EY GEORGIA TAX & LAW BRIEF

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1 EY GEORGIA TAX & LAW BRIEF APRIL 2018 Expected Amendments to the Tax Code of Georgia On 5 April 2018, a bill was introduced to the Parliament of Georgia on the amendments to the Tax Code of Georgia (TCG). Purpose of the bill is to enforce the decision of the Constitutional Court of Georgia on the case JSC Telenet v Parliament of Georgia and to ensure the compliance of respective provisions of the TCG. According to the bill, in the course of tax inspection tax authority defines the value of the property to be taxed with the market value only in cases where the taxpayer meets the criteria set by the Order of the Minister of Finance. The bill provides that by 1 May 2018 the Minister of Finance should elaborate and approve the rules for defining the value of taxpayer's property to be taxed with the market value. The bill will become effective immediately upon its publication. The source and date of publication: website of the Parliament of Georgia, 05/04/2018. Expected Amendments to the Tax Code of Georgia On 26 April 2018, a bill was introduced to the Parliament of Georgia on the amendments to the Tax Code of Georgia (TCG). The purpose of the bill is to formulate relevant provisions of the TCG in compliance with the criteria set by the Constitutional Court of Georgia in its decision on the case N(N)LE Frema v. Parliament of Georgia. According to the bill, request filed by tax authority or the National Enforcement Bureau to approve the freezing of individual's property should be examined by the court at an oral hearing within 5 days after the request is submitted.

2 Pursuant to the bill, the rule referred to above is applicable to the cases where there is a risk of alienating the property at issue, which will make it difficult or even impossible to enforce the payment of tax debt. The bill provides that when the request on urgent onsite inspection filed at the court is preconditioned by the information obtained by tax authority that a person intends to evade the fulfillment of tax obligations through alienating the assets to another person, the tax authority is authorized to apply tax mortgage to the property of the taxpayer. According to the bill, tax mortgage should be applied only to the extent of the value of the assets related to such precondition, regardless whether the taxpayer has outstanding tax debt or not. Tax authority will be obliged to replace the applied tax mortgage after the finalization of tax inspection, in accordance with and proportionally to the identified tax debt. The Law will become effective immediately upon its publication. The source and date of publication: website of the Parliament of Georgia, 26/04/2018. Amendments to the Civil Procedure Code of Georgia On 16 April 2018, a bill on the amendments to the Civil Procedure Code of Georgia was published in the Legislative Herald of Georgia. The amendments extend the term within which a person filing an application for securing a claim at the court is obliged to provide security to compensate possible damage to the other party. According to the amendments, the aforementioned claim should be secured within the term determined by the court, but not exceeding 30 days. Pursuant to the amendments, if security to compensate possible damage is not provided, the court will immediately issue a ruling to revoke the interim injunction aimed at securing the claim, which may be appealed. According to the amendments, the term for appealing the ruling is 5 days and it cannot be extended. The Law became effective immediately upon its publication. The source and date of publication: Legislative Herald of Georgia, 16/04/2018. Expected Amendments to the Organic Law of Georgia on the National Bank of Georgia On 12 April 2018, a bill was introduced to the Parliament of Georgia on the amendments to the Organic Law of Georgia on the National Bank of Georgia. According to the bill, cash payments in Georgia will be carried out based on the cash rounding principle. Pursuant to the bill, the rounding principle means that the sum will be rounded up or down to the nearest five multiples. The Law will become effective on 1 January The source and date of publication: website of the Parliament of Georgia, 12/04/2018.

3 Expected Amendments to the Code of Administrative Offences of Georgia On 12 April 2018, a bill was introduced to the Parliament of Georgia on the amendments to the Code of Administrative Offences of Georgia. The bill revokes the provision, which provides for administrative liability for the offences such as failure of the business entity to make settlement with the client to the accuracy of one tetri. The Law will become effective on 1 January The source and date of publication: website of the Parliament of Georgia, 12/04/2018. Order #65/04 dated 17 April 2018 issued by the President of the National Bank of Georgia On 18 April 2018, the President of the National Bank of Georgia issued Order #65/04 on Amending the Order on the Approval of the Regulations on Credit Concentration and Large Risks in Commercial Banks. The Order introduces limitations for the commercial banks on issuing loans to customers without high quality analysis of their solvency. According to the Order, in case the borrower receives income from trade/business activities, commercial banks should carry out detailed financial analysis of the borrower. Pursuant to the Order, total amount of all loans issued by banks without high quality analysis of borrower's solvency is limited to 25% of the Regulatory Capital of the bank. According to the Order, the limitations referred to above do not apply to the loans where precious metals, stones or real estate are pledged as collateral, to the extent of the value of the collateral. Pursuant to the Order, total amount of all loans to borrowers/co-borrowers with real estate pledged as collateral and without high quality analysis of their solvency is limited to 15% of the Regulatory Capital of the bank. The Order provides that the validity term of the documentation/information used for the high quality analysis of solvency should not exceed 6 months from the date of approving the loan. The Order also states that the documentation/information submitted for the purposes of analyzing the financial obligations of a borrower in total should be recently updated. The Law will become effective on 7 May The source and date of publication: Legislative Herald of Georgia, 18/04/2018.

4 New Draft Concerning Responsible Lending Framework On 7 May 2018, the National Bank of Georgia published a draft of the Regulations on Issuing Loans to Individuals. Draft Regulation is intended for improving the credit standards and the quality of credit portfolios. Regulation also aims to promote socially responsible credit relations, so that the rights of the borrowers are protected from the risks caused by the buildup of excessive debt. Draft Regulation defines criteria for issuing a loan and, after the Regulation is approved, all lending organizations subject to supervision and regulation of the National Bank of Georgia will be obliged to meet the said criteria. The source and date of publication: website of the National Bank of Georgia, 07/05/2018. Order #62/04 dated 11 April 2018 issued by the President of the National Bank of Georgia On 12 April 2018, Order #62/04 of the President of the National Bank of Georgia was published in the Legislative Herald of Georgia. Mentioned Order amended the Order #151/04 of the President of the National Bank of Georgia concerning the Approval of Rules for Protecting Customer Rights in the Course of Providing Services by Financial Organizations, dated 23 December The Order lays out rather strict requirements in terms of informing the customers while offering loan and deposit products. According to the Order, while offering loan and deposit products to customers personally, financial organizations will be obliged to fully inform the customer about the effective interest rate of the offered product. The Order states that the mentioned requirement, inter alia, applies to offering services through remote communication means such as Internet Bank, ATMs, SMSs, etc. The Order sets an obligation for financial institutions to amortize a loan transparently, which implies the application of daily interest accrual principle in calculations of the accrued interest. The Order also defines the rule for concluding a contract between financial organizations and customers through remote communication means. In addition, the Order approves contract templates in order to make the content of the contracts clearer and ensure that the customers are duly informed. The Order will become effective on 14 May The source and date of publication: Legislative Herald of Georgia, 12/04/2018.

5 Expected Amendments in the Procedure for Granting Temporary Residence Permit to Foreigners The purpose of this bill to create additional mechanism for preventing illegal migration. According to the bill, the fact of filing a request for temporary residence permit by an illegal immigrant shall no longer constitute a ground for legal stay in Georgia. The bill states that if the decision on expulsion of a foreigner is made, the latter will no longer be able to rely on the court proceedings as the ground for extending his/her stay in Georgia. Pursuant to the bill, Georgian residence permit shall no longer be granted to the foreigners, whose expulsion from Georgia has been temporarily postponed. According to the bill, following permits shall not be granted based on the C category ordinary visa: Work Residence Permit Study Residence Permit Residence Permit for Family Reunification Residence Permit for Former Citizen of Georgia Residence Permit for Stateless Persons Permanent Residence Permit Short-term Residence Permit The bill envisages the only exception from the rule referred to above, specifically for the investment residence permit, special residence permit for the victims of trafficking or for the victims of domestic violence. According to the bill, the set price will be increased for the non-agricultural immovable property the procurement of which in Georgia would allow a foreigner to obtain a short-term residence permit. Pursuant to the bill, only the foreigner living in Georgia for past 10 years will be eligible for permanent residence permit. The bill provides that current 6-year validity term of the temporary residence permit will be extended to 12 years. As of today, the bill has not been introduced to the Parliament of Georgia for examination. The source and date of publication: website of the Ministry of Justice of Georgia, 10/05/2018. Amendments to the Law of Georgia on Tobacco Control On 1 May 2018, amendments to the Law of Georgia on Tobacco Control entered into force. The amendments banned tobacco smoking in any building-construction, except the place of residence of an individual, prison facilities, casinos, cigar-bars, temporary detention isolators, airport transit zone, etc.

6 According to the amendments, tobacco smoking is prohibited in the facilities, both in the buildings and outside on the respective territories owned by such facilities, intended for the persons under 18 as well as the public gatherings intended for the persons under 18. The amendments define the term "buildings-constructions" as any construction having a floor, any type of roof or ceiling and movable or immovable walls of any type (regardless of the wall material) across the 1/2 of the total surface, including open or closed windows and doors. According to the amendments, tobacco smoking will be allowed in taxis and motorboats. The amendments prohibit the demonstration of any form of tobacco smoking through media, other printed or electronic means, at large shows and through theatre performances. The amendments provide that the restriction referred to above does not apply to the cases, when a smoker in an open space is recorded on camera accidentally, in live stream. The Law became effective on 1 May The source and date of publication: Legislative Herald of Georgia, 30/05/2017. Amendments to the Code of Administrative Offences of Georgia On 1 May 2018, amendments to the Code of Administrative Offences of Georgia were enacted. According to the amendments, failure by a person to fulfill the obligations prescribed by the Law of Georgia on Tobacco Control will result in a fine in an amount of GEL 500. The amendments provide that in case of repeatedly committing the same action the amount of fine will increase up to GEL 1,000. According to the amendments, in case of violating certain obligations set by the Law of Georgia on Tobacco Control, such as smoking in air and maritime public transport, a person shall be fined with GEL 50; in case of repeated commission of the same action, the amount of fine increase to GEL 100. The Law became effective on 1 May The source and date of publication: Legislative Herald of Georgia, 30/05/ /679 Regulation of the European Union on the Protection of the Rights of Natural Persons with Regard to the Processing of Personal Data and to the Free Movement of Personal Data (General Data Protection Regulation - GDPR) dated 27 April 2016 According to the Regulation, the processing of personal data of data subjects who are in the European Union by a processor established outside the European Union falls within the scope of 2016/679 Regulation.

7 Pursuant to the Regulation, the aforementioned provision applies where personal data is processed in relation to offering of goods or services to data subjects. The Regulation also states that its provisions shall be applicable to the cases where an entity established outside the European Union processes personal data of data subject in relation to the monitoring of their behaviour, as far as their behaviour takes place within the European Union. The Regulation provides that processing of personal data of the deceased persons (data subjects) does not fall within its scope. Pursuant to the Regulation, respective authority shall ensure the imposition of administrative fines in respect of infringements of the Regulation. The amount of administrative fine shall depend on the circumstances of each individual case, taking into account the gravity and duration of the infringement, number of data subjects affected, previous infringements, category of personal data, etc. The Regulation states that the infringement of its provisions may be subject to administrative fines up to EUR 10,000,000 or EUR 20,000,000 and, in certain cases, up to 4 % of the entity's total annual turnover of the preceding financial year. According to the Regulation, EU Member States should adopt national mechanisms to address the infringements of the Regulation, which pursuant to the Regulation itself are not subject to administrative fines. The Regulation will become effective on 25 May Source and date of publication: Official Journal of the European Union, 04/05/2016.

8 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) Head of Law Practice Tax & Law 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.