Special Regimes as the Foundation of Structuring
Tax structuring begins with the choice of regime. Under article 83 of the Code, special tax regimes extend to natural persons holding micro business status, entrepreneur natural persons holding small business status, and persons holding the status of fixed tax payer. The right choice of regime renews the business's tax position, while a wrong one leads to assessments and sanctions — which is why the decision must always be calculated through the prism of articles 88, 98 and 98-1 of the Code, governing small business status, profit tax rates and distributed profit.
Small Business Status
Under article 88, small business status may be granted only to an entrepreneur natural person. The ceiling of the regime is a 500,000 lari limit on the aggregate income received during a calendar year, while for wine tourism and agrotourism operators the limit extends to 700,000 lari. The Government, in agreement with the parliamentary finance and budget committee, may prohibit particular activities within which the status cannot be granted, and determine types of income that are neither taxed under the special regime nor included in aggregate income. The practical conclusion: before switching to the status, verify whether your activity is on the prohibited list and how the limit is computed.
Profit Tax Rates
Article 98 sets the general and special rates of profit tax. The general rate is 15 percent. Profit from oil and gas operations is taxed at 10 percent where the contract was concluded before 1 January 1998 — the regime of "existing contracts". The taxable profit of a banking institution, credit union, microfinance organization and lending entity is taxed at 20 percent. The organizer's taxable profit from systematically electronic gambling involving foreign citizens is taxed at 5 percent on that part of the activity, while profit from slot machine saloons and other gambling organization is taxed at 20 percent. Knowledge of the sectoral rates is one of the main instruments of structuring: a change in the form of activity changes the rate as well.
Distributed Profit
Article 98-1 defines what counts as distributed profit — profit distributed by an enterprise to its partner as a dividend, in monetary or non-monetary form. Not counted as distributed, for example, are: a payment on liquidation or redemption of shares not exceeding the partner's contribution to capital; a payment effected by transfer of ownership of shares, apart from securities admitted to trading on an organized market; and assets transferred to the state or municipality through a capital reduction where more than 50 percent of the enterprise's shares are owned by the state or municipality. At the same time, the Code treats as distributed profit a transaction with a related person at a non-market price — to the extent of the difference, following transfer pricing logic. This norm is a risk zone of structuring: the prices of intra-group transactions must always correspond to the market principle.
Deemed distribution also covers the carrying out of a controlled transaction whose conditions do not correspond to the market principle, and a transaction with a person exempt from income or profit tax where the price differs from market — in such cases the amount of distributed profit equals the difference between the market price and the transaction value. A separate rule concerns the permanent establishment of a non-resident enterprise: profit transferred from it to the non-resident is deemed distributed, and the establishment is attributed the profit it could have earned as an independent enterprise acting under the same conditions.
Practical Directions of Structuring
In practice the decision rests on three questions: who will be the subject of the activity — an entrepreneur natural person or an enterprise; which regime fits the income structure — small business status with its limits, fixed tax or the general regime with profit tax; and how profit distribution is planned so that dividends and transactions with related persons do not produce adverse consequences. The detailed rules of registration, payments and reporting are defined by other provisions of the Code and must be verified for each project — an exact calculation requires professional advice.
Frequently Asked Questions
Who may hold small business status?
Only an entrepreneur natural person; for legal entities the status is unavailable. The limit is aggregate annual income of 500,000 lari, and 700,000 lari for wine tourism and agrotourism.
What are the profit tax rates?
The basic rate is 15 percent; 10 percent for existing oil and gas contracts concluded before 1 January 1998; 20 percent for the banking and lending sector; 5 percent on electronic gambling oriented at foreign citizens.
When is profit deemed distributed?
On distribution of dividends, and on transactions with related persons at non-market prices — to the extent of the difference between the market price and the transaction price.
Can a share transfer avoid being a dividend?
A payment to a partner by transfer of ownership of shares is not distributed profit, except for the transfer of securities admitted to trading on an organized market.
How We Help on Legal.ge
The Legal.ge team answers every question of corporate tax structuring: we compare regimes against your income structure, compute the difference at the level of limits and rates, spot distributed-profit risks in intra-group transactions and help you take a substantiated decision on the structure. Contact us — the right structure saves tomorrow the tax you see today. Legal.ge.