Issue #858 Business by Georgia Today

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Issue no: 858/34

• JULY 5 - 7, 2016

• PUBLISHED TWICE WEEKLY

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ON NEW HORIZONS It's official...and now the hard work really begins!

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In this week’s issue... Georgian Peach Export Rockets PAGE 2

How Socially Responsible is Your Business?

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Deutsche Bahn to Help Develop Georgian Transport Corridor

UNDP/ENPARD: Agricultural Success Stories in Adjara

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NBG: Georgia’s Debt Down, FDIs on the Up

BY ZVIAD ADZINBAIA

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Electricity Market Watch

n order to inform wider society of agriculture and rural development in Adjara region, journalists of broadcast, print and online media were invited to villages across the Adjara region and to see small farmers’ cooperatives. The media tour of June 27-30 was mainly supported by The United Nations Development Program (UNDP) Georgia, and the European Neighborhood Program for Agricultural Development (ENPARD). The media was first-hand informed of the challenges faced by small farmers, the successes of agriculture cooperatives, and the role of agriculture cooperation in enhancing rural development in Georgia. Continued on page 3

GALT & TAGGART PAGE 9

Janos Herman, EU Ambassador to Georgia; Niels Scott, Head of UNDP in Georgia; Archil Khabadze, Chair of the Adjara AR Government; Zaur Putkaradze, Minister of Agriculture of the Adjara AR; and others visited a blueberry plantation in the village of Ochkhamuri, Kobuleti, Adjara. Photo: Vladimer Valishvili/UNDP

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BUSINESS

Georgia - EU Association Agreement Officially Comes into Force

GEORGIA TODAY JULY 5 - 7, 2016

Georgian Peach Export Rockets BY EKA KARSAULIDZE

BY TAMAR SVANIDZE

he long-awaited EU-Georgia Association Agreement (AA), which provides a legal cooperation framework between Georgia and the European Union, officially came into force after the EU Foreign Affairs Council announced its decision to end the procedures needed for ratification of the AA on Friday. The ratification process, which lasted two years, was finalized in December 2015 after Belgium became the last EU country to successfully pass the resolution. Georgia’s Ministry of Foreign Affairs said in an official statement that the ratification of the agreement is further proof that the current EU Member States support Georgia’s European integration. The Association Agreement between

Georgia, the European Union and the European Atomic Energy Community and their Member States was signed on June 27, 2014, in Brussels and began a phased implementation process on September 1 of the same year. “As of today, all provisions of the Association Agreement will be fully in force and Georgia’s political association and economic integration into the European political, trade-economic, social and legal structures will become irreversible and continue at full speed,” the Ministry of Foreign Affairs said in a statement. The AA is a broad framework agreement between the EU and countries that aspire to join the world’s largest economic bloc. The EU typically concludes Association Agreements in exchange for commitments to political, economic, trade and human rights reform. In the case of Georgia, the agreement also includes a Free Trade Agreement (FTA).

eorgia is exporting significantly more peaches this season. According to the Ministry of Agriculture of Georgia, from June 1-28, the country exported 942 tons of peaches, while in June 2015, Georgia exported only 52 tons of the same fruit. That is more than 1,000 percent higher than the same time last year. Georgia’s Ministry of Agriculture said

this season’s peach harvest was very plentiful and is expected to produce about 30,000 tons of peaches in all, which will be sold on the local market as well as exported abroad. The leader of importing countries of Georgian peaches is Russia, so far having imported 61 percent of the total peaches from Georgia. 25 percent of peaches was exported to Azerbaijan and to Kazakhstan – 11 percent. These were followed by Armenia and Ukraine. In addition, peaches are being sold successfully on the local market. Figures

showed about 5,000 tons of peaches were sold on the domestic market just last month. Georgia Fruits Company is in charge of purchasing peaches within the Kakheti Region. Its refrigerator-storehouse complex is capable of accepting and sorting about 80 tons of peach and apple per day. Moreover, to support the local peach harvest, a special group was created in Gurjaani, Kakheti region, to help farmers prepare all necessary documents needed during the harvest, processing and export period.

BUSINESS

GEORGIA TODAY JULY 5 - 7, 2016

UNDP/ENPARD: Agricultural Success Stories in Adjara Continued from page 1 The journalists travelled to villages in the Adjara highlands where they visited berry and hazelnut plantations, trout farms and greenhouses. They also met with Janos Herman, EU Ambassador to Georgia; Niels Scott, Head of the UNDP in Georgia; Archil Khabadze, Chair of the Adjara AR Government; Zaur Putkaradze, Minister of Agriculture of the Adjara and other officials engaged in the field. “It is encouraging to see that with the assistance offered by the European Union and our cooperation with UNDP, the Government of Georgia and local partners are able to make farming more efficient and bring new prospects to the rural areas,” stated Herman. According to the Ambassador, ENPARD assisted more than 70 farmers’ cooperatives in Adjara alone. “Over ten thousand small farmers have benefitted from our services,” he concluded. Niels Scott underscored that the success of ENPARD in Adjara is the result of proactive cooperation with the national and regional government. “The program is coming to an end this month [sic] but we look forward to launching the next stage and continuing our assistance for rural development in Adjara and other regions of Georgia,” he said. GEORGIA TODAY was impressed in particular by the agricultural cooperative ‘Perspektiva Tkhili’ located in Shuakhevi that cultivates up to 2,500

hazelnut bushes on more than 4-hectares of land. The farmers proudly say that the seedlings, peeling machine, and motobloks that ENPARD provided to them have significantly assisted them to advance their level of production and efficiency. 73-year old Nodar Zos-

With the assistance offered by the EU and UNDP, the Government of Georgia and local partners are able to make farming more efficient and bring new prospects to the rural areas

A young farmer that produces blueberry. Photo: Vladimer Valishvili/UNDP

idze, who leads the cooperative, shows his extraordinary zest in further boosting the business that one would not even imagine existing in such a mountainous area. The same sense of surprise was felt on visiting agricultural cooperative ‘Peranga,’ in Qeda’s Akho village, which deals in trout production. The team successfully runs a trout farm in Adjara’s extremely mountainous areas, selling their product in Tbilisi and Gori. Before ENPARD’s assistance, the cooperative had to transport the fish in ill-equipped vehicles, causing nearly 20-25% damage to their product. The ENPARD-provided transport, fully equipped with water basin, oxygen tanks and a water measuring machine have given the team hope and a possibility to almost eliminate their overall transportation-related losses.

Furthermore, principally deviating from traditional clichés in Adjara, agriculture cooperative ‘Naturgift’ in Khelvachauri has effectively developed berry production. The cooperative grows blueberries and strawberries on 1.5 hectares of land. The production has substantially increased since the farmers received new seedlings and an up-to-date drip watering system with assistance from ENPARD. ENPARD has been operating in Adjara throughout 2013-2016 with a total budget of EUR 3.3 million with up to EUR 3 million from the EU and the rest from the Adjara Government. ENPARD-Adjara is part of the wider program of ENPARD-Georgia, designed to assist agriculture and rural development in the country. This year, the EU recognized ENPARD as one of its most

efficacious initiatives. Throughout the last three years, ENPARD-Adjara has piloted innovative solutions for a range of rural development issues and has laid the ground for promoting agriculture and rural development reforms in the region. One of the achievements of the project is the development of the Adjara Rural Development Strategy in cooperation with the Adjara Rural Development Council. The strategy was adopted by the Adjara Autonomous Republic (AR) Government on May 17, 2016. The list of project successes includes the establishment of over 70 small farmers’ cooperatives across Adjara, consultation and information, and agriculture extension services for over 10 thousand farmers. Within the context of demonstration projects, regional farmers were introduced to new agriculture technologies such as modern greenhouses, the cattle hydroponic nutrition system, drip watering, and high production value chains in the production of berries, table grapes and walnuts. The first phase of ENPARD Adjara ended on 30 June 2016 but the program is expected to continue throughout 201617. Acknowledging the impressive achievements in 2013-16 and aiming to ensure smooth transition between ENPARD-1 and ENPARD-2, the Adjara Government initiated a new 18-month project ‘Sustainable Agriculture Development in Adjara’ with a budget of GEL 1.3 million.

BUSINESS

GEORGIA TODAY JULY 5 - 7, 2016

How Socially Responsible is Your Business? BY KATIE RUTH DAVIES

hink about the company you work for or the business you run. Look around your office and take a moment to think about the everyday workings of it. Now look at the checklist. How many points can you tick in the positive column? Would you say you’re part of a Truly Responsible Business (TRB)? Do you have a policy of Corporate Social Responsibility (CSR)? On July 1st-3rd 2016, The Center for Strategic Research and Development of Georgia (CSRDG), Pontis Foundation and International Visegrad Fund ran a summer school for selected company representatives to open them to the complex world of CSR, related aspects of the newly ‘in force’ EUGeorgia Association Agreement (AA), and the skills needed to create a Global Reporting Initiative (GRI) report. When asked what CSR is before the training began, the majority answer was “helping othersthe poor, disabled, children or elderly,” and “recycling our waste office paper.” Three days later and the answers from the same people to the same question were so detailed, it would fill this column just listing them. Teaching them were local representatives of the CSRDG, Lia Todua (Consumer Rights) and Mariam Shotadze (Environment); from Slovakia, Michal Kissa from Pontis and the Business Leaders’ Forum, talking on responsible consumer relations, and Slavomíra Urbanová, Pontis Foundation, talking on the concept of CSR. From Poland was Mirella Panek-Owsianska, Responsible Business Forum, discussing labor standard integration and the GRI; and from Hungary, Gergely Tóth, from environmental NGO KÖVET who spoke broadly on the environmental impact of businesses and how to reduce that impact. The trainings were co-ordinated

On July 1st-3rd 2016, The Center for Strategic Research and Development of Georgia (CSRDG), Pontis Foundation and International Visegrad Fund ran a summer school for selected company representatives to open them to the complex world of CSR

by Lela Khoperia, CSRDG CSR Program Coordinator and Tatiana Zilkova, PONTIS Foundation, External Relations Program Manager. The majority of those present represented large multi-national or foreign-owned businesses (Wissol, Pasha Bank, Geocell…) for whom the concept of CSR was already familiar and a part of their regular operations. “It’s about more than doing good deeds for your clients and employees, it’s about making them safe,”Anano Korkia, Head of PR & Marketing Department of Pasha Bank, Georgia, told GEORGIA TODAY. “Although Pasha is a corporate bank, if you follow the line down, you do eventually end up at a physical person using your services. We have a responsibility to that person, as we do our own staff members. Pasha offers its staff many health and development prospects and is very

CSR is the responsibility of us all. attentive to its clients.” Turn off those extra unnecessary lights- open up Rusudan Kbilashvili, PR & CSR Manager, Wissol Group, has been working comfortably with a CSR the window blinds and let the natural light in- for and reporting strategy since around 2010. “Inter- a start it will activate your circadian rhythm and national partners decide to partner with us because keep you alert longer. Use both sides of the paper of our sustainable development plans. We have six when you write or print; recycle waste paper. Don’t main directions: Marketplace, Employees, Custom- leave machines on standby- switch them off. Opt ers, Health, Safety & Environment, Finances and for environmentally-friendly furniture, stationary Partners. We often pioneer customer service stand- and décor. Choose to work only with socially and ards in Georgia which are then taken on by our ecologically responsible partners and clients. Award those who follow your responsible policies closely. competitors.” But also present at the School were some younger Encourage your employees to drink tap water rather members of society for whom CSR was, like it is than bottled. Check out local and international Eco for many Georgians, something of a foreign or certification to show your clients your environ“European” ideal which seems inapplicable to mentally friendly policies. When it comes to the Georgia’s current reality and insignificant due to times of year when you would normally send out gifts to clients or partners, give a percentage of the the size of the country. “This is totally new for us. My company is being money you would spend to a charitable cause forced by our European investors to adopt a CSR instead, as Pasha Bank did last year when it bought policy,” Kote Chachanidze, Project Manager and a Rusudan Petviashvili painting, had signed printed CSR Manager of the 3-week-old SME ‘Georgian copies sent to its partners, and then donated the original to a charity for its own use. Set up a fixed Herbs,’ told GEORGIA TODAY. Pro Bono system whereby you and your employees And so it is and so it increasingly will be. Georgia is not a big country and does not have offer your skills, knowledge and services to NGOs much of a carbon footprint when compared to its or other needy organizations free of charge, helpEuropean neighbours (Georgia-1.6 hectares [133rd ing them to develop. Reduce, Reuse, Recycle… All of these suggestions are realistic and are just place], Luxembourg 15.8 ha [1st place]). Yet, on signing the AA, Georgia committed to a bettering the tip of the iceberg to what can be done. Most of its work environment, and that, in a very large are money-savers in the short or even long term. But for them to work, the staff in your company part, includes CSR. needs to be informed, educated and shown the What is CSR? It is people- the ones who work around you, who impact they can have and should have. Take the supply you, who deliver those supplies and who fear route and show them how disastrous the path ahead looks right now. Or show them the positive use your services. It is place- your office, the streets you drive and possibilities of changing before it’s too late. Ideally, park in, the fields, forests and rivers from which do both, because your customers will care. Even as far back as 2006, when the CSRDG ran a socioyou draw your raw resources. It is time- what is used now and how resources logical survey, 60 % of their Georgian participants said they would choose a CSR company (or to buy are preserved for the future. products of a CSR company) over It is said that by 1st August the world will have t h e the alternative. consumed its entire annual allowance for 2016. “The CSRDG training was notaThis means that anything conble for the foreign speakers, able sumed after that will to show best practises that we c ut i n to t h e can relate to from Eastern Euroresources meant   pean countries who have already for future generabeen where Georgia is,” said tions. Now, if you Korkia of Pasha Bank. “The believe the overrk training has given me some population fears, or at Wo y t e f a ideas for a better recycling the “three Earth” S h lt ea process we could implement concept, then this Employee H ort and how we could partner means that we’re p p u S e with other organizations to heading for a bifurca- Employe se g Abu make a difference.” tion point where overin t c a r te “Now I have some tools population and insuf- Coun to use and the contacts I ficient resources to riendly F t n e ar t need to start in the right sustain us means we need P pmen Develo direction to make us a the equivalent of three Training & g teerin more socially responsiplanet earths’ worth of n lu o te V ble company,” Chacharesources if we are to sur- Corpora o work) n o s nidze of Georgian vive. However, some sci- (Pro B e e y mplo Herbs said. entists believe that instead with E e u g lo Georgia is at the of an imminent crash, the Dia e alanc beginnings of the kind graph of future populationLife B k r o W n of development proto-resources is more of an ‘S’ ipatio Partic cesses that many big Western councurve, with the world’s popu- Employee tries are struggling to get control of and clean up. lation expected to level off naturally and some kind of balance It is in the perfect position to make the right choices to be found. Humans are, after all, the smartest and implement the sensible business policies that species and we should be able to find a way out of will affect positively on the health, safety and lifethe crash-course we currently seem to be on, right? style of our future generations. You can be a part What can you, the employee, employer, or busi- of that change. And when you lock up the office and head home, ness owner do? It all starts with awareness-raising of course. Of highlighting and demonstrating that keep living it, keep being Socially Responsible.

IST L K C HE C R S C

BUSINESS

GEORGIA TODAY JULY 5 - 7, 2016

SOCAR: TAP almost 20% Complete to a Cost of $877 Mln BY EKA KARSAULIDZE

Pawel Smalinski, General Director of Geocell, Giorgi Chogovadze, Head of the Georgian National Tourism Administration and Gigla Agualshvili, Minister of Environment and Natural Resources Protection of Georgia at the launch of the new Movla App

New Mobile App Allows Georgians to Locate Littered Spots BY TAMAR SVANIDZE

eorgia's Ministry of Environment and Natural Resources Protection has partnered with Tbilisi-based mobile telecommunications company Geocell to launch a new application that allows users to mark littered areas throughout the country. Dubbed Movla (or 'caring' in Georgian) the program was presented to the public at the Mtskheta railway station just outside the capital, Tbilisi. The software provides users with photographs of littered areas and the ability to geo-locate the position on the map as well as share the information

on social networks. The application also allows users to identify the litter and label it as communal, construction, industrial or mixed waste. According to Environment Minister Gigla Agulashvili, the new app will help Georgian citizens to organize public campaigns that demand the areas be cleaned. Movla also provides safety details about the proper protective gear needed for dealing with industrial waste. The application is already available for Android users and can be downloaded from Google Play. Geocell said an iOS version for Apple mobile devices is in development and would be released in the near future.

OCAR Azerbaijan state oil company has announced that the cost of the Southern Gas Corridor, in the framework of the Trans Adriatic Pipeline (TAP) construction, is expected to exceed USD 1 billion, reported Trend News Agency. â&#x20AC;&#x153;The cost of the Southern Gas Corridor, the basic package of which belongs to the government of Azerbaijan, will amount to USD 1.2 billion by 2020,â&#x20AC;? said a representative of SOCAR, which owns a 49 percent share in the joint-stock company, on July 1. As SOCAR reported, 14 percent of investment, or USD 877 million, has already been spent on the

TAP pipeline construction. In addition, the company stated that 19.5 percent of the works have been completed to date. The aim of the Southern Gas Corridor project is to transport natural gas, via a 3,460 km pipeline, to Italy from Azerbaijan, through Georgia, Turkey, Greece and Albania. The total cost is USD 45 billion. TAP is a part of the 870 km route starting from Greece and going via Albania and the Adriatic Sea to the southern part of Italy. The throughput is from 10 to 20 billion cubic meters. This pipeline will be connected with the TANAP pipeline (Azerbaijan, Georgia, Turkey) on the Turkish-Greek border. Natural gas transit volume to Georgia via the pipeline is expected to increase from 2019, while from 2020, Georgia will receive by 1 billion cubic meters in transit fees annually.

BUSINESS

GEORGIA TODAY JULY 5 - 7, 2016

Georgia to Focus on Energy Efficiency Deutsche Bahn to Help Develop Georgian Transport Corridor

BY EKA KARSAULIDZE

inister of Energy of Georgia, Kakha Kaladze, said that Georgia is ready to work on energy efficiency and renewable energy development, during his speech at the ‘Tbilisi - Energy Efficient City’ conference last week. The conference was held in the Georgian capital in the framework of the European Commission’s large-scale initiative ‘Covenant of Mayors’.

“Our country has been actively working towards energy development, and a significant part of this is energy independence, not only for local development and promotion, but also to seriously upgrade our role in the region,” Kaladze said. The Georgian government has decided to become a member of the European Energy Community which means that the issues reflected in the European directives will become mandatory for the country, “including energy efficiency,” the Minister noted. The European Commission's initiative ‘Covenant of Mayors’ brings

together local and regional governments which voluntarily commit themselves to increasing energy efficiency and use of renewable energy sources on their territories. Parties signatory to the agreement also aim to reduce emissions of carbon dioxide into the atmosphere to 20 percent by 2020, thus contributing to the development of a green economy and improving living standards. To date, the project has involved 5,460 municipalities throughout the world, including seven cities of Georgia – Tbilisi, Kutaisi, Rustavi, Gori, Poti, Zugdidi and Batumi.

tate-owned Georgian Railways on July 1 signed a memorandum of understanding with Deutsche Bahn, one of Germany’s largest private railway companies. The agreement envisages deepening the level of cooperation between Georgian and German transportation companies on the trans-Caspian route, which will allow cargo to be transported between

China and Europe via Georgia, Iran, the Persian Gulf and the Caspian Sea. The German side has said it would like to actively participate in the development process of “Georgian corridor” to provide additional transport options. Deutsche Bahn plans to enter into the Georgian transport sector as it is one of the biggest operators of rolling stock operating between China and Europe.

BUSINESS

GEORGIA TODAY JULY 5 - 7, 2016

Hollywood Tempted as it Discovers a Sea of Untapped Locations in Georgia BY MERI TALIASHVILI

fter implementing the film industry incentive program offering a 25 percent cash rebate to foreign filmmakers to shoot here, Georgia has begun work to attract prominent international producers. The recent visit of top location scouts from Hollywood on June 20th is a positive for the future potential of the Georgian movie industry. GEORGIA TODAY met Ana Kvaratskhelia, Director of the Entrepreneurship Development Agency (Enterprise Georgia) to speak about the incentive program, results of the visit of Hollywood scouts, and future hopes for Georgian film industry development.

TELL US ABOUT THE FILM IN GEORGIA INCENTIVE PROGRAM Film in Georgia is a newly launched film industry incentive scheme that aims to promote Georgia as an Eastern European Filming Destination by offering local and international producers up to 25 percent rebate on qualified expenses incurred in Georgia. Enterprise Georgia runs this cash rebate system in cooperation with the Georgian National Film Center. My agency’s key objective is to further promote film friendly Georgia on an international scale and put in place effective mechanisms that will encourage the easy entrance of international producers. For the maximum comfort of the producers,

our agency ensures provision of various services based on the “One Stop Shop” principle that covers initial location scouting, assistance in procurement of permits from government institutions, coordination with various stakeholders, etc. State-owned properties are free to shoot, which is another financial benefit that filmmakers can get in Georgia. We do believe that Film in Georgia, coupled with the country’s geographic and architectural diversity, businessfriendly environment and low level of bureaucracy ensures a pleasant and productive filmmaking process.

HOW DID THE HOLLYWOOD SCOUTS AND PRODUCERS REACT TO GEORGIA? Their one week visit was a direct result of our participation at an LA location show, where Enterprise Georgia presented our country as a filming destination and assisted Georgian production companies in networking and introducing their capacity. At the show we held meetings with Hollywood’s major players – Disney, Paramount Pictures, NBC universal, Universal pictures, Warner Brothers, HBO and Fox, as well as independent filmmakers and talent agencies. The famous location managers of Hollywood movies, such as : Transformers, Captain America, The Hangover, and Mission Impossible spent one week in Georgia checking out Tbilisi, Rustavi, Mtskheta, Kazbegi, Uplistsikhe, Tskhaltubo, Zugdidi, Mestia, Anaklia, as well as Batumi! You can imagine how surprised they were when in such a short

period we managed to show mountains, desert, seaside, national parks and a fusion of architectural styles in different cities.

WHAT MOST CAPTURED THEIR ATTENTION? Our guests were truly impressed by Georgia’s resemblance to different places in the world. For instance, I heard them comparing Tbilisi, Batumi and Sighnagi to European and Asian style cities. Batumi even helped location scouts discover a small Cuba for themselves. Of course Kazbegi, the treasure of Georgia, made a huge impression, the middle age villages in Svaneti surrounded with these huge mountains left them speechless and I saw new film ideas coming to their minds and mysterious smiles on their faces. The large scale semi derelict and derelict industrial sites, like the Rustavi Metallurgy plant and Locomotive Manufacturer in Tbilisi, also got a lot of interest. Since the Hollywood location scouts were mainly looking for some virgin locations and unique sites, they got much more than they expected. The producers went away saying that Georgia has huge potential for attracting various productions. Based on the feedback we got from the location scouts we believe they will spread the word to the rest of the Hollywood pretty soon. By this time the three international producers who are already benefiting from the Film in Georgia program will have finalized work and

Ana Kvaratskhelia, Director of the Entrepreneurship Development Agency (Enterprise Georgia)

these movies will become success cases that Hollywood producers can refer to.

WHAT IS THE FINANCIAL SCALE OF THE PROJECTS THE VISITORS TEND TO WORK ON? The scale and the budgets of the companies we brought to Georgia are huge for our country. The group included location managers from major film studios like Disney and Paramount who work on movies with budgets exceeding USD 20 mln, however, in the frames of the tour we also invited independent filmmakers who work on films with budgets below that.

DO THEY PLAN TO COLLABORATE WITH THE LOCAL PRODUCTION COMPANIES IN GEORGIA? Enterprise Georgia ensured that the visiting location scouts spent time networking with the representatives of local

production companies to get all needed information on the local industry and to see future cooperation opportunities. In fact, one of the milestones that we need to undergo to bring Hollywood production to Georgia is to have quality local production service providing companies. It’s a common practice for Hollywood to hire production companies based in the country they are shooting a film, therefore the crew, prices and high professionalism plays a huge role. And we have some great news- in the five months since the launch of Film in Georgia, we can already boast four big international projects in our portfolio! The outlook is truly optimistic, with several production houses showing interest in filming here. We have already promoted the new program in Los Angeles, USA, and in Mumbai, India, and will continue extensive marketing to put our country on the map for international producers.

BUSINESS

GEORGIA TODAY JULY 5 - 7, 2016

NBG: Georgia’s Debt Down, FDIs on the Up

BY EKA KARSAULIDZE

he gross external debt of Georgia amounted to USD 14.6 billion (33.5 billion GEL) as of March 31, 2016, which was 107.1 percent of the Gross Domestic Product (GDP) from the last four quarters, claims the National Bank of Georgia’s (NBG) latest data. During the first quarter of 2016, the gross external debt of Georgia decreased by USD 429.9 million (988.7 million GEL).

NBG explained this change as mainly due to transferring direct investor’s debt into equity capital. State foreign debt amounted to USD 6.2 billion (14.7 billion GEL), which is 45.4 percent of GDP. Of this, government debt is USD 4.5 billion (10.7 billion GEL), 33.1 percent of GDP; the National Bank's debt amounted to USD 219.4 million (519.6 million), 1.6 percent of GDP, while state-owned enterprises bonds and loans are USD 801.0 million (1.9 billion GEL) or 5.9 percent of GDP and USD 655.6 million (1.6 billion GEL) or 4.8 percent of GDP, respectively.

The NBG reported that Georgia enjoyed a record number of Foreign Direct Investments (FDIs) – USD 376 million (865 million GEL) in Q1 of 2016. This was a 103 percent increase year-on-year and a record since 2008. Following this increase, the country’s investment position on the global scale has improved. As of March 31, 2016, the country’s net International Investment Position amounted to USD 18.7 billion (43 billion GEL). This was 136.8 percent of the country’s GDP of the last four quarters, meaning the country is attracting more FDIs, said NBG.

BUSINESS

GEORGIA TODAY JULY 5 - 7, 2016

The Galt & Taggart Research team comprises Georgian and Azerbaijani finance and economic experts who have broad experience of covering the macro and corporate sectors of the two countries. Our current product offering includes Georgian and Azerbaijan macroeconomic research, Georgian sector research, and fixed income corporate research. For free access to Galt & Taggart Research, please visit gtresearch.ge or contact us at gt@gt.ge.

Electricity Market Watch FOR GEORGIA TODAY BY TAMARA KURDADZE

tion methodology for electricity and natural gas supply, unbundling of generation and distribution, and a move toward a competitive electricity and natural gas market.

KHUDONI HPP ON HOLD UNTIL A NEW PPA POLICY IS DEVISED

ector research is one of the key directions of Galt & Taggart Research. We currently provide coverage of Energy, Healthcare, Tourism, Agriculture, Wine, and Real Estate sectors in Georgia. As part of our energy sector coverage, we produce a monthly Electricity Market Watch, adapted here for Georgia Today’s readers. Previous reports on the sector can be found on Galt & Taggart’s website - gtresearch.ge.

BGEO GROUP PLC ANNOUNCES THE PURCHASE OF THE REMAINING 75% STAKE IN GGU JSC BGEO Investments, a BGEO Group subsidiary, has signed a Share Purchase Agreement to acquire a 75% equity stake in Georgian Global Utilities Limited (GGU), the parent company of Georgian Water and Power (GWP). As a result of this buyout, BGEO Group will own 100% of GGU. The transaction values GGU’s enterprise value at GEL 287.5mn. BGEO Investments will pay a cash consideration of US$ 70mn (c.GEL 152.6mn) for the 75% stake in GGU. GGU supplies water and provides wastewater services to up to 1.4mn people in Tbilisi, Mtskheta, and Rustavi. In addition, GGU owns and operates three hydropower generation facilities with a total installed capacity 143 MW.

GEORGIA’S ACCESSION TO THE ENERGY COMMUNITY Negotiations for Georgia’s accession to the European Energy Community (EC) have concluded, according to the Deputy Minister of Energy, Mariam Valishvili. The next step in the process is a discussion of the matter at the EC Council of Ministers in autumn 2016. If membership is approved, Georgia will have to make some changes to align its energy market practices with EU best practices, including changes in the tariff calcula-

The Khudoni HPP (702 MW) project has been put on hold by the government due to anticipated changes in Georgia’s PPA policy. The project, owned by Indian Transelectrica, was already facing difficulties and has yet to obtain a construction permit. Following the ministry’s announcement last month that Georgia will re-evaluate the existing PPA policy in accordance with IMF recommendations, government works on the Khudoni project from the government’s side are halted before the new policy is drafted. Pro subscribers was up 3.6% y/y and Kakheti Energy Distribution (KED) subscriber usage was up 1.4% y/y. Consumption by Georgian Manganese, the largest eligible consumer, was flat in May 2016, making up 12.5% of domestic consumption. Domestic consumption needs were fully met by domestic hydrogeneration in May 2016. Electricity generation by Enguri and Vardnili made up 50% of total consumption. Electricity exports in May 2016 were up 32.0% y/y to 189.9 gWh, with 81.7 gWh going to Russia, 61.0 gWh to Turkey, and 45.2 gWh to Armenia. The average export price of Georgian electricity was USc 3.3/kWh, still competitive in comparison with Turkey’s market price of USc 4.2/kWh.

GAZPROM TO DELIVER NATURAL GAS TO A SMALL DISTRIBUTOR IN WESTERN GEORGIA Gazprom signed a 100 million cubic meter (mmcm) delivery contract with a small natural gas distribution license holder, Gasko+. The contract was signed during the St. Petersburg International Economic Forum on June 16th and gas is to be delivered in July-December 2016. Gasko+ is a minor distribution licensee operating in Western Georgia. Notably, annual household consumption of natural gas in Georgia in 2015 amounted to 694 mmcm.

PARTNERSHIP FUND TO INVEST US$ 5MN IN SMALL AND MEDIUM SIZE HPP DEVELOPMENT Partnership Fund intends to invest US$ 5mn in the Caucasus Clean Energy Fund (CCEF). CCEF was launched in June 2015 by a US private equity firm, Schulze Global Investments, and is anchored by EIB, GEEREF and Austrian OeEB, according to company sources. The MoU was signed by Schulze Global Investments and the Partnership Fund on June 17th, 2016. CCEF is committed to investing in small and medium-sized HPPs in Georgia and has a target to raise US$ 100mn.

DOMESTIC CONSUMPTION NEEDS FULLY MET BY DOMESTIC HYDROGENERATION Domestic electricity consumption was up 3.8% y/y in May 2016. The Abkhazian region’s consumption remains subdued, with only 1.0% y/y growth in May 2016, albeit from the high base of May 2015 (+31.5% y/y). Excluding the Abkhazian region, Georgia’s domestic consumption grew 6.2% y/y, with growth concentrated on the greater Tbilisi area (+11.6% y/y). Consumption by Energo-

ELECTRICITY PRICES IN TURKEY AND GEORGIA The weighted average market clearing price in Turkey was flat y/y in US$ terms, but increased 10.5% y/y in TRY terms. In Georgia, the balancing electricity price increased 37.9% y/y to USc 4.7/kWh. However, the wholesale price of electricity in May is not representative of the market, as a mere 1.7% of total electricity supplied to the grid was traded through the market operator. The rest of the trade occurred through bilateral contracts.

BUSINESS

GEORGIA TODAY JULY 5 - 7, 2016

Prime Minister Giorgi Kvirikashvili, held a number of meetings with their Swiss colleagues

Tourism Development in Focus at GeorgianSwiss Business Forum BY EKA KARSAULIDZE

fter signing a memorandum with the European Free Trade Association (EFTA) for future collaboration in Bern on June 27, the Georgian delegation, headed by the Prime Minister Giorgi Kvirikashvili, held a number of meetings with their Swiss colleagues. The Georgian side presented the country’s economic potential and its business-friendly environment. PM Kvirikashvili highlighted that a free trade deal with the EFTA, which units Switzerland, Liechtenstein, Iceland and Norway, is one of the most important achievements for Georgia’s economy and opens a 14 million consumer market. Additionally, Georgia already has a Deep and Comprehensive Free Trade Area (DCFTA) deal with the European Union (EU), free trade with Turkey and the Commonwealth of Independent States (CIS), a preferential export regime (GSP) with the United States (US), Canada, and Japan, and the country expects to sign a free trade deal with China by the end of the year. Kvirikashvili noted that Georgia has all the opportunities to attract Swiss investors, such as open and transparent policies, a preferential investment climate, leading positions on international ratings, a growing economy, an increasing number of Foreign Direct Investments, and more. Moreover, special emphasis was put on companies that already operate in Georgia, like Georgian-Swiss Company Blauenstein Georgia and Joint Stock Company Margebeli, which was established by joint Georgian and Swiss investors. The Georgian-Swiss Business Forum gathered around 60 Swiss businesspersons in Switzerland's capital Bern on June 28. They showed particular interest in the tourism sector. “I have the impression that Georgia has huge potential for tourism and there are sectors that can be developed,” said Eric Jakob, Head of Promotion Activities in the State Secretariat for Economic Affairs in Switzerland. In particular, Jakob mentioned the high mountainous region of Georgia, Tusheti. In the framework of the visit of the Georgian delegation, experts from both countries reached an agreement to create a master plan for the development the Tusheti

10 Galaktion Street

area, which is already one of the top destinations for both tourists and locals alike. PM Kvirikashvili said the Government of Georgia wished to establish a platform that would carry out studies and analyses about the development of Georgia’s mountainous areas. He stressed the master plans about the development of Georgia's mountainous regions must ensure the preservation of unique local ecosystems and cultural heritage. Besides Tusheti, the Georgian authorities are also planning to develop other popular tourist mountainous area of the country, including Mestia, Ahmet and Mulakhi. Eric Jakob added that the Swiss side is also interested in wine tourism. “We agreed with Georgian authorities that we will first cooperate in the wine tourism field. The World Tourism Organization scheduled a conference in September, so we are looking forward to future opportunities to share our experience with Georgia,” said Jakob. The first Global Conference on Wine Tourism by the World Tourism Organization (UNWTO) will be held in the Kakheti, Eastern Georgia wine region of Georgia from 7-9 September 2016.

Tel: (995 32) 2 45 08 08 E-mail: info@peoplescafe.ge

Is Vano Chkhartishvili still Trying to Misappropriate Patarkatsishvili’s Wealth?!

BY MAIA MISHELADZE

he Tbilisi Appellate Court is to consider the verdict of the High Court of Justice in England and Wales. Vano Chkhartishvili, accused of robbing a deceased friend by the High Court of England, continues to fight for his wealth in Georgia. The Tbilisi Appellate Court will make a decision regarding a case on which one of the world’s most just courts has already made a verdict. The High Court of England reviewed the late Badri Patarkatsishvili family lawsuit against Chkhartishvili and concluded that the wealth in question belonged to the deceased. Therefore, the heir to this wealth was his family. Despite this fact, Chkhartishvili still continues to fight for this wealth in Georgia. The dispute was started by Chkhartishvili back in 2014. The court session between the representatives of Blue Tropic, Coppella Ventures Limited and Vano Chkhartishvili took place on June 28. According to the claimant, there was a verbal agreement between him and the late Patarkatsivhili by which the assets of Blue Tropic and Coppella Ventures Limited belonged to him. The High Court of England ruled that the abovementioned companies were victims and charged Chkhartishvili to compensate for their material loss. Judge Maia Sulkhanishvili of the Civil Case Chamber is reviewing this case in the Tbilisi Appellate Court. The judge has suggested the parties settle the dispute through negotiations so the case could once and for all be closed. Vano Chkhartishvili’s representative, Mamuka Ghviniashvili, claims that his client is not against compensating the loss and has offered to hire a well known audit company to determine the sum that needs to be paid. According to the attorney of Blue Tropic and Coppella Ventures Limited, Lasha Birkaia, this is another attempt to delay the process, as an audit company cannot make a determination due to the amount of legal details in the case. According to Chkhartishvili’s representatives, Patarkatsishvili’s family is demanding a sum of USD 60 million for damages, a claim denied by the family’s attorney. Chkhartishvili’s representatives claimed they were open to paying USD 10 million. Ultimately, Judge Sulkhanishvili suggested that the parties agree on USD 35 million. During the court hearing on June 28, Chkhartishvili’s representative Mamuka Ghviniashvili asked the Judge to pro-

vide new evidence, soliciting the existing evidence and interrogating a witness for a claim that was based on the decision by the Tbilisi City Court on July 22, 2014. “Let it be established that, in July 2004, there was an agreement of cooperation between Ivane Chkhartishvili and Badri Patarkatsishvili which ended on the 26th of December 2013; let it be established that 95.5% of the Poti Millfactory owned by this cooperation was sold by Blue Tropic Limited and any revenue from this sale belonged to this cooperation which, at the time of sale, was represented by Ivane Chkhartishvili, Ina Gudavadze, Liana Zhmotova, Ia Patarkatsishvili and Natela Patarkatsishvili. I inform the Appellate Court that the Poti Millfactory also owned a plot of land, along with the constructions on that land and various portable items. The abovementioned wealth was purchased by TBC Bank on the 20th of December, 2010, in an auction made by the very same bank and was later, after two days, on the 22nd of December, sold to Agricom. According to the Poti Millfactory, the auction and transactions made on that wealth happened with numerous legal violations. Due to this fact, it filed a lawsuit in the Tbilisi City Court. On the 28th of January, 2015, the founder of Agricom, Konstantine (Koki) Osipov was questioned as a witness. He gave a detailed and highly important testimony. Specifically, he had been involved in the mill business since 2009 and that he was always interested in purchasing the Poti Millfactory. He said that he had been negotiating with Chkharitshvili since 2009 on the sale of the Poti Millfactory.” Ghviniashvili gave a detailed report on the Osipov-Chkhartishvili negotiations. He claims that in 2009-2010 Osipov and Chkhartishvili couldn’t agree on a price and ultimately the asset was purchased by Osipov from TBC Bank. In 2011, Patarkatsishvili’s family members met with Osipov and showed him documents according to which they were the owners of the Poti Millfactory. Osipov paid them USD 1 million. According to Ghviniashvili, Osipov’s testimonies prove their side right. Despite the fact that the Poti Millfactory was registered to Blue Tropic Limited, the real owners of this wealth were the cooperation of Ivane Chkhartishvili and Badri Patarkatsishvili. Therefore, Ghviniashvili asked the Appellate Court to once again question Koki Osipov. Vano Chkharitshvili’s representative claims that questionable circumstance is provided by cases regarding a plot of land near universal store “Tbilisi” and plot of land at Pkhovi #3: “With regard the mentioned facts, during the first instance, Giorgi Kavta-

radze was questioned twice as a witness. Kavtaradze explained that for the purchase of universal store “Tbilisi”, half the price, USD 450,000, was given personally to him as a loan from United Georgian Bank, while the second half was given to him as cash, though he can’t recall who gave it to him. We asked him to covered the USD 450,000 loan that he mentioned and he replied was that he was unable to recall that either. But he specifically stated that it wasn’t covered by either Chkhartishvili or any person connected to him.” According to Ghviniashvili, the loan was covered by Ivane Chkhartishvili’s money. He states that Chkharitshvili owned 34 percent of Didube Plaza Limited which was registered to Giorgi Kavtaradze. On June 15, 2006, Kavtaradze sold 30% to Turkish businessman Omer Sar and 4% to Giorgi Kandelaki. According to Ghviniashvili, the loan was covered from this sale. Correspondingly, Ghviniashvili asked the Judge to request the loan agreements of Giorgi Kavtaradze from 2006 to 2007 in VTB Bank (former Georgian United Bank). The Judge acknowledged this request and planned to review it during the next hearing, on September 27. During the hearing of June 28, Judge Sulkhanishvili accepted the request of the attorneys of Blue Tropic and Coppella Ventures Limited regarding the consideration of a verdict on this case by the High Court of England. As we have already reported on the details of the court procedure in London, we will only remind you that in 2013 two companies, Blue Tropic and Coppella , registered in Virgin Islands, filed a lawsuit in England regarding real estate property located in Georgia and shares of companies registered in Georgia. According to the documents, the shares of Blue Tropic and Coppella are owned by a discretionary trust firm ‘Nile Trust’ whose direct beneficiary owner was Badri Patarkatsishvili. The defendant in this case was Georgian businessman Vano Chkhartishvili. Blue Tropic and Coppella gave power of attorney to Giorgi Kavtaradze, a Georgian lawyer who was known to Badri Patarkatsishvili and who started working for Vano Chkhartishvili. He was given the right to manage the property and activities of the plaintiffs. Chkhartishvili assigned Kavtaradze the task of using the power of attorney to transfer shares from plaintiffs to his own property or companies controlled by him. Plaintiffs say that he did not pay anything to transfer ownership of the shares and that the majority of the transfers were made within one month of Badri Patarkatsishvili’s death. Blue Tropic owned a 92.85% share of the Georgian company JSC Poti Mill, registered on the Georgian stock exchange. According to the plaintiffs, on March 5, 2008, Giorgi Kavtaradze, following the instructions of Vano Chkhartishvili, put the shares up for sale at 4.95 GEL each. On the same day the shares were bought by the company ‘Sonata Alliance Group Ltd’ registered in Georgia, which is owned by ‘Sonata Alliance Inc’ a company registered on the Seychelles Islands, in the beneficiary own-

ership of Vano Chkhartishvili and his family members. Coppella had, in 2004, purchased a universal store building located in Tbilisi, at 2/4 Rustaveli Ave., from Zurab Alavidze and GEDEONI LLC for USD 900 thousand. On 17 August 2007 Universal Store was sold to Movat Georgia for USD 12 mln 275 thousand. Movat Georgia transferred the money to the Georgian branch bank account of Coppella, which was opened at TBC Bank. Thirteen days later, on August 2007, Giorgi Kavtaradze, following instructions of Vano Chkhartishvili, transferred USD 10 million from the amount received as a result of this sale, from the account of Coppella to the account of ‘Sonata Alliance Inc. Giorgi Kavtaradze was questioned during the trial in Britain. His testimony reads that on the 30th December of 2004 Badri Patarkatsishvili paid USD 900,000 for the purchase of the Universtore “Tbilisi”. Chkhartishvili, on the other hand, states that he paid the USD 900,000. He said he gave half (USD 450,000) in cash to Giorgi Kavtaradze and the other half was taken by Giorgi Kavtaradze as a loan from Chkhartishvili’s United Georgian Bank. Because of this Badri Patarkatsishvili decided not to invest and therefore Chkhartishvili sold the Universtore for USD 12,275.000. The USD 450,000 which Chkhartishvili gave to Giorgi Kavtaradze in cash, was kept in Chkhartishvili’s safe at his office. Giorgi Kavtaradze said that he does not remember such a fact. To sound more convincing, Chkhartishvili added specific details such as rolling the cash in a piece of cloth… After the end of court hearing the Appellate Court, we contacted Chkhartishvili’s representative, Mamuka Ghviniashvili. “The High Court of England has not made its decision yet,” he said. “Therefore, what is written in the verdict can’t be considered as fact since any decision can be appealed. To some extent we have reshaped our requests and we are trying to prove to the Court that the owner of the assets, some parts of it, is Chkhartishvili. And different parts are a result of the joint business of Chkharitshvili and Patarkatsishvili.”

THE DISPUTE IS ABOUT USD 60 MILLION. YOU’VE OFFERED ONLY USD 10 MILLION TO THE OPPOSING SIDE, WHILE THE JUDGE ASKED YOU TO AGREE TO USD 35 MILLION. HOW REALISTIC IS THIS AMOUNT FOR YOU? The sum is a subject I can’t discuss. It’s obvious that the decision is my client’s. However, my client was ready to settle this dispute through negotiations from day one.

ARE YOU STILL REQUESTING AN INTERNATIONAL AUDIT COMPANY TO DO THE EVALUATION? We won’t demand it. This was just an offer which stands to this day. Both of the parties are subjective, one considers this asset to be theirs but so does the other. Chkharitishvili considered that the best way out was to involve a third, independ-

ent party to evaluate the material loss.

WHY IS THE QUESTIONING OF THE FOUNDER OF AGRICOM SO IMPORTANT FOR YOU? This is in direct relation with the case because Koki Osipov said during the court hearing that he paid USD 1 million to Patarkatsishvili’s family, Irakli Rukhadze specifically. Osipov also said that he discussed the purchase of Poti Millfactory in 2006-07 with Chkharitshvili because he considered him to be the owner.

WHEN DID OSIPOV PAY USD 1 MILLION TO RUKHADZE? “As he himself said, he first contacted Patarkatsishvili’s family during the spring of 2011 and the transaction happened at that time, too.” We also talked with Lasha Birkaia, the attorney of Blue Tropic and Coppella. “The Request of Ivane Chkhartishvili’s representative only serves the purpose of delaying the court decision and it has nothing to with the case.”

LASHA, WHY DO YOU THINK IT IMPORTANT TO QUESTION OSIPOV? Osipov stated that after Badri had passed away, he gave USD 1 million to Badri’s family. Osipov had negotiations regarding this asset with Chkhartishvili but after members of Patarkatsishvili’s family contacted him, he paid the money to them. If the asset belonged to Chkhartishvili, then why did Osipov pay USD 1 million to Patarkatsishvili’s family?

WHAT IS PROVEN BY THE FACT THAT GIORGI KAVTARADZE SOLD 34% OF DIDUBE PLAZA? Nothing! The Judge had the same question and as you saw the party couldn’t come up with an answer.

WHAT PROVES THAT 34% WHICH WAS ON KAVTARADZE’S NAME WAS ACTUALLY OWNED BY CHKHARTISHVILI? Nothing. In this case it’s even impossible to identify the money. There is no way to prove that the universal store was purchased with this money even if they prove that the 34% of Didube Plaza was owned by Kavtaradze. Chkhartishvili’s representative says that if they prove it, they’ll call for Kavtaradze as a witness once more because they think Kavtaradze will confirm that Didube Plaza was Chkhartishvili’s.

THE JUDGE SUGGESTED YOU SETTLE WITH USD 35 MILLION. IS THAT ACCEPTABLE FOR YOU? That decision must be taken by the sides themselves and not by the representatives. We’re only obliged to tell our sides about the proposal but the ultimate decision is theirs. But one thing is a fact, also confirmed by Chkharitshvili’s representatives: he has to pay something. The question as to why he hasn’t paid the money that he thinks he should pay before now is still unanswered. Patarkatsishvili passed away in 2008, didn’t he?

BUSINESS

GEORGIA TODAY JULY 5 - 7, 2016

First Energy Efficient ‘Solar Chamomile’ Launched in Kutaisi BY EKA KARSAULIDZE

n the historic center of the city of Kutaisi, Imereti region, the first energy efficient public garden was opened with a large metal structure, designed as three large flowers, which allows you to charge your computer, mobile phone and other electronic devices through USB. It was created according to modern technologies and equipped with solar panels. The ‘Solar Chamomile’ collects the sun’s energy during daylight hours, which charges internal bat-

teries that in turn charge users’ electrical devices. Kutaisi City Hall announced that the first ‘solar chamomile’ installed in Georgia aims to encourage the use of green energy and an energy efficient lifestyle in Kutaisi and eventually throughout the country. From September 2016, the same Kutaisi central garden will be fitted with a Wi-Fi hotspot and an electronic library where users can download digital books using QR codes. The project was co-financed by Winrock International, United States Agency for International Development (USAID), Kutaisi City Hall and the Energy Efficiency Center of Georgia.

Works of Industrial Designer on Display at Tbilisi’s Art Palace

Contact: www.edelbrand.ge Phone: 599 461908

n exhibition featuring the works of hyperrealist designer David Dron opened at the Art Palace of Georgia on Friday. Watercolor and pencil drawing of automobiles, ships and various portraits will be on display during the weeklong exhibition. Dron is a first year student at Tbilisi’s International School of Design and had previously studied industrial design at the State Academy of Arts. As an upand-coming artist, Dron gained praise from the chief designers of famedItalian car companies Ferrari and Lamborghini in 2012. Dron’s conceptual and industrial designs have also caught the attention of several art centers, including the European School of Design in Germany. The exhibition will be held at Tbilisi’s Art Palace until July 8. WHERE: 6 Kargareteli Str., Tbilisi

BUSINESS

GEORGIA TODAY JULY 5 - 7, 2016

Dechert OnPoint: Amendments to the Tax Code

echert Georgia, through the contribution of partners Archil Giorgadze and Nicola Mariani, joined by senior associates Ruslan Akhalaia and Irakli Sokolovski, as well as Ana Kostava and Ana Kochiashvili, is partnering with Georgia Today on a regular section of the paper to provide updated information regarding significant legal changes and developments in Georgia. In particular, we will highlight significant issues which may impact businesses operating in Georgia.

Georgia’s Parliament approved amendments to the Tax Code of Georgia (the “Tax Code”) on 12 May 2016, thereby introducing a new corporate profit tax regime (the “New CPT”), one of the most significant changes to Georgia’s tax system during the past decade. The key difference between the New CPT and the corporate profit tax currently in effect (the “Current CPT”) relates to the taxable object and timing of tax payments. In particular, under the Current CPT enterprises determine their annual profit according to the tax accounting rules and pay the Current CPT on their profits whether or not these profits are distributed. In contrast, the profits under the New CPT are taxable only upon their distribution. In addition to distributed profits, however, the New CPT also applies to: non-business expenses and certain payments; the market value of free supplies or payments made; and representation expenses incurred in excess of the cap set out in the Tax Code.

DISTRIBUTED PROFITS Under the New CPT, profit is taxable upon distribution only. Respectively, if the taxpayer does not distribute the profit, the taxpayer shall not be liable to corporate profit tax (provided, it does not make other types of payments or supplies which are subject to the New CPT). In addition to the distribution of the profits, the non-arm’s length international transactions and non-market price transactions between the related parties may trigger the New CPT. Related party transactions trigger the New CPT if one of the parties to such transaction is: (i) an entity to which the New CPT does not apply; or (ii) an entity or an individual which is exempt from the corporate profit or individual income taxation. In such instances, the following amounts shall be deemed part of the distributed profit: (a) the portion of the income received or to be received in excess of the market price; or (b) the portion of the expense incurred or to be incurred in excess of the market price. Importantly, under the New CPT the non-market price transactions between related parties shall not trigger the New CPT if both parties to the transaction are liable to pay the New CPT, which is one of the key positive developments. Another important feature under the

New CPT is that distribution of the profits by a Georgian enterprise to another Georgian enterprise (except enterprises exempt from profit taxes) do not trigger the obligation to pay the New CPT.

NON-BUSINESS EXPENSES OR PAYMENTS Under the Current CPT, non-business expenses are not eligible for deduction. Under the New CPT, however, nonbusiness expenses shall be immediately taxable notwithstanding the financial performance of the taxpayer. The nonbusiness expenses include: (a) expenses which are not documented if the documentation of the expenses is required by the Tax Code; (b) expenses which do not relate to the generation of income, profit or compensation; and (c) interest payments made in excess of the cap set by the Minister of Finance. In addition to this, certain payments (whether they qualify as an expense or not) are also subject to the New CPT. The payments which trigger the New CPT payment obligations include certain payments made to entities registered in the countries with preferential tax regimes (the “Offshore Persons”) or entities exempt from the New CPT. These include (among others): (a) Payments made for the purchase of debt instruments issued by the referred entities; (b) payments for contractual penalties under the contracts; (c) advance payments; and (d) the principal amount of the loan. In the above listed instances, the New CPT shall be assessed on the full amount of the actual payment made. For instance, if the Georgian entity granted a loan to the Offshore Person, then the entire amount of the loan transferred to the Offshore Person would be subject to the New CPT. In addition to the above stated, the following payments are also subject to the New CPT: (a) contribution to capital of or payment for the shares of the nonGeorgian residents or the entities exempt from the corporate profit tax; (b) granting of a loan to any non-Georgian resident (both individuals and enterprises); and (c) granting of a loan to any individual (both residents and non-residents). Notably, if the taxpayer which made an advance payment receives: (i) its advance payment back; or (ii) goods/ services for which the advance payment was made, then the taxpayer may credit the New CPT paid on such advance payment against its future tax liabilities or claim back this tax from the state budget. If the purchaser of debt instruments or shareholding received back its payment, then the taxpayer may credit the New CPT paid on such transaction against its future tax liabilities or claim back this tax from the state budget.

Source: Dechert

REPRESENTATION EXPENSES

CONCLUSION

Representation expenses are expenses incurred by the taxpayer in the course of business activities in relations to representation or relationships with third parties (usually for business development or the support of business relationships). These expenses include the following: (a) costs of various business related events (e.g. presentations, receipts), including the costs of tea, coffee, mineral waters, juice, breakfast, dinner, supper and banquette, among others; (b) costs relating to sightseeing; (c) costs relating to the purchase of souvenirs; and (d) costs relating to serving guests, including, consular services costs (visa costs); transportation services (e.g. from airport); hotel services (booking, stay); and business event costs. The representation expenses in excess of the cap established by the Tax Code are taxable under the New CPT. The cap is equal to the higher of the following two items: (a) one percent of the preceding year’s income; or (b) one percent of the preceding year’s expenses.

Thus, one of the key developments under the New CPT is that the profits of an enterprise shall not be subject to the New CPT, unless such profits are distributed or the taxpayer makes supplies or payments expressly specified in the Tax Code (e.g. non-business expenses, free supplies, etc.). Another important development is that the Revenue Service shall not have a right to make adjustment to the non-market price transactions between related Georgian enterprises to the extent such enterprises are subject to the New CPT. Lastly, the profit distributed by the Georgian enterprise to another Georgian enterprise shall not trigger the obligation to pay the new CPT. The new regulations, however, set a stricter approach with respect to certain transactions, e.g. payments to offshore companies or loans granted to individuals. Notwithstanding certain disadvantages of the new regulations, it is expected that overall the New CPT will have positive impact on Georgia’s private sector. These expectations are

likely to be confirmed in the coming years. *** Note: this article does not constitute legal advice or tax advice. You are responsible for consulting with your own professional tax advisors concerning specific tax circumstances for your business. Dechert’s Tbilisi office combines local service and full corporate, tax and finance support with the global knowledge that comes with being part of a worldwide legal practice. Dechert Georgia is the Tbilisi branch of Dechert LLP, a global specialist law firm that focuses on core transactional and litigation practices, providing world-class services to major corporations, financial institutions and private funds worldwide. With more than 900 Lawyers in our global practice groups working in 27 offices across Europe, the CIS, Asia, the Middle East and the United States, Dechert has the resources to deliver seamless, high quality legal services to clients worldwide. For more information, please visit www. dechert.com or contact Nicola Mariani at nicola.mariani@dechert.com.

FREE SUPPLIES The free supplies of goods and/or services or transfer of money are taxable under the New CPT. The tax is assessed on the market price of the free supplies

PUBLISHER & GM

George Sharashidze COMMERCIAL DEPARTMENT

Commercial Director: Iva Merabishvili Marketing Manager: Mako Burduli

GEORGIA TODAY

or the amount of money transferred (as applicable). For the purposes of the New CPT, free supplies include any supplies of goods and/or services the purpose of which is not receipt of income, profit or compensation. This definition implies that e.g. the gifts given to individuals or companies in the course of marketing activities should not trigger the New CPT. Besides, the free supplies with respect to which the taxpayer paid withholding tax shall not be further taxable with the New CPT.

EDITORIAL DEPARTMENT:

Editor-In-Chief: Katie Ruth Davies

Journalists: Tony Hanmer, Tamar Svanidze, Zviad Adzinbaia, Beqa Kirtava, Meri Taliashvili, Eka Karsaulidze, Zaza Jgarkava, Maka Bibilashvili, Karen Tovmasyan, Dimitri Dolaberidze, Maka Lomadze, Tim Ogden, Ana Akhalaia, Robert Isaf, Joseph Larsen, Will Cathcart, Vazha Tavberidze, Nugzar B. Ruhadze

Photographer: Giorgi Pridonishvili Layout: Misha Mchedlishvili Webmaster: Sergey Gevenov Circulation Managers: David Kerdikashvili, David Djandjgava

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