EY GEORGIA TAX & LAW BRIEF

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1 EY GEORGIA TAX & LAW BRIEF JULY 2018 Amendments to the Tax Code of Georgia From 21 July 2018, amendments to the Tax Code of Georgia entered into force. According to the amendments, pension deposits and related profit within the Accumulative Pension Scheme became exempt from income tax, except for the cases when the participant to the pension scheme decides to leave Georgia for good and asks for the transfer of relevant amount accumulated on his/her individual pension account. Deposits to the pension account and relevant profit within the Accumulative Pension Scheme shall not be considered as a salary income, except for the cases where: a) Pension scheme participant uses his/her right to request the full amount of his/her individual pension fund. Herewith, a person shall be entitled to use this right only if he/she has reached the state pension age, and within no later than 5 years after the first deposit to his/her individual pension fund. b) If the participant of the pension scheme passed away and the sum relevant to the pension assets accumulated on the individual pension account of the deceased is transferred to his/her legal successor(s). Pension assets may be transferred as a single payment or they could be transferred to the individual pension account of the legal successor, if the latter wishes so. If the legal successor chooses to receive a single payment, the sum received by him/her will be considered as a salary income and subjected to the taxes prescribed by Georgian legislation. The source and date of publication: Legislative Herald of Georgia, 06/08/2018. Decision of the Constitutional Court of Georgia On 3 July 2018, the Chamber of the Constitutional Court of Georgia issued Ruling 1/2/671 concerning Constitutional Complaint 671.

2 The complaint disputed the constitutionality of the provision of the Tax Code of Georgia (TCG), according to which rendering services of constructing, renovating and mural painting churches and cathedrals, commissioned by the Patriarchate of Georgia, was exempt from VAT, without the right to input VAT. Claimant argued that the disputed provision established legal privileges the Georgian Orthodox Church compared to other religious organizations, as it allowed the Patriarchate of Georgia to purchase services with highly favorable terms with 18% less value of those services. The Claimant further explained that the same privilege was not extended to the representatives of other religious organizations while purchasing or commissioning the same type of services. Hence, the Claimant considered the disputed provision to be discriminative, as it established an unjustified differentiation between substantially equal persons. In its decision, the Constitutional Court noted that based on the disputed provision the Patriarchate of Georgia, unlike the Claimants, was able to purchase or commission the services of construction, renovation and painting of churches and cathedrals with far better terms, which constituted a differentiated treatment towards substantially equal persons. In this case, the Constitutional Court of Georgia decided to apply a so called strict scrutiny test. In particular, the Court assessed the lawfulness of the established differentiated treatment towards substantially equal persons using the principle of proportionality. To be more precise, the Court considered whether the established differentiation served actual legitimate purpose and whether it was the valid, necessary and proportionate mean for achieving such legitimate purpose. The Constitutional Court of Georgia explained the legitimate purpose referred to by the Respondent could be achieved fully without differentiating between substantially equal persons. Herewith, the decision states that the existing agreement between the State and the Church does not imply in any event the requirement of granting Georgian Orthodox Church privileges in any type of legal relations. In the light of the foregoing, the Constitutional Court arrived at the conclusion that the normative content of the phrase commissioned by the Patriarchate of Georgia of Article b of the Tax Code of Georgia, according to which the services of construction, renovation and painting of churches and cathedrals commissioned by the Patriarchate of Georgia are exempt from VAT, without the right to input VAT, is in conflict with the requirements of Article 14 of the Constitution of Georgia (which provides for the principles of equality and prohibition of discrimination). The source and date of publication: Legislative Herald of Georgia, 03/07/2018. Amendments to the Organic Law of Georgia on the National Bank of Georgia On 21 July 2018, amendment to the Organic Law of Georgia on the National Bank of Georgia was published on the website of the Legislative Herald of Georgia. According to the amendment, cash settlements on the territory of Georgia are carried out based on the principle of rounding the sum. The principle of rounding the sum implies rounding certain amount of cash up or down to the nearest number divided by 5. The amendment will become effective on 1 January The source and date of publication: Legislative Herald of Georgia, 21/07/2018.

3 Law of Georgia on Accumulative Pension On 6 August 2018, the Law of Georgia on Accumulative Pension was published on the website of the Legislative Herald of Georgia. The Law regulates the issues related to organizing the Accumulative Pension Scheme and defines the rules and terms of participation for the participants of the scheme. The Law is applicable to the activities of asset management companies, specialized depositaries, commercial banks, insurance companies and other individuals to the extent such activities are related to accumulated pension. The Law defines the principles of mandatory and voluntary participation in the Accumulative Pension Scheme. The Law also establishes the obligations of the employee, employer and state in terms of the pension deposits. Rules and procedures for participation in and administration of the Accumulative Pension Scheme shall become effective from 1 January The source and date of publication: Legislative Herald of Georgia, 06/08/2018. Rule for Evaluating the Conformity with Occupational Safety Norms On 27 July 2018, the government of Georgia issued a Decree 382 on Determining the Rules and Terms for Selective Control during the Evaluation of the Conformity with Occupational Safety Norms in Higher-risk, Heavy, Harmful and Dangerous Job Sectors. The Decree defined the rules and terms for selective control during the evaluation of the conformity with occupational safety norms in higher-risk, heavy, harmful and dangerous job sectors. The Decree provides, that the employer shall be subject to selective inspection, if: a) the employer performs higher-risk, heavy, harmful and dangerous works; b) there is an information suggesting the high probability of violation of the occupational safety norms; c) there is an information about accidents that took place during last 5 years; d) there is an information about professional diseases revealed during last 5 years; e) there is a high public interest and the Ministry of Internally Displaced Persons, Labor, Health and Social Protection of George has made a relevant decision to carry out an inspection. The Decree became effective immediately upon its publication on the website of the Legislative Herald of Georgia. The source and date of publication: Legislative Herald of Georgia, 01/08/2018. Decree of the Government of Georgia on Information about the Grocery Products On 8 July 2016, Decree 301 of 1 July 2016 issued by the government of Georgia was published on the website of the Legislative Herald of Georgia. The Decree becomes effective from 1 September 2018.

4 The Decree approved the Technical Regulation on Informing the Customers about Grocery Products. Technical regulation on informing the customers about the grocery products aims at protecting customers right to have information about grocery products and ensures the efficient operation of the internal market. Technical regulation sets out general principles, requirements and procedures for submitting information in relation to the information displayed on the grocery product labels. There are specific types of groceries, the labels of which should include additional information defined by the legislation of Georgia, together with the information required by the technical regulation. Technical regulation is applicable to the grocery products subject to state control, intended for the end users, including the groceries offered by public catering facilities and the groceries delivered to the public catering facilities. Decree shall become effective from 1 September The source and date of publication: Legislative Herald of Georgia, 08/07/2016. Adoption of the Georgian Translation of the International Financial Reporting Standards (IFRS), 2018 Edition On 11 July 2018, Order N-15 of the Head of the Service for Accounting, Reporting and Auditing Supervision (hereinafter - "the Service"), dated 10 July 2018, was published in the Legislative Herald of Georgia. According to the Order, Georgian translation of 2018 edition of the International Financial Reporting Standards (IFRSs) adopted and published by the International Accounting Standards Board shall be adopted in Georgia. The IFRSs shall be published on the website of the Service ( The Service shall ensure the periodic review and editing of the IFRS translations adopted under this Order in order to improve the quality of Georgian translation. The Order became effective immediately upon its publication. The source and date of publication: Legislative Herald of Georgia, 11/07/2018. Rules for Supervision and Regulation of the Activities of Microfinance Organizations On 5 July 2018, Order 143/04 of the President of the National Bank of Georgia was published on the website of the Legislative Herald of Georgia. The Order approved the Rules for Supervision and Regulation of the Activities of Microfinance Organizations. Pursuant to the Order, the National Bank of Georgia supervises and regulates the activities of microfinance organizations by adopting economic norms and limitations for them and by controlling the conformity of those organizations with the mentioned norms and limitations. The Order shall become effective on 1 June The source and date of publication: Legislative Herald of Georgia, 06/07/2018.

5 Rules for Licensing and Regulating Brokerage Companies On 6 July 2018, Order 145/04 of the President of the National Bank of Georgia on Approving the Rules for Licensing and Regulation Brokerage Companies was published on the website of the Legislative Herald of Georgia. In 2 months after the Order became effective, the Order 34/01 (dated 9 March 2010) of the President of the National Bank of Georgia concerning the Approval of the Rules for Licensing, Determining Minimum Regulatory Capital and Submitting financial Statements for the Brokerage Companies will be declared annulled. In 4 months after the Order became effective, acting and licensed brokerage companies shall ensure the fulfillment of the organizational requirements prescribed by the Rules: functionality of the organization-systemic structure and software support of the brokerage company; functionality of the administrative-accounting procedures and system; brokerage company should have a policy for administering the assets of the clients and procedural-organizational regulation for minimizing the risks of losing or decreasing the assets of its clients; conflict of interests management policy; risks management policy; code of ethics and the policy for pricing the services. Brokerage company is obliged to have the monitoring mechanisms for the policies and procedures prescribed by the Order and to ensure the control over the performance thereof at all stages of its activities. The Order became effective immediately upon its publication. The source and date of publication: Legislative Herald of Georgia, 06/07/2018. Procedure for Classifying the Assets of the Microfinance Organization and Forming the Provisions for Possible Losses On 6 July 2018, Order 142/04 of the Acting President of the National Bank of Georgia was published on the website of the Legislative Herald of Georgia. The Order approved the Procedure for Classifying the Assets of the Microfinance Organization and Forming the Provisions for Possible Losses. Purpose of the Order is to ensure that the microfinance organizations formulate and fulfill internal procedures and reporting requirements for the obligations related to the asset classification and provisions. In case of failure to fulfill the requirements of the Procedure for Classifying the Assets of the Microfinance Organizations and Forming the Provisions for Possible Losses, the National Bank is authorized to apply the sanctions prescribed by the legislation against the microfinance organization in default. The Order shall become effective on 1 September The source and date of publication: Legislative Herald of Georgia, 06/07/2018.

6 Contact Information: Zurab Nikvashvili Partner Head of Tax & Law in Georgia and Armenia EY Georgia LLC Kote Abkhazi st. 44, 0105, Tbilisi, Georgia Office: +995 (32) Dr. George Svanadze LL.M., MLB (Bucerius/WHU) Associate Partner Head of Law Practice EY Georgia LLC Kote Abkhazi st. 44, 0105, Tbilisi, Georgia Office: +995 (32) EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com EY Georgia LLC All Rights Reserved This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. The views of parties set out in this publication are not necessarily the views of the global EY organization or its member firms. Moreover, they should be seen in the context of the time they were expressed.