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.