Corporate Income Tax in Georgia: Really Complicated?

Georgia’s attractive Estonian-style tax system has propelled it to the ninth spot on the Tax Foundation’s state tax competitiveness index. At first glance, the essence of the system is simple—companies are exempt if they do not distribute profits. In practice, however, things can get a bit more complicated, with other expenses treated as profit distributions for tax purposes.

To understand all the nuances, we propose taking a closer look at the provisions of the Tax Code of Georgia that pertain to profit tax (also known as corporate income tax) and the related topic of withholding tax.

Who pays corporate income tax

All Georgian companies and foreign organizations conducting business through a permanent establishment are subject to corporate income tax.

In the absence of a permanent establishment, a non-resident company that receives income from sources in Georgia pays income tax through the withholding tax mechanism, which applies primarily to the domestic counterparties acting as tax agents for the non-resident company.

When corporate tax applies

The law describes four situations equivalent to the business withdrawing money from its operations in which a commercial company operating under the Estonian Model of taxation must pay corporate income tax.

1. Distribution of profits, including (but not limited to) the payment of dividends.
2. Expenses and other payments not related to economic activity.
3. Free provision of goods and services or transfer of funds.
4. Entertainment expenses exceeding the established limit.

The list above applies to most companies, with two exceptions. For non-profit organizations (NPOs), the provision on profit distribution does not generally apply, and tax must be paid on expenses and free supplies only if they conflict with the charitable objectives of the organization’s activities. Different rules also apply to commercial banks, microfinance organizations, pension funds, and gambling operators, who do not qualify under the Estonian Model and always pay tax on net annual profit at a rate of 20% (regardless of whether they distributed funds or not).

How tax rates change

The base corporate income tax rate under the so-called Estonian Model is 15%. For companies in Georgia, there are legal ways (special status) to reduce the tax burden. The rate varies significantly in this context and easiest to illustrate with the help of a table:

In Georgia, corporate income tax is calculated with gross-up, multiplying the taxable base by 0.85 (at a 15% rate) or 0.95 (at a 5% rate) to account for the tax itself and reach effective rates of approximately 17.65% and 5.26%, respectively.

How profit distribution works

First, it is important to note that corporate tax on profit distribution arises only when the beneficiary is an individual, non-resident, or legal entity exempt from income tax (in at least one of the categories listed in the table above).

Second, some clarification is needed regarding the preferential regimes:

• If a virtual zone participant distributes profits received from the sale of services within Georgia (to all parties except resident companies), the tax rate will also be the standard 15%. The 0% tax exemption applies exclusively to the distribution of profits from export sales.
• For FIZ participants, permitted activities are defined as transactions involving goods that are produced in the same free industrial zone or pass through it. Accordingly, if they distribute income from the sale of goods that were not imported into Georgia (did not pass through the FIZ), there is no exemption from corporate income tax and the standard rate of 15% applies. There is also a specific 4% tax for these companies on revenue from the sale of goods into Georgia (regardless of profit distribution). This can be avoided by trading only within the FIZ or for export. We covered free zones in a separate article.
• For special trading companies, permitted activities include re-export and trade in a customs warehouse. The zero corporate tax exemption does not apply, however, if the organization distributes profits from the sale of fixed assets that have been used in economic activities for more than two years.
• As for investment funds, the 5% rate applies if the company invests in bank deposits or financial instruments.

What qualifies as profit distribution

Profit distribution is generally understood to mean the payment of dividends to partners or shareholders in cash or in kind—in the form of property, real estate, or goods from inventory (in the latter case, the market value of the transferred assets serves as the basis for corporate tax).

However, the Tax Code of Georgia describes two additional kinds of profit distribution:

• Transactions with related parties, if the transaction price differs from the market price, the counterparty does not pay income tax under the Estonian Model, and the related-party relationship actually influenced the price. Related parties are defined as directors or business owners (with a stake in the capital exceeding 20%), as well as their relatives or companies affiliated with yours. In this case, tax must be paid on the difference between the market price and the actual transaction value.
  • First example: If a company sells an office building to its director for USD 100,000 when the market price is USD 500,000, this is recognized as a hidden distribution of profits, and the company is required to pay tax at a rate of 5% or 15% on the USD 400,000 disparity.
  • Second example: A Georgian IT company supplies software to its parent organization at a discounted price. This is also treated as a profit distribution.
  • To summarize: The arm’s length principle must always be observed in transactions. That is, the terms of a transaction between related parties must be the same as if the transaction were conducted between two independent counterparties in the open market.
• Transactions at non-market prices with entities exempt from income tax (the only exceptions are state budgetary organizations and the National Bank of Georgia). This provision works like the previous one, but the relationship is no longer relevant, and it covers transactions with all “tax-exempt entities,” including charitable organizations, participants in the virtual zone, special investment zones, special trading companies, and certain others.

Withholding tax

When paying official cash dividends, the company faces a separate tax at the source of payment (withholding tax) in addition to corporate income tax, referred to simply as a dividend tax. The implication is that the organization acts as a tax agent for individuals, non-residents, or non-profit legal entities and withholds tax from them at a rate of 5%.

Again, there are several cases where withholding tax does not apply:

1. If dividends are paid to a resident company (similar to corporate income tax).
2. If the payer is an international IT company, an SEZ enterprise, or an investment fund (they are exempt from withholding tax).

If the payments are made to a non-resident from a country with which a double taxation agreement has been signed (though the possibility of reducing the tax rate to as low as 0% depends on the specific agreement—this method does not work for some countries). We wrote about double taxation agreements in detail on our blog.

What constitutes non-economic activity

The law places expenses not necessary for business or equivalent to capital withdrawal in this category and subjects them to corporate tax at rates of 5% or 15%. These include:

• Expenses without documentary evidence (the most ambiguous item!)
• Expenses for non-commercial purposes (i.e., not intended to generate profit, income, or compensation)
• Payments to specific entities, such as the purchase of goods or services from individual entrepreneurs with microbusiness status or fixed-tax payers
• Transactions in favor of offshore entities or entities exempt from income tax, such as the purchase of debt securities, the transfer of advances, the payment of fines and penalties, and losses from the assignment of claims
• Interest on loans (paid by the company itself) exceeding the annual interest rate set by the Ministry of Finance (20% according to current ministerial orders)
• Loans to individuals, non-residents, offshore entities, and entities exempt from income tax

Loans warrant closer examination. The law imposes corporate tax on them primarily to discourage long-term capital flight, and if the borrower repays the loan, the company is entitled to offset tax already paid (on the principal) in the month the repayment occurs.

For standard loans, corporate tax is levied on the principal at a rate of 5–15%. For interest-free loans, the issuance may be interpreted as a deviation from the market price, and the taxable base will include not only the principal amount, as in the first case, but also the amount of interest expense calculated at the market rate (and the interest expense is not refundable from the budget).

The law also addresses interest-free loans to employees. These are not subject to corporate tax regulations but are governed by general income tax rules and must be treated as part of the employee’s salary. In this case, the annual market rate on the loan is set at 20%, and 1/12 of the annual interest is subject to personal income tax—also 20% (or 5% for international companies).

What constitutes a gratuitous supply

The law defines a gratuitous supply as the transfer of assets, services, or funds without receiving profit or compensation (or incurring direct expenses, as in the case of non-economic activities).

The following are subject to a 5/15% corporate tax:

• Any gratuitous assistance to non-resident companies, as well as to Georgian legal entities that are exempt from income tax under the same Estonian Model
• A supply of goods or services to individuals not exceeding GEL 1,000 (approximately USD 370), with 20% income tax (for residents) or a 10% withholding tax (for non-residents) to amounts in excess of GEL 1,000
• Donations to charitable organizations, provided their total amount exceeds 10% of the company’s net profit for the previous year
• Shortages of inventory or fixed assets

The limit on entertainment expenses

Entertainment expenses include the money spent on receptions, presentations, banquets, cultural events for guests, and expenditures of a similar nature. They are exempt from corporate income tax as long as they do not exceed 1% of the organization’s revenue for the previous calendar year (or 1% of expenses, if expenses exceed revenue). For new companies, the limit is calculated as 1% of expenses incurred by the end of the current year. Any amount exceeding this limit is subject to taxation at rates of 5% or 15%.

How to file corporate income tax

The reporting period for corporate income tax (and withholding tax and many other types of taxes) is the calendar month, with returns to be filed and paid by the 15th of each month following the reporting month.

All exemptions where no tax is due must also be reported on the return. Note that final tax liabilities are rounded down to the nearest whole number—amounts less than one Georgian lari are zeroed out.

We would also like to reiterate that the gross-up mechanism applies when calculating corporate income tax in Georgia. The taxable base must be divided by 0.85 (at a 15% rate) or 0.95 (at a 5% rate) before calculating the final amount of tax liability.

Key takeaways

• Most Georgian companies operate under the Estonian Model, meaning corporate tax is only incurred upon the distribution of profits. This applies primarily to dividend payments, but there are many situations where other transactions are treated as distributions.
• For example, some of the most non-trivial items include undocumented expenses and the issuance of loans, which fall under the definition of non-economic activities, as well as inventory shortages, which the law treats as the free supply of goods or services.
• Some expenses may appear to be non-economic but should be assessed for whether they benefit an employee before being classified as such as they may be subject to ordinary income tax (as salary).
• The corporate tax rate varies depending on the type of company, the recipient of the profit distribution, and the source of that profit. It is 15% by default, 5% for international IT companies, and 0% for special trading companies, virtual zone participants, and SEZs in certain cases. Additionally, no tax is due if the direct or indirect distribution of profits benefits a Georgian company without tax incentives.

Of course, income tax is not the only obligation companies face in Georgia. Read about other taxes in our general guide.

If you need legal support, outsourced accounting services, assistance with company registration, or help obtaining special statuses and licenses, just use the form below to reach a helping hand from the experts at PB Services. We provide comprehensive solutions capable of overcoming any business challenge.