A Partnership as an Enterprise
Under Article 21 of the Tax Code, an enterprise is any entity carrying on economic activity or created for that purpose: Georgian and foreign legal entities, permanent establishments of foreign enterprises and — decisive for partnership taxation — associations, partnerships and other similar entities. Such a structure is a profit tax payer, and the general rules apply to it, in particular the distributed-profit taxation model. When structuring, what matters is how the relations between members are characterized, since this directly affects taxation. Characterization precedes the computation of every tax liability that follows.
Related Persons
Under Article 19, related persons are those between whom special relations may influence the conditions or economic results of their activity. These include founders of one enterprise with a combined share of at least 20 percent; participation of one person in another of at least 20 percent; control — membership of a supervisory board, directorship, the right to appoint to these positions or holding 20 percent of voting shares; positional subordination; kinship; and, importantly for a partnership, membership of persons in the same partnership. The first line of relatives includes a spouse, parent, child, sister and brother; the second — their spouses, parents, children, sisters and brothers. The circle is fixed by the law and does not extend to other relatives.
Deemed Distributions
Under Article 98-1, a transaction between an enterprise and a related person is deemed a distribution of profit where the transaction price differs from the market price and the relationship influences the result: the amount of distributed profit is then the difference between the prices. The same applies to controlled operations and transactions with exempt persons. Internal transactions of a partnership — supply of goods to members, provision of services or transfer of shares — must therefore be documented at market price, otherwise the difference is treated as a dividend and taxed with profit tax. This consequence flows directly from the statute and not from any agreement.
Contribution of Assets and Reorganization
Under Article 151, a transfer of assets by a person to a legal entity in exchange for 50 percent or more of the shares in it is not a supply of assets: for the recipient their value is the same as for the transferor at the moment of transfer, and the value of the received share equals the value of the transferred assets less the debt. Article 152 determines the tax consequences of reorganization: the transfer of property and shares between parties to a reorganization is not a realization, and the exchange or distribution of shares is not a dividend. Reorganization includes the merger of two or more residents, the acquisition or consolidation of 50 percent or more of voting shares, and division — unless the tax authority establishes that the purpose of the operation is tax avoidance.
Asset Groups and Exceptions
A systematic reading of Articles 151 and 152 requires attention to exceptions: their requirements do not extend to assets depreciated under the group method under Chapter XV of the Code, except where all assets of a group depreciated at one rate are transferred simultaneously — then the recipient takes the group’s value balance. Nor do the provisions of Article 151 apply to a transferor of assets with a legal defect where the debt exceeds the value of the transferred assets. Under Article 152, a party to a reorganization is any resident legal entity directly involved in it, directly holding an involved entity, or itself held by such a holder; for these purposes ownership means holding 50 percent or more of the voting shares and 50 percent or more of the value of all remaining shares. In structuring a partnership, these thresholds decide whether a transfer is exempt or treated as a realization.
Frequently Asked Questions
Below we answer the questions most frequently raised about the taxation of partnerships.
Is a partnership a taxable enterprise?
Yes — associations, partnerships and similar entities are included in the definition of an enterprise and pay profit tax. The characterization therefore precedes every computation of the tax itself.
When are partnership members related persons?
Membership of persons in the same partnership is itself a special relation; so is founding with a share above 20 percent and control. The description is read as a sign of dependence and is assessed separately for each person involved.
What happens in a below-market transaction with a member?
The difference between the prices is deemed distributed profit and is taxed with profit tax. The law attaches this consequence to the status itself.
How are assets transferred for shares?
Assets transferred for 50 percent or more of the shares are not a supply, and their value passes unchanged.
How We Help on Legal.ge
On Legal.ge we help partnerships with structuring: analyzing member relations, checking the prices of internal transactions and planning asset contributions and reorganization. Contact our team. The correctness of a structure is verified in advance rather than corrected after the fact.