VAT (18%) is probably the most complicated type of taxation that any new business owner in Georgia will have to deal with. However, understanding VAT can save you a lot of money in many cases. Being VAT registered can also massively simplify your work residence permit application (if you wish to become a legal resident) and save you money in that process too.
For most foreigners opening a business in Georgia for the first time, prior experience of VAT abroad may lead them to thinking that they should not register for VAT, if they can avoid it. However, in the vast majority of cases this is a poor assumption.
In this article I’ll break down the complicated world of VAT into some straightforward choices so you can adequately assess if VAT registration is right for you.
UPDATE FEB 2021: The RS made a surprise change to VAT qualification which has made registering a brand new business more difficult. Essentially, most new businesses would be assigned “unqualified” status, meaning they’d be registered but would not have the same level of options for claiming back VAT. The RS has still not fully confirmed all the new conditions. But for most, the “unqualified” status will allow them still to use VAT turnover as proof for a residency application, and probably (unconfirmed) claim back reverse-VAT, but not to claim back local VAT on purchases. We hope to know more soon.
Should You Register For VAT? Quick Summary.
For those who will have no interest in delving deeper, you can make a quick assessment of your own situation with the following points.
If ALL of the 4 points below are true for your business, then your business will typically save money as a result of voluntary VAT registration:
- You do not sell products or services to anyone based in Georgia and have no intention to in the future.
- You do have foreign business expenses from outside Georgia (software, contractors, etc.)
- You do have business expenses in Georgia where VAT is levied (ie. purchasing office furniture, electronics, etc.)
- You only sell to businesses abroad (B2B) and/or provide services to consumers (B2C) via digital means.
IF all 4 points are true or even if only points 1 & 4 are true, BUT you also intend to apply for Georgian Legal Residency via the work residence permit, using your business turnover as proof, then VAT registration is normally a good idea.
This is because, standard income declarations cannot be used as evidence of turnover for a residence application, whereas, VAT turnover declarations (which show VATable and non-VATable turnover) can be used and are actually the best type of document to submit, as these will provide the clearest evidence the residency agents will be looking for.
If you have no interest in going any deeper into why the above is true, or how it affects your monthly tax reporting responsibilities, then our accountants can handle all of this for you. Contact us to learn more about our accounting packages.
If you’d like more detailed information, or you believe the above 4 points do not all apply to your business, keep reading.
Explaining the above 4 points and why they mean VAT registration is a good thing
1 & 4. You do not sell products or services to anyone based in Georgia and have no intention to in the future. You only sell to businesses abroad (B2B) and/or provide services to consumers via digital means.
If you only provide services to customers outside Georgia, and those customers are B2B and/or are B2C but rendered digitally (ie. software, online teaching, ebooks etc.), then all of those income transactions are not VATable in Georgia. As a VAT registered business, no VAT would be levied at time of transaction and this type of revenue would be declared on your monthly VAT turnover declarations as non-VATable income.
In a nutshell:
- No VAT to charge to the client/customer,
- No VAT to pay to the Georgian government,
- BUT, the income will add to your monthly VAT declaration (as non-VATable turnover) – and hence towards a residency application, if that is relevant to you.
In addition to the types of VAT exemption listed above, there are other exemptions and you can read more here.
2. You do have foreign business expenses from outside Georgia (software, contractors, etc.)
Most foreigners running a business from Georgia with foreign clients will also have foreign business expenses. This can be anything from a monthly zoom subscription, to an assistant working from the Philippines as your contractor. Essentially, any service or digital product supplied from outside Georgia, though other exceptions apply in rare cases.
These purchases will be liable for Reverse-VAT, for any Georgian business or individual entrepreneur, even if you are not a registered VAT payer.
BUT, you can only claim back that 18% if you are VAT registered.
NOTE: this category does not include physical items purchased for import, these will be taxed at time of import, and VAT, if applicable, will be applied at time of import.
If you are still confused about the concept of reverse-VAT, you can read a full explanation with examples here.
3. You do have business expenses in Georgia where VAT is levied (ie. purchasing office furniture, electronics, etc.)
If you buy something in Georgia from a VAT registered company (eg. office furniture, electronics, services), VAT will be levied at source. So long as you use the purchased goods/services in VATable transactions or for the purpose of supply of goods/services outside the territory of Georgia, get the appropriate VAT receipt and include your business information at time of purchase, you can claim back the 18% VAT on your monthly VAT declaration.
What is the result of VAT registration based on the above?
So long as criteria 1 & 4 above are met, then the following are your main considerations:
If NOT VAT registered:
- You must declare and pay 18% (reverse-VAT) on all services purchased from a foreign VATable person (typically, any foreign business).
- You cannot claim back VAT withheld at source in Georgia when making local purchases.
- You cannot use VAT turnover as evidence when applying for residency – meaning instead you have to use bank statements from a Georgian Business account (foreign accounts, online accounts and personal accounts are not accepted) OR you have to pay for an auditor (typically 500 to 2000 GEL) to go through all your accounts and bank statements.
- You do not have to make monthly VAT turnover declarations (stating your VATable and non-VATable turnover)
IF VAT Registered:
- You must declare reverse-VAT on services purchased from a foreign VATable person (foreign business), but can simultaneously claim it back, effectively meaning you have nothing to pay.
- You can claim back VAT on most local purchases where VAT was levied at source.
- You can export your VAT turnover information in order to use it as evidence for a residency application (once the total combined VATable & non-VATable turnover exceeds 50,000 GEL per foreigner employed by the company).
- You must make a monthly VAT turnover declaration.
So, in this case, VAT registration saves you money, makes residency applications easier and the only negative is the addition of 1 additional declaration per month.
And if your accountant already handles your declarations, then that may be covered. Our monthly accounting packages, for example, do include your VAT turnover declaration filing. You can contact us for more information if you would like to use our accounting services.
VATable & Non-VATable transaction
VATable income transactions are those that the tax code defines as incurring VAT. Which must be levied at source. If all your business income is from a foreign source, as defined in points 1 & 4 above, then typically all your income is non-VATable.
If you sell to Georgian businesses and customers, then you should read more on exactly which types of transactions would VATable.
If you will have VATable sales within your company, then your decision on VAT registration becomes more complicated. I will summarise some of the main points below.
If VAT registered, then both VATable and non-VATable income must be declared and this combined sum will be equal to your total business turnover.
Voluntary vs. Mandatory VAT Registration
If your VATable turnover exceeds 100,000 GEL in any 12 month period, then you are required to register as a VAT payer immediately. As explained above, businesses with no domestic transactions, except for export businesses and some other rare cases, will likely have zero VATable turnover and so never be required to register for VAT.
In those cases, voluntary registration is typically recommended by us, if meeting the aforementioned 4 criteria.
Considerations if you don’t meet the above 4 criteria
At this point, if you are still below the 100,000 GEL threshold where VAT registration is mandatory, then you have to decide if voluntary registrations will save you money or cost you money. Some essential considerations:
- How much VATable turnover will you have? And will charging 18% VAT on top of your services cause you to lose business that would negate any benefits of being registered?
- Will your VATable turnover actually be exempt due to any special rules? (One relevant VAT exempt industry is provision of tour packages within Georgia, but there are others too).
- Do you still have reverse-VAT or local VAT liable business expenses? If you have significant expenses where you can claim back VAT, but only a very limited amount of VATable income, then those savings could outweigh any negative impacts of charging VAT on products and services.
This is a non exhaustive list of considerations. If you are still not sure, it’s best to book an appointment with a tax adviser. This is free for new clients. If you are a current client, our paid consultation sessions can be booked here.