Profit tax planning, particularly within the context of the so-called "Estonian Model" currently effective in Georgia, is a crucial component of a business's financial strategy. Since 2017, Georgia has fundamentally transformed its corporate taxation system by shifting to a distributed profit tax regime. This means that companies are not taxed at the moment profit is generated, but only when that profit is distributed as dividends or distributed via other means provided by law (such as incurring non-economic expenses). This model offers businesses a unique opportunity to reinvest funds without paying taxes, thereby increasing liquidity and fostering company growth. However, this system comes with specific risks and regulations that require competent planning. Improper administration or incorrect classification of expenses can lead to unexpected tax liabilities and penalties, jeopardizing the company's financial stability.
What Does Profit Tax Planning Service Cover?
Profit tax planning by specialists on Legal.ge involves a comprehensive approach that ensures company compliance with the Tax Code while legally optimizing the tax burden. The service includes:
- Analysis of Distributed Profit: Developing a strategy for dividend distribution to minimize tax liabilities while protecting shareholder interests.
- Audit of Non-Economic Expenses: Detailed examination of expenses to determine whether they qualify as profit distribution. This includes representation expenses, employee bonuses, and other payments.
- Assessment of Gratuitous Supply Taxation: Analyzing the tax consequences of providing goods or services free of charge, which often triggers profit tax.
- Consultation on Taxation of Loans: Assessing tax risks associated with issuing loans to partners or related parties, which may be treated as profit distribution under certain conditions.
- Utilization of Tax Incentives: Effectively using benefits available under special statuses (e.g., Virtual Zone Person, International Company).
- Management of Transfer Pricing Risks: Ensuring transactions with related parties align with market prices to avoid artificial profit reduction.
Common Situations and Scenarios
In daily business operations, situations often arise where qualified profit tax planning is critically important. For instance, when a company plans to distribute dividends to a foreign partner, it is essential to consider not only the profit tax (15%) but also the dividend tax (5%) and Double Taxation Avoidance Treaties. Another common scenario involves a company incurring significant representation expenses (restaurants, events). If these expenses are not properly documented or exceed the established limit, they are taxed as profit distribution. Additionally, cases where a company issues a loan to an individual or a non-resident company are frequent; under the law, this may be considered profit distribution and taxed immediately, causing an unexpected financial hit. Another scenario is inventory shortages discovered during stocktaking, which are also treated as supply and taxed under profit tax.
Georgian Legal Framework
Profit tax planning is based on the regulations of the Tax Code of Georgia. This Code defines profit tax payers, objects of taxation, and tax rates. The specifics of the "Estonian Model" are outlined in the relevant sections of the Code, which regulate profit distribution, incurred expenses, and other payments not related to economic activity. Besides the Tax Code, Orders of the Minister of Finance of Georgia and situational manuals issued by the Revenue Service are important as they clarify the practical application of legal norms. Furthermore, in the case of international transactions, International Agreements on the Avoidance of Double Taxation are decisive, as they may alter taxation rules regarding non-residents.
Step-by-Step Service Process
When hiring a specialist on the Legal.ge platform, the process proceeds in a structured manner. First, a preliminary study of the company's financial status and business model is conducted. The specialist analyzes the company's accounting records, expense structure, and planned transactions. The second stage involves identifying potential tax risks (e.g., non-economic expenses, documentation gaps). The third stage is the development of an optimal tax strategy, which may involve scheduling dividend distributions or adjusting expense policies. In the final stage, the specialist assists the company in preparing and filing monthly declarations, ensuring full compliance with legislation and protecting the client in the event of a tax audit.
Why Choose Legal.ge?
Legal.ge is the leading platform in Georgia giving you access to qualified tax lawyers and auditors. The specialists registered on our platform possess deep knowledge of the nuances of the "Estonian Model" and have years of practical experience in tax disputes and planning. Finding a specialist on Legal.ge guarantees that your business's tax strategy will be legal, secure, and maximally effective. Protect your business from unforeseen costs and utilize all opportunities granted by legislation with the help of professionals.
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