1% tax: Freelancers/Individuals & Small Businesses. Move To Georgia!

Benefit from 0% to 3% tax rates (1% in most cases) on gross turnover by becoming an Individual Entrepreneur with Small Business Status (or micro business status) in Georgia (country).

If you and your business meet the following criteria, you could qualify for these amazingly low tax rates:

• Business turnover of less than 500,000 GEL (approx $165,000 USD) annually.
• You are the sole operator (individual) of the business.
• You are not on the list of prohibited business activities and are genuinely self-employed.
• You do NOT need to be a legal resident or a citizen of Georgia.

See below for more details and some caveats relating to the above summary.

(Note: 3 GEL = $1 USD approx.)

Foreigners from more than 90 countries (including The EU, UK, USA, NZ, & AUS) are welcomed to use the Georgian 1 year visa free entry program to legally work and stay in Georgia as well as open a business, or move your current business here.

About Individual Entrepreneur & Small Business Status Registration

The Individual Entrepreneur registration is not the forming of a legal entity. Instead, it is the registering of an individual person as a business. You retain liability over debts and legal matters relating to this business type.

You do not automatically get the 1% tax rate just by registering as an Individual Entrepreneur (IE). To gain the tax benefits described above, you need to apply using your Individual Entrepreneur status at the Revenue Service, either in person or using a representative, to obtain a Small business status (Annual turnover below 500,000 GEL – 1% tax). Having employees under this structure is allowed (Tax withholding is due on employee salary).

Notably, individuals having annual turnover of <30,000 GEL can also apply for a Micro Business Status (0% tax). No employees allowed (Resolution 415). IE registration is not required to get the Micro Business status.

The small business status is ideal for freelancers and self-employed individuals with a foreign income source but also for anyone else operating a sole proprietorship, or intending to do so in Georgia, so long as it is not on the list of prohibited activities (including: consulting of any kind, medical, architectural, legal and more – see the full list below). You also must NOT be an employee, or a contractor who is really an employee, hiding behind a service contract.

If your annual turnover exceeds the 500,000 GEL annual threshold, you will be taxed 3% on turnover for all income starting from the month in which the threshold was exceeded, for the remainder of the tax year. If it exceeds 500,000 GEL in two consecutive years, your small business status will be revoked going forward to the next tax year. Alternatively, exceeding the annual threshold significantly could also potentially result in annulment of the Status in the first year of operation. You will be able to continue to operate with the flat tax rate of 20% on net profit. However, at this point you may be advised to form an LLC or other business structure.

When Should I Register For The 1%?

It’s essential to note that these low tax rates do not apply retroactively for the whole tax year. They apply only from the 1st day of the month following your successful registration.

For any months of the tax year when you become a tax resident automatically and you were earning income working remotely from Georgia or locally, prior to getting the Small Business Status, you will owe 20% on your gross income, which must be declared and paid by March 31st of the year following that reporting year.

If you are here more than 183 days (or less in some cases) in any tax year, then most double taxation avoidance treaties will not protect you. Even if you are paying tax elsewhere, you might find that you also owe that tax in Georgia. It should be noted that this is not a special law within Georgia; it’s actually true of most countries in the world. Read more about tax liability for Digital Nomads here.

For this reason, it’s essential that you register your business as soon as you arrive in Georgia. Otherwise, if you intend to stay here, you will end up paying 20% tax on income, rather than 1%, and you might be paying unnecessary tax elsewhere which you may struggle to claim back after the fact. We have a complete guide to the best way to plan moving your taxes to Georgia with minimal tax leakage, here.

If you’d like personalized advice on your options, book a free consultation with us – online via Zoom, or in-person in Tbilisi.

Why are the taxes so low?

The Georgian government has created a favorable environment for foreigners to attract investments and boost the economy. To achieve that goal, both Georgian residents and non-residents are introduced to tax reforms that bring a lot of benefits to them and aid the growth of the entrepreneurial community.

A small businesses with a single owner may also consider registering as an LLC, which you may prefer to do in some cases, for liability (no personal liability on debts, etc.) or tax reasons (i.e., a very high turnover business with high expenses and low net profit may be better off with being taxed on profit instead of turnover. Re-investment of profit is also tax free).

If you plan to establish a business in the IT sector (most specifically software development business) you may also want to become an LLC so that you can apply for Virtual Zone status which can mean 0% VAT and 0% corporate income tax (Source: Law of Georgia on IT Zones).

However, for most contractor and freelancer style businesses, as well as many others, the small business status is going to be your best option for the lowest possible tax rates in Georgia (or micro business if you earn under 30k GEL).

So here are the specific details relating to those two business statuses:

Which Status Do You Qualify For? How much tax will you pay?

Calculating your total Georgian turnover

When calculating and reporting your monthly and annual turnover as an individual entrepreneur, certain personal income can be excluded (note: tax may still be due elsewhere on that income):

1. Leasing of property/renting out immovable property.
2. Income from loans.
3. Profits from a gambling business.
4. Gifts.
5. Capital gains derived from the sale of the following property: A) real estate; B) vehicle; C) securities.
6. Income received in the form of inherited property.
7. Income received in the form of dividends.
8. Income received as interest.
9. Income received in the form of royalties.
10. Income from debt forgiveness.
11. Capital gains from the sale of shares (From an additional business – as Individual Entrepreneur registration cannot include partners).

(Source: Resolution 415) 

Example: You have earned 25,000 GEL by editing videos and 10,000 GEL from loan interest and royalties, which is a total of 35,000 GEL in a calendar year. Even though you have earned more than 30,000 GEL, according to Resolution 415, you still remain a Micro Business.

NOTE: Income from abroad is still “Georgian Sourced” if the work is being performed in Georgia (via. a laptop, for example). This also includes Georgian tax residents who spend periods outside of Georgia working.

Summary of taxes you will need to declare and pay each month

With the Small Business Status, you are required by law to declare and pay taxes by the 15th day of each month. The declarations you need to make:

• Income Declarations (1% on turnover). 
• IF registered for VAT, you must make monthly VAT turnover declarations – including VATable (18%) and non-VATable (0%) turnover). Being registered means you can claim back VAT on purchases where it is collected at source (so long as you attain “qualified” VAT status).
• Reverse VAT declarations (18% on all international service purchases) (Mandatory on international purchases, even if you are not VAT registered). If VAT registered, you can claim this 18% back and effectively pay 0%.
• Salary tax (20%) + 2+2% pension, for Georgian employees. Salary tax is dependant on where your employees are based. Salary income tax is due if the employment is exercised in the territory of Georgia (DTA exceptions apply).
• Keeping of the general journal (effectively a spreadsheet of your business expenses). This is not a tax to pay, it is simply a mandatory record keeping requirement. In the event of an audit, the journal must be supplied. It does not need to be submitted to the RS at any other time.

Should you register for VAT? If all your income derives from B2B transactions from foreign clients and/or B2C digitally rendered to foreign customers, and you have any business expenses where you pay VAT or reverse VAT, then the answer is typically YES.  Read our guide on VAT here to decide.

As you can see from this breakdown, if you are an Individual whose clients are based outside of Georgia, if your service purchases, contractors, etc. are from treaty countries, you are VAT registered, and have no employees, you will likely only pay 1% on turnover, claim back most or all of your reverse VAT.

The taxes are great, but there is a lot of monthly declarations and record keeping which need to be performed. If you want someone else to take responsibility for that, see our discounted accounting for Individual Entrepreneurs with minimal needs (our “Lite” accounting).

When should I register my business?

You should register a soon as possible within the tax year (calendar year) when you will become a tax resident in Georgia. This happens automatically after 183 days in any 12 month period. Read our article about automatic tax residency and its implications here. Or, register by December of the year prior to the year you will become a tax resident.

You will only receive the tax rates outlined above from the first day of the month after your application is approved. You may be taxed the flat 20% on gross income earned prior to approval. Foreign income from the tax year you became a tax resident in Georgia that was earned before entering Georgia is sometimes not taxable in Georgia but it may be taxed elsewhere (in the country it was earned, or your previous country of tax residency). 

How to register as an Individual Entrepreneur and get Small Business Status

Registering your new business, and with the Revenue Service, is relatively straightforward, but if you don’t speak Georgian, or don’t have a full understanding of the paperwork you need to submit, it is easy enough to make mistakes that could lead to your application being rejected.

If you’d like help on getting your application submitted correctly, as well as advice on important services like monthly accounting and opening a business bank account, then please book a free consultation with one of our fluent bi-lingual tax advisers.

FAQs

What business activities are prohibited from getting Small Business Status?

According to the Resolution of the Government of Georgia №415, Small Business Status is not granted for these activities: 

• Activities that require specific licensing or permission;
• Currency exchange operations;
• Medical, architectural, legal, or notarial, auditing, consulting activities of ANY kind (including tax consultants);
• Gambling Business;
• Staffing (legislation is vague on this, our opinion is this includes HR/Recruitment activities);
• Engaging in activities that require a significant investment, or engaging in the production of excisable goods.
• Notably, income from employment of any kind (or activities which clearly resemble employment) will be excluded from the 1% tax regime. In other words, you can still be employed, but that income will be taxed at 20% as normal, and not included in your small business 1% taxable income.

What If I spend Less than 183 days in Georgia per tax year, or want to spend time in other countries?

If you spend less than 183 days in Georgia per tax year, you will no longer be a tax resident and you will no longer be protected against your tax residency reverting back to your country of domicile (A country in which you have strong ties, perhaps your country of citizenship, a country in which you’ve spent significant amount of time, or a country where you have bank accounts, property, family, etc.)

Georgian double taxation treaties often cannot protect you from taxation elsewhere if you are not a tax resident of Georgia AND you spend less than 183 days here. 

If your business is registered in Georgia, you will continue to pay tax on all income derived from work performed in Georgia, or on revenue generated within Georgia. Income which is generated while not physically present in Georgia, may in some cases be exempt from Georgian tax. But this is a nuanced issue and should be discussed with a tax adviser to determine if your foreign income would actually qualify.

If you trigger tax residency in another country, you may be liable to pay tax on some or all of your income in that other country. If you perform physical work while traveling, even though the work is online and income is foreign sourced, you may have some tax liability in the countries in which you are travelling.

If you will not be physically present in the Republic of Georgia at least 183 days in order to be a tax resident each year, you can consider the high net worth program, with which you often don’t even need to visit Georgia to qualify for tax residency.

If you are from the USA, other considerations apply.

What happens If I earn over the 500,000 GEL threshold for Small Business Status?

You will be charged 3% on all turnover past the 500,000 GEL threshold. If you earn over 500k for 2 consecutive years, your small business status will be revoked and you will no longer be eligible for the tax benefits discussed in this article.

How do I submit tax declarations?

For the Small Business Status, monthly tax declarations are mandatory and must be submitted through the rs.ge online portal. Access to this portal is granted via 2 step authentication (SMS code) only to Georgian phone numbers. After your monthly tax bill is generated, you must make payment direct from a Georgian bank account – not a foreign bank account. However, some limited/unreliable online payment options are available.

Declarations must be submitted and taxes paid between the 1st and 15th of each month. So, if you will not be able to get messages to your Georgian phone and make the declarations every single month, you will need a representative here who can make the submission on your behalf. Our accountants can handle this for you.

Micro businesses are only required to submit annual tax declarations, by March 31st (GTC Article 93).

What expenses should be tracked and what can be charged against my tax bill?

Georgian tax law still requires small business owners to keep a special journal documenting all of their business expenses (Get a free template below). You are not required to declare or submit the figures from this journal as part of your monthly tax return. But they may be requested if you were audited (GTC Article 91). 

Your tax liability is on gross turnover, and you cannot claim back any tax relief based on your expenses.

Micro Businesses are not required to keep any records of expenses, only of turnover.

Other Tax & Reporting Considerations?

Although your expenses are not deductible, your foreign expenses are still subject to reverse-VAT.

Meaning, if you hire contractors from abroad, or have other expenses (such as a zoom subscription, or other services that are not already taxed at source in Georgia) you are liable to declare and pay reverse-VAT (18%) monthly.

Reverse-VAT can be claimed back, if you are a VAT taxpayer – which you can either register to be voluntarily, or are required to be if your VATable turnover exceeds 100,000 GEL in any 12 month period.

Should you register for VAT? Learn more here.

Do I Also Have To Pay Personal Income Tax?

No. The 1% tax on gross business turnover is the only income tax you will pay on your business income.

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Get Help or Get Our Small Business Registration Checklist

If you’d like help on getting your application submitted correctly, as well as advice on important services like managing your monthly accounts or opening a Georgian business bank account, then please book a free consultation with one of our fluent bi-lingual tax advisers.

If you’d like to DIY the process, you can follow our Small/Micro Business Status checklist, and get a copy of the general journal template.