The Tax Form and Status of an Investment Fund
The Tax Code determines the foundations of the tax regime of an investment fund. An investment fund is an enterprise founded, in accordance with the Law of Georgia on Investment Funds, in the form of a joint investment fund or an investment company. Under the same law, the activity connected with the management and administration of a fund, and the provision of depository services to it, is treated as a financial service. For funds investing in real estate this means that the choice of the form of the fund and the tax qualification of its services are defined from the outset, and tax planning must be built within this framework. It is also essential that each sub-fund of an umbrella fund is treated for the purposes of this regime as an independent investment fund, which creates additional flexibility in structuring.
Profit, Loss and Reporting of a Joint Fund
The profit and loss of a joint investment fund are treated as profit and loss of each unit holder outside the fund, in proportion to the value of the unit in his or her ownership. The loss attributed to a unit holder must not exceed the amount of his or her contribution to the fund and the expenses and commission paid to the asset management company. The management company is obliged to open for each unit holder an investment account, in the manner established by a joint order of the Ministry of Finance and the National Bank, and to keep the record of his or her profit and loss. The excess income received upon the sale or redemption of a unit is reduced by the amount taken into account in the same holder's taxable income on the basis of the loss calculation. Unit holders conduct their tax reporting independently, and neither the fund nor the asset management company is charged with the respective tax agent obligation. Activity carried out by or in the name of a unit holder in accordance with the law does not create a permanent establishment in Georgia.
The Taxation of Dividends and Units, and Exemptions
The profit distributed by a joint fund is not taxed with profit tax. A dividend paid by an investment company to an individual or a non-resident enterprise is not taxed at the source of payment, while the distribution is taxed under the dividend taxation rules of the Code: at 15 percent, except where the company invests only in bank deposits and-or financial instruments — then 5 percent applies. A distribution is exempt from profit tax where the income from which the dividend is paid is not received from a source in Georgia, or derives from the sale of an equity or debt security publicly issued in Georgia and admitted to trading on an organized market recognized by the National Bank, or flows from a debt security issued by the Government of Georgia or an international financial institution. Excess income of a non-resident or an individual upon the supply or redemption of a unit is taxed at 15 percent, while 5 percent applies only where the fund invests solely in deposits and financial instruments. Exempt from income and profit taxes are income from the sale of a unit admitted to trading on an organized market, and income from the sale or redemption of a unit of a fund that invests only in bank deposits, government or international institution securities and publicly issued debt securities.
Property Tax — Payer and Object of Taxation
For real estate investment funds the property tax is also relevant; its payer and object are determined by the respective article of the Code. The payer of property tax is a resident enterprise or organization, with respect to assets recorded on its balance as fixed assets or investment property, uninstalled equipment, construction in progress, and also property leased out by it; with respect to immovable property and other objects received as security for a contractual obligation; and with respect to property acquired through auction or direct sale in enforcement proceedings. A non-resident enterprise is a payer with respect to such property in Georgia, including property transferred under a lease or similar contract. An individual is a payer with respect to immovable property in ownership, including construction in progress and a part of a building, yachts, helicopters, airplanes and passenger cars defined by the respective nomenclature code. For an object registered in the name of a deceased person, the payer is the person who holds it in possession or use, unless the use is carried out under a contract. A fund holding a real estate portfolio therefore pays property tax on the investment property recorded on its balance.
Frequently Asked Questions
How is the dividend of an investment company taxed for an individual?
At a rate of 15 percent; where the company invests only in bank deposits and-or financial instruments, a rate of 5 percent applies, except for profit distribution received from a resident enterprise.
Who conducts tax reporting for a joint fund?
Unit holders conduct reporting independently; neither the fund nor the asset management company is charged with the respective tax agent obligation.
Does a permanent establishment arise for a unit holder?
No. Activity carried out by or in the name of a unit holder in accordance with the law does not create for the holder a permanent establishment in Georgia.
What property is taxed with property tax?
Assets recorded on the balance of an enterprise as fixed or investment property, uninstalled equipment, construction in progress and leased-out property; for an individual — immovable property and certain categories of transport.
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