EY GEORGIA TAX & LAW BRIEF

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1 EY GEORGIA TAX & LAW BRIEF JANUARY, 2017 Income Tax Reform Amendments to the Tax Code of Georgia became effective on 1 January According to the amendments, the so-called distributed profit tax model will be introduced. In particular, the taxable items of a resident entity shall be: a) Distributed profit; b) Expenses incurred or other payments not related to economic activities; c) Gratuitous delivery of goods/services or/and transfer of funds; d) Representation costs that exceed the maximum amount defined by the Tax Code. New rules of levying a profit tax on a commercial bank, a credit union, insurance organization, microfinance organization and pawnshop will become effective on 1 January The profit tax rate has not changed; to receive a taxable amount a taxable item must be divided by According to the amendments, the profit distributed to shareholders in a monetary or non-monetary form as dividend is a distributed profit. However, the payment which is based on the dividend received from a resident enterprise shall not be considered to be a distributed profit. A payment made to a non-resident enterprise in a monetary or non-monetary form from profit earned from permanent establishment s activities shall be considered to be a distributed profit of a permanent establishment. The permanent establishment is attributed a profit, which it would be able to generate as an independent enterprise engaged in the same or similar activities, operating under the same or similar conditions.

2 According to the bill, the following shall be also treated as the distribution of profit: a) A transaction made by an enterprise with a related party, if the value of the transaction agreed between them is different from a market value and their interdependence has an impact on the result of the transaction; b) Making controlled transactions, if the established conditions of such transactions do not comply with the arm s length principle; c) A transaction made by an enterprise with a party exempt from income/profit tax, if a transaction value is different from a market value; According to the bill, transfer of goods or delivery of service not for the purpose of receiving profit, income or compensation, shall be considered to be a gratuitous delivery. The following are major exceptions: a) Donations made to a charity organization during a calendar year, which do not exceed 10% of the profit received during the previous calendar year; b) Gratuitous transfer of goods or funds, which is taxed at source in line with Article 154 of the Tax Code. c) Providing free hotel services (hotel accommodation) for a hotel room owner by a tourism enterprise or/and a person/persons invited for hotel operation by a tourism enterprise under an agreement, for no more than 60 days during the calendar year. d) Gratuitous delivery of goods/services or/and transfer of funds to the state, municipality or legal entity of public law; e) Gratuitous transfer of real estate to a charitable organization, if the beneficiary organization has carried out charitable activities at least for the past 3 years with respect to people disabled since childhood or/and people with severe disabilities; f) Guarantee provided under article 249 of the Tax Code of Georgia and the Civil Code of Georgia, as well as gratuitous delivery of servitude services. According to the bill, for the purpose of taxation, the maximum amount of representation costs incurred during the calendar year shall be 1% of income received or expenses incurred during the previous calendar year, while the maximum amount of representation costs incurred in the year of incorporation shall be 1% of expenses incurred by the end of the current calendar year. According to the bill, Article 123 of the Tax Code regulating thin capitalization was cancelled. According to the amendments, the reporting period for a resident enterprise and nonresident s permanent establishment in Georgia, which are taxed according to a new profit tax scheme, shall be a calendar month. These persons shall file with the tax authority on a monthly basis not later than 15th day of the month following the reporting month a profit tax return and tax return on remunerations paid and taxes withheld according to the reporting month. The source and date of publication: Legislative Herald of Georgia 01/06/2016. Amendments to Rules of Issuance of up to GEL Credit by Commercial Banks 5/04 Order of the President of the National Bank issued on 18 January 2017 amended the rules of issuance of up to GEL in loan by commercial banks. According to the amendments, commercial banks may issue up to (one hundred thousand) in loan to an individual in foreign currency provided that the loan is issued to a person who is not a citizen of Georgia.

3 The order became effective on 20 January The source and date of publication: Legislative Herald of Georgia, 18/01/2017. Landmark Court Decision Supreme Court of Georgia Clarifies Paying Damages for Non-Pecuniary Damage Background Information: The claimant filed a suit against the respondent and demanded payment of nonpecuniary damages caused by the destruction of property by fire. City Court Tbilisi City Court made a preliminary decision that the fire was the consequence of a respondent s unlawful, culpable action, which inflicted a non-pecuniary loss to the claimant. The preliminary decision of the Tbilisi City Court was appealed by the respondent. The latter demanded that it be canceled and the case be returned to the same court. Appeals Court Appeals Court considered that the respondent s appeal was to be satisfied partially, in particular, the episode which stated that the fire was a consequence of unlawful, culpable action of the respondent, which resulted in the non-pecuniary damage to the claimant, was to be canceled. Consequently, according to a new decision the episode of the claim that dealt with paying non-pecuniary damages caused by fire was to be dismissed. The respondent appealed the ruling of the Appeals Court and clarified that there was no cause-and-effect relationship between the respondent s action and the consequence; the expert examination assigned by the court could not prove the opposite, but the court ruled anyway that deterioration of the claimant s health was the consequence of the respondent s unlawful and culpable action, even though it failed to clarify the content the action and its relation to the consequence. Supreme Court On 20 January 2012, the Tbilisi Court of Cassation of Tbilisi made a decision #AS , in which it clarified the payment of non-pecuniary damages. The Court of Cassation clarified that Appeals Court considered wrongly that the case was subject to Article 413 of the Civil Code of Georgia on the payment of nonpecuniary damages. The Court of Cassation considered that the human health is one of the benefits protected by Paragraph 2, Article 413 of the Civil Code of Georgia, therefore the claimant may demand payment of non-pecuniary (moral) damages because of inflicting harm to it. The Court of Cassation clarified that according to Article 413 of the Civil Code of Georgia non-pecuniary damages may be claimed when a harm is inflicted to human health, which also resulted in claimant s suffering and psychic stress.

4 The Court of Cassation clarified that in this case, psycho-emotional stress experienced as a result of burning down a residential house and such negative factors as homelessness, debts and consequent deterioration of health do not provide grounds for demanding non-pecuniary damages set forth in the law, otherwise Article 413 of the Civil Code would extend to any deterioration of health caused by moral suffering as result of the breach of any property-related obligations, which shall be unacceptable. The Court of Cassation ruled that the respondent s appeal shall be partly satisfied and the case shall be returned to the same chamber for reconsideration. The source and date of publication: the website of the Tbilisi Supreme Court, Competition Law Negative Decision of LEPL Competition Agency on Launching Investigation on the basis of Application N01/1090 of N(N)LE Center for Competition Law and Consumer Submitted on 15 November 2016 The Competition Agency issued a negative decision on launching an investigation based on the application of the N(N)LE Center for Competition Law and Consumer in line with N5 Order of the Chairman of the LEPL Competition Agency issued on 9 January According to the order, the Agency has considered that the allegation regarding the violation of Article 7 of Law of Georgia on Competition by Booking.com made by N(N)LE Center for Competition Law and Consumer does not meet a lawful standard of a reasonable doubt. Moreover, the application submitted to the agency does not contain any specific indication of constraining competition on the market by so-called MFN conditions of the Booking.com s agreement. The order states that most of the interviewed economic agents consider Booking.com to be an efficient means for public offering of their services and point to a significant role this platform has plaid in the development of Georgia s tourism business. The Booking.com itself has flatly denied any violations but showed willingness to introduce the terms mandatory in the EU states voluntarily into the territory of Georgia, states the order. Considering the above mentioned factors, the Competition Agency has concluded that currently there is no reasonable doubt in place to launch an investigation. The source and date of publication: the webpage of the LEPL Competition Agency.

5 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.