The Tax Calculation of an Asset Sale
Tax optimization of an asset sale in Georgia is a calculation under the Tax Code: the supply of an asset enters the net of value added tax, while securities operations are exempt financial operations; profit tax applies to the enterprise's base, but under the distribution model the timing of taxation is deferred to the moment of payout. One must not rely on the foreign-law doctrine of a going-concern transfer relief: the list of exempt operations is closed by the Code, and argumentation must proceed from that list. This page covers the asset-disposal side of the calculation.
Supply of Goods and Value Added Tax
Supply of goods is the transfer of the owner's right to dispose of material property. It also includes transfer of ownership for consideration by decision of a state or municipal body or by law; actual transfer under a lease, leasing or similar contract with a buyout condition; and transfer under a commission contract. The supply by a co-owner of his share in common property is treated as supply of the immovable, and the joint supply of a land plot and a building attached to it is treated as supply of the building. This last rule is critical for real-asset packages: joint transfer of land and building determines the tax fate of the whole package.
The exclusion rules matter as well: supply of goods does not include a taxable person's supply of all assets or a part thereof — an independently functioning division — to another taxable person; the contribution of an asset into the capital of an enterprise or a cooperative; and the transfer of an asset between parties to a reorganization of an enterprise. The conditions for applying these norms are determined by the Minister of Finance of Georgia; structuring a transfer of business falls into a regime different from an asset disposal.
Financial Operations and the Closed List of Exemptions
A financial instrument is any agreement creating a financial asset for one person and a financial liability for another; it includes money, loans, bills and securities such as equity shares, stocks, bonds and derivatives. Financial operations include the issue, acquisition, circulation and supply of these securities, including support of their circulation. Financial operations/financial services are exempt from value added tax without the right of credit — it is on this norm that the exit through equity securities is built. The supply of a land plot is also exempt — together these exceptions allow land and equity-security elements to remain outside the tax net.
The Object of Profit Tax
The object of profit-taxation of a resident enterprise is distributed profit, an expense not connected with economic activity, gratuitous supply of goods/services or transfer of money, and excess representation expenses; the taxable amount under these categories is obtained by dividing the expenditure by 0.85. For a non-resident receiving Georgian-source income from realization of property not attributable to a permanent establishment, the object is the difference between aggregate annual income and deductions; realization of property includes the sale of common shares of a resident legal person or a partner's share.
Distributed Profit and the Timing Lever
The central lever of the distribution model of profit tax is the concept of distributed profit: distributed profit is profit distributed by the enterprise to its partner as a dividend, in monetary or non-monetary form. Distributed profit does not include, in particular, a payment made at liquidation or at the buyout of a share that does not exceed the partner's contribution to the capital; a payment to a partner by transferring into his ownership a share of the same enterprise; and the transfer of assets to the state or a municipality by capital reduction, if more than 50 percent of the enterprise's shares are owned by the state or municipality. Reinvested profit is not taxed until distribution — the amount received from the asset sale and retained in the business triggers profit tax only at the moment of distribution. At the same time, an operation with a related person is deemed distribution of profit if the transaction price differs from the market price and the relationship influences the outcome — the difference between market and actual price is shaped as untaxed distribution. Timing planning and the fairness of internal pricing are the two main pillars of the tax architecture of an asset disposal.
Frequently Asked Questions
Below we summarise the questions that arise most often in practice on this topic.
What is supply of goods for tax purposes?
The transfer of the owner's right to dispose of material property; supplemented by transfer of property for consideration by decision of a body or by law, lease/leasing with a buyout condition, and commission transfers.
Which transfers are not supply of goods?
The transfer of all assets or an independently functioning division to another taxable person, the contribution of an asset into capital, and transfers between parties to a reorganization.
Why is a share sale exempt?
A share and a stock are financial instruments, and their issue, acquisition, circulation and supply are a financial operation/service exempt from value added tax without the right of credit.
When is the profit from the asset sale taxed?
Under the distribution model — at the moment of distribution as a dividend; a payment at liquidation or buyout of a share within the amount of the contribution is not treated as distributed profit.
How We Help on Legal.ge
Tax optimization of an asset sale requires precise calculation of the classification of supply, the list of exemptions and the timing rules of distribution. Our team will help you select the transaction structure, assess the classification of the supply, document exempt operations and draw up a distribution plan. Contact us on Legal.ge — we will assess your asset package and build a lawful and efficient tax architecture for the disposal.