EY GEORGIA TAX AND LAW BRIEF

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1 EY GEORGIA TAX AND LAW BRIEF NOVEMBER 2018 Draft Law on Amendment of the Tax Code of Georgia On 1 November 2018, a Draft Law was initiated in the Parliament of Georgia on the amendment of the Tax Code of Georgia. The Draft Law offers definitions for social entrepreneurship and a social enterprise and establishes tax incentive for such enterprises. According to the Draft Law, social entrepreneurship is any organized entrepreneurial activity prescribed by the Law of Georgia on Social Entrepreneurship that strives to ensure social equity, employment of vulnerable groups, achievement of social objectives in the fields of education, culture, healthcare, sports and environmental protection, the purpose of which, for the most part, is not to earn and distribute income among partners or shareholders. A social enterprise has been defined as a legal entity registered with the status of a social enterprise according to the requirements of the Law of Georgia on Social Entrepreneurship. If the Draft Law is adopted, the market value of the property transferred to a social enterprise will not be recorded in the social enterprise s gross income if the recipient of the property has been engaged in social entrepreneurship for at least the past three calendar years. If the Draft Law is adopted, it will be enacted upon its publication. 01/11/2018. Draft Law on Amendment of the Tax Code of Georgia On 8 November 2018, a Draft Law was initiated in the Parliament of Georgia on Amendment of the Tax Code of Georgia. According to the Draft Law, the income earned by an individual from leasing a residential space to an organization, natural or legal entities for residential purposes, who makes no deductions from such income and falls under the special tax treatment for individuals with the micro business status as defined by the Tax Code of Georgia, shall not be taxed with 5%.

2 If the Draft Law is adopted, the Government of Georgia will be additionally instructed to introduce changes in the Decree of the Government of Georgia on Special Tax Treatment and to remove Part I of Annex 3 from the Decree (income earned from property lease/real estate rent). If the Draft Law is accepted, it will become effective from 1 January /11/2018. Draft Lawon theamendment of the Law of Georgia on Accounting, Reporting and Audit On 22 November 2018, a Draft Law was initiated in the Parliament of Georgia on the amendment of the Law of Georgia on Accounting, Reporting and Audit. According to the Draft Law, the persons who have acted in the capacity of an engagement partner for at least seven years prior to enactment of the Law of Georgia on Accounting, Reporting and Audit, and are not certified accountants as required by this law, are granted the certified accountant s status upon submission of documented proof of having provided audit services to the Service for Accounting, Reporting and Supervision. If such persons are interested in registering with the State Registry for Auditors/Audit Firms, it is deemed that they have at least three-year experience of auditing financial statements under the auditor s supervision. If the Draft Law is adopted, it will become effective upon its publication. 22/11/2018. Draft Law on the Amendment of Product Safety and Free Movement Code On 15 November 2018, a Draft Law was initiated in the Parliament of Georgia on the amendment of the Product Safety and Free Movement Code. According to the Draft Law, if the legal basis for a penalty is not removed, the violator of the construction law and the client involved in the construction, or the persons acting as the client and the contractor, will have to pay three times as much as the initial penalty amount every three months after the initial penalty is imposed. However, such penalties can be imposed no more than three times. According to the Draft Law, the failure to provide facilities and architectural or design features for people with disabilities shall result in an appropriate penalty depending on the class of the premises, from GEL 4,000 to GEL 30,000 for Tbilisi, GEL 2,000 for self-governing cities, and as for municipality settlements, GEL 1,000 for cities and GEL 500 for towns or villages. If the Draft Law is adopted, it will be enacted from 1 January /11/

3 Draft Law on the Amendment of the Law of Georgia on Legal Status of Foreigners and Stateless Persons On 15 November 2018, a Draft Law was initiated in the Parliament of Georgia on the amendment of the Law of Georgia on Legal Status of Foreigners and Non-citizens. According to the Draft Law, the investment residence permit will be issued to foreigners and their family members if such foreigners have invested at least USD 500,000 in Georgia, as required by the Law of Georgia on Promotion and Guarantees of Investment Activity, and has employed at least 50 Georgian citizens for the investment. Such residence permits can be issued for no more than six years. The Draft Law aims to remove the regulation that allows short-term residence permits to be issued to the foreigners and their family members who own real estate, other than agricultural land, and the real estate value exceeds USD 35,000 equivalent amount in the Georgian Lari. Along with other changes, the Draft Law aims to remove the regulation that grants short-term residence permit for the period of one year to the foreigners who have ownership rights over real estate in the territory of Georgia. If the Draft Law is adopted, it will be enacted upon its publication. 15/11/2018. Decree of the Government of Georgia on Approval of the Rule of the Market Supervision and the Rule of Product Removal, Withdrawal, Recall from the Market and Destruction On 14 November 2018, Decree 539 of the Government of Georgia was published on the website of the Legislative Herald of Georgia setting the rules for proactive and reactive supervision of the market, product removal, withdrawal, recall and destruction. According to the decree, the market supervision is carried out based on the risk analysis and reasonable doubt and includes only the products regarding which there is information available about risks or their incompliance with the requirements of the Product Safety and Free Movement Code and relevant technical regulations and that are highly likely to cause threat and/or damage. According to the decree, the market supervision must be carried out on a pro rata basis, meaning that the decision of the market supervision authority on a restrictive measure must be proportional to the type of incompliance discovered regarding a product sold in the market, possible threat and gravity of threat. The Decree was enacted on 15 November Source and date of publication: the Legislative Herald of Georgia, 14/11/2018 3

4 Decree of the Government of Georgia on Definition of Product Threat Categories in the Market and Approval of Risk Assessment Rule and Form On 14 November 2018, the Decree 540 of the Government of Georgia was published on the website of the Legislative Herald of Georgia together with relevant annexes. For the purposes of the Decree, a product is a non-food product as described by the new approach technical regulations. According to the Decree, if a confirmed product-related threat exists, LEPL Technical and Construction Supervision Agency (the TCSA ) decides to apply a restrictive measure or a set of measures, such as product removal, withdrawal recall and/or destruction. According to the Order, risk assessment shall be triggered by the following events proving incompliance with technical regulations, such as, accidents, malfunctions, messages received from a business entity or direct customers about product-related incompliances, information obtained about a specific product from planned as well as unplanned inspections and the experience gathered by the TCSA, and the results of the sample analysis, information received from international organizations and supervision authorities in foreign markets about products with confirmed threat. The Decree was enacted on 15 November Source and date of publication: the Legislative Herald of Georgia, 14/11/2018 Decree of the Government of Georgia on Approval of Technical Regulation about Alcoholic Beverages On 20 November 2018, the decree 554 of the Government of Georgia was published on the website of the Legislative Herald of Georgia, setting requirements for naming, description, submission and labelling of alcoholic beverages, except for the spirits made from grapes as defined by the laws of Georgia, and regulating production, market placement and presentation of alcoholic beverages by business entities. The Technical Regulation provides requirements for categorization, market placement, description, submission and labeling of alcoholic beverages, as well as for business entity and alcoholic beverages compliance control. According to the decree 554, the alcoholic beverages that are not in compliance with these requirements may be placed in the market until 1 January Moreover, it is forbidden to place or sell alcoholic beverages in the market in the containers (vessels) sealed with lids/corks containing foil or lead capsules. The compliance of alcoholic beverages as envisaged in the Technical Regulations with its requirements is controlled by LEPL National Food Agency, LEPL Revenue Service and by business entities through their internal controls. The Decree will be enacted on 1 April Source and date of publication: the Legislative Herald of Georgia, 20/11/

5 Decree of the Government of Georgia on Technical Regulation General Rule for Wine Production and Defining the List of Permitted Processes, Materials and Substances On 8 November 2018, Decree 524 of the Government of Georgia was published on the website of the Legislative Herald of Georgia, setting mandatory requirements for wine characteristics, manufacturing rules, ageing, placement of wine with Protected Designation of Origin (the PDO ) or Protected Geographical Indication (the PGI ) status in the consumer market and permitted processes, materials and substances in the winemaking practices. The requirements of the Technical Regulation apply to all wine producers. The compliance of wine with the Technical Regulation will be monitored by LEPL National Wine Agency during the wine certification, LEPL National Food Agency during government supervision of wine in the consumer market, and by the wine producer through its internal controls. The Decree was enacted on 7 December Source and date of publication: Legislative Herald of Georgia, 08/11/2018. Decree of the Government of Georgia on Approval of Technical Regulation about Traceability and Labelling of Genetically Modified Organisms, Traceability of Genetically Modified Food/Animal Feed Products On 20 November 2018, the Decree 548 of the Government of Georgia was published on the website of the Legislative Herald of Georgia, setting requirements for genetically modified (the GM ) food and animal feed and regulating labelling and market placement by business entities. The requirements set by the Technical Regulation apply to the products placed in the market that contain or consist of genetically modified organisms (the GMOs ), and food/feed products obtained from the GMOs. The Technical Regulation requirements do not apply to human and veterinary medicines. The compliance of the products containing or consisting of the GMOs, and food/feed products produced from the GMOs, with the Technical Regulation and the laws of Georgia is monitored by LEPL National Food Agency and LEPL Revenue service. The Decree will be enacted on 1 January Source and date of publication: Legislative Herald of Georgia, 20/11/2018. Decree of the Government of Georgia on Requirements of Genetically Modified Food and Animal Feed On 20 November 2018, the Decree 549 of the Government of Georgia was published on the website of the Legislative Herald of Georgia, setting requirements for genetically modified (the GM ) food and animal feed and regulating production and market placement of such products by business entities. 5

6 The requirements of the Decree apply to the genetically modified organisms (the GMOs ) used for food and animal feed, which partially or in whole do not have the ability to multiply and/or transfer genetic material, as well as the food that contains, consists of, or is produced from the GMOs or contains ingredients made of the GMOs, as well as animal feed that contains, consists of, or is produced from the GMOs. The Decree defines the GM food and feed related certification, government procedures and labelling requirements. The GM food and feed are monitored by LEPL National Food Agency and LEPL Revenue service. The Decree will be enacted on 1 January Source and date of publication: the Legislative Herald of Georgia, 20/11/2018. Orderofthe President of the National Bank of Georgia on Approval of Statute about Information Required for Wire Transfers On 30 November 2018, the Order 253/04 of the President of the National Bank of Georgia (the NBG ) was published on the website of the Legislative Herald of Georgia. The purpose of the Order is to set the mandatory details of the payer and the recipient required for a wire transfer that must be enclosed to the wire transfer at its every stage. The Order applies to the transfers where the payment service provider of the payer and/or the recipient is the NBG licensed commercial bank, or the NBG registered payment service provider or microfinance organization. The Order also applies to the wire transfers in any currency that is sent, transmitted or received by the NBG licensed commercial bank, or the NBG registered payment service provider or microfinance organization. The requirements of the Order do not apply to transfers through a payment card, an e-money instrument, a mobile phone or the payer s other similar digital or IT gadgets, if an e-payment instrument is used to pay for goods or services and the e-payment instrument is enclosed to the payment transaction at its every stage so that it is possible to link the payment transaction with the payer. Nor do the requirements of the Order apply to transfers of payments for goods or services if all the following requirements are met: a) the provider of the sender and the recipient is the commercial bank, the payment service provider or microfinance organization; b) the Electronic Information Exchange System (the EIES ) between the payer s provider and the receiver ensures that the purpose of the payment transaction is identified; c) the payer s provider and/or the recipient s provider can identify through the recipient the receiver of goods or services using the transaction unique code or other detail, and d) the transaction amount does not exceed EUR 1,000 or USD 1,000 or GEL 3,000 or the latter s equivalent in another foreign currency. The order becomes effective on 1 July Source and date of publication: the Legislative Herald of Georgia, 30/11/

7 Statement of the National Bank of Georgia According to the information published on the website of the National Bank of Georgia on 14 November 2018, the Decree on Loan Disbursements to Individuals will be enacted on 1 January The regulations set by the Decree will become mandatory simultaneously for commercial banks and microfinance organizations, credit unions and lending entities. The basic principles of the Decree remain the same. Source and date of publication: the website of the National Bank of Georgia, 14/11/

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) Associate Partner 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.