Tax residency in Georgia is automatic after 183 days in any rolling 12 month period – this is a legal fact, not a choice, no matter which country you come from, or what visa you arrived on. Tax rates in Georgia can be very favorable, as low as 0%, but only if you take action on your tax situation here.
The biggest mistake, by far, that most foreigners make, is that they don’t understand the tax laws before moving to Georgia. They stay more than 183 days, become tax residents, and only then start exploring their tax liabilities and options.
At which point, they are already likely to have to overpay for not acting sooner, sometimes by tens of thousands of dollars.
In most cases, by not acting sooner:
- They owe significantly more tax than they would have otherwise.
- They may have missed filing a legal annual declaration and will be due to pay a fine, back taxes, and more.
- They paid taxes elsewhere which were higher than they would have paid in Georgia.
If you are feeling a little worried or confused, I can promise you that you are not alone.
I can say this is the number 1 mistake foreigners make, because it is the most common scenario we discover during first consultations with our clients! If you are still in denial that this is a real issue, we have a well-referenced article on automatic tax residency.
Below you’ll learn why the tax rates in Georgia are likely lower than in your previous country of tax residency, and how you can benefit from them.
The reason this common tax mistake happens usually comes down to the following factors:
- The information about the tax law is not well publicized.
- Apart from Georgia, few countries have a visa that runs longer than 6 months, so triggering tax residency on a tourist visa is a pretty rare thing worldwide, and thus probably not something you’d usually consider.
- If you already pay taxes somewhere else, maybe you just didn’t realize that spending significant time in another country makes you potentially liable for tax there.
- There is a common myth that all foreign-source income is tax free in Georgia. It really isn’t. Read why here.
Whatever the reason, we at ExpatHub deal with this problem on a daily basis, and the good news is, even if you have made some mistakes and will pay more tax than you should have, in most cases, once you get things organized and legalized, you’ll probably be paying less tax going forward than in the country where you currently pay taxes (Especially if you are from the UK/EU).
Continuing to ignore the issue will likely make you a tax evader, so it’s better to get legal and start making the tax laws work in your favor, rather than digging yourself deeper into tax evasion.
Regardless of whether you have been in Georgia more than 183 days, you will hit the tax residency marker soon, or if you intend to move here in the future, you should understand how the tax rates will affect you, so that you can best make them work in your favor.
- Why Move Your Taxes Sooner Rather Than Later – Example
- Overview Of Some Standard Tax Rates In Georgia
- Next Steps To Fix Your Tax Problems
- DTAs (Double Taxation Agreements)
- The CRS (Common Reporting Standard)
- Get Help With Your Georgian Tax Situation – Minimize Taxes
Why Move Your Taxes Sooner Rather Than Later – Example
As mentioned above, if you spend more than 183 days in any rolling 12 month period in the Republic of Georgia, you are automatically a tax resident on a personal level.
Waiting until your tax residency has kicked in to seek tax advice is your worst possible choice. Your best choice is actually to seek tax advice before you even arrive to Georgia, or straight after arriving.
Why is this? Because tax benefits afforded to LLCs and Individual Entrepreneurs cannot be applied retroactively. You have to register before you can start benefiting.
Here is a typical example of why this is a problem.
Example – Freelancer – In USD for simplicity (local currency is GEL)
- Joe Bloggs arrives in Georgia in December 2019 on the 365 day visa-free entry.
- After 183 days (June 2020) he becomes a tax resident automatically, but hasn’t yet taken any action on his tax situation.
- He hears about the 1% tax rate for individual entrepreneurs (with Small Business Status) and is looking to reduce his annual tax bill for the whole year, as well as to close out his taxes in his previous country of tax residence.
- He discovers that the 1% tax rate only applies after registering for the Small Business Status, and any income earned up until that registration is activated, will be taxed at a flat 20%. Instead of paying 1% on gross turnover for the whole year, Joe must pay 20% on income for all those months before registering.
Let’s look at how much money Joe lost in tax.
NOTE: As a natural person not registered as an Individual Entrepreneur in Georgia, technically you can deduct expenses, so you would pay 20% on your profits.
Joe sorted out his Small Business Status in June 2020, just after triggering tax residency, and the 1% tax rate activates for him on July 1st, 2020.
- Joe generates $120,000 USD gross turnover in 2020 – $10k per month.
- Expenses for the year are $20k. For simplicity, lets say $10k before July 1st, and 10k after July 1st.
- Joe will pay 20% on his income from January to July. $60k – $10k expenses = $50k @ 20% = $10k Tax.
- + 1% on gross turnover ($60k) from August to December = $600.
Total tax bill = $10,600 USD
If Joe had registered for the Small Business Status upon his arrival in Georgia in December 2019, his taxes for 2020 would have instead looked like this:
- $120k turnover. $20k expenses.
- 1% flat rate on turnover for the whole year = $1,200.
Total tax bill = $1,200 USD
Joe’s choice not to check the tax rules from day 1 cost him $9,400 USD. For many people at Joe’s income level, the flat 20% tax bill may already seem a great option compared to other countries around the world. But as you can see, you could be paying even less if you act immediately, rather than waiting until the last minute.
Individual Entrepreneurs have some of the best tax rates in Georgia. But LLCs also offer substantial benefits compared to some of their foreign counterparts. More information on that below.
NOTE: If Joe arrived in Georgia in June 2020, and thereby became a tax resident in December 2020, he would be a tax resident for the whole of 2020, even for the months he was not physically present in Georgia.
Overview Of Some Standard Tax Rates In Georgia
Now let’s explore some of the most typical tax rates you’ll find in Georgia, so you can assess which is the best option for you.
Personal Income Tax (PIT)
Standard personal income tax applies to employees and natural persons who do not have any other business type registered.
If you are employed by a Georgian company, they should withhold 20% tax at source and pay that tax to the authorities on your behalf. Simple.
If you are employed by a foreign company and excercise employment in Georgia, you will be liable to report your annual salary income yourself and pay 20% personal income tax on the gross amount (subject to a different regime if there is a Double Taxation Avodance treaty between Georgia and your employer’s country of residence).
The natural person 20% flat tax rate (no matter how much you earn) could result in lower taxes overall compared to many other countries, especially for those individuals with a higher income.
But it is not going to work out well if you get double taxed both in Georgia and the country where you earn your income. Also, you could be paying less than 20% personal income tax if the below options apply to you.
Either way, if you are in Georgia for 183 days in any 12 month period, you are a tax resident and liable for taxes. Not paying those taxes is tax evasion, plain and simple. When discovered, you will be issued back taxes and fines. Tax evasion in excess of 100,000 GEL (roughly $30,000 USD) is considered a criminal offence in Georgia, with the potential for jail time.
So if you want to avoid breaking the law, as well as minimizing your tax liability, you should act immediately to explore your options.
If you want to figure out tax liabilities for your individual case, we offer a free 30 minute consultation.
Now, let’s discuss the smart options that could reduce your tax to as low as 0%.
Individual Entrepreneurs / Sole Proprietorship
Individual Entrepreneurs are natural persons registered for economic activity. You do not become a legal entity, the business is tied directly to you as an individual, and you hold personal liability for debts of the business.
Once you are registered, you can then apply for Small Business Status, which entitles you to pay just 1% tax on annual turnover for revenue up to 500,000 GEL (approx. 200,000 USD). This status is not available to all types of businesses (consultants, for example, do not qualify) but the majority of business types will qualify. It should be noted that if you are a low income earner, below 30,000 GEL (approx. 12,000 USD) you can actually pay 0% tax with the micro business status.
As described in the Joe Bloggs example above, this 1% tax rate applies only from the first day of the month following your successful registration. This is exactly why you should typically register as soon as you arrive in Georgia.
For anyone who does not have large liability concerns, and has a high profit/low expenses business (most freelancers, for example) this option should result in an immense reduction in tax liability compared to most other countries.
Read our full article on the Small Business Status and conditions to qualify.
If you’d like to get personalized advice, or get started applying for a Small Business Status, contact us for a free consultation.
LLCs, Corporate Tax, & Dividends
With a Georgian LLC (Limited Liability Company) you will pay:
- 15% corporate tax – only when distributed.
- 5% dividend tax.
- 0% tax on undistributed profit (i.e. reinvestment within the company or to other companies).
As well as favorable taxation, you also benefit from zero personal liability against debts.
In other countries you may pay annual corporate tax on all profits and then personal income/dividend tax on all income you take from the business as dividends.
In Georgia, you only pay tax at the time of distribution, 15% as a corporate tax and 5% directly withheld on dividends. No additional personal income/dividend tax is levied on those dividends and this is a flat tax no matter how much money you earn from dividends.
Also, you pay 0% on profits that you reinvest in the company or in other companies.
This means if your business is at a stage where you are using the profit to grow the company, or to fund another company, you can use 100% of that money for growth and lose nothing to the tax man.
You could also choose to take a salary from the company and pay the standard 20% flat tax rate, withheld at source, on your personal income.
We have a complete guide to Georgian LLCs here.
It’s important to note that if you have your business registered overseas, along with paying any corporate or dividend tax which you may pay at source in that country, there is a possibility that you may also pay the corporate tax here in Georgia.
It depends entirely on how the revenue within the company is generated. If you are actively managing said business from Georgia, then that is active income and likely to be liable for those taxes in Georgia, even if the money is never remitted here. This is because of Article 29 in the Georgian Tax Code: Permanent Establishment. This enforces that any business actively managed from Georgia has Permanent Establishment in Georgia and should be treated as a Georgian company with regard to tax.
The exact details of when and if Permanent Establishment (PE) will trigger can be very complicated. For simplicity, if you are the sole owner of a company and manage that company from Georgia, you definitely need to be very concerned about PE. If you are a partial owner who is also a manager, you still need to figure out your exact liability as some additional taxes may be owed.
If your dividends are entirely passive (company shareholder dividends, for example) and you do not manage the company at all, then you probably won’t be liable to pay any additional tax in Georgia.
So, if you actively work on a business registered abroad, then by moving that business to Georgia, you might not only gain a better tax situation for the LLC itself, but also avoid additional taxation as a Georgian tax resident.
Until you legally move your business here, additional taxes due to Permanent Establishment rules may apply, unless a DTA prevents it or another solution can be applied.
Next Steps To Fix Your Tax Problems
As mentioned above, you cannot retroactively apply for the best possible tax rate. So the longer you wait, the more tax you will likely be liable for regarding those previous months – in addition to whatever taxes you may already be liable to pay elsewhere.
Don’t become a tax evader, minimize your taxes legally
Which of the following situations applies to you?
I haven’t arrived in Georgia yet, but intend to stay more than 183 days
- This is the best possible situation, because you can plan your tax strategy in advance and organize the best possible tax rates for your income type. You can get a free consultation with us via zoom and we can help you assess how moving your business here can reduce your taxes, as well as what your liabilities will be if you stay here but continue to earn income from a foreign source.
I’ve been in Georgia less than 183 days
- You could leave Georgia before you hit the 183 day mark. Then your tax liabilities could revert back to wherever you currently pay tax. If you are a digital nomad who has been country-hopping to avoid taxes, you should read more about that.
- If you intend to stay and will hit 183 days in the current calendar year, then you should explore your options immediately to minimize taxes for the future months of the current year.
- If you will hit 183 days in the next calendar year, you should explore your options and plan to register your business here.
For all of these cases we can quickly and efficiently help you select the best option. Book a free no-obligation consultation with us online via Zoom.
I’ve been in Georgia more than 183 days
- Seek advice immediately. The longer you leave it, the messier and more expensive your taxes are likely to become. We can help you figure out your best options during a free consultation.
- You are required by law to file a Georgian tax declaration by March 31st of the year following the year you hit the 183 day mark. Depending on where else you will have paid tax for the relevant tax year, and whether or not that country has a DTA with Georgia, income that was already taxed may or may not need to be declared and taxed in Georgia.
NOTE: If you are from a country like the UK or Australia, where the tax year does not begin in January, then things can be a little more complicated. Contact us for more information based on your individual case.
A couple of other things it’s good to be aware of:
DTAs (Double Taxation Agreements)
Does your current country of tax residency, or the one you intend to move to after Georgia, or the one where your income is already taxed and withheld at source, have a DTA with Georgia?
Every DTA is different, so there is no definite rule we can advise on. In general, if the answer is yes, then you are much less likely to owe tax on the same income in both countries. But your responsibility for what to declare, and where, can get a little complicated.
If the answer is no, you could be liable for tax on the same income in both countries. Your best solution to this, if you intend to stay in Georgia, rather than return to the other country, is to move all your income and business to Georgia and close out your tax residency in the other country, so that they no longer have a claim on you as a tax resident. (For US citizens, your option is to apply for the Foreign Earned Income Exclusion. However, you’ll typically still pay dividend tax on your US company, which in some cases is a good reason to move it to Georgia.) This can be a little complicated, which is why it’s best to get started on this process the second you decide to make your move to Georgia long-term.
NOTE: A common misconception about Georgia and the USA is that they have a reciprocal DTA. Actually, the USA has a DTA which potentially protects you in the US from double tax on some of your Georgian income, but the reverse is not true, and your US income could potentially be taxed in Georgia.
The CRS (Common Reporting Standard)
I’ve written about this topic elsewhere and it’s worth reading more about it, as the CRS will affect people from the majority of countries around the world.
Essentially, the CRS is an agreement between countries to efficiently and digitally share taxpayer and financial information (your bank records) freely. The crux of this is that the Georgian Revenue Service will have easy digital access to your tax records from all around the world (if you are from one of the countries that has joined the program – including the UK, EU, Australia, and many more.)
For the USA, FATCA, rather than the CRS, gives the IRS access to your international bank accounts. As an American citizen it is mandatory to inform the IRS of any and all foreign bank accounts you open.
The Georgian Revenue Service already has instant access to your passport records and can see when you have been in the country more than 183 days. From 2023, they will be able to combine this information with the ability to quickly scan your worldwide financial records. If you owe them tax, they no longer need to go through complicated legal channels to access your records. They will have easy access on their computer terminals.
The statute of limitations in Georgia is 3 years, meaning that in 2023 they can prosecute for back taxes back to 2020. In the past, tax departments mainly pursued big fish for tax evasion. With the simplicity of an automated system, pursuing small fish and accidental tax evasion will be simple and cost effective enough that they may start doing it as a matter of everyday business.
Get Help With Your Georgian Tax Situation – Minimize Taxes
It should be clear by now that if you will be in Georgia long enough to trigger tax residency, then taking steps early, rather than waiting until you have already become a tax resident, will result in the lowest possible taxes on the Georgian side.
You will also need to act regarding your taxes abroad, and should discuss your options with a tax adviser in the appropriate country.
For all your Georgia-based tax questions, we offer a 30 minute free consultation (for first time clients) online via zoom (as well as in-person in Tbilisi) so you can sort out your tax situation before even arriving in Georgia.