The Republic of Georgia certainly has some serious benefits associated with the tax system, compared to high tax countries like much of Western Europe, USA, Australia etc. That said, in a tax system that is still developing rapidly, you’ll find a lot of tax advice online that is either very outdated or simply incorrect.
Tax myths are prevalent and we, as an international led firm, have been working hard to debunk all of the most pernicious ones that could land you in trouble So you can get correctly informed about your tax liabilities.
The pervasive misunderstanding of some of these myths means that even Revenue Service (RS) employees often provide incorrect advice. Meaning that sitting down with a front desk assistant at an RS office should not be seen as a way to get 100% reliable information.
For this reason, we base our information at ExpatHub directly on the Tax Code of Georgia because, ultimately, if the RS wants to take you to court over a tax issue, the only defense you have is establishing the law as defined in the tax code. Opinions of front desk agents at the RS, especially those expressed verbally, will have little or no relevance once you are in court or facing an audit.
It is our recommendation under all circumstances that if an adviser, be it us, the RS or any other tax adviser, offers you information, you should request they back it up with reference to the tax code or other relevant legislation. The number 1 mistake foreigners make with tax advice in Georgia is accepting tax advice without evidence. Always ask for proof.
The 10 myths below are some of the most common that we hear flouted around on Facebook groups and in dealings with many new clients who come to us having been given incorrect advice. You can click through to find additional information and references where relevant.
Myth #1: Income Earned from Abroad is Tax Free
Possibly the most common, as well as the most dangerous myth that’s making rounds in the Georgian expat community, is that any and all income received from abroad is tax-free in Georgia.
We’ve written about this before at length, but in short, while it’s technically true that Georgia doesn’t tax foreign-source income, it’s the definition of what qualifies as foreign-source income that catches most freelancers, digital nomads, and other groups by a surprise.
In reality, only certain types of foreign-originating income is tax-free. This mostly includes passive income, such as certain dividends (see below!), royalties, and interest. But when it comes to income obtained in exchange for any type of work or service, it’s in most cases taxed at full, regardless of where it originates from, as long as the service provider is a Georgian tax resident.
Because of the widespread misinformation, mostly circulated by bloggers and unqualified consultants, hundreds (if not thousands) of foreigners leave their tax affairs unsettled and wake up to a grim reality where they owe 20% tax on all of their income generated while being in Georgia.
What makes matters worse is that most people in this situation could have very easily reduced the tax liability down to as little as 1% had they acted earlier.
Important note on dividends: While foreign dividend income is indeed tax exempt in Georgia, don’t make the mistake of assuming that your foreign business operated from within Georgia isn’t liable for tax. See Myth #4 below for more details.
Myth #2: You Have no Tax Liability Until You Spend 183 days in Georgia.
Many foreigners seem to think they can come and work remotely in Georgia and that either:
- If they leave within 183 days, they don’t owe any tax.
- OR If they stay longer than 183 days, they only start owing tax from day 183.
- OR if they arrive on a tourist visa, they will never owe tax unless they register as a tax resident or legal resident. Meaning they can do visa runs and live in Georgia, sometimes for years, completely tax free.
1 is only true in some cases, the most common being:
- Georgia has a Double Taxation Avoidance Treaty with the country where the foreigner is a tax resident and will actually pay tax, and said treaty means they cannot be taxed in both countries on the relevant income they earned while in Georgia.
- They are an employee of a foreign company (not a business owner) and will be in Georgia for less than 30 days.
Some cases are less nuanced than others, and you must read Myths #3 & #4 below to get a clearer understanding.
2 & 3 above, are just simply false.
With 2, tax liability exists either from the day they arrived in Georgia, or from the 1st day of the tax year in which they became a tax resident of Georgia. It will depend on your exact circumstances as to which it is.
With 3, tax liability in Georgia is based on physical presence. If work (remote or otherwise) is performed within the territory of Georgia, you may have tax liability, regardless of type of visa or permit you have. This situation is not unique to Georgia, it’s true in most countries worldwide. The digital nomad revolution has led to a lot of tax evasion, both knowingly and unknowingly. As tax authorities get wise to this, we can expect to see repercussions becoming more widespread in the future.
Read about why country hopping does not legally avoid taxation, here.
Myth #3: If You Pay Tax in Another Country and/or There is a Double Tax Treaty Between Your Country and Georgia, You Don’t Owe Tax in Georgia
The general misunderstanding here is that Double Taxation Avoidance Treaties (DTAs) mean you can somehow just continue to pay tax in the relevant country of your preference. In fact, DTAs are designed to outline exactly where you will pay tax, in order to avoid double taxation. The treaty defines your tax jurisdiction for you and that may not always be where you expect.
Whether the country that you owe tax in is Georgia or the other country or countries you’re related to, depends on a plethora of factors, including how much time you’ve spent in either of the countries, what are your other ties (property, center of life, etc.) with the countries in question, where are you physically conducting your activities from, and most important of all, what the DTA between Georgia and the other country of interest stipulates – as no two agreements are exactly alike.
NOTE: This is a complex topic and this description is not an exhaustive explanation of considerations for where in the world you may owe tax. Contact a tax adviser for a more accurate assessment of your individual situation.
In cases where there is no DTA, such as with Australia, USA, South Africa and many others, your answer gets simpler: You may owe tax in both countries, on the same income. And, if you have automatically become a tax resident of Georgia via the 183 day rule, you definitely owe tax in Georgia on all your non-exempt income.
You have two main options at this point:
- Investigate Foreign Tax Credits (to claim back tax paid in Georgia against tax paid in another country).
- Investigate ways to revoke tax residency either permanently or temporarily in the other country.
We discuss the concept of Foreign Tax Credits, from the US perspective within this article. The concept has some similarities in other countries but you should seek the advice of a local tax adviser in the relevant country for more information.
Myth #4: You Can Continue Managing Your Foreign Business Remotely Without any Tax Implications
This myth is tied in with Myth #1 (the myth of foreign source income being tax free), as well as Myths #2 & #3.
The obvious first consideration:
- Earning income from abroad, if you are doing so actively while in Georgia, is rarely considered “Foreign Source Income” (Myth #1). Hence that income will normally be taxed in Georgia.
However, the less well understood concept which is of concern here is Permanent Establishment (PE).
At its simplest, PE allows that any foreign business which has a fixed place of business in Georgia, should be taxable in Georgia. Working from your AirBnB can technically be considered a fixed place of business, especially if management of your business is carried out from that location in a regular way.
The most concerning part of PE though, for those who may be in Georgia short term, is that it can be triggered the second you arrive and start working in a regular way, within the territory of Georgia. Meaning potential tax liability from day 1, not from day 183 or day 30 (Myth #8).
PE typically applies to anyone managing a foreign legal entity (such as an LLC). It is less likely to apply to Individual Entrepreneurs (Sole Proprietors), though it can in rare cases, especially those such as the US form of a single member LLC, which for many US citizens is seen as being a type of Sole Proprietorship, but by Georgian law is absolutely not.
Because the legal entity exists in both the country of registration and as a PE in Georgia, it can potentially be taxed in both countries, even if a DTA exists (Myth #3)
Myth #5: Monthly Filing Requirements Are Super Simple For Individual Entrepreneurs
Individual Entrepreneurs (IEs) with Small Business Status (SBS) pay 1% tax only on turnover and cannot deduct expenses. This concept leads to an incorrect assumption that simply filling one income declaration, once per month completes their entire accounting requirements.
This is rarely true.
What a lot of Westerners don’t know is that the reporting requirements in Georgia are much more stringent and complicated than in many other countries, and that in most cases, accounting requires actual work, as opposed to uploading your bank statements to Xero and QuickBooks and just filing an annual declaration.
In some cases, business owners who did not speak to a tax adviser from the start, didn’t even realize that monthly filing was mandatory, and when they come to file their annual return, discover they owe penalties for all their missed monthly deadlines.
In the case of businesses, as well as Individual Entrepreneurs, declarations need to be filed monthly and tax often needs to be calculated and paid on the same day that the transaction triggering tax liability takes place.
Some common requirements that IEs with SBS miss:
- Reverse VAT (mandatory even if not VAT registered) and Withholding Tax on all international purchases of services (including digital services like Zoom and other online software).
- VAT Turnover declarations, if VAT registered (in order to claim back Reverse VAT, for example).
- Keeping of the General Journal (mandatory).
- Keeping their Tax Card up to date. Failure to do so can lead to 20% tax, rather than 1% tax on relevant income.
- Any additional requirements depending on your unique situation.
Keeping up with all of these requirements, especially using an online portal that does not translate properly to English, can lead to multiple mistakes.
An expert Georgian accountant can organize this for you. As well as transferring liability for filing errors from you to them, they can also alert you to issues or optimizations.
Myth #6: There is no Property Tax
My colleagues and I continue to be baffled by the sheer amount of property owners walking into our offices and only finding out from us for the first time that they owe Property Tax – often going back many years.
Georgia’s tax system is extremely lean with only 5 different types of taxes, but property tax sits firmly among these five and that’s been the case for a while.
And as with any law, neither willful ignorance nor the fact that the salesman of the property development company claimed there’s no tax, will save one from liability.
For most property owners in Georgia, the tax rate that applies is anywhere from 0.2% to 1% of the value of the property, per year.
Whether it’s 0.2%, 1%, or somewhere in between, depends on multiple factors, including whether the property is owned by a company or an individual, where the property is located, and the owner’s total household income.
Do note that owners whose worldwide household income doesn’t exceed 100,000 GEL (or equivalent) are exempt from Property Tax.
Myth #7: The Tax Authorities are Incapable and Won’t Ever Collect (Audit You) Anyway
Time and time again, we hear from people who have been advised that being 100% compliant on their taxes in Georgia is unnecessary as “they’re never going to audit you anyway”. Leaving out the obvious issues with such advice, I can assure you that it also couldn’t be further from the truth.
Not a month goes by at ExpatHub without someone contacting us to ask for our help or representation with an audit or a tax notice. In some cases, we’re talking about large amounts of money, but in others – quite the opposite.
At the time of writing this in April 2021, things appear to have turned especially bad, with the Revenue Service having seemingly ramped up their efforts to recoup unpaid and underpaid taxes from various types of taxpayers. That has manifested in more audits being conducted, as well as more aggressive approaches taken in areas where the law can be interpreted in multiple ways.
For that reason, it’s as important as ever to seek high-quality tax advice, especially on matters where the law may not offer full clarity, such as Virtual Zone questions, FIZ (Free Industrial Zone), and Small Business Status requirements.
Myth #8: Services Provided to Foreigners are Always VAT Exempt
Many bloggers and tax advisors alike, tend to incorrectly claim that “all services rendered abroad are free from VAT”.
While that’s indeed true in most cases, most doesn’t mean all, and one needs to be careful to study the actual conditions to avoid the RS delivering a notice to pay 18% back-tax on the last 3 years worth of turnover.
While the new VAT rules that came to force in 2021 further extended the list of services provided to clients abroad that’s free from VAT, we still don’t have a blanket exemption.
In short – services provided to businesses registered abroad will always be VAT exempt. While services provided to consumers who are based abroad will be exempt in many cases, but not all.
Take a look at our short analysis on the 2021 VAT regulation changes for a comprehensive list of what kind of services do and don’t trigger VAT.
Myth #9: It’s Not Possible to Pay Company Taxes in Georgia Without a Local Business Bank Account
With many people not being able to open a local business bank account, it’s a fairly common belief that not having one makes it impossible for the company to pay tax.
As with many myths, there’s an element of truth to it. While it’s technically possible to pay tax by a credit or debit card (do note that a lot of foreign cards get rejected), it’s indeed advisable to have a local Georgian bank account to remit your tax payments from, as the tax authorities don’t accept wire transfers from abroad.
But what makes things less problematic is that the account in question doesn’t need to belong to the company itself. Instead, the company’s director can open a local bank account instead, then transfer the funds from the company’s (foreign) account to their personal (Georgian) account, and make the tax payment from the latter.
That approach is perfectly legal and acceptable, and something that many of our clients have chosen to do.
BONUS Myth #10: It’s Easy to Open a Business Bank Account
Though this is not a tax myth, it is a myth that affects a lot of people trying to open a business in Georgia.
Banking, and the regulations surrounding it (KYC / DD / CRS / FATCA, etc.) is ever-changing during these times. In Georgia and around the world.
As it happens, Georgia used to be among the easiest places in the world to open a bank account. And when it comes to personal (not business) bank accounts, opened by individuals from certain (mostly EU) countries, this somewhat remains the case.
But when it comes to business banking, and opening accounts for foreign-owned Georgian entities, things have changed drastically throughout 2019 and 2020, and at the time of writing this, rejections are far more common than approvals. To make matters worse, the rejections often come without any reason or possibility of recourse provided.
In other instances, accounts do get opened, but then promptly frozen once the first few transactions are remitted. That’s particularly the case with one specific bank touted in a lot of groups for their “ease of opening” – while in reality, what good is an open account if it will only last for a few months.
Luckily, “virtual banks” like Wise (formerly TransferWise), Paysera and others are still accepting Georgian LLCs, and have somewhat less stringent policies when it comes to account opening. You can, of course, still expect to prove your source of funds and go through basic KYC procedures.
As for securing accounts with Bank of Georgia, TBC, or any other local bank, my recommendation is to speak to someone who knows how the banks operate prior to completing your application. That’s unless your business is extremely straightforward and simple for a bank representative to understand, and you’re not expecting to receive any funds from abroad.
Your prospects of getting approved also increase significantly if there’s a Georgian shareholder / board member in your company.
You can read more about your bank account options in Georgia here.
If any of the above myths apply to you, and you require solutions, book a free consultation with our advisers.