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 typical cases (about 90% of foreigners who want to acquire Small Business Status with 1% tax rates). However, your situation may differ, and if so, it’s essential that 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 may 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 (approx. 200k USD) annually in any 2 consecutive years. (If it only exceeds 1 year, you will pay 3% rather than 1%. After 2 consecutive years, the status will be cancelled.)
- Your business activities must not be on the list of excluded activities (which includes, but is not limited to, any type of consulting, gambling businesses, or the medical, architectural, & legal professions).
- You are the sole owner of the business (but employees / contractors are allowed). You cannot be in partnership with other persons.
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 register for SBS on April 13th, your 1% tax status will activate for all revenue generated, beginning on 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 on this 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 & When Do I Declare Those Taxes?
Once you have acquired the Small Business Status, you are required to make monthly declarations using the Revenue Service’s 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, or else have international roaming on your Georgian phone number.
You must file monthly by the 15th:
- Income Tax (1%) Declaration
- Tax Withholding Declaration*
- Reverse VAT Declaration* (even if not VAT registered)
- VAT Declaration (only if VAT-registered)
- Tax Payment To Treasury (Can be done from any Georgian bank account. Some limited/temperamental payment options using international cards now exist too.)
Filing to be done at the time of any qualifying transaction:
- 18% Reverse VAT* payment on foreign purchases (Can claim back, if VAT-registered)
- 20% Personal Income Tax payment on salaries**
- Maintaining a General Journal in accordance with accounting laws
* Only filed in case of conducting reportable transactions, ask your accountant. Excludes items that will be physically imported.
** Due on employees who are tax residents of Georgia or non-treaty countries.
If you want to avoid having to navigate filing yourself, or if you 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 (occasionally also on income earned prior to arriving if you are a tax resident of Georgia for the whole year) – 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 for taxation 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 for which you already paid the 1% tax.
You can learn more about any additional annual tax filing liability you may have here.
Some more resources on understanding foreign income in Georgia:
- Why most foreign income is NOT tax exempt.
- Why your foreign business income may be taxed 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. However, having your banking based in Georgia, rather than abroad, can help avoid any additional liability you may incur in countries where your banking is currently performed.
We have a full guide on your banking options and associated considerations relating to online payment processing, multiple currencies, and other topics.
Read our guide to banking in Georgia.
Should I Register For VAT? It Depends.
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 – providing you also have some VATable income transactions in Georgia. If this applies to you, then you can claim back 18% on things you buy for your business here – including office furniture and any other incidental items. (Please note, since January 2021, claiming back local VAT if your business does not also charge VAT on products / services in Georgia is now much harder to become qualified for.)
- 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 50k GEL in turnover, you will normally 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 often need to hire an auditor – though some other limited options may be available. 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 processes can take more than 1 year to complete and normally require proof that you now live permanently in Georgia – such as demonstrating 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’s tax system is notoriously one of the hardest to exit.
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 can be very complicated, and speaking to an adviser in your home country as well as in Georgia is highly recommended.
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 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 help to prove that you are a tax resident here in order to exit other tax systems or to reduce your tax liability.
Next Steps – Get The 1% Now
Now that 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.
Book a free consultation now, and we’ll clarify any remaining questions as well as organise a time to get your registration completed.
Consultations are available in-person (Tbilisi) or online via Zoom. These are free sessions with no obligation to purchase any services.