FOREWORD. Georgia. Services provided by member firms include:

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1 2016/17

2 FOREWORD A country's tax regime is always a key factor for any business considering moving into new markets. What is the corporate tax rate? Are there any incentives for overseas businesses? Are there double tax treaties in place? How will foreign source income be taxed? Since 1994, the PKF network of independent member firms, administered by PKF International Limited, has produced the PKF Worldwide Tax Guide (WWTG) to provide international businesses with the answers to these key tax questions. As you will appreciate, the production of the WWTG is a huge team effort and we would like to thank all tax experts within PKF member firms who gave up their time to contribute the vital information on their country's taxes that forms the heart of this publication. The PKF Worldwide Tax Guide 2016/17 (WWTG) is an annual publication that provides an overview of the taxation and business regulation regimes of the world's most significant trading countries. In compiling this publication, member firms of the PKF network have based their summaries on information current on 30 April 2016, while also noting imminent changes where necessary. On a country-by-country basis, each summary such as this one, addresses the major taxes applicable to business; how taxable income is determined; sundry other related taxation and business issues; and the country's personal tax regime. The final section of each country summary sets out the Double Tax Treaty and Non-Treaty rates of tax withholding relating to the payment of dividends, interest, royalties and other related payments. While the WWTG should not to be regarded as offering a complete explanation of the taxation issues in each country, we hope readers will use the publication as their first point of reference and then use the services of their local PKF member firm to provide specific information and advice. Services provided by member firms include: Assurance & Advisory; Financial Planning / Wealth Management; Corporate Finance; Management Consultancy; IT Consultancy; Insolvency - Corporate and Personal; Taxation; Forensic Accounting; and, Hotel Consultancy. In addition to the printed version of the WWTG, individual country taxation guides such as this are available in PDF format which can be downloaded from the PKF website at PKF Worldwide Tax Guide 2016/17 1

3 IMPORTANT DISCLAIMER This publication should not be regarded as offering a complete explanation of the taxation matters that are contained within this publication. This publication has been sold or distributed on the express terms and understanding that the publishers and the authors are not responsible for the results of any actions which are undertaken on the basis of the information which is contained within this publication, nor for any error in, or omission from, this publication. The publishers and the authors expressly disclaim all and any liability and responsibility to any person, entity or corporation who acts or fails to act as a consequence of any reliance upon the whole or any part of the contents of this publication. Accordingly no person, entity or corporation should act or rely upon any matter or information as contained or implied within this publication without first obtaining advice from an appropriately qualified professional person or firm of advisors, and ensuring that such advice specifically relates to their particular circumstances. PKF International Limited (PKFI) administers a family of legally independent firms. Neither PKFI nor the member firms of the network generally accept any responsibility or liability for the actions or inactions of any individual member or correspondent firm or firms. PKF INTERNATIONAL LIMITED JUNE 2016 PKF INTERNATIONAL LIMITED All RIGHTS RESERVED USE APPROVED WITH ATTRIBUTION PKF Worldwide Tax Guide 2016/17 2

4 STRUCTURE OF COUNTRY DESCRIPTIONS A. TAXES PAYABLE COMPANY TAX CAPITAL GAINS TAX BRANCH PROFITS TAX NEW CORPORATE TAX REGIME VALUE ADDED TAX FRINGE BENEFITS TAX LOCAL TAXES LAND TAX PROPERTY TAX (PHYSICAL PERSON) PROPERTY TAX (GEORGIAN ENTERPRISES) OTHER TAXES CUSTOMS DUTIES IMPORT DUTY EXCISE TAX B. DETERMINATION OF TAXABLE INCOME CAPITAL ALLOWANCES DIVIDENDS INTEREST DEDUCTIONS LOSSES C. FOREIGN TAX RELIEF D. CORPORATE GROUPS E. RELATED PARTY TRANSACTIONS F. WITHHOLDING TAX G. PERSONAL TAX H. TREATY AND NON-TREATY WITHHOLDING TAX RATES PKF Worldwide Tax Guide 2016/17 3

5 MEMBER FIRM For further advice or information please contact: City Name Contact information Tbilisi David Gvetadze (office) (mobile) pkf@pkfgeorgia.com BASIC FACTS Full name: Georgia Capital: Tbilisi Main languages: Georgian Population: 3,729,500 (2015 estimate) Major religion: Orthodox Christianity Monetary units: Georgian Lari (GEL) Internet domain:.ge Int. dialling code: +995 KEY TAX POINTS There are six main taxes in Georgia: Personal Income Tax (PIT); Corporate Income Tax (CIT); Value Added Tax (VAT); Import Duty; Excise Duty and Property Tax. Companies incorporated and tax resident in Georgia (tax residents) are subject to tax on their worldwide income, whereas, companies incorporated overseas are normally treated as nonresident foreign tax residents and taxable on income from Georgian sources only or income arising from business activities carried on through a permanent establishment in Georgia. Georgian and foreign enterprises are subject to Corporate Income Tax on their taxable profits at a flat tax rate of 15% of net taxable income. Companies must file individual tax returns and report their taxes separately. Consolidated tax returns are not permitted. Value Added Tax (VAT) applies to a vatable supply of goods or services in Georgia and chargeable on the Customs value of goods imported. The standard VAT rate is 18%. Property tax is a local tax administered by local self-government bodies (up to a maximum limit specified within the Tax Code) and comprises land tax and property tax of individuals and enterprises. Individuals resident in Georgia are subject to personal income tax (PIT) on their worldwide income, whereas, non-residents are subject to PIT on Georgian source income only, subject to double taxation treaty relief. Unless other rates apply (for example, for interest and dividends), the income of an individual is taxed at the flat rate of 20%. A. TAXES PAYABLE The principal source of tax law in Georgia is the Tax Code, with the new Tax Code being adopted by the Parliament of Georgia and effective from 1 January Tax concessions and exemptions are granted through amendments to the Tax Code. There are six main taxes in Georgia: Personal Income Tax (PIT) a nationwide tax; Corporate Income Tax (CIT) a nationwide tax; Value Added Tax (VAT) a nationwide tax; Import Duty a nationwide tax; Excise Duty a nationwide tax; and, Property Tax a local tax. COMPANY TAX Companies incorporated and tax resident in Georgia (tax residents) are subject to tax on their PKF Worldwide Tax Guide 2016/17 4

6 worldwide income, whereas, companies incorporated overseas are normally treated as non-resident foreign tax residents and taxable on income from Georgian sources only or income arising from business activities carried on through a permanent establishment in Georgia. Georgian and foreign enterprises are subject to Profit Tax on their taxable profits and the following types of income are treated as received from Georgian sources: Dividends income from a resident entity; Royalty income received from a resident entity; Interest income on debt obligations issued by a permanent establishment of foreign company or resident entity; Income from immovable property i.e. arising from the sale of immovable property located in Georgia; Some other types of income. The profit of a Georgian enterprise, which represents all taxable income from its economic activities less allowable deductions, is taxed at a flat rate of 15 percent. A foreign enterprise carrying on economic activities through a permanent establishment in Georgia is also subject to profit tax at a flat tax rate of 15% on its net taxable income (gross income received from Georgian sources which relate to the activities performed by its permanent establishment less any deductions allowable under the Tax Code). The tax period for corporate income tax is a calendar year. Annual profit tax returns must be submitted to the tax authority by 31 March each year. CAPITAL GAINS TAX There is no separate capital gains tax legislation in Georgia. Capital gains are subject to regular income tax when they are realized. Unrealized capital gains are not subject to taxation. BRANCH PROFITS TAX There is no branch remittance tax in Georgia. NEW CORPORATE TAX REGIME Starting from January 1, 2017 Corporate Income Taxation Regime will be changed. Corporate income tax will be payable at the time of profit distribution only. The single CIT tax base will be dividends or profit distributed in a different manner such as non-business expenses and payments, representation costs above the defined threshold as well as other hidden profit distributions. This model is intended to stimulate reinvestments as businesses will have an incentive to retain their earnings and reinvest in growth - upgrading their facilities and increasing their competitiveness. VALUE ADDED TAX VAT applies to a vatable supply of goods or services in Georgia and chargeable on the Customs value of goods imported (as set by the Customs legislation of Georgia). The standard VAT rate is 18%, which is applied to most goods/services. Certain transactions however are exempt from taxation: VAT zero-rated transactions: where the export of goods is exempted but VAT input rights remain; and, VAT exempt transactions: where the import of certain medicine, machinery, publications, mass media and baby products are exempted without input VAT rights. VAT returns should be submitted to the tax authorities by the 15th day of the following month. FRINGE BENEFITS TAX Broadly, all payments or benefits-in-kind provided by an employer to an employee are taxable unless specifically exempted. PKF Worldwide Tax Guide 2016/17 5

7 LOCAL TAXES Property tax is a local tax administered by local self-government bodies (up to a maximum limit specified within the Tax Code) and comprises land tax and property tax of individuals and enterprises. LAND TAX Physical and legal persons are subject to land tax if they possess land plots or use state owned areas, including land used for agricultural and non-agricultural purposes. The land tax depends on where the land is located and its quality. It is not based on the taxpayer s economic position. The base maximum annual rate for non-agricultural land is GEL 0.24 per one square meter and the tax is calculated by multiplying the annual base tax rate by the territorial coefficient and the land area. A (physical) person is required to submit an annual tax return by 1 st November each year. A legal entity is required to submit an annual tax return by 1 st April each year. PROPERTY TAX (PHYSICAL PERSON) The property tax rate applying to an individual depends on the amount of his or her annual income, regardless of their tax residency status, from sources in and outside Georgia. The tax is levied on fixed assets used for economic activities, immovable property (building or a part thereof) and construction in progress. It does not apply to land. The property tax rate ranges from 0.05% to 0.2% of the fair market value of the property that is located in Georgia if the individual s family worldwide income is between GEL 40,000 and GEL 100,000 during the reporting calendar year. However if the individual s family worldwide annual income exceeds GEL 100,000, the tax rate is between 0.8% and 1%. A tax return must be submitted by the individual before November 1 st following the reporting calendar (tax) year and tax must be paid to the tax authority by 15 November. PROPERTY TAX (GEORGIAN ENTERPRISES) Georgian enterprises and foreign enterprises engaged in economic activity in Georgia through permanent establishments, organizations whose property or part of property is used for economic activity may be subject to property tax. For foreign enterprises, property tax is imposed only on property located in Georgia. Unless specifically exempted, property tax applies at a flat rate of 1% of the average annual net book value of fixed assets, uninstalled equipment and construction in progress (or similar property of an enterprise utilised for economic activity) listed on its Balance Sheet. OTHER TAXES CUSTOMS DUTIES The taxation of the import and export of goods is regulated by the Tax Code. Customs duties include Import Duty and Excise Duty. IMPORT DUTY Depending on the type of goods being imported, Customs tax can apply at a rate of 0%, 5% or 12%. EXCISE TAX Excise Duty applies to certain goods such as alcoholic beverages, tobacco products, oil and gas, cars and mobile communication services. Excise tax rates are fixed per physical unit of excisable good (litre, cm³, kilogram, ton, etc.) and can vary from product to product. PKF Worldwide Tax Guide 2016/17 6

8 B. DETERMINATION OF TAXABLE INCOME Generally, expenses connected with earning gross income are able to be deducted to arrive at the net taxable income. Therefore, expenses not connected with the economic activities of an entity such as personal expenses and entertainment expenses are not deductible (unless entertainment is considered to be the taxpayer s economic activity). Any limitations or restrictions relating to certain expenses or deductions which otherwise would be deductible in full, are provided within the Tax Code. Restrictions, conditions and limitations can apply, for example, to the deduction of interest, doubtful debts, repairs, insurance payments and reserve funds, scientific research expenses, depreciation of fixed and intangible assets. CAPITAL ALLOWANCES The general rules for the operation and deduction of tax depreciation are provided within the Tax Code and they provide a taxpayer with the option to either deducting tax depreciation on fixed assets over a period of time or deducting 100% of the purchase (production) cost of the asset immediately. Whatever option is selected by a taxpayer, it should be consistently followed for the following five years and applied to all purchased, produced or leased fixed assets. Tax depreciation allowances can generally be claimed for all capital assets, including fixed and intangible property, except for land, art (such as paintings, jewellery and antiques), historical objects (except for buildings), biological assets, museum items, and any other assets that are not subject to wear and tear. Fixed assets costing below GEL 1,000 are not subject to tax depreciation but can be deducted in full against the gross income of the accounting year of purchase or production. Fixed assets are categorised into five groups and the rate of tax depreciation applying to each group is shown below. Please note, tax depreciation is charged individually on buildings and structures as each building or structure is effectively considered as a separate group. Group Types of Fixed Assets Rate 1 Motor cars; motor-and-tractor equipment for the use on roads; office furniture, movable parts of motor transport; trucks, buses, special motor vehicles and trailers; machinery and equipment for all sectors of industry and the foundry industry; black smith and pressing equipment; construction equipment; agricultural vehicles and equipment. 2 Special tools, stock and equipment; computers, peripheral devices and equipment for data processing; electronic devices. 3 Railway, maritime and river transport vehicles; power vehicles and equipment; thermos-technical equipment turbine-powered equipment; electric engines and diesel generators; electricity transmission and communication facilities; pipelines. 4 Building and structures 5 5 Assets subject to depreciation not included in other groups 15 The expenses of an intangible asset can be written off depreciation (amortization) over their limited useful life and recorded as a separate group for this purpose. If it is not possible to determine the useful life of an intangible asset it should be depreciated at the rate of 15%. DIVIDENDS Dividends paid to resident companies are not subject to withholding taxation and are not included within the taxable income of the recipient resident company. Dividends paid to resident and nonresident individuals, organisations and non-resident companies are subject to withholding tax. Where PKF Worldwide Tax Guide 2016/17 7

9 an entity receives dividends that have been taxed at source they will not be subject to further taxation and will therefore be excluded from the taxable income of the recipient. Dividends received from free floating securities, an international financial company, an agricultural cooperative (until 1 January 2017) or a free industrial zone company are not subject to withholding tax and are not included within the taxable income of the recipient. INTEREST DEDUCTIONS Where a taxpayer incurs interest in the course of their business activities it is generally deductible, however, there are some limitations that can apply. Where the interest paid and/or payable (using the accruals method) does not exceed 24% of the credit (loan) per annum, it is deductible. Please note that thin capitalisation rules are expected to come into force on 1 January 2018 and it is expected that a debt to equity ratio of 3:1 will be applied (5:1 for a leasing company). In saying this it is also expected that certain entities will be outside the rules such as financial institutions and entities with gross income below GEL 200,000 as well as others. LOSSES Georgian legal entities can carry tax losses forward and utilise them against future taxable profits arising in the following five years. Where the statute of limitation is increased from 5 to 11 years a taxpayer can elect a 10-year loss carry forward period. Losses cannot be carried back. The carry forward of losses is however not permitted for an international financial company, special trade company or free industrial zone company. C. FOREIGN TAX RELIEF Where income from a foreign source has been subject to overseas tax a credit for the overseas tax paid is available that is the lower of: 1) The amount of the foreign tax paid; and, 2) The amount of Georgian corporate income tax levied on the foreign income. Therefore, the maximum relief available is only up to the amount of the tax that would be payable on the foreign income in Georgia. Please note, to support the foreign tax relief claim, supporting evidence of the overseas tax paid should be made available to the Georgian Tax Authority. D. CORPORATE GROUPS Companies must file individual tax returns and report their taxes separately. Consolidated tax returns are not permitted. Branches and other units of Georgian companies do not file separate returns or pay CIT independently. They consolidate their taxable profit (or loss) within the main company, which pays corporate income tax on the total taxable profit. E. RELATED PARTY TRANSACTIONS Comprehensive transfer-pricing rules are contained within the Georgian tax legislation and specific provisions exist in the Tax Code that are aimed at regulating the taxation of transactions between related parties. Georgian transfer pricing rules generally follow OECD transfer pricing principles and five pricing methods are recognised by the tax authority, namely, the comparable uncontrolled price; cost plus; resale price; profit split; and net profit margin methods. Income and expenses may be allocated between related parties by the tax authorities to reflect a third party arms-length position with the principle of fair market value being also taken into account. Where possible, the tax authority will compare the cost of related party transactions with the cost of similar transactions between unrelated parties. A taxpayer is obligated to maintain supporting records to evidence its related party transactions were conducted on a third party arms-length basis and the documentation should be made available to the tax authority if requested, within 30 calendar days. PKF Worldwide Tax Guide 2016/17 8

10 F. WITHHOLDING TAX Foreign companies which do not conduct economic activities through a permanent establishment in Georgia are subject to withholding tax on the gross income from Georgian sources. The tax is withheld by the payer at source and no deductions from the gross income are permitted. Non-resident taxpayers who receive certain types of income however can be treated as if the income is connected to a permanent establishment in Georgia and the Tax Code allows the non-resident taxpayer to file a tax return and claim any deductions allowable. The following withholding tax rates apply to the Georgian source income of non-residents where such income is not attributable to any permanent establishment of the non-resident in Georgia: Income from Georgian Sources Tax Rate Dividends 5% Interest 5% Oil and gas subcontractors 4% International telecommunication and transportation services 10% Royalties 5% Management fees - Income received in the form of wages 20% Payments to non-residents of other Georgian source income not connected to their PE in Georgia Please note that where a non-resident is registered in an offshore or low tax jurisdiction, royalty, interest and service fee payments will be subject to withholding tax at the rate of 15%. Dividends are subject to withholding tax regardless of whether they are paid to individuals or foreign entities. Please note: Dividends received by entrepreneurial legal entities are excluded from taxable gross income; and, Dividends paid to Georgian legal entities are exempt from withholding tax at source. G. PERSONAL INCOME TAX Individuals resident in Georgia are subject to personal income tax (PIT) on their worldwide income, whereas, non-residents are subject to PIT on Georgian source income only, subject to double taxation treaty relief. An individual is considered to be a resident of Georgia for PIT purposes if they are present in Georgia for more than 183 days in any 12-month period ending in a tax (calendar) year. PIT is levied on salaries and any other compensation paid to employees including benefits-in-kind, subject to certain exceptions. PIT is deducted at source from an employee s salary by an employer. Tax is levied on the annual income of an individual entrepreneur, which consists of gross income less the relevant expenses in earning that gross income (except for non-deductible or partially nondeductible expenses). Unless other rates apply (for example, for interest and dividends), the income of an individual is taxed at the flat rate of 20%. Annual personal income tax returns must be submitted to the tax authority by 31 March each year. There is no liability to social security payments on income paid or received by employers, employees or individual entrepreneurs. Similarly, there is no inheritance tax or wealth tax in Georgia. H. TREATY AND NON-TREATY WITHHOLDING TAX RATES Georgia has Double Tax Agreements (DTA s) with 47 countries: 10% PKF Worldwide Tax Guide 2016/17 9

11 Country Dividends (%) Interest (%) Royalties (%) Armenia 5% 5% 5% Austria 0%&5% 0% 0% Azerbaijan 5% 5% 10% Bahrain 0% 0% 0% Belgium 5% 5% 5%, 10% Bulgaria 5% 5% 10% China 0%,&5% 5% 5% Croatia 5% 5% 5% Croatia 5% 5% 5% Czech 5% 5% 0%, 5%, 10% Denmark 0%,5% 0% 0% Egypt 5% 5% 10% Estonia 0% 0% 0% Finland 0%, 5% 0% 0% France 0%,5% 0% 0% Germany 0%,5% 0% 0% Greece 5% 5% 5% Hungary 0%,5% 0% 0% India 5% 5% 10% Iran 5% 5% 5% Ireland 0%,5% 0% 0% Israel 5% 5% 0% Italy 5% 0% 0% Kazakhstan 5% 5% 10% Kuwait 0%,5% 0% 10% Latvia 5% 5% 10% Lithuania 5% 5% 10% Luxembourg 0%,5% 0% 0% Malta 0% 0% 0% Netherlands 0%,5% 0% 0% Norway 5% 0% 0% Poland 5% 5% 10% Qatar 0% 0% 0% Romania 5% 5% 5% San Marino 0% 0% 0% Serbia 5% 5% 10% Singapore 0% 0% 0% PKF Worldwide Tax Guide 2016/17 10

12 Country Dividends (%) Interest (%) Royalties (%) Slovakia 0% 5% 5% Slovenia 5% 5% 5% Spain 0% 0% 0% Sweden 0% 0% 0% Switzerland 5% 5% 0% Turkey 5% 5% 10% Turkmenistan 5% 5% 10% UAE 0% 0% 0% UK 0% 0% 0% Ukraine 5% 5% 10% Uzbekistan 5% 5% 10% PKF Worldwide Tax Guide 2016/17 11

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