EY GEORGIA TAX AND LAW BRIEF

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1 EY GEORGIA TAX AND LAW BRIEF DECEMBER 2018 Law on Amendment of the Tax Code of Georgia From 1 January 2019, the Law on Amendment of the Tax Code of Georgia became effective. The law allows microfinance institutions to deduct loan loss provisions according to the Regulation of the National Bank of Georgia on Assets Classification and Loan Loss Provisioning for Microfinance Institutions. In addition, the tax regulations that used to apply only to pawn-shops, now apply with a modification to all lending entities, towards which over 20 individuals (incl. private entrepreneur) simultaneously have a debt/liability. As a result, the term pawn-shop in the Tax Code, similarly to the Law on the National Bank of Georgia, has been replaced with the term a lending entity. Under this law, the excise duty on unfiltered cigarettes containing tobacco has been matched with the excise duty on filtered cigarettes containing tobacco and became GEL 1.7 per 20 cigarettes. The excise rate for filtered cigarettes containing tobacco (per 20 cigarettes), capsules and similar products containing tobacco (20 units), as well as heat-not-burn (HnB) tobacco products producing vapor (20 units) is calculated by adding by the excise rate on the respective table to 30% of the selling price of the respective product, instead of 10%. The law has brought significant changes to tax sanctions. Particularly, it has introduced 50% reduction of penalty if the tax accruals originating from a tax inspection are recognized and the taxpayer has paid all the taxes and 50% of penalties within 30 days of serving the tax demand notice. The discretionary power of using a warning instead of a monetary penalty, that was prescribed by Article 270 of the Tax Code, now applies to Section 1 of Article 286 of the Tax Code for transportation of goods for business activity without a bill of lading, refusal to issue a bill of lading upon the buyer s request or refusal to accept a bill of lading upon purchase of goods when the market value of the goods supplied/to be supplied without a bill of lading does not exceed GEL 10,000. According to the law, the penalty interest stops to accrue three years after the start of its accrual.

2 The law has fully amended the article about penalties for late submission of a tax return, in particular if submission of a tax return is delayed for up to two months, the penalty shall be 5% of the tax payable based on this tax return/calculation, and if submission of a tax return is delayed for more than two months, the penalty shall be 10% of the tax payable based on this tax return/calculation. The amendment has also revoked the minimum threshold of the penalty, which used to be GEL 50. According to the law, if the tax return amount is reduced by less than 5%, the entity shall be fined with 10% (instead of the standard penalty of 50%). If the tax return amount is reduced by 5%-20%, the entity shall be fined with 25% (instead of the standard penalty of 50%). It is also important that the sum of the penalties accrued for tax deduction during the tax inspection shall not exceed the total of the taxes accrued as a result of such inspection. In addition, the benefit received by an individual from forgiving (write-off) of loans issued before 1 January 2019, as well as the interest and penalty on such loans, is exempt from Personal Income Tax (PIT), if the commercial bank or a microfinance institution forgives (writes off) a respective liability for such an individual. Commercial banks and microfinance institutions are given a right to deduct the forgiven (written off) loan issued to individuals before 1 January 2019, as well as the interest and the penalty accrued on such a loan from gross income except when: loan loss provisions are deducted from the gross income of the respective period; the interest and the penalty accrued on the loan are not included in the gross income of the respective period. Moreover, considering this restriction, the benefit derived from a forgiven (written off) loan issued prior to 1 January 2019 to individuals, the interest and the penalty accrued on such a loan, shall not be included in the gross income of a commercial bank or a microfinance institution. Source and date of publication: The Legislative Herald of Georgia, 31/12/2018. Draft law on Amendment of the Tax Code of Georgia On 13 December 2018, a draft law was initiated in the Parliament of Georgia on the amendment of the Tax Code of Georgia. The draft law mainly differentiates the issues governed by customs legislation and regulations governed by tax legislation. If the draft law is adopted, the regulations of the customs law will be entirely removed from the Tax Code, and if there is a link to the customs laws the Tax Code will refer to the Customs Code. Apart from these changes, the draft law suggests removal of the concept of an International Financial Company and the cancellation of the tax reliefs related to them. Instead an entity called International Company is suggested to be created that carries out the activities prescribed by the respective decree of the Government of Georgia and generates revenue only from these activities. An International Company may not be created in a free industrial zone. If an International Company engages in an activity not prescribed by the respective Government decree, it will lose the status of an International Company retrospectively. For the purposes of VAT taxation, if an International Company provides the prescribed services to non-residents, it will be deemed that the services were provided abroad. An International Company will not have to withhold PIT for employees. Besides, the foreign citizens who are residents of Georgia and employed by an International Company are exempt from PIT. The dividends paid by an International Company are not taxed at source, nor are they included in the recipient s gross income. 2

3 An International Company s distributed profits will be taxed similarly to other Georgian enterprises, however, with 5% only. An International Company is exempt from property tax (except for land), if the property is used for an activity allowed by the respective decree of the Government of Georgia. The draft law stipulates a new concept of a pharmaceutical enterprise. The status is assigned to enterprises by the Government of Georgia. Such enterprises produce and supply pharmaceutical products in Georgia. Supply of self-manufactured pharmaceutical products by a Pharmaceutical Enterprise (the list of pharmaceutical products is set with a joint order of the Minister of Internally Displaced Persons from the Occupied Territories, Labour, Health and Social Affairs of Georgia and the Finance Minister of Georgia) is exempt from VAT with the right to credit input VAT. Tax information can also be transferred to LEPL Technical and Construction Supervision Agency while exercising the authorities provided by the laws of Georgia. Also, according to the draft law, giving a consent to divulging taxation secrecy is now allowed electronically. Other than the potential changes described above, the draft law also makes it mandatory to agree the advanced tax ruling (ATR) with the Finance Minister of Georgia. If the draft law is adopted, the benefit received by employees from use of company car for personal travel will be taxed with PIT according to the car engine capacity and the type. The tax amount will not depend on the book value of a car and will be set at GEL 0, 60, 100, 200 and 300. If the draft law is adopted, supply of electronic books will also be exempt from VAT payment with the right to credit input VAT. According to the amendment, if the payments are non-monetary as defined by Articles of the Tax Code of Georgia, the profit tax base shall be the market price of the goods/services supplied, and if the market price of the supplied goods/services includes VAT the market price, exclusive of VAT. Source and date of publication: The website of the Parliament of Georgia, 13/12/2018. Law of Georgia on Pension Saving is now fully in force On 1 January 2019, the regulation on the participation in the pensions saving scheme as set by the Law of Georgia on Pension Savings entered into force. Employees, other than the employees who turned 60 (or 55 for female employees), before the enactment of the said law, become participants upon receiving the first salary, and the employees who turned 60 (or 55 for female employees) before 6 August 2018, as well as self-employed persons, become participants voluntarily by making the first pension contribution. Moreover, if an employee turned 40 before 6 August 2018 and does not wish to participate in the pensions saving scheme, he/she can submit a written request to LEPL Pension Agency in a manner prescribed by the said agency and be removed from the pensions saving scheme 5 months after being automatically included in the scheme but not earlier than 3 months after being enrolled in the scheme. Otherwise he/she will remain involved in the pensions saving scheme. 3

4 The Order of the Director of LEPL Pension Agency on the Approval of the Rules of Making Pension Contributions, Forms of Information Submission and Instruction for Administration of the Amounts Paid in Excess On 1 January 2019, the Order of the Director of LEPL Pension Agency on the Approval of the Rules of Making Pension Contributions, Forms of Information Submission and Instruction for Administration of the Amounts Paid in Excess (the Instruction ) entered into force. The Instruction prescribes the rules approved by LEPL Pension Agency with regards to the mandatory and voluntary membership in the pensions saving scheme and making pension contributions in compliance with the Law of Georgia on Pension Saving, the forms of information submission and the rules and procedures for administration of the amounts paid in excess. The Instruction applies to all employers, employees and self-employed resident individuals, who are the citizens of Georgia or foreign citizens holding permanent residence permit in Georgia or stateless persons. The Instruction also applies to the Treasury Service of the Ministry of Finance, to the extent of making pension contributions. The Order became effective on 1 January Source and date of publication: The website of LEPL Pension Agency. Approval of the Regulation Governing the Special Depository of the Pension Saving Scheme On 3 December 2018, Order N 259/04 of the President of the National Bank of Georgia, approving the regulation governing the special depository of the pension savings scheme, was published on the website of the Legislative Herald of Georgia. According to the Order, a financial institution licensed by the National Bank of Georgia, as well as a special depository licensed by the respective regulatory agency of a developed country as determined by Order N 16/01 dated 19 February 2010 of the President of the National Bank of Georgia and recognized by the latter shall be authorized to render depository service to the Pension Agency. The Order became effective upon publication. Source and date of publication: The Legislative Herald of Georgia, 03/12/

5 Approval of the Rule for Additional Requirements for Pension Assets Management On 3 December 2018, Order N 257/04 of the President of the National Bank of Georgia was published on the website of the Legislative Herald of Georgia. According to the Order, authorization/recognition of the pension assets management company may be granted only to a) the National Bank of Georgia licensed financial institutions authorized to carry out brokerage activities, b) assets management companies, licensed by the regulator of a developed country as determined by Order N 16/01 of 19 February 2010 by the President of the National Bank of Georgia. Management of the pension assets may also be carried out by an entity created or established for the purpose of assets management or/and issuance of investment advice by the international organization Georgia is the member state of, and not subject to licensing by respective regulators of separate countries. The Order became effective upon publication. Source and date of publication: The Legislative Herald of Georgia, 03/12/2018 Approval of the Resolution on Lending to Individuals On 25 December 2018, Order N 281/04 of the President of the National Bank of Georgia, which approved the Resolution on Lending to Individuals, was published on the website of the Legislative Herald of Georgia. The requirements of the Resolution apply to individuals, including private entrepreneurs, provision of security for all kinds of loans or/and guarantees issued by the lending organizations. According to the Order, in the event of issuing a loan without carrying out solvency analysis of the borrower/co-borrower, credit/loan demand of the lending organization shall be deemed satisfied only by carrying out the actions prescribed by the applicable laws of Georgia with regards to the collateral, including the sale or/and obtaining ownership of the property. This requirement does not apply to the loans secured with vehicles, if the borrower/co-borrower intentionally destructs/conceals the collateral. According to the Order, requirements of the Resolution do not apply to the outstanding balances before enactment of the Order and refinancing such balances, if no growth of the loan amount takes place. According to the Order, requirements of the Resolution also do not apply to provision of the guarantee/collateral executed with the individual for securing the contractual amount of the loan itself existed by the date of 24 December The Order became effective on 1 January Source and date of publication: The Legislative Herald of Georgia, 25/12/

6 Approval of the Rule of Mandatory Audit of Consolidated Financial Statements of Commercial Banks and Information Disclosure in the Notes to Consolidated Financial statements On 27 December 2018, Order N 284/04 of the President of the National Bank of Georgia was published on the website of the Legislative Herald of Georgia. The Order regulates main issues related to the mandatory audit of consolidated financial statements of commercial banks, including branches of foreign banks, the relations between the National Bank of Georgia, external audit firms of the banks and the banks themselves, as well as the issues related with the information disclosure in the interpreting notes to the audited consolidated financial statements. According to the Order, commercial banks have to perform mandatory audit of consolidated financial statements for the reporting period commenced from 1 January 2019, to perform non-audit services and disclosure of information in the notes in compliance with the requirements prescribed by the Order. Herewith, if a bank has no subsidiary, the requirements of the Rule approved with the Order shall apply to individual financial statements of the bank. The Order became effective on 1 January Source and date of publication: The Legislative Herald of Georgia, 27/12/2018. Amendment of Order N 217/04 dated 27 September 2018 of the President of the National Bank of Georgia on the Approval of the Rules of Registration, De-registration and Regulation of Lending Entities in the National Bank of Georgia On 17 December 2018, Order N 270/04 of the President of the National Bank of Georgia amending Order N 217/04 of the President of the National Bank of Georgia and appendices thereto was published on the website of the Legislative Herald of Georgia. According to the amendments, the lending entity is obliged to provide the National Bank of Georgia with the soft copies of the quarterly information on the issued loans and raised funds in MS Excel format, within 15 working days from completion of the reporting quarter. According to the amendments, the lending entity is authorized to perform only loan issuance/acquisition/recovery and related activities. The Order became effective upon publication. Source and date of publication: Legislative Herald of Georgia, 17/12/

7 The National Bank of Georgia Published the Draft of the Amendments to be Made to the Rule for Protecting Customer Rights On 18 December 2018, the draft Order of the President of the National Bank of Georgia on the amendments of Order N 151/04 of the President of the National Bank of Georgia on the Approval of the Rule for Protecting the Rights of the Customers during the Provision of the Services by Financial Organizations was published on the website of the National Bank of Georgia. According to the draft Order, the agreements stored with the financial organizations and customers shall be of equal legal force. According to the draft Order, if requested by the customer, the financial organization is obliged to promptly provide the customer with the information on his/her current account as well as the information on the credit and deposit financial products in the form of an certified extract and the debt certificate. According to the draft Order, the National Bank of Georgia is authorized to apply the sanctions prescribed by the applicable laws of Georgia even if the terms and conditions of the agreements signed with the customer are in conflict with the requirements of the Civil Code of Georgia with regard to the loan issuer and the loan interest. Source and date of publication: the website of the National Bank of Georgia, 18/12/

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.