georgia taxes individuals on the territoriality principle. Therefore both residents and nonresidents are subject to income tax on their Georgian-source income only. Territoriality and residence Under the Tax Code of Georgia, an individual is considered to be resident of Georgia if he or she is physically present on the territory of Georgia for 183 days or more in any continuous 12 calendar-month period ending in the tax year concerned. Persons in the Georgian public service are considered to be resident even if they spend the whole year abroad on service. Structure of income tax According to the Tax Code of Georgia, the taxable income of a resident person consists of the gross income generated by him or her in Georgia, as reduced by deductions and allowances granted by the Tax Code for this period. Gross income includes:    

Income from employment Income from independent economic activity Income from alienation of property Dividends and interest (except interest from deposits in a bank or licensed financial institution)  Royalties  Income arising from the waiver or cancellation of debts  Income from leasing, usufructs, rent etc. Exempt income Income exempt from income tax includes:  Income from sources outside Georgia  The state retirement pension and cumulative and refundable payments from private pension schemes to the extent only of contributions made  State scholarships and allowances  Rewards received by sportsmen and their trainers for being medal winners in the Olympic Games, World and European Championships  Alimony  Income received as part of a divorce settlement  Certain capital gains  Certain inheritances and gifts  The value of apartments awarded free of charge through privatisation as well as by victims of earthquakes and other calamities in return for dwellings damaged in the same area or by displaced persons for environmental reasons in another area  Income from the disposal of securities issued by an International Finance Company  Income received from selling government and National Bank securities  Income received by a non-resident from risk insurance and reinsurance activities  Income received by a non-resident from letting Georgian property not belonging to a permanent establishment in Georgia  Interest received from state securities

DOING BUSINESS IN GEORGIA 2011 May 2011

DOING BUSINESS IN GEORGIA 2011

 Income from employment of a non-resident individual if the employment period lasted no longer than 30 calendar days in the territory of Georgia and it is not connected to the expenses of a permanent establishment of a non-resident person in Georgia  The first GEL 3 000 of the taxable income of the following persons:  Persons disabled from birth or with considerable disabilities  Georgian citizens who took part in World War II or are veterans of other military operations in defence of the integrity of Georgia  Persons awarded the honorary title of ‘Mother of Georgia’  Single mothers  Newly adoptive parents, for the first year following adoption  Children’s guardians. Taxation of employment income Employment income consist of wages, salaries, and any compensation or benefits including income in the form of a pension, other income gained at a previous place of employment or income from a future place of employment. Employee benefits include:  Use of a company car (valued at 0.1% of the book value of the car at the beginning of the tax year for each day during which the car is at the disposal of the employee for private use)  The provision of accommodation  Cost of goods or services supplied free of charge by the employer to the employee or the employee’s dependants (excluding training programmes directly related to performance of the employee’s duties). Employment income also includes reimbursement of expenses, remittance of a debt or obligation, life and health insurance premiums (payable by the employer on behalf of the employee).Benefits are normally valued at their market value. The following are not included in employment income:  Reimbursement of per diem expenses to an employee within the norms specified by the Ministry of Finance  Reimbursement of representative expenses. Taxation of personal business income Taxable income from the carrying out of an independent economic activity consists of the difference between the person’s gross income for those activities and the amount of deductions granted by the Tax Code. Income from a business Gross income from a business includes:  Income earned from economic activity not related to an employment and  Income earned from activities other than those related to employment and economic activities.

Taxation of investment income Dividends Dividends distributed by Georgian companies (to a natural person or a non-resident enterprise) are subject to a 5% withholding tax at source (unless in the case of a non-resident a relevant tax treaty stipulates otherwise).

DOING BUSINESS IN GEORGIA 2011 May 2011

DOING BUSINESS IN GEORGIA 2011

Interest Interest income is subject to a 5% withholding tax at source (unless in the case of a nonresident a relevant tax treaty stipulates otherwise). For exempt interest, see above under ‘Exempt income’). Royalties and rent Royalties and rent distributed to resident individuals by a resident person or by a permanent establishment of a non-resident person are subject to taxation at source at the rate of 20%. That rate will be reduced gradually from 1 January 2013 (see table 5). Tax rates on royalties and rent of resident individuals received from Georgian residents or permanent establishments of non-resident persons in the years 2011, 2012, 2013 and 2014 are shown in Table 5 below. Table 5 Tax rates

2011

2012

2013

2014

Royalties and Rent

20%

18%

15%

Capital gains Capital gains are normally included in income and taxed at the normal rate of income tax. Certain gains are exempt, however. They include:  Gains from the disposal of tangible assets owned for more than two years  Gains from the sale of means of transport owned for more than six months after registration. Other income Although there is no inheritance or gift tax, certain inheritances and gifts are subject to income tax. These are exempted inheritances and gifts received from a transferor to whom the transferee is related in the 3rd or 4th degree, to the extent that they exceed GEL150 000 in any year. Deductions and allowances Other than the deductions and reliefs already referred to, there are no general deductions or allowances. Tax rate The single flat rate of income tax is 20%, which will be reduced to 18% from 1 January 2013 and further to 15% from 1 January 2014, although dividends and interest are taxable at 5% and royalties and rent are taxable at 20%. Withholding taxes Income received by non-residents and not related to a permanent establishment of the nonresident is subject to taxation at source at the rate of 15% (a 10% rate applies to income from international shipping services and international telecommunications services, and a 4% rate applies to income received by non-resident subcontractors carrying out oil and gas operations prescribed by the Oil and Gas Act (unless a relevant tax treaty stipulates otherwise). Tax rates imposed on the income of non-residents received from Georgian sources in the years 2011, 2012, 2013 and 2014 are shown in Table 6 below.

DOING BUSINESS IN GEORGIA 2011 May 2011

DOING BUSINESS IN GEORGIA 2011 Table 6 Tax rates

2011

2012

2013

2014

Dividends

Interest

Royalties and other income

15%

Returns and payments Returns In most cases, income tax on personal income is withheld at source (including on remuneration, in the form of salary tax) at the appropriate rate, so most individuals are not obliged to submit tax returns. The responsibility for withholding and accounting for taxes withheld is that of the payer of the income. The following persons are required to withhold tax at source:           

Employers paying remuneration to employees Persons who pay pensions outside the framework of the state social security system Persons who pay dividends Persons who pay consideration in the course of business for services supplied by a person without a Tax Identification Number Persons engaged in the gambling industry paying winnings to natural persons Persons who pay scholarship income (other than state scholarships) to natural persons Persons who pay interest Persons who pay royalties to individuals Persons who pay for rent to individuals Securities brokers who sell securities on behalf of persons not registered as taxpayers are obliged to withhold at source the capital gains arising from the sale Persons who alienate property free of charge to persons not registered as taxpayers.

The following are exempt:  Companies registered in a free industrial zone are exempt from the obligation of withholding tax at source on salary payments to resident individuals  Non-resident companies paying salaries to employees when salary expenses do not belong to the expenses of a permanent establishment of the non-resident. Residents and non-residents whose income is not taxed at source and also residents having monetary resources on accounts with foreign banks (although the income is not taxable) have to submit a tax return prior to 1 April of the year following the reporting year. Persons carrying on an independent economic activity must also file returns. In the case of salary tax, employers must report and account for the tax withheld on a quarterly basis* before the 15th day of the month following the reporting quarter. An annual return of payments made, including the registration number of the person concerned, his or her name, residential address, the total amount of income received and the total amount of *

Currently the reporting period is a month. A move to a quarterly reporting period will be implemented in steps until 1 January 2013. DOING BUSINESS IN GEORGIA 2011 May 2011

DOING BUSINESS IN GEORGIA 2011

tax withheld during the reporting year must be reported no later than the next 30 days following the tax year. Quarterly reporting Certain tax agents have a right to submit returns quarterly. In this case returns should be filed no later than the 15th day of the month following the reporting quarter, showing income paid and taxes withheld in the reporting period. From 1 January 2013 all tax agents will be required to submit returns quarterly. Under the Tax Code of Georgia the calendar year includes four quarters:    

Q1 Q2 Q3 Q4

From 1 January until 31 March From 1 April until 30 June From 1 July until 30 September From 1 October until 31 December.

Payment As in the case of companies, individual entrepreneurs must make payments on account of income tax, based on their final taxable income in the previous year:    

No No No No

later later later later

than than than than

15 15 15 15

May – 25 % July – 25 % September – 25 % December- 25 %.

The balance remaining, if any, is due by 1 April of the following year. Where payments on account exceed the final liability, the individual may claim a repayment or apply to have the excess credited against other tax liabilities. An individual who had no taxable income (profit) during the previous tax year, either because he or she incurred a loss or was not trading, is not required to make any payments on account.

Inheritance and gift tax Georgia does not levy any inheritance or gift taxes, but certain inheritances and gifts are subject to income tax (see above under ‘Other income’).

Wealth tax There is no wealth tax.

DOING BUSINESS IN GEORGIA 2011 May 2011

DOING BUSINESS IN GEORGIA 2011

OTHER TAXES

Property tax The subject of Property tax is:  For a resident entity/organisation:  Fixed assets  Constructions in progress  Unfinished capital investments  Intangible assets  Leased business property.  For a non-resident entity: all the above mentioned properties which are located in the territory of Georgia (including properties which are leased out, rented or usufruct, or let under similar contracts).  For a fiscal individual:  Immovable property owned by a resident (includes constructions in progress, unfinished capital investments or part thereof)  Yachts (launches)  Aircraft  Property leased from a non-resident  In the case of an economic activity: fixed assets, constructions in progress and intangible assets, also leased business property. Taxpayers In the case of companies and other businesses, property tax is payable by resident companies and organisations and by foreign legal persons holding property located in Georgia. In the case of individuals, the tax looks at the family unit. Families whose annual taxable income is less than GEL 40 000 are exempt from the tax. Rates The rate of tax on business assets may not exceed 1% of the average annual value of residual assets on the balance sheet, which is calculated as the mean of the value of taxable assets as at the beginning and the end of the tax year. These values may be indexed as follows:    

By a factor of 3 for assets purchased before the year 2000 By a factor of 2 for assets purchased in the years 2000, 2001, 2002 and 2003 By a factor of 1.5 for assets purchased in the year 2004 Assets with no information on when they were purchased have a similar factor as assets purchased before the year 2000.

The factors above do not refer to:  Entities using a valuation method for immovable properties on the balance sheet and having audited financial statements according to resolution of the Georgian Government. Therefore, audited financial statements can only be used for four years  State-funded entities according to resolution of the Georgian Government. In the case of land, a person is liable to property tax on land owned by 1 of April of the tax year. For a business, the tax rate depends on the use to which the piece of land is put, its location and fertility. DOING BUSINESS IN GEORGIA 2011 May 2011

DOING BUSINESS IN GEORGIA 2011

For individuals, the rate of tax on property depends on the family’s annual taxable income. For families with income of no more than GEL 100 000, rates vary between 0.05% and 0.2%. For families with higher annual taxable incomes, the rates vary between 0.8% and 1.0%. Returns and payments Companies must file property tax returns by 1 April of the following year. Payments on account are due no later than 15 June of the reporting year. Any balance must be paid when filing the return. Individuals have until 1 May of the following year to file a return and do not make payments on account. The tax due is payable by 15 November. Exempt property The following are exempt from property tax:                  

Highways, communications and electric power lines Non-business assets of a company or organisation Property used for oil and gas related activities specified by the Oil and Gas Act State-owned land allocated to state-funded entities, except for land used for economic purposes Heritage property, except that used for economic activities, which does not include the sale of entrance tickets Land comprised in or owned by nature parks, botanical gardens and arboreta, municipal parks and cemeteries, zoological gardens, oceanographic stations, public gardens, alleys, preserves, forestry organisations, unless used for economic activities City reservoirs and their water areas, land used for transport and underground communications, unless they are used for the production of agricultural goods and economic activities Land occupied by reservoirs designated for the supply of the population with potable water, for operation of power stations and irrigation/drainage systems as well as the related sanitary, security, and technical zones Land used for carrying out oil and gas operations (activities) envisaged by the Oil and Gas Act, unless used for other purposes; Agricultural land on 50% or more of which the topsoil is damaged due to a natural disaster According to the Georgian law, “occupied territories” – temporarily, until the settlement of the conflict and the regulation of the economic situation State-owned and unused pastures and haymaking meadows, reserve agricultural lands or lands designated for re-cultivation Land used as safety zones and for underground communications at airports, airfields, helicopter fields, air navigation, also plots allocated for the future development of ports unless they are used for economic activities Agricultural land accepted for re-cultivation for the first five years Citizens resettled on the territories of former settlements, as well as within the framework of state settlement measures – for the first five years of settlement Agricultural land of up to 5 hectares owned by natural persons as of 1 March 2004 Disabled veterans of World War 2 and other persons of equivalent status with respect to land allotted through privatisation Inhabitants of the villages, communities and settlements situated on the northern and southern slope of the Caucasus range and the Adjara-Guria mountains, as specified by the Social and Cultural Development of Mountainous Regions Act – with respect to land

DOING BUSINESS IN GEORGIA 2011 May 2011

DOING BUSINESS IN GEORGIA 2011

  

   

in the given area. Relief of 50% is also available in respect of the tax on land for the inhabitants of the mountainous regions of southern Georgia Land and other property of medical establishments used for medical activities, except for land used for non-medical economic activities Land occupied by scientific-research, educational, experimental breeding stations and experimental farms used for scientific and educational purposes and the work conducted thereon, where financed by the state Agricultural land on which 50% or more of the harvest has been destroyed by a natural disaster (blizzard, hail, drought, and flood) or other force majeure. The exemption will be awarded by the local authority concerned in consultation with the relevant territorial unit of the Ministry of Agriculture. The exemption will be considered twice – within 2 weeks of the disaster and prior to harvesting Taxable property of a fiscal person, except for land, if the income of this person and his/her family unit during the year before annual year is not more than GEL 40 000. Property located in a free industrial zone Biological assets Until 1 January 2026, property which is owned by an individual entrepreneur in a Tourist Zone and used for its hotel activity.

Excise duties In Georgia, excise duties are imposed on certain goods such as alcohol and alcoholic beverages, tobacco, means of transport, petrol and diesel, and mobile communication services. Excise duties are payable by:     

Manufacturers of excisable goods Importers of excisable goods Exporters of excisable goods Suppliers of natural-gas condensate or natural gas for means of transport Providers of mobile communication services.

Tax rate The rate of excise duty varies according to the nature of the goods. Exemption from excise duty is with or without the right to reclaim input excise. The following operations are with the right to reclaim input excise duty:  The export of excisable goods, except for ferrous and/or non-ferrous metal scrap  The supply of goods at the point of sale free of customs duty. Tax returns and payment Manufacturers of excisable goods, suppliers of natural gas condensate and natural gas for means of transport, and providers of mobile communication services have to submit excise duty returns by the 15th day of the month following the reporting period and pay the appropriate duty. The reporting period for excise standpoints is a quarter of a calendar year*. Producers and importers of excisable products subject to excise stamping in the territory of Georgia must pay the total amount of excise duty and the face-value of excise stamps upon the purchase of those stamps. *

Currently the reporting period is a month. A move to a quarterly reporting period will be implemented in steps until 1 January 2013. DOING BUSINESS IN GEORGIA 2011 May 2011

DOING BUSINESS IN GEORGIA 2011

Import Duty Taxable entities Customs duty is payable by persons moving goods into Georgian customs territory. Taxable object The taxable object is the customs value of the goods imported in Georgia. Tax rate Table 7 Rate

Applies to

12%

Foodstuffs, tobacco and tobacco alternate materials, salt, asphalt, cement, concrete and wooden materials, mineral water, synthetic cotton wools, cloth, shoes, paper, stone. Certain specified foodstuffs

Alcohol – depends on the content of alcohol. Various

Motor vehicles – depends on the age and engine capacity

Assessment and payment Assessment is made in accordance with the customs value of the goods. The duty is due at the time of importation, before completion of the import operation, on the basis of the customs declaration. Exemptions The Georgian Tax Code allows for several exemptions from custom duties. Among them are:  The export and import of goods financed by grants or credits from foreign states or international organisations  The importation of baby and diabetic food  The importation of machinery, equipment and means of transport intended for oil and gas operations envisaged under the Oil and Gas Act  The importation into Georgian customs territory of goods produced in a Free Industrial Zone from such a zone.

Natural resources tax Enterprises engaged in businesses regulated by natural resources legislation, enterprises using wood and timber, and persons hunting migratory birds outside hunting reserves must receive permission or a licence, and are subject to the natural resources tax. The period for the use of water resources in agriculture is the calendar year. Tax is due by 1 December of the calendar year. The period for enterprises using mineral-water resources is the calendar quarter. Tax is due no later than the 15th of the month following the end of the quarter. The period in respect of gas is the calendar month, and tax is due no later than the 15th day of the month following. DOING BUSINESS IN GEORGIA 2011 May 2011

DOING BUSINESS IN GEORGIA 2011

In respect of wood and timber, tax is due no later than the time that the material is transported from the woodland. In respect of growing plants, tax is payable only until the relevant licence is obtained. In respect of all other natural resources, tax is payable monthly by the 15th day of the month following.

Gambling duty Gambling duty is levied on licensed operators of casinos, other gambling establishments and games of chance. For gambling establishments, the duty is payable per table at a rate of between GEL 15 000 and GEL 30 000 per quarter, and per slot machine at GEL 1 500 to GEL 3 000 per quarter. Other rates apply to bingo and lotto, bookmakers, electronic games and lotteries.

DOING BUSINESS IN GEORGIA 2011 May 2011

DOING BUSINESS IN GEORGIA 2011

SOCIAL SECURITY CONTRIBUTIONS

There are no social security contributions in Georgia. Social benefits are funded out of general taxation.

DOING BUSINESS IN GEORGIA 2011 May 2011

DOING BUSINESS IN GEORGIA 2011

APPENDIX Double taxation agreements Georgia has concluded income and capital tax treaties with the following jurisdictions: Country

1st round

2nd round

Date of Initialisation

Date of Signing

Date of Ratification

Uzbekistan Azerbaijan Ukraine Romania Bulgaria Turkmenistan Armenia Kazakhstan Iran Greece Netherlands Italy Belgium Lithuania Latvia United kingdom China Austria Poland Czech Germany Estonia Finland Denmark Malta France Turkey

10-1995 05-1996 04-1995 11-1997 09-1997 07-1997 06-1996 03-1997 08-1995 02-1997 09-1996 04-2000 05-1999 07-1999 07-1999 03-2002 10-2003 04-2004 08-1998 01-2001 07-2002 07-1999 01.2007 03-2006 05.2009 02-1999 04-1997

10-1995 11-1996 10-1996 11-1997 05-1998 07-1997 05-1997 03-1997 05-1996 06-1998 10-2000 04-2000 02-2000 05-2001 05-2001 03-2004 09-2004 06-2004 08-1998 07-2002 03-2006 05-2001 01.2007 03-2006 05-2009 12-2004 02-02-07

28.05.96 18.02.97 14.02.97 11.12.97 26.11.98 05.12.97 18.11.97 11.11.97 03.11.96 10.05.99 21.03.02 31.10.00 14.12.00 11.09.03 13.10.04 13.07.04 22.06.05 11.04.05 05.11.99 23.05.06 01.06.06 25.12.06 11.10.07 10.10.07 23.10.09 07.03.07 21.11.07

01.10.97 28.04.98 15.10.97 12.06.98 02.04.99 19.05.99 17.03.99 1.06.00 11.11.97 09.06.99 27.09.02 27.04.01 27.04.01 24.06.04 22.02.05 24.12.04 16.09.05 11.10.05 16.02.01 10.10.06 14.07.06 23.05.07 28.12.07 28.12.07 23.10.09 25.04.07 28.12.07

Luxembourg Ireland Singapore Kyrgyzstan Kuwait Switzerland Russia Spain Israel Cyprus Slovenia Hungary Egypt Qatar United Arab Emirates Slovak Republic Bahrain India Belarus

11.2006 05-2007 08.2008 03-1997 04.2007 02-1998 10-1997 04-2006 05.2007 05.2007 09.2008 09.2008 12.2009 04.2010 05.2010

----11-1996 10-1996 ----05-1998 ----04.97, 05.97 ----05-1996 06-1998 10-2000 ----02-2000 05-2001 05-2001 05-03, 03-04 09-2004 06-2004 ----07-2002 05-03, 10-04 05-2001 ------------05-00, 12-04 1998, 00, 02, 05, 07 ------------06-2004 ----06-1999 04-1998 -----

Entry Into Force 20.10.97 06.06.98 01.04.99 15.05.99 01.07.99 26.01.00 03.07.00 05.07.00 14.02.01 20.10.02 21.02.03 19.02.04 04.05.04 20.07.04 04.04.05 11.10.05 10.11.05 01.03.06 31.08.06 04.05.07 21.12.07 27.12.07 23.07.08 01.01.09 19.12.09 01.06.10 15.02.10

11-2006 05-2007 09-2009 06-2004 04-2007 05-2009 04-1998 09-2009 08-2009 06-2010 09-2010

15.10.07 15.11.08 24.11.09

19.02.09 23.12.08 23.03.10

14.12.09 06.05.10 28.06.10

13.10.09 15.06.10 10.08.99 08.06.10 17.05.10

09.03.10 21.07.10 01.06.00 21.07.10 28.06.10

04.2010 ----

04-2010 04-2010 05-2010 12-2010 06-2010 07-2010

25.05.10 20.12.10 24.11.10

28.06.10

06.2010 07.2010 08.2010

10.2010

Â Georgia has no estate tax treaties or social security agreements.

DOING BUSINESS IN GEORGIA 2011 May 2011

DOING BUSINESS IN GEORGIA 2011

BDO WORLDWIDE BDO Member Firms are present in the following countries and territories: Albania Algeria Angola Argentina Aruba Australia Austria Azerbaijan Bahamas Bahrain Belarus Belgium Bolivia Botswana Brazil British Virgin Islands Bulgaria Cambodia Canada Cape Verde Cayman Islands Chile China (PRC) Colombia Comoros Costa Rica Croatia Curaçao Cyprus Czech Republic Denmark & Faroe Islands Dominican Republic Ecuador Egypt El Salvador Estonia Finland France Georgia Germany Gibraltar Greece

Greenland Guatemala Guernsey Hong Kong Hungary Iceland India Indonesia Ireland Israel Italy Jamaica Japan Jersey Jordan Kazakhstan Kenya Korea Kosovo Latvia Lebanon Liechtenstein Lithuania Luxembourg Macao Madagascar Malaysia Malta Mauritius Mexico Morocco Mozambique Namibia Netherlands New Zealand Nigeria Norway Oman Pakistan Panama Paraguay Peru

Philippines Poland Portugal Qatar Reunion Romania Russia San Marino St Lucia St Maarten St Vincent & The Grenadines Saudi Arabia Senegal Serbia Seychelles Singapore Slovakia Slovenia South Africa Spain Sri Lanka Suriname Sweden Switzerland Taiwan Tajikistan Tanzania Thailand Trinidad & Tobago Tunisia Turkey Turkmenistan Uganda Ukraine United Arab Emirates United Kingdom United States Uruguay Venezuela Vietnam Zambia Zimbabwe

DOING BUSINESS IN GEORGIA 2011 May 2011

CONTACT BDO LLC 42 Kazbegi Ave 0177 Tbilisi Georgia Tel. +995 32 54 58 45 www.bdo.ge International Tax Coordinator: Mikheil Enukidze E-mail: menukidze@bdo.ge

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO LLC to discuss these matters in the context of your particular circumstances. BDO LLC, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it. BDO LLC, a Georgian limited liability company, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. www.bdo.ge