Do you manage your foreign business remotely from Georgia? If you didn’t register that business with the Georgian authorities, you may be breaking the law, and even owe back taxes and fines.
Who does this effect?
- Most foreign business owners actively managing their foreign enterprise remotely from Georgia.
- Even those business owners on a tourist visa.
- Even those in Georgia less than 183 days in any 12 month period (and hence not personal tax residents).
- Most types of foreign enterprises (Legal entities like: LLCs, Corporations, etc).
- Potentially, even enterprises with multiple directors, if 1 or more of the directors manage the enterprise from Georgia. It depends.
NOTE: Sole proprietorships, which are not legal entities, are typically not directly affected by the problems discussed below, but if you as the sole proprietor are physically present in Georgia for more than 183 days, you will still be liable for certain types of taxation here.
How does it affect you?
- Permanent Establishment (Georgian Tax Code Article 29) rules in the Georgian Tax Code mean that Foreign Enterprises physically operated/managed from Georgia (this may even include working from a laptop to run your business) can be considered a taxpaying entity in Georgia and be taxed at a comparable level to an equivalent Georgian enterprise.
- If you own a foreign business that is registered as a legal entity anywhere other than Georgia, but you as the owner/director are physically present in Georgia and operate/manage your business from here, you may owe taxes in Georgia as if your enterprise was a Georgian enterprise.
When will this affect you?
- When it could be clearly shown that you are actively managing your business within Georgia’s borders in a fixed/consistent way. If management from Georgia is taking place, the law allows for prosecution at any time, so there is a level of nuance as to when you may have a problem.
If you are only in Georgia for a vacation, and not actively managing your business in a regular way, you are unlikely to be affected. However, it’s best to read all the details below to get a better understanding, and if you are still not 100% sure, it’s highly recommended to contact a Georgian Tax Expert.
NOTE: Never assume that a Double Taxation Agreement (DTA) between Georgia and the country your business is registered in simply lets you off the hook. You will very often still be liable.
In this article I’ll explain why a foreign enterprise, managed by you while living in Georgia (even on a tourist visa), can trigger Permanent Establishment here and lead to an inconvenient tax situation.
Why Foreign Enterprises Could Be Taxed In Georgia
When you hit the 183 day mark in any rolling 12 month period, personal tax residency is triggered in Georgia. Any personal income that you receive within any tax year you are deemed a tax resident, could be liable to income tax in Georgia.
Although it would probably be clear to most that this means any salary they have taken from their foreign enterprise could be taxed in Georgia, what is typically unclear is that the whole operation of their enterprise could be liable for Georgian taxes.
Not just in a situation where you have been in Georgia more than 183 days, but in any situation where it could be shown that your business is or was being actively and consistently managed from here.
The reason this could happen is because, by Georgian law, the place of management of the business has a direct effect on where that business is seen to be based.
If your Permanent Establishment for your business can clearly be seen as being in Georgia, because you operate and manage the business from Georgia on a consistent basis, then said business could be considered as a Georgian business for tax purposes.
If that is the case, and you likely have not taken any steps to legally register that business in Georgia up until this point, you have effectively been operating an unregistered business. You could be liable register a Permanent Establishment, pay back-taxes and penalties for not paying/declaring taxes in a timely manner.
How The Tax Code Confirms This Problem
If you are thinking at this point that this argument seems a little far-fetched, I can answer your skepticism with evidence from the tax code.
Article 29 – Permanent establishment
“A permanent establishment of a foreign enterprise or of a non-resident natural person in Georgia is a fixed place of business through which the economic activity of the entity is wholly or partly carried on in Georgia, including the activity of an authorized agent,” (GTC Article 29(1)).
“2. The following shall be treated as equal to a permanent establishment:” and “2.d, a place of management, branch, representative office, department, bureau, office, agency, workshop, mine or quarry or any other place of extraction of natural resources, or any other subunit or any other place of business of a foreign enterprise,” (GTC Article 29(2)(d)).
The most important words in these sections are “Fixed place of business” and “a place of management”.
If you arrive to Georgia and create a fixed place of business – which could include setting up a home office at your AirBnB or renting office space, then you are creating a permanent establishment for your foreign enterprise and are opening yourself up to be considered as operating a business in Georgia.
The looser term “a place of management” could be applied to any fixed place from which you manage the business, such as if you get a monthly coworking subscription. In our experience, if “a place of management” is multiple cafes, occasionally your kitchen table, or even answering emails on the bus, then it is very rare for such cases to be pursued. But, it can still happen.
Cases in which you have clearly set up an office of any kind where work is consistently done for a prolonged period – these sorts of cases have often been pursued by the tax authorities.
The strangest thing is, if you’ve been operating your business in Georgia for some time, but still paying taxes in the country where your business is based, you’ll likely find that if you’d just moved your business immediately, the taxes you’d be paying in Georgia may have been less than your taxes elsewhere.
So, if you have the intention to stay in Georgia and not just be here briefly as a tourist, you’d be better off investigating your Georgian tax options and making an educated decision once you know your possible choices.
Because every business is different, if you’d like to confidentially discuss the best way for you to resolve any tax concerns relating to your foreign business, you can book a free consultation with one of our expert advisers, either in-person, or online via zoom.