Individuals with the status of “Small business” can pay only 1% personal income tax in Georgia
Under article 90 of the Georgian tax code, an individual with an earning up to 500 000 GEL (approx. $170 000) yearly obtaining a certificate of “small business” can enjoy 1% personal income tax in Georgia.
We see that 1% is a super low tax, highly beneficial for many freelancers and individual entrepreneurs worldwide. Probably, you cannot find many jurisdictions offering such tax incentives; however, that is not as simple as it sounds.
Here is what you should consider before enjoying the 1% taxation in Georgia:
Non-residents can obtain a status of “small business” and can enjoy 1% tax in Georgia (Positive side)
As per the currently applicable approach at Georgia Revenue Service (GRS-Georgian tax and custom administration) you do not need to be a Georgia’s tax resident to benefit from the “small business” status (1% personal income tax). When Georgia’s Revenue Service issues “small business” certificate, the authorities do not ask you whether you are a Georgian tax resident or not, but mostly the question is only about the business activities you carry out in/from Georgia.
On the other hand, if you are not a tax resident of Georgia but a tax resident of other country, 1% taxation might NOT be fully beneficial for you as, most likely, the income received and taxed at 1% in Georgia, will be taxed again under the law of a jurisdiction where you are a tax resident (worldwide taxation).
Such a problem (worldwide taxation in other jurisdiction(s)) may also arise when you are a dual tax resident: of Georgia and other countries (even if the tax treaties are in place, they do not always ensure full protection).
It is a complicated topic with many details, but in short, the most effective way to fully enjoy 1% tax is relocation to Georgia and becoming only Georgian tax resident or a tax resident of no country.
You can read the article of mine about Georgian tax residency rule here.
You can request consultation regarding “small business” (including international taxation) by filling the following contact form: https://tpsolution.ge/contact/
Unclear law about non-resident “small business” individuals
The fact that non-residents also are entitled to enjoy 1% tax in Georgia is not explicitly specified in the law, however it is neither forbidden by the law, thus we make conclusion that whatever is not forbidden, it is allowed.
Also, the current practise shows that the Georgian tax authorities have no any problem with non-residents enjoying 1% tax in Georgia as long as they satisfy all other criteria provided by the Georgian laws. However, I shall notify you that there is no any guaranty, GRS will not challenge this case later similarly to what they recently did with regard to Virtual Zone Persons. (Please see more information here).
“Small business” status does not apply to all business activities (Negative side)
For example, consultation service and employment contracts (and some other business activities) do not qualify under the 1% taxation in Georgia. A list of activities which are not qualified for “small business” status is given in the decree #415 of the Georgian government.
The decree of Georgian government #415 regarding “small business” provides the list of:
- Economic activities that are taxed at the regular rate (e.g. 20%) by “Small Business” in parallel of 1% taxation. Also, such types of income do not take part in calculation of 500 000 Gel annual income threshold;
- Economic activities that are not allowed for “small business” individuals, meaning that in the case of performing such activities (so called, forbidden activities), the status of “Small Business” will not be granted or will be revoked.
- Economic activities which are not listed above (neither forbidden nor taxed at ordinary rate in parallel) are allowed for “Small Business” entrepreneurs and can be taxed at 1% rate (or 3% above 500,000 GEL, if applicable);
Please, note that it is not only decisive factor how you name your service contract, but it is crucial to analyse the nature of the service you provide and the real conduct of your transaction to find out whether there is a risk that the Georgian tax authority will revoke your “small business” status by re-qualifying your transaction.
If the nature of the service does not correspond to the contractual name (form) Georgian tax inspectors might apply the so-called General Anti-Avoidance Rule (GAAR) and change the qualification of your business transactions for tax purposes.
General Anti avoidance rule (GAAR) applicable in Georgia
According to the Georgian tax code article #73.9:
“To determine tax liabilities, a tax authority has the right:
- a) not to take into account business transactions of no substantial economic impact;
- b) to change the classification of a business transaction based on its form and substance if the structure of the transaction does not correspond with its substance”
You see that Georgia’s tax authorities are entitled to change the transaction’s qualification regardless of a contract. For example, if a contract says “IT service” or “management services,” a tax authority might qualify it as “consultation on IT” or “consultation on management issues”; as a result, revokes the “small business” status retrospectively (20% tax instead of 1%).
Therefore, please, make sure that the contract terms are well-worded and comply with the real conduct of your transactions.
Service fee of “small business” may be re-qualified as wage, thus taxed at 20% tax rate
The same problem as described above might arise if GRS intends to qualify a service contract of a “small business” as an employment agreement. (Employment income received from Georgian source is taxed by 20% rate only).
If you worked as an employee and changed your contract and named it as “service agreement” to enjoy the 1% taxation, make sure that other conditions of the contract and actual conduct also changed, otherwise, only changing the name of the agreement might lead to the application of GAAR-requalification of the transaction.
Several factors make an employment contract different from a service provision. For example, when a service provider has only one client for a long time, it might create doubts that the contractual relationship is employment and not the service provision. Of course, that is not the only decisive factor in this analysis but they might start with that.
For your information, there have been a quite few cases when Georgia’s tax authorities challenged the “small business” status, claiming that based on the facts, a person was an employee and not a service provider and the only purpose of naming a contract a “service agreement” was to avoid tax and benefit from the 1% tax lawlessly.
More detailed on potential requalification your service fee as employment you can read another article of mine here.
If income of “small business” exceeds 500 000 GEL per annum, it is not the reason for automatic annulation of the “small business” status (Positive side)
If annual income of “small business” exceeds 500 000 GEL, it is not a legal base for revoking the “small business” status as long as the 500 000 income threshold is not exceeded in 2 consecutive years.
Besides, you pay 3% above 500 000 starting from the month when you exceed the mentioned threshold.
For example, if you receive 600 000 GEL by one transaction and it is your recognized income, you pay 3% on the full amount of 600 000 GEL. On the other hand, if you receive 60 000 GEL during 10 months, and exceed the threshold in the 9th month, you will pay 1% during first 8 months on 480 000 GEL and 3% on 120 000 GEL.
The tax reporting period of “Small business” in Georgia
Tax reporting period for individuals with status of “small business” is a month. It is advised to submit monthly tax declaration even if there was not any transaction in a concrete reporting month (zero tax declaration).
Monthly reporting is only for income taxable by 1% rate. If an individual with “small business” status received income taxable by an ordinary rate in parallel to 1% taxation (e.g. 20% tax), such income shall be reported annual based until the end of March of the year following the reporting year.
Having a certificate of “small business” does not guarantee tax certainty. Even in the case of having the “small business” certificate, 1% tax rate may still be challenged by tax authorities of Georgia (Negative side)
You cannot enjoy the 1% tax rate without a “small business” certificate issued by Georgia Revenue Service. However, this is one of several criteria, not the only one. Even if you have the certificate of “small business” at your hands, GRS still has right to challenge the status and claim you shall be taxed at 20% tax rate instead of 1%.
“Small business” Registration in Georgia
The procedures are as follows:
You visit a service centre of Georgia Revenue Service e.g., at Kostava Avenue, or Gulua street, Tbilisi, take your queue number and get served by a nice and polite girl (Assumption: in that moment, you are already registered as an individual entrepreneur in Georgia).
You can visit the service centre alone or with a tax adviser.
She asks the reason for your visit. You say that you need to obtain a “small business” status. The main question from her is: what is your business activity? If you say, for example “a consultation service”, or only “employment” they tell you that you do not qualify for the 1% taxation mode. If you say that, for example, you carry out the IT service, you will receive the “small business” certificate without checking any contracts or other details from their side.
The girl at the service centre does not request service contracts and does not verify if you indeed provide IT services; she relies on your words and issues the certificate.
However, if, for example, after two years, a tax inspection is initiated in your business, tax inspectors from the audit department of Georgia Revenue Service (which is different from service department. Btw, where I worked for almost 8 years) will check your contracts and actual conduct of your business (the substance of the business transactions) and may challenge your 1% tax rate if real conduct of your business is not the same as it is stipulated in your agreements. As a result, they may tax you by 20% retrospectively, plus penalties and late payment interest, regardless having status of “small business”.
Imagine that after analysis they concluded that your activity is providing consultations regarding IT, instead of IT services or requalified your agreement as employment instead of service contract. In this case, they will revoke your status and make tax assessments retrospectively, applying a 20% personal income tax instead of 1%, regardless the fact that GRS has issued the “small business” certificate for you.
Besides the taxes in such a case, you will face penalties up to 50% of the additional tax assessment and 0.05% late payment interest of the principal amount of tax for each overdue day.
Statute of the limitation period in Georgia
It may be useful for you to know that the statute of limitation in Georgia lasts for 3 years. In reality, this period can be as long as 3 years and 11 months for the taxes which are reported monthly. After that time, a tax period closes and a tax authority is not entitled to conduct tax inspections.
What to know before enjoying “small business” status (1% tax) in Georgia-sum up
In Georgia, 1% taxation of individuals (natural persons) is a great possibility for many entrepreneurs and freelancers to save tax expenses in a legal way. However, as I already noted, you better to be careful before enjoying 1% tax rate.
Before obtaining the status of “small business”, I suggest you to receive proper pieces of advice form a Georgian tax consultant and make sure that your business activity is subject to the 1% taxation without facing significant tax risk. Also, you need to make sure that your contract is well worded and consistent with your business’s real conduct.
Finally, for 8 years of working as a tax inspector of Georgia, I have seen various cases proving that it is very “expensive” for businessmen/entrepreneurs to “solve” tax-related issues without proper analysis and consulting with a qualified professional, as superficial and easy approach to tax related issues frequently ends with a high tax burdens and penalties.
The short conclusion of the article: enjoy a 1% tax rate in Georgia as many entrepreneurs do, but do it carefully and correctly, consider the information provided above and consult with qualified tax professionals before starting registration procedures.