Note: This article has initially published by Gela Barshovi (our founder and managing partner) on Bloomberg. Please, see the original link of the article: https://news.bloombergtax.com/daily-tax-report-international/insight-taxation-of-cryptocurrency-in-georgia
Georgia welcomes crypto business and is very popular with mining bitcoins (one reason is due to low electricity prices). Georgia is among one of the top mining countries in the world, it does not have any legislative restrictions for crypto exchange and, to date, does not require any license for such activity. Also, Georgia provides a high tax certainty and beneficial tax system for businesses involved in the crypto field.
The Georgian Ministry of Finance published a public decision on June 28, 2019 (the decision) regarding the taxation of cryptocurrencies in Georgia.
According to the decision:
- individuals in Georgia are exempted from income tax on any profit received from selling cryptocurrencies;
- selling cryptocurrency (exchanging it into Georgian or other national currencies) is not taxable by value-added tax (VAT) (applies to both corporations and individuals);
- selling computing (hash) power from Georgia abroad is not taxable by VAT either. In addition, right on input VAT on such operations is maintained (applies for both corporations and individuals);
- selling computing (hash) power in Georgian territory (from Georgian resident to Georgian resident) is a VAT taxable operation;
- purchasing computing (hash) power by Georgian resident from abroad is subject to reverse VAT in Georgia.
Selling Cryptocurrency—Natural Persons
According to the Georgian tax code (GTC), natural persons (both, residents and nonresidents) are taxable in Georgia only on their income received from Georgian source. Specifically, personal income tax for natural persons is a worldwide income, however, GTC provides exemption on non-Georgian source income received by them while personal income tax for nonresident natural persons is only income received from Georgian source. Therefore, no worldwide taxation applies for natural persons in the country.
Article 104 of the GTC defines what type of incomes are considered to be received from Georgian source. The types of incomes of natural persons which do not meet any criteria listed in Article 104, are automatically exempt from taxation in the country.
The decision confirms that neither paragraph of Article 104 fits to the profit from selling cryptocurrency, therefore, such profit shall not be deemed as being generated from Georgian source. As a result, according to the decision, natural persons are exempted from income tax on such profit.
The main criteria for residency in Georgia is to be present in the country for at least 183 days within 12 consecutive months.
Selling cryptocurrency—Legal Entities
Legal entities are taxed on their worldwide income in Georgia, unlike natural persons. Therefore, the gain received from selling cryptocurrency by Georgian companies is subject to 15% of corporate income tax (CIT).
It should be noted that Georgia has a special CIT system, similar to Estonia. In particular, Georgian companies pays no CIT on their profit annually but such tax is payable only upon the distribution of dividends and CIT is not payable unless dividends are not distributed.
In other words, if a Georgian entity decides not to distribute a profit but to reinvest it, they pay no CIT on the reinvested amount. In case of distributing dividends, 5% withholding tax on dividend applies at source in addition to 15% CIT.
It is an easy process to establish a company in Georgia. No limitations apply for foreigner shareholders and no minimum capital contribution is required. A company’s official registration can be completed in one working day after the application.
VAT on Selling the Cryptocurrency
According to Georgian tax legislation, there are two taxable events by VAT: Providing goods and rendering services on Georgian territory. The VAT rate is 18%. In addition, money is not considered as a good, therefore providing money is not a VAT taxable operation.
According to the decision, selling any kind of cryptocurrency (exchanging it into Georgian or other currencies) has a similar nature as exchanging money and for VAT purposes shall be taxed in the same way as money is. As a result, selling cryptocurrency shall not be regarded as a VAT taxable operation.
To sum up the above described, the decision clearly implies that selling the cryptocurrency shall not be taxable by VAT in Georgia.
VAT on Selling (Purchasing) Computing (Hash) Power
Process
Computing (hash) power is used for mining cryptocurrency. Miners either mine a crypto themselves and become the owner of the cryptocurrency bearing all price fluctuation risks or they can provide hash power to a client only and generate lower but steady income, in this case a client receives a title of owner of cryptocurrency mined via the purchased hash power. That operation is like virtually renting data centers for mining crypto coins.
Customers have an opportunity to purchase computing (hash) power platforms directly from miners or from mediator companies. The customer starts mining and generating crypto coins immediately after the purchase without owning any mining equipment. The mining period is limited according to the contract terms and it typically lasts a year. Customers have an opportunity to monitor and control their earnings on a daily basis. They usually pay a one-off fee for the service and bear all risks of price fluctuation of the crypto. The price of hash power is usually offered per TH/s (Tera Hash per Second).
Tax Consequences
In general, the service is taxable by VAT in Georgia if such service is rendered in the territory of the country. The decision describes that selling hash power is considered as provision of electronic services for VAT purposes. Thus, for determining whether selling hash power has been rendered on Georgian territory we need to apply the same rules as for electronic services described in the tax code. Article 166 of the GTC separately sets rules for such services.
If the recipient and user of the electronic service is a Georgian resident, this service is considered to be provided on Georgian territory and conversely, such service is understood to be provided outside of Georgian territory if a recipient and user is a non-Georgian resident.
From above rules we can derive that, selling hash power is not taxable by VAT if a Georgian resident sells it to a nonresident and it shall be taxed by reverse VAT if a Georgian resident purchases it from non-resident. Lastly, selling the hash power by a Georgian resident to a Georgian resident is taxed by VAT which is 18%.
Due to the EU directive, the amendments of Georgian VAT rules are officially announced most likely from 2021. However, it is expected that those amendments will not have any negative effect on current rules of cryptocurrency VAT taxation.
Withholding Taxation
Based on Article 134 of the GTC, payment to nonresidents for services are subject of withholding taxation with 10% rate if such income received by nonresident is considered as being received from Georgian source according to Article 104 of the GTC.
Article 104 is quite a long article which leaves room for interpretation and determination whether selling hash power from abroad to Georgia is Georgian source income, depends on specific facts and circumstances. The decision does not clarify whether that income shall be understood as Georgian source or not. Additionally, a tax treaty might prevent a Georgian company or natural person from such taxation at source anyway even if it is taxable based on the GTC.
Application of Tax Treaties
Georgia has pretty rich tax treaty network signed with 56 countries so far. The most treaties are based on the 2008 OECD or UN models. Article 7(business profit) or Article 21(other income) might apply on the case when a Georgian resident person pays to nonresidents for the hash power or on the opposite.
The above-mentioned articles usually give exclusive taxing right to the resident country of service provider unless such activity creates permanent establishment in another country which should not be a case taking in mind a nature of such an operation (It does not require presence in other country’s territory).
Considering all of the above, in case of tax treaties application no withholding tax payment should be due when payment for purchased hash power is made from Georgia to abroad.
Lastly, if a natural person decides to become a Georgian resident, application of the tax treaties might prevent them from double residency in case of tax administration of other jurisdictions claim their residency as well.
Conclusion
The recent decision provides a preferential tax system especially for individuals. According to the decision:
“If a natural person becomes a resident of Georgia, he/she will not be taxed on the profit generated from selling cryptocurrency, neither VAT will be applicable on such transaction. If a legal entity established in Georgia does the same activity, no VAT is payable in that case as well but CIT of 15% and withholding tax 5% will be due only in case of distribution dividends to shareholders.”
Selling hash power is deemed as a provision of electronic service and is not taxable by VAT if a Georgian resident sells it to a nonresident. However, that transaction is subject to reverse VAT in Georgia if a Georgian resident purchases hash power from abroad. In addition, 10% of withholding tax might apply on the later transaction which might be prevented via application of relevant tax treaty signed by the Georgian government.
Reproduced with permission from Copyright 2020 The Bureau of National Affairs, Inc. (800-372-1033) www.bloombergindustry.com
About the writer of the article: Gela Barshovi is an international and Georgian tax consultant and managing partner of Georgian accounting firm TPsolution. For the tax consultation, business registration, accounting, reporting services, and/or questions regarding the article, you can contact him at gela.barshovi@tpsolution.ge