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 sometimes 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 think that they should not register for VAT if they can avoid it. However, in the 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 that you can adequately assess if VAT registration is right for you.
The big headline to know as a starting point is: Your income from services provided to B2B (all) and B2C (most digitally rendered services, and a few other exceptions) who are based outside Georgia is not VATable in Georgia. VAT does not need to be added to those transactions, even if you are VAT registered.
However, that is not the end of the story, and deciding whether VAT registration is right for you involves many other factors we’ll discuss below.
Before we go any further, I just need to clarify some important changes that happened to VAT registration in January 2021:
Qualified & Unqualified VAT Status
To reduce VAT fraud, the Revenue Service (RS) introduced a VAT qualification process. Previously, anyone could register for VAT and start claiming back VAT immediately. Since the change, however, your VAT registration will be automatically unqualified until you can show the authorities proof that you should be qualified.
What is the difference between qualified & unqualified?
The main relevant difference is that if you remain unqualified you cannot claim back local input VAT – for example, when you purchase a product or service supplied in Georgia which incurs VAT, you cannot claim that VAT back.
However, even if unqualified, you can still claim back reverse-VAT (which is always owed in Georgia on services and most digital products supplied to your Georgian company from outside Georgia.) So, if you hire service contractors from outside Georgia, or have foreign expenses in general, you can reduce your tax burden on these types of expenses by 18%.
So bear this in mind when deciding if VAT registration is for you. Without VAT registration, you must declare and pay 18% on all those expenses. With VAT registration, you must still declare but you can also simultaneously claim back, so you would effectively pay zero. If your international expenses are moderate or significant, then the additional effort/cost of filing a VAT return each month, or having your accountant do it, will likely save you money compared to paying that 18% tax.
How to get qualified VAT status? I’ll cover that below.
Should You Register For VAT? Quick Summary.
For those who have no interest in delving deeper, you can make a quick assessment of your own situation using the following criteria.
If ALL 4 of the 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 do so in the future.
- You do have foreign business expenses from outside Georgia (software, contractors, etc.) Especially when those expenses, taxed at 18%, would amount to a sum that would exceed your time/cost for VAT accounting.
- You do have business expenses in Georgia where VAT is levied (i.e., 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, 2, & 4 are true), AND especially if you also intend to apply for Georgian Legal Residency via the work residence permit using your business turnover as proof, then VAT registration is typically a good idea.
This is because copies of 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.
Other options are available, so if you intend to apply for residency, but are not sure if you would benefit from VAT registration, contact an adviser for more details.
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. Learn more about our accounting packages.
If you’d like more detailed information, or you believe that the above 4 points do not apply to your business, keep reading.
Analyzing 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 (i.e., 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 the 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 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 toward 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, this means any service or digital product supplied from outside Georgia, though 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 the 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 (i.e., purchasing office furniture, electronics, etc.)
If you buy something in Georgia from a VAT registered company (e.g., 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 the time of purchase, you can claim back the 18% VAT on your monthly VAT declaration.
You must have qualified VAT status to claim back this type of VAT.
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 that 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. In some circumstances you can request a turnover summary from the RS (normally taking 7 to 30 days to be processed) and this is sometimes accepted by the SDA. Legally, they do not have to accept this type of document, but in practice they sometimes do.
- 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 that you have nothing to pay.
- If you get qualified VAT status, 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 and makes residency applications easier, and the only negative is the addition of 1 extra declaration per month.
Furthermore, if an accountant already handles your declarations, then it may even be covered. Some of our monthly accounting packages, for example, include VAT turnover declaration filing. You can see all our accounting packages here.
VATable & Non-VATable transactions
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 might be VATable.
If you have VATable sales within your company, then your decision on VAT registration becomes more complicated. I will summarize 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.
Getting Qualified VAT Status
If you want to get qualified VAT status, so you can claim back local Georgian input VAT, you must meet some requirements and explain your reasoning to the RS. Your accountant can assist with this.
The basic requirements are:
- Explain your business activities.
- Explain why qualified VAT payer status is needed for your business.
- Show existing, relevant contracts.
- Provide at least one RS invoice (“ანგარიშ-ფაქტურა”) already issued by another Georgian VAT payer.
- Other requirements that are specific just to your business and would need to be assessed on a case by case basis.
In essence, the RS wants to know that you will be collecting VAT from sales you make, and not just claiming back VAT from purchases you make. They want to ensure that you contribute VAT to the system.
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 will never be required to register for VAT.
In those cases, voluntary registration is typically recommended by us, provided you meet the 4 previously-mentioned 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 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 the benefits of being registered?
- Will your VATable turnover actually be exempt due to any special rules? (One relevant VAT exempt industry is the 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.