Introduction
Georgia is a developing, low-cost country with a growing economy and stable, attractive tax system. The present article provides a brief analysis of certain international aspects of the Georgian tax legislation, namely – the rules of residence and permanent establishment, tax base, withholding tax rates, anti-avoidance rules, transfer pricing and tax treaty policy.
Residence
A natural person becomes a resident of Georgia for a fiscal year if he/she spends at least 183 days during any 12 months that expire in this year. Besides, if a Georgian citizen is not a resident of any country in a particular year, he/she is considered a resident of Georgia if requests so.
Corporations are considered to be residents of Georgia if their management and/or incorporation are carried out in this country.
Permanent Establishment
The definition of permanent establishment in the Georgian local tax legislation tom some extent differs from the one provided by OECD or UN.
The Georgian general definition of PE is a certain place (not necessarily fixed) where non-resident entity fully or partially carries out economic activity. An exception from the rule refers to foreign entities providing services that fall into the scope of the Georgian law on oil and gas. Such companies are exempted from PE obligation.
Another significant deviation from OECD is the definition of a dependent agent PE in the Georgian legislation: the agent creates PE in the country if its control by a non-resident entity lasts for more than 3 months unless the following criterions are met:
A person holds a status of a professional agent, broker or mediator under the relevant legislation.
A person is not entitled to conduct negotiations or sign on behalf of non-resident principle.
In other words, even if an agent is not entitled to sign contracts and/or conduct negotiations, possibility of creation of PE still remains if that person does not officially hold the status of professional agent, broker or mediator.
However, the local definition of PE is fully reliable only if a treaty does not exist with a residence country of a foreigner, otherwise the treaty overrides and only provisions of this article more extenuating than a treaty definition of PE will be applicable.
Tax bases
Resident corporations are taxable on their worldwide income. Non-resident ones and natural persons pay taxes on Georgian source income only.
In January 2017 a new corporate income tax system was introduced. It envisaged that the tax is due only at the moment of profit distribution to shareholders or in equivalent situations of such distribution.
Withholding tax rates
Interest, dividend and royalty paid to nonresidents are subject to 5% withholding tax. On payments for other services 10% tax is due. The rate is 15% if abovementioned payments (except dividend) are made to offshore-based nonresidents.
Foreign tax credit
Article 124 of GTC says that if a Georgian company gets profit independently from a Georgian source, when the profit is taxed, a tax credit is available on the tax paid abroad up to amount of which would have been paid if the source were Georgian.
Anti-avoidance rules
Georgia has several anti-avoidance rules: general and specific. General rule is prescribed in the article 73 of GTC that enables a tax inspector to change qualification of a transaction based on its substance.
Notably, the substance over form principle is not frequently used by Georgian tax authorities. For example, to the author’s knowledge a loan has never been qualified as a capital contribution by them so far.
The most notable specific anti-avoidance rules are Transfer Pricing, higher withholding tax rates on payment to offshore based entities (both discussed in different sections of the article) and limitation deductibility linked with non-resident entities.
Payment for a service provided by a nonresident is deductible based on cash method, only after the actual payment is carried out.
Georgia does not apply the rule of thin capitalization and limitation of interest deduction based on EBITDA. Only limitation of interest deduction is set by the decree of the Finance Ministry disallowing deduction of more than 24% of the annual interest. In addition, that limitation does not refer to the companies operating in financial sector.
Transfer Pricing
Transfer pricing legislation in Georgia has been effective since December 2013. It is regulated by the articles 126-1291 of Georgian Tax Code and decree of Finance Ministry dated December 18 2013, #423. The legislation is mostly consistent with OECD transfer pricing guideline 2010 with minor deviations:
Required minimum involvement in the shares for considering associated persons is 50%.
Transfer pricing applies not only to the transactions between associated entities but transitions between Georgian resident and offshore-based person, regardless their association.
If such information is available, comparable financial results are searched from the same year in which a transaction took place rather than average of previous few years.
Georgia does not have any safe harbor rules regarding Transfer Pricing and does not apply simplified approach on intra-group services yet. TP documentation has to be provided by a taxpayer within 30 days upon the request; no special penalty applies to non-provision of such documentation, although shifting of burden of proof is the result in the situation.
In addition, the decree makes reference to OECD guideline 2010 regarding the Transfer Pricing topics which are not regulated by it (For example, cost-contribution arrangement).
No MAP and APA are applicable in the country as of today, however it is expected those rules to activate shortly.
Tax Treaty Policy
Georgia is a contracting state of 55 tax treaties being in effect today. Distribution rules on dividend, interest and royalty differ among the treaties.
Approximately 30 treaties allocate taxing right to Georgia with regard to interest and royalty payments (when a source is Georgia). The number is about 45 in case of dividend payment, however, in that case taxing right depends on percentage of shares non-residents hold in a Georgian company and an amount of capital contribution made by them.
Those treaties limit Georgia’s taxation usually up to 10%, however as highlighted above, domestic tax rates on such payments are 5%, therefore 10% limitation does not have any effect and 5% is anyway applied.
Georgia still does not apply Authorized OECD Approach (AOA) in article 7 of its treatises. Most treaties imply the wording similar to the previous or 2008 version of OECD model convention.
In other words, in many situations permanent establishment is not considered as a separate independent entity for tax purposes but cost allocation takes place between head office and PE without mark-up.
Besides, article 14 – ‘independent personal services’ – is included in most or all treaties.
In its domestic legislation Georgia applies limited force of attraction; however most of the treaties signed by the country limits application of the rule.
Conclusion
The charming tax system is one important factor among few which makes Georgia attractive destination for foreigner investors. The main reasons of such charm are that the legislation is relatively simple, it provides considerable number of incentives and minor withholding tax rates, in addition, the country has rich tax treaty network and lenient anti-avoidance rules. Lastly, there is a possibility of advance tax ruling which ensures certainty for tax payers.