Is all your foreign income tax free if you live in Georgia? To answer simply: no.
If you’re a foreigner looking into the tax consequences of relocating to Tbilisi, Georgia, you’ve probably come across at least a few write-ups talking about Georgia’s territorial tax system.
If you’re like many, you may have heard claims, such as, “income originating from a foreign country is tax-free in Georgia,” or, “funds that aren’t deposited into a Georgian bank account don’t trigger Georgian tax.”
Both of these claims are fundamentally untrue.
In this article, we’ll explore why that is and how you can legally optimize your taxes when relocating to Georgia or setting up your tax residency.
(Disclaimer: The 80% claim in the title is anecdotal. Due to the lack of credible information, it is impossible to accurately predict the actual percentage of people who misinterpret territorial tax and unknowingly break the Tax Code. That said, there is no question that the true number is very high.)
Dispelling The Key Myth
Many foreigners, especially freelancers, come to Georgia each month, thinking that the income that they earn from overseas is tax-free “because of Georgia’s territorial tax system.”
This is not the case.
The statement that foreign-sourced income is tax-free is technically accurate, based on Article 82 (Tax exemption) from the tax code:
“Income (including gain) received by a resident natural person, which does not belong to Georgian source income,” (GTC Article 82 (p.1)(u)).
The problem stems from the fact that most foreign income (with limited exceptions) earned while you are in Georgia is not considered as foreign-sourced.
If you earn your income as a result of performing any sort of activities while you’re located within the territory of Georgia, it is almost always considered Georgian-sourced, not foreign-sourced, and unless a separate business structure is in place (more about that below), it’s subject to a 20% Personal Income Tax rate.
I invite everyone to read the whole of Article 104 of the Georgian Tax Code, which clearly specifies what is and isn’t considered Georgia-sourced income; the short version is this:
- Virtually any income that originates from actual work or services that you provide while being located in Georgia is not foreign-sourced and is subject to taxation (Article 104 (p1)(c.g) & (p1)(q));
- Passive income originating from abroad (royalties, dividends, etc.) is generally tax-free, but note that in the case of dividends originating from a foreign company that is owned or managed (Article 27 & 28) by you while you are physically in Georgia, Permanent Establishment rules may kick in (Article 29), making the income subject to Corporate Income Tax & Dividend Tax in Georgia.
A related myth is that funds which are not remitted to Georgia and are kept in a foreign bank account are not taxed. That’s also untrue, and Article 104 (p1)(q)(2) of the Tax Code, in fact, clearly states the following:
“In determining the source of income specified in the first paragraph of this article, the place of receipt of the amount of income shall not be taken into account.”
Note that while there are rare exceptions, none of the above is subject to different interpretations or “opinions”. The law is extremely clear, and I extend an open invitation to anyone claiming otherwise to substantiate their claims on the basis of the legislation. Contact us.
So, if you have:
- Income from foreign clients
- Income earned from your foreign employer (If not already taxed at source, and/or there is no double taxation agreement between Georgia and your employer’s country)
- Dividends from a foreign company you actively manage
- Any other sort of foreign income that is not 100% passive (like royalties)
You should urgently assess your tax options and liabilities.
Below, options for reducing your tax liabilities by sorting out your Georgian tax situation sooner rather than later.
Act Now and Pay 1% Instead of 20%
How most freelancers fail is by coming to Georgia and not doing anything.
As a result, most discover at the time of tax filing that all of their previous year’s income will be taxed at the full 20%. And that can be a hard pill to swallow.
But the few smart ones who consider their options in advance can often reduce that tax liability to as little as 1%.
The key here is registering for Small Business Status.
In short, Small Business Registration is a special regime that allows certain individual entrepreneurs to pay just 1% tax on turnover. However, there are some criteria that apply:
- Your annual turnover must not exceed 500,000 GEL (roughly $160,000 USD);
- There are some restricted activities, such as consulting & gambling;
- The reduced tax applies only to individuals. You cannot operate as an LLC;
- The tax in question is applied to your gross turnover rather than profit.
If it appears that you may qualify, then it makes a lot of sense to take action right now. The reduced tax rate doesn’t apply retroactively, so the longer you wait, the more of your income will be taxed at the full 20%.
For more information about the Small Business Registration, you can read our full guide here, download our Self-Service Checklist, or book a 30-minute Free Tax Consultation where we can help you navigate the landscape.
Don’t Qualify for Small Business Status? Consider an LLC.
Naturally, many people won’t qualify for the Small Business Status described above, mostly due to exceeding the maximum income threshold or performing restricted activities.
Doing nothing and continuing to earn income as a Natural Person is the worst possible strategy.
Instead, you should consider registering a company (an LLC), and transferring your income there.
After all, incorporating here is a super quick process (usually 1-2 business days) and very cheap (less than $400 altogether, including professional help), and much of the process done for you.
The benefits of this are plentiful:
While the total tax leakage on funds taken out is going to be 20% in both cases (20% Personal Income Tax in the case of operating as a Natural Person, or 15% Corporate Income Tax + 5% Dividend Tax in the case of an LLC), the big difference is in the possibilities of tax deferral.
In short, Georgia employs the “Estonian model” of business taxation, which means that your profits are only taxed when paid out (some rare exceptions apply), and re-invested profits are free from taxation.
In practice, this means that any cash that you invest into assets, into growing your business, or indeed just keep in your company’s bank account as cash, will all be completely tax-free. In the case of investments, for example, your investment principle will be much larger as you can defer your tax indefinitely.
As a Natural Person, all of your business income will be subject to 20% taxation, without the ability to deduct any expenses.
An LLC, on the other hand, can deduct nearly all business-related expenses and not pay tax on that amount. Are you engaging in business travel? Using a part of your home as your office? Paying for online services? All of that would likely qualify as legitimate business expenses.
Limited Liability & Protection
As its very nature implies, an LLC (short for Limited Liability Company) provides you with limited liability.
This means that should a client, a supplier, a partner, or anyone else sue your business and win, their claim will only be toward the assets of your company, and nothing more.
However, in the case of operating as a Natural Person, their claim will be towards all of the assets that you own, anywhere in the world.
That’s something that will make a bigger difference to some than to others, but “better safe than sorry” is an excellent mantra to abide by in any case.
If you’re an expat in Tbilisi, Georgia, who’s spent long enough time here to trigger tax residency and whose income originates in any part from doing any work or providing any services (including managing a company that does this), then the odds are incredibly high that your income will be subject to the full 20% taxation rate.
That tax burden can be reduced significantly, but you’ll need to act fast as nothing can be done retroactively for income already generated.
At ExpatHub, we aim to provide as much information as possible for people choosing the DIY-approach, but if you’d like your tax affairs to be handled by a professional, we invite you to a no-obligation, free-of-charge, 30-minute tax consultation.
Online via zoom, or in person.