The Essence of the Estonian Model and Its Taxpayers
Georgia’s Estonian model of profit taxation means that profit earned and not distributed by an enterprise is not taxed — the object of taxation becomes only the distributed profit and certain expenditures specified by law. 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 located in Georgia. The advantage of deferring the tax until distribution applies most fully to resident enterprises.
For a resident enterprise, the object of taxation is: distributed profit; an expense or other payment not connected with economic activity; the gratuitous supply of goods, provision of services, or transfer of monetary funds; and representation expenses exceeding the limit established by the code. For an organization carrying on economic activity, the object consists of expenses and payments that do not stem from the purpose of its activity, together with gratuitous transfers and representation expenses above the limit under the same principle. The model thus does not mean the profit is “frozen” forever; it means the moment of taxation is shifted to the distribution of profit or to the incurring of non-business expenditures.
What Counts as Distributed Profit
Distributed profit is profit distributed by an enterprise to its partner as a dividend, in monetary or non-monetary form. At the same time, the law precisely identifies payments that are not treated as distributed profit: payments made on liquidation or on the redemption of a share, up to the amount of the partner’s contribution to capital; payments effected by transferring shares of the same enterprise, except for the transfer of proportional securities admitted to trading on an organized market recognized by the National Bank of Georgia; the distribution of dividends to a separate category of persons determined by the law on entrepreneurs; the transfer of assets to the state or a municipality through a reduction of capital, where more than fifty percent of the enterprise’s shares belong to the state or a municipality; the distribution of a dividend received from a foreign enterprise, other than one registered in a jurisdiction with preferential taxation; and the subsequent distribution of a received dividend. Correct classification of these exceptions often determines whether a tax charge arises on a particular transaction at all.
Computing the Taxable Amount and Non-Cash Forms
A distinctive feature fixed directly in the law is the computation rule: the taxable amount derived from an expenditure is obtained by dividing the amount of the payment by the coefficient of zero point eight five. Where a payment specified by law is made in non-cash form, the object of taxation is determined at the market price of the goods supplied or the services rendered, and where the market price includes value added tax — at the market price without that tax. These details are decisive for how a transaction must be reflected in tax reporting.
Exceptions: Who Falls under the Classic Rule
The Estonian model is not universal. For a banking institution, a credit union, a microfinance organization, and a loan-granting entity, the object of profit taxation is the difference between the aggregate income received during a calendar year and the amounts of deductions under the code — that is, these entities are taxed under the classic profit regime. Special rules also apply to profit derived from existing contracts in oil and gas operations and to participants in international pipeline projects, for whom the object is likewise the difference between income and deductions within the respective project.
Profit received by the Patriarchate of Georgia from the sale of crosses, candles, icons, books, and calendars used for religious purposes is exempt from profit tax. Exempt as well is the distribution of profit received by an agricultural cooperative from the first supply of agricultural products produced in Georgia, together with related expenditures within the same activity — this preference operates for the period fixed by law. The distribution of profit received by a person employed in agricultural production from the first supply of agricultural products is likewise exempt where the income from such supply during a calendar year does not exceed two hundred thousand lari. These deadlines and conditions are subject to legislative change, so any concrete plan must be checked against the current wording of the code.
Frequently Asked Questions about Profit Tax Planning
When is profit not taxed?
As long as the profit has not been distributed and the enterprise has not incurred a non-business expense, a gratuitous transfer, or a representation expense above the statutory limit, no taxable event occurs under the distributed-profit regime.
What falls within the notion of distributed profit?
Profit distributed to a partner as a dividend in monetary or non-monetary form; payments on liquidation exceeding the partner’s contribution also fall within this notion, while returns of contributed capital do not.
Does the model apply to every entity?
No. Banking institutions, credit unions, microfinance organizations, and loan-granting entities are taxed under the classic rule — on the difference between income and deductions.
How is the taxable amount computed from an expense?
Under the statutory coefficient: the amount of the expense or payment is divided by zero point eight five, and a non-cash payment is valued at the market price without value added tax where the price includes it.
How We Help on Legal.ge
The Legal.ge team will help you apply the Estonian model in practice: we analyze your enterprise’s payments, distinguish distributed profit from payments outside that notion, verify the computation of the taxable base, assess the availability of exemptions and exceptions, and design a dividend policy under which your tax burden is minimal and fully lawful. Contact us through the Legal.ge website and receive a precise legal assessment of your situation.