The 1% tax regime in Georgia
Georgia offers an attractive tax system that allows entrepreneurs and freelancers to benefit from an extremely low tax rate of just 1%. This scheme is ideal for individuals looking for a simple, cost-effective and efficient tax environment.
Take advantage of Georgia's unique tax system
Georgia offers impressive tax incentives to entrepreneurs and freelancers who qualify for “small business” status. With a tax rate of only 1% on income up to GEL 500,000 annually, the country offers an attractive option for business people looking for an efficient and cost-effective tax solution. However, this tax rate does not automatically apply to all income or business activities and requires careful compliance with certain conditions and regulations.
No visa required - ideal for international entrepreneurs
An additional advantage of doing business in Georgia is that many nationalities do not require a visa to enter the country. This facilitates access to this tax-friendly environment and makes it possible to conduct business without major bureaucratic hurdles.
Criteria for the 1% tax rate
In order to benefit from the low taxation, entrepreneurs must:
- Have an annual income that does not exceed the threshold of GEL 500,000.
- Carry out business activities that are explicitly classified as suitable for small businesses. Not all economic activities are allowed; in particular, consulting and some other services are excluded.
- Ensure that their contractual relationships are not classified as employment relationships, regardless of the name of the contract.
Tax registration and compliance
Registration as a small business requires a visit to a service center of the Georgian tax authorities or registration via their official website. It is important that entrepreneurs clearly define and document their business activities, as the tax authorities will scrutinize the contract and actual business activities to determine whether they meet the requirements.
Handling tax audits and risks
One of the challenges of using the 1% rule is the possibility that tax authorities may adjust the classification of business activities based on a comprehensive analysis of contractual terms and actual business behavior. Business transactions that do not have a material economic effect or whose structure does not correspond to their substance can be reclassified under the general anti-abuse rules (GAAR). This could result in small business status being withdrawn retroactively and higher tax rates becoming applicable.
Pitfalls
Risks when registering as a small business
In Georgia, small business status offers significant tax advantages, including a tax rate of only 1% on income. However, there are also certain risks associated with registering and maintaining this status that need to be considered:
- Accuracy of business activity: When registering, the service center mainly relies on the verbal description of your business activity. It is important that this description is accurate and honest. For example, stating IT services could lead to approval of small business status, whereas consultancy services are often excluded.
- Risk of subsequent review: Although the certificate is initially issued on the basis of your information, subsequent tax audits may lead to a reassessment. If the actual business activities do not correspond to those stated, your small business status may be revoked. This will result in subsequent taxation at the higher tax rate of 20%.
- Penalties for misclassification: In addition to reassessment, penalties may also apply, which can include up to 50% of the additional tax liability plus daily interest of 0.05% on overdue tax amounts.
- Limitation period: Please note that the limitation period for tax claims in Georgia is 3 years and 11 months, including the month in which the tax return is filed. Within this period, the tax authorities may carry out a review of your tax affairs.
Important procedure
- Documentation and evidence: It is crucial to carefully document all business transactions. This will make it easier to defend your case should a tax audit occur.
- Seek timely advice: To ensure that your business remains properly classified as a small business, it is advisable to seek regular tax advice. A tax advisor can help ensure that all requirements are and remain met.
By keeping these points in mind, entrepreneurs in Georgia can take advantage of small business status without having to fear unexpected tax challenges.
Conclusion
For entrepreneurs who want to make the most of the Georgian tax system, it is essential to obtain detailed advice in advance and ensure that all requirements are met. This includes careful contract drafting, precise categorization of business activities and active management of tax risks.
Want to take full advantage of 1% taxation in Georgia? Contact us today for comprehensive tax advice and assistance with registering your small business. Visit our website or call our experts to set up your business for success in Georgia and take advantage of these impressive tax benefits.