If you are a freelancer or small business owner (or looking to become one) and you have decided you are ready to open your business in Georgia and reduce your taxes to 1%, this article summarizes the key considerations to do this successfully.
If you are still not sure if you want or need to open a business in Georgia, read this article.
The below is written for the typical cases (about 90% of foreigners who want to acquire small business status with 1% tax rates). You may not fit with the majority, if so, it’s essential you get a free tax consultation before moving forward, to avoid any potentially costly mistakes.
As this is a short summary, there may be additional considerations not discussed that apply to some people reading this.
Do I qualify for the 1% Tax Rate?
If you don’t, then you need to explore other options. So it’s best to establish that you will qualify before moving forward. Basic qualifications include:
- Your business turnover must not exceed 500k GEL (~$165k USD) annually in any 2 consecutive years. (if it exceeds in just 1 year, you pay 3% rather than 1%. After 2 years, the status would be cancelled)
- You must not be on the list of excluded activities (which includes, but is not limited to, any type of consulting, gambling businesses, medical, architectural and legal professions).
- You are the sole owner of the business (but employees are allowed).
Read more about the Individual Entrepreneur with small business status here.
When Will I Benefit From The 1% Tax rate?
The Small Business Status (1%) must be registered for after you have already registered as an Individual Entrepreneur (IE). The Small Business Status (SBS) will be applied to your business on the 1st day of the month immediately following your registration date.
So, if you register as an IE on April 12th, and then for SBS on April 13th, your 1% tax status will activate for all revenue generated from May 1st.
Whether you register on April 1st or April 30th, May 1st would still be the first day where you qualify to pay 1% tax.
For this reason it is essential to register as soon as possible, as every month where you continue to earn income while working within Georgia, you will potentially owe back taxes (20% on gross income) as the 1% tax rate cannot be applied retroactively – more info below. If you need help getting registered, book a free consultation with us.
NOTE: The 1% tax is on turnover, not profit. So if your business has a very high turnover with a low profit margin, you might want to start thinking about other options like an LLC.
How Do I Declare Those Taxes?
Once you have acquired the Small Business Status, you are required to make monthly declarations using the Revenue Service online portal. This can only be accessed via 2 step authentication from your Georgian cell phone number. So, if you leave Georgia you will typically need someone locally to file your declarations.
You must file monthly:
- Small Business income declaration with both monthly and cumulative totals and salary calculations.
- Reverse-charge VAT declarations (mandatory if you have foreign business expenses, regardless of if you are VAT registered, see below).
- VAT declarations (if you are VAT registered, see below)
- After filing, you must pay the taxes directly to the treasury from a Georgian bank account ONLY. This can be a personal bank account.
If you want to avoid having to navigate filing yourself, or need a representative as you will often be out of the country, our firm offers special discount rates for Individual Entrepreneur accounting services. See our pricing page for more info.
What Other Taxes Are Owed?
In addition to the monthly declarations and any VAT due, as described above, other tax considerations include, but are not limited to:
- Property tax on vehicles and real estate you own.
- Tax on any tax liable income earned prior to registering but after arriving in Georgia – typically 20% on gross income. This will be filed and paid as part of your annual tax return by March 31st of the following year. This can get very complicated, so it’s best to discuss your prior earnings since first arriving in Georgia, with a tax adviser to assess which will be liable and which will not.
- Any other tax liable personal income not already declared through the business.
You do not pay additional personal income tax in Georgia on income where you already paid the 1% tax.
Some more resources on understanding foreign income in Georgia:
Do I Need A Local Bank Account?
IEs with Small Business Status are NOT required to open a full Georgian business bank account to handle their business transactions. You have other options:
- Transferwise Georgian online business account – with borderless bank accounts in USD, GBP, EUR, AUD, NZD and others. You will get full bank details for each currency where your clients can deposit money. This is much easier (and cheaper) than getting money to a Georgian based foreign currency bank account.
- Personal Georgian Bank Account. You are allowed to receive business income to your personal account. Though, if you choose to do this, it is recommended to open a 2nd personal account used solely for business transactions. In order to pay your monthly tax bills to the treasury, you MUST have access to a Georgian bank account. Online banks are not sufficient for this process.
- Online payment processors (like Stripe) are either unavailable or very difficult to organize in Georgia and typically only large companies going through the national banks and having mostly domestic transactions, will get approved. PayPal is available but it is limited, expensive and tricky to withdraw from there to your Georgian bank – though it can be done. If you need to receive online payments by card, then transacting in another country is often the only option and may incur tax liability in the country where the transactions are performed.
Should I Register For VAT? Normally, YES.
Although mandatory registration for VAT only occurs if your turnover reaches 100k GEL in any 12 month period, there are a lot of reasons why most foreigner owned businesses should actually voluntarily register for VAT immediately.
- To claim back reverse charge VAT (18%) which must be declared and paid on all business purchases made from vendors outside Georgia, where Georgian VAT was not already collected (which is typically, any foreign purchases of services and digital goods). With reverse charge VAT, even non-VAT registered businesses have to pay, so if you have business expenses outside Georgia, you are often better off by being VAT registered.
- To claim back local VAT (18%). If you buy products or services within Georgia where VAT is applied, you can claim that back. Saving you 18% on things you buy for your business here – including office furniture and any other incidental items.
- If all your business transactions are with foreign businesses and clients, you typically are exempt from charging them VAT. So, you will not have to increase your prices but you will be able to claim back all the above VAT. For most businesses, this is a big win.
- To get residency via the work permit option. If you intend to stay in Georgia for more than 1 year, and your business will turnover more than 50k GEL per year, you will be eligible to apply for residency. To prove that 50k GEL in turnover, you will need to supply a copy of your VAT turnover return, or pay to hire an auditor (at least 500 GEL, but significantly more in complex cases) to confirm revenue. If you don’t register for VAT, you will need to hire an auditor. You should register for VAT as soon as you open the business in order to accrue the 50k GEL as soon as possible. You can ask about residency options during your free consultation with us.
Once I’m Registered, How Do I Stop Paying Taxes Elsewhere?
This depends where you are from.
Countries like the USA, expect you to continue to file and pay taxes no matter where else you live or pay taxes in the world. There are a number of options to reduce those expat taxes though, which we summarize here.
Some countries, like Australia and New Zealand, require you to go through some pretty lengthy exit procedures to stop being tax residents. These can take more than 1 year to complete and normally require proof you now live permanently in Georgia – such as property ownership, legal residency etc. You will however be able to claim foreign tax credits against any tax you pay in Georgia on income that is then also taxed in your home country. South Africa is notoriously one of the hardest countries to exit the tax system.
Other countries like Germany and the UK have double taxation agreements with Georgia. However, these agreements rarely exempt you from taxes completely. Suffice to say, it’s very complicated in some cases and speaking to an adviser in your home country, as well as in Georgia, is normally essential.
If you are not sure where you are still a tax resident, perhaps because you have been traveling for a prolonged period, it’s essential you read this article.
From the Georgian side, we can help you get issued your tax residency certificate (if you spend 183 days per year in the country, or qualify for the High Net Worth Individual program), which will allow you to prove you are a tax resident here and begin towards exiting other tax systems, or reducing liability.
Next Steps – Get The 1% Now
Now you understand some of the main considerations with the 1% tax regime in Georgia, your next step is to apply and get the status.
Our team is ready to help complete your application smoothly and easily, either remotely or from Tbilisi, Georgia.
Consultations are available in-person (Tbilisi) or online via Zoom. These are free sessions with no obligation to purchase.