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.