Special Tax Jurisdictions in Georgia

Background

As part of drastic reformation campaign of the investment climate in the country, Government of Georgia during last dozen of years has been focusing on the liberalization of corporate and personal taxation systems within the state.

Initial orient was on decreasing amount and the number of taxes, as a result of which Georgia currently has 6 taxes:

• Corporate Income Tax
• Personal Income Tax
• VAT  
• Import Tax
• Excise Tax
• Property Tax

Notable is the fact that along with the state service system reform that minimized the beaurocracy levels and enhanced the transparency and digitalization within the sector, tax reform had an important effect in the macroeconomic environment in the country and steady growth of the economy in the beginning of the century. Since then, Georgia has been widely recognized as the top reformer and the performer country and various key international organizations ranked the country in top places among easiness of doing business, in simple & low taxation country, etc. 

Start-up of Special Jurisdictions

Government of Georgia perfectly realized that for consistency and inclusive growth, other motivational arrangements were needed to be installed. First step was to introduce Special Taxation jurisdiction for particular business segments in face of Free Industrial Zones. Predominantly effective structure for industrial and trading business, this concept development happened just after the short war of Georgia with Russia in 08/2008. Fully operative since 2011-12, first 2 FIZs started their operations in the cities of Kutaisi and Poti, first being Industrial-oriented one of the major cities in the country, while latter – one of the oldest port cities on the Black Sea. Even though strategically located on the crossroad between Europe and Asia and having fully tax-free environment (permanent exemption from all corporate taxes), Free Zones found it difficult to boost the business attraction due to various objective or subjective reasons, such as lack of concept knowledge (and consequent pure management), ineffective legislations, country unstable political environment, post war crisis, etc. However within several years, and steady approach towards mentioned challenges, Free Zones started to grab the interest of various manufacturers and traders, predominantly from the wider region of Caucasus, Central Asia, Turkey, Ukraine, UAE and some European countries. Free Zones became safe home for hundreds of International Service Providers and Traders. They have slowly started to assume an optional role for hubbing the business – a tiny version of UAE established concept. 

During last several years, further 2 new Free Zones (totaling 4) were created in Kutaisi and Tbilisi. Intensity of businesses brought in some bigger players on the ground that started to set up processing units inside Free Zones. Within those, again regional countries were more active, whereas projects from industrial sectors like building materials, pharmaceutical, auto, new technologies, wood and plastic were initiated inside these Zones. 

After new alterations in tax regulations, oriented on taxation increase for businesses without substance within the zones, Free Zone are becoming more suitable for physical business doers. Free Zones administrators are mastering more & more services and facilities at place. Manufacturers and traders now have comfort of getting turn-to-key all-inclusive solutions, from initial set-up financial support, to ready facilities, HR recruitment, Tax Free operations and trade with various countries and regions, like EU, Turkey, China, CIS, etc.

Currently, Free Zones already have a say within predominantly Industrial & Import-Export sector development in the country and they serve as a very suitable alternative for many foreign investors and local players within these business sectors.

Apart from Free Zones, one of the important incentives was created for international IT companies in face of Virtual Zone Company and International Company statuses, the latter being one of the new initiatives of the country.

Both statuses, granted by the Ministry of Finance of Georgia, offer unique tax structure for IT companies:

Conditional factor is that business must be operational from Georgia, which means Company owners need  to source their activities from within the country, however this can be ideal opportunity from them, since Georgia offers increasing exponential human capital in the IT sector, highly sophisticated internet solutions, low-cost facilities and last, but not least, very liberal immigration procedures (Please see our article on this topic) for expats, all being critical factors for smooth set-up and steady running of these businesses in the country.

Within the wider focus to attract SME sector, country has had good piece of offering for small entrepreneur sub-segment. Whether it is foreigner or local entrepreneur, after registering Individual Minor Entrepreneur Status within 1-2 days, person can run various businesses within and outside country and pay – believe or not – just 1% tax from total turnover, nothing else. And this is up to 500 000 GEL (around 140 000 EUR turnover) – ideal opportunity for people involved in Real Estate rental, intermediary activities, other minor businesses.

Georgia shows dynamic approach towards further reforming taxation modules within the country not only on the corporate side, but also from the personal taxation perspective (Please see our article on Tax Residency and Relocation Opportunities of Georgia). In a nutshell, one can see that Georgia, with its multi-cultural ethnicity, easy living standards, European lifestyle, unique food, comfortable tax and other residency solutions and easiness of doing minimally taxed businesses, offers a lot to foreigners from personal as well as corporate perspectives.