Who Pays Profit Tax and What Is Taxed
Taxpayers of profit tax are a resident enterprise and a non-resident enterprise that carries on activity in Georgia through a permanent establishment or receives income from a source in Georgia, as established by Article 96. The taxable object of a resident enterprise is distributed profit, an expense or other payment not connected with economic activity, gratuitous supply of goods or services, and representative expenses above the established limit. This means that undistributed profit remains in the business, and planning therefore rests on choosing the moment of distribution. Non-cash payments become taxable at market price — without value added tax where the market price includes it.
A separate rule applies to an organization carrying on economic activity: its taxable objects are an expense or payment not connected with the activity or not arising from the organization’s purpose — including one not connected with charitable activity or not arising from the purpose of a grant agreement — as well as gratuitous transfers and representative expenses above the limit. For a non-resident’s permanent establishment, the object is determined by the expenses and costs arising from the activity of that establishment.
The 0.85 Coefficient and Deductible Expenses
Under Article 97, where a payment is treated as distributed profit, the taxable amount is obtained by dividing the amount of the expense by 0.85 — a coefficient that applies to every corporate payment deemed a distribution. In parallel, Articles 100 and 105 define gross income and deductions: a resident’s gross income consists of income received in and outside Georgia, a non-resident’s — only from Georgian sources. All expenses connected with earning income are deductible, except those made non-deductible by the Code; the cost of fixed assets is deducted gradually, through depreciation — unless the taxpayer elects full deduction.
The precondition of deduction is documentary confirmation of the expense, unless the Code provides otherwise; the Minister of Finance determines the individual cases where documentation is not mandatory. The benefit from supplied goods or services is deducted in the reporting year in which the goods or services are used in economic activity — this timing of deductions is a key planning instrument.
The Limit on Interest Deduction
Article 107 sets the ceiling for interest deduction: interest paid or payable on a loan is deductible within the annual rate established by the Minister of Finance, proportionally to the relevant period. Where more than 20 percent of the enterprise’s shares (interest) belongs, directly or indirectly, to a legal entity exempt from profit tax, the deductible amount must not exceed the sum of interest income received and 50 percent of taxable profit determined without interest. When planning credit structures, the status of the creditor and the ownership structure therefore matter.
Loss Carryforward and the Planning Horizon
Under Article 121, a legal entity’s excess of deductions over gross income is carried forward for up to 5 years and covered against the excess of deductions of future periods. A loss from the sale of an asset by an individual is compensated only against a gain from the sale of the same kind of asset and is not carried to the next year. For an entrepreneur individual, the excess of deductions not connected with employment is not deductible against salary — it too is carried forward for up to 5 years. The corporate planning horizon is thus up to five years, allowing the taxable base to be reduced by the timing of deductions.
Non-Resident Income and Exclusions
Where a non-resident enterprise receives income from the sale of property not connected with its permanent establishment, it is taxed at source without deductions, and the taxable object is the difference between aggregate Georgian-source income of the calendar year and the deductions connected with receiving it. Such property includes common shares of a resident legal entity or a partner’s share. Gross income does not include the benefit received through the reduction of sanctions or the write-off of tax debt under a tax agreement with the state or municipality, salary paid by a small-business-status person to an employee that is not taxed at source, or, until 1 January 2028, the supply of agricultural produce produced in Georgia between an agricultural cooperative and its members. For a banking institution, credit union, microfinance organization or loan-providing entity the object is likewise the difference between gross income and deductions, and for the organization of gambling — between bets received and winnings paid out. These classifications drive planning, because they determine the base on which the 0.85 coefficient or the difference method applies.
Frequently Asked Questions
Below we answer the questions most frequently raised about corporate tax planning.
What is taxed with profit tax in Georgia?
For a resident enterprise — distributed profit, unrelated expenses, gratuitous transfers and representative expenses above the limit; for a non-resident — objects arising from its permanent establishment and Georgian-source income.
How is the taxable amount computed from an unrelated payment?
The amount of the expense is divided by 0.85, and the result is treated as the amount taxable with profit tax.
For how long is a loss carried forward?
A legal entity’s excess deductions are carried forward for up to 5 years; an individual’s loss on the sale of an asset is not carried to the next year.
Can interest be fully deducted?
Only within the established annual rate, proportionally to the period; where an exempt entity is involved, the ceiling is further restricted.
Can an expense be deducted without documents?
The rule is documentary confirmation; the exceptions, where documentation is not mandatory, are determined by the Minister of Finance of Georgia.
How We Help on Legal.ge
On Legal.ge we help enterprises plan profit tax: choosing the moment of distribution, documenting expenses, calculating interest ceilings and scheduling loss carryforwards. Contact our team on any tax planning issue.