Related Persons
International tax planning rests on the concept of relatedness: related persons are those between whom a special relationship may influence the conditions of their activity or of persons they represent. The law treats as such, for example, founders of one enterprise whose aggregate share is not less than 20 percent; the direct or indirect participation of one person in the enterprise of another with the same threshold; control; official subordination; kinship; and membership in a partnership. Relatives of the first line are the spouse, parent, child, sister and brother; of the second line, their spouses, parents, children, sisters and brothers; guardianship is equalled to family unity. For the purposes of these norms, control means membership of a supervisory board, directorship, the right to appoint persons to these positions, and the holding of a voting share or 20 percent of shares.
Permanent Establishment
The tax footprint of a non-resident in Georgia often begins with a permanent establishment: a fixed place through which a foreign enterprise or a non-resident individual carries on economic activity in the country in whole or in part, including through a dependent representative. A construction, installation or assembly site with related supervisory activity, rigs and ships used for the exploration of natural resources, a place of management, branch, representative office, division, office, agency, workshop or mine are all equalled to it. By a special rule, the management of the foreign enterprise by another person for more than 3 months also constitutes a permanent establishment. At the same time, no permanent establishment arises from an independent intermediary of professional status, from mere ownership of securities, shares or property, from the secondment of employees or from mere control; nor does an establishment used only for storage, display, purchasing, collection of information or generally preparatory and auxiliary activity qualify. The duty of registration lies on the tax authority, and the establishment counts as such from the moment of registration, authorization or the start of representative activity.
Controlled Transactions and the Arm's Length Principle
Where a Georgian enterprise carries out financial or commercial transactions with a related foreign enterprise, each determines its taxable profit according to the arm's length principle: the conditions of the transaction must not differ from those which independent enterprises would have agreed in a comparable situation. Where the conditions do not conform, the profit that would have arisen under the arm's length principle — but did not — is included in taxable profit. The rule extends to transactions with the enterprise's own permanent establishment, and it is particularly important that a transaction with a resident of a low-tax jurisdiction is treated as controlled even without relatedness. The criteria of a market price are determined by the minister of finance.
Valuation Methods and Advance Agreements
To test the arm's length principle the law provides five methods — comparable uncontrolled price, resale price, cost plus, net margin of the transaction and profit split — and the price is determined by the method most appropriate to the case. An instrument of risk management is the advance pricing agreement: on the application of the taxpayer, the head of the Revenue Service may conclude it before the transactions begin, for a definite term, fixing in advance the criteria — the method, comparable transactions, adjustments and assumptions. The agreement extends only to the person with whom it is concluded, and if the person acts in accordance with it, a contrary decision by the controlling authority and the imposition of a tax or sanction are inadmissible. It is not applied where the facts change or the underlying norm is cancelled, and a harsher norm with retroactive effect cannot touch an agreement concluded before its entry into force. Information submitted for its conclusion is a tax secret, and where a market price is declared the person bears no liability merely for breaching the agreement's condition.
Frequently Asked Questions on Tax Planning
Below are brief answers to the core questions of international tax planning under the Code.
Who is a related person?
For example, founders with an aggregate share of at least 20 percent, a participant with at least 20 percent, persons under control or subordination, and relatives.
When does a non-resident have a permanent establishment?
When carrying on economic activity through a fixed place, including construction or management by another person for more than 3 months; mere ownership and an independent intermediary do not suffice.
What is the arm's length principle?
The conditions must correspond to those agreed between independent enterprises; otherwise the profit is included in the taxable base.
How many valuation methods are there?
Five — comparable price, resale price, cost plus, net margin and profit split; the most appropriate one is chosen.
What does an advance agreement give?
Advance determination of pricing criteria before transactions; acting in accordance with it excludes contrary decisions and sanctions.
How We Help on Legal.ge
The tax lawyers of Legal.ge will help you assess relatedness, identify permanent establishment risks, document controlled transactions and select the method, and prepare an advance pricing agreement. Contact us — without planning in advance, corrections and sanctions come later.