During the month of January 2023 Amendments to the tax legislation of Georgia

Kreston Georgia continues to review tax law changes and updates. This time, we offer an overview of the legislative news introduced in the month of January 2023.

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1. Changes in the orders of the Minister of Finance.

1.1. Amendment on mutual assistance in tax matters.

1.2. Change in the VAT declaration for persons with the status of a tourist enterprise.

1.3. The procedure for canceling the tax registration of a person registered as a tax payer by the tax authority was defined 

2. Changes in the orders of the head of the revenue service.

2.1. New methodical instruction on "Taxation of virtual zone person with profit tax"

2.2. New Methodological Instruction on "Free Industrial Zone Enterprise"

2.3. New N2549 and N2550 Situation Guides on Capital Increases and Decreases.

2.4. New N1517 Situational Guidance on Taxation of Funding for Injured Persons.

2.5. New N2432 Situation Guide on Taxation of Money Withdrawn from System-Electronic Gaming Account.

1. Changes in the orders of the Minister of Finance

1.1Amendment on mutual assistance in tax matters

On January 2023, 24, an amendment to Order N994 of the Minister of Finance and Instruction No. 38 was published and entered into force.¹ A new Article 38 was added after the article² Article that concerns administrative mutual assistance in tax matters, which means assistance in collecting taxes, within the framework of the obligation imposed by the Convention of January 1988, 25 or other international agreements of Georgia.

In particular, it was determined by the amendment that within the framework of the Convention of January 1988, 25 on "Administrative Mutual Assistance in Tax Matters" or the obligation assumed by Georgia under another international agreement, the competent (authorized) body of the contracting state, for the purpose of collecting the tax debt incurred in the same state, "request for assistance" "In the execution, the tax debt payment security measure specified in Chapter XIII of this rule is used.

"Request for assistance" means an application to a competent authority of a Contracting State for assistance in the recovery of a tax debt under the Convention of 1988 January 25 on "Mutual Administrative Assistance in Tax Matters" or another international agreement, which shall contain such information as the name of the competent authority of the Contracting State , the name of the tax authority receiving the request, the requisites of the taxpayer of the contracting state, the types and amount of the taxes that are subject to collection and are not disputed, the summary of the essence of the "request for assistance" and other additional information, which is determined by Part 3 of the same article.

In addition, the amount of tax debt in the "request for assistance", within which the request will be fulfilled, must be expressed in the national currency of Georgia (GEL) and must not be less than 1000 GEL. The Contracting State shall present a new "request for assistance" taking into account the minimum threshold amount mentioned in the same paragraph.

In case of full or partial fulfillment of the "request for assistance", the revenue service of the contracting state will be notified in writing about the date of collection of the tax debt, the amount of the collected amount (in GEL) and the date of transfer of the amount.

1.2Change in the VAT declaration for persons with the status of a tourist enterprise

On January 2023, 25, an amendment to the order of the Minister of Finance N996 was published and entered into force, and as a result, part IV "Amount taxable under VAT upon cancellation of the status of a tourist enterprise" was added to the appendix "A" of the VAT declaration, which is available only to legal entities with the status of a tourist enterprise.

The obligation to fill in the mentioned part of the declaration shall arise for the enterprises with the status of tourist enterprise in the event of the expiration of the term of the status or its early cancellation. In addition, in case of expiration of the status, the form is filled in the last reporting period of the calendar year (in the month of December), and in case of cancellation before the expiration of the status, the form is filled in the corresponding reporting period of the cancellation.

In the new Part IV of Appendix "A" of the VAT declaration, the amount obtained as a result of dividing the amount of turnover from the supply of hotel rooms/apartments by 1.18 during the entire period of validity of the status, which was not taxed by VAT, as it is exempted from VAT by the right of deduction, 172 of the Civil Code of Article 4, Part XNUMX, Sub-Clause "K".

Also, the mentioned form reflects the information about the VAT-taxable operations (except for the VAT-exempt operations) declared by the persons invited for the operation of the tourist enterprise and/or the hotel as a result of the operation of a specific hotel and the amounts additionally charged by the tax authority according to the said object. It does not include compensation for the delivery of assets (including hotel rooms/apartments).

1.3The procedure for canceling the tax registration of a person registered as a tax payer by the tax authority was determined

On January 2023, 16, an amendment to the Order of the Minister of Finance N996 was published and entered into force, and a new Article 7 was added to the instruction after Article 7¹ The article, which defined the rules on how to cancel the tax registration of a person registered as a tax payer by the tax authority, which implies recording the relevant status in the tax administration information system of the Revenue Service. The tax authority, if there is a relevant basis, makes a decision to cancel the tax registration for the persons subject to registration as taxpayers by the tax authority, information about which is published on the official website of the Revenue Service, in the register of taxpayers. The tax registration of the mentioned persons shall be canceled within 1 month from the submission of the relevant document to the tax authority in connection with the termination of the activity, and in the case of conducting a tax audit, no later than 1 month after the completion of the tax audit, if there is no reason to refuse the cancellation of the tax registration provided for in the same article.

Below is detailed information about the procedure for canceling the tax registration of the persons described in the above-mentioned amendment:

1. A natural person who is a citizen of Georgia (except for an individual entrepreneur) and a natural person without Georgian citizenship Tax registration is canceled from the date of the person's death. The basis for cancellation of tax registration is:

• Information provided by the State Services Development Agency/Ministry of Foreign Affairs of Georgia to the tax authority regarding the death of a person;
• The application submitted by the interested person on the cancellation of the tax registration of the deceased person, together with the person's death certificate. The death certificate, if it is issued by the authorized body of a foreign country, must be accompanied by a notarized translation into Georgian.

2. of association, partnership and other similar formation Tax registration is canceled from the date of cessation of activity by the person, and in case of tax audit, from the date of completion of administrative proceedings/judicial proceedings on the results of tax audit. In order to cancel the tax registration, the following shall be submitted to the tax authority:

• the decision of the participants on termination of activity and/or;
• Another document confirming the existence of grounds provided by the law for termination of activity.

1. of a foreign enterprise/organization, its permanent establishment, as well as a permanent establishment of a non-resident natural person, corporations, companies, firms and other similar formations created in accordance with the legislation of a foreign country Tax registration is canceled from the date of cessation of activity by the person, and in case of tax audit, from the date of completion of administrative proceedings/judicial proceedings on the results of tax audit. In order to cancel the tax registration, the following shall be submitted to the tax authority:

• legalized/apostille certified, translated into Georgian and notarized document confirming termination of activity;
• And in the event that legalization/apostille certification of the document is not required - only its notarized translation in Georgian language.

2. Diplomatic and organization with equal status Tax registration is canceled from the date of the decision made by the authorized person to terminate the activity of these persons. In order to cancel the tax registration, a document issued by the Ministry of Foreign Affairs of Georgia is submitted to the tax authority, which confirms the fact of the termination of activity by the organization with a diplomatic and equivalent status.

In addition, if the tax authority has become aware of the decision taken to terminate the activities of these persons, the tax authority has the right to cancel the tax registration of the said persons on its own initiative.

3. Public law legal entity and budgetary organization Tax registration is canceled from the date of the decision made by the authorized person to terminate the activity of these persons. In order to cancel the tax registration, the decision taken by the authorized person on the termination of the activity shall be submitted to the tax authority in accordance with the legislation of Georgia.

In addition, if the tax authority has become aware of the decision taken to terminate the activities of these persons, the tax authority has the right to cancel the tax registration of the said persons on its own initiative.

2. Changes in the orders of the head of the revenue service

2.1New methodical instruction on "Taxation of virtual zone person with profit tax"

The order of the head of the Revenue Service N2022 of December 29, 33544 approved a new methodical reference "On taxation of profits of a person of the virtual zone" by which the order of the head of the Revenue Service N2022 of March 25, 7547 on the same issue was declared invalid and which reflected additional issues identified in the practice of tax administration.

The main approach to the taxation of virtual zone persons with tax on profits remains unchanged. In particular, for the purposes of the distribution of the tax relief specified in Article 99 of the Civil Code, Article XNUMX, Sub-Clause "Ж", it is essential that the entity of the virtual zone carries out information technology activities on the territory of Georgia and receives profits from the information technologies (software products) created by it in Georgia within the scope of Georgia. Outbound delivery (including delivery as a service).

However, the approach of the tax authority has changed regarding the cases in which a person's activity should be considered an information technology activity carried out on the territory of Georgia, and accordingly, information technologies created within the framework of such activity should be considered to be created in Georgia. According to the existing approach before the change, it was essential for the purposes of taxation that the person of the virtual zone should use the labor of the person(s) hired in Georgia to create information technology, including necessarily with the appropriate profile, and the salary rate should essentially be in accordance with the wages in the labor market of Georgia according to the relevant professions. Due to such an approach of the tax authority, a number of virtual zone persons who did not have a person hired in the relevant profile (programmers), since only the resident founding natural person created the product and therefore paid dividends instead of salary, were charged taxes and sanctions as a result of the inspection, since the founder Part of the income received in the form of dividend was reclassified by the tax authority as received by a person employed in the profile section

salary and was therefore taxed at the 20% rate of income tax instead of the 5% rate on the dividend.

With the new methodical reference, the practice of tax administration in this part has changed positively and logically. In particular, software products are considered to be created in Georgia, if their creation is essentially carried out directly by the employee(s) and/or resident founder(s), among them, it is possible for a virtual zone person to purchase services for the creation of software products. In addition, even in the case when a person creates information technologies only through a resident founder and does not have hired persons with the appropriate profile, it will be considered that his activity complies with the requirements of the Law of Georgia "On Information Technology Zones", as well as the requirements of the Code and is fulfilled by Article 99 of the Code The requirements established for benefiting from the profit tax exemption determined by subparagraph "Ж" of the first part of the article. Accordingly, the dividend issued to the resident founder will no longer be subject to requalification as salary by the tax authority.

Another important approach was formed with the new methodological guidance. If the person of the virtual zone supplies the information technology outside of Georgia, which was created in the period before the status of the person of the virtual zone was granted, it is important to determine whether the distribution of the profit received from the said supply will be exempted from the profit tax. In this regard, in the old methodological guidance, there was a general note that for the purposes of tax relief it is essential that the creation and supply of information technology takes place under the status of a virtual zone person. In the new methodical instruction, the circumstance was highlighted that in any case, the profits received from the delivery of the software product created before the status of the person of the virtual zone, after the person has received the status, outside the borders of Georgia, the benefit of the profit tax established by the code will be applied. In particular, in the new methodological reference, such an approach is used for the case when the software product was created by a person before obtaining the status of a virtual person and provided it with a license to use it to clients operating outside the borders of Georgia, while further support services are an integral part of the contract for the temporary use of the software, for which the clients pay monthly license fee. As for the software product

Further support and services are the most important component of using this product, it will be considered that the income received by the legal entity in exchange for the license to use such product after receiving the status is received in exchange for the information technology provided after receiving the status, and the corresponding profit distribution will be exempted from profit tax.

2.2New Methodological Instruction on "Free Industrial Zone Enterprise"

As we know, the activity of a free industrial zone enterprise (hereinafter, the Tiz enterprise) is regulated by the Tax Code of Georgia (hereinafter, the Tax Code of Georgia), the Customs Code of Georgia, the Law of Georgia "On Free Industrial Zones", Resolutions N463, N131 and N291 of the Government of Georgia, as well as By order N996 of the Minister of Finance. However, for the purpose of additional clarifications, on December 2022, 29, the Revenue Service approved a new methodological instruction on the "free industrial zone enterprise", which explains the rules of the free industrial zone enterprise, including the permitted and prohibited activities, the rules for using tax incentives, and also defines Tax obligations and rights within this status. In our publication, we will offer you the important aspects of the methodical reference, and the full methodical reference can be found at the attached link https://rs.ge/OrdersoftheHeadoftheRevenueService?cat=1&tab=1

According to the Law of Georgia "On Free Industrial Zones", a free industrial zone is a type of free zone stipulated by the Customs Code of Georgia, which is a part of the territory of Georgia with defined borders and a special status granted by law, and where additional conditions and tax benefits apply. And, the enterprise of Tiz can be any organizational-legal and ownership form of enterprise, which is registered in the free industrial zone in accordance with the norms of enterprise registration established by the legislation of Georgia. In addition, enterprises registered outside the free industrial zone (both registered in Georgia and foreign enterprises) carry out their activities in the free industrial zone through permanent establishments registered in this zone, except for the distribution of electricity, water, natural gas in the free industrial zone,

Georgian enterprises providing communication and sewerage services and related activities. Meanwhile, the Tiz enterprise operates in another territory of Georgia (outside the free industrial zone) as a permanent establishment of a foreign enterprise.

Below we discuss some important examples that are provided in the new methodological guidance:

Example 1:

A non-resident enterprise in a free industrial zone carries out activities allowed for a Tiz enterprise (production of perfumery products) through a permanent establishment registered in this zone. The permanent establishment of the non-resident enterprise has transferred the profit received from its activities in cash to the non-resident enterprise.

Rate:

In accordance with the 97st and 3rd parts of Article 98 of the Civil Code, one of the objects of taxation with profit tax for a permanent establishment of a foreign enterprise is the distributed profit. And, XNUMX of the Civil Code¹ According to part 3 of the article, the tax paid to the non-resident enterprise in monetary or non-monetary form from the profits obtained as a result of the activity of this permanent establishment is considered as profit distributed to the permanent establishment of the non-resident enterprise (withdrawal of the profit attributed by the non-resident enterprise to its permanent establishment). In accordance with the same section, the permanent establishment shall be entitled to the profits that it could have received as an independent enterprise engaged in the same or similar activities and under the same or similar conditions.

Whereas, according to subsection "n" of the first part of Article 99 of the Civil Code, the distribution of profits received from activities permitted by the Tiz enterprise in the free industrial zone and expenses incurred/taxes incurred within the same activity are exempted from profit tax and considering that the non-resident enterprise is a permanent establishment through the free industrial zone carries out activities allowed for the Tiz enterprise, as given in the example, the withdrawal of the profit attributed to its permanent establishment by the non-resident enterprise will be subject to the profit tax relief established by Article 99 of the Civil Code.

Example 2:

The Tiz enterprise provided advertising services to the non-resident enterprise and distributed the profit from the said operation as a dividend to the founder individuals.

Rate:

In accordance with Article 25, Part 7 of the Civil Code, the tax relief can be used only in the case and for the services that will be determined by the resolution of the Government of Georgia. Considering that the government of Georgia has not determined the list of types of services to be provided by the Tiz enterprise to non-residents and, accordingly, the list of activities allowed in the free industrial zone, the provision of services by the Tiz enterprise to non-residents should not be considered as an activity allowed in the free industrial zone. Thus, the profit tax relief established by Article 99 of the Civil Code cannot be applied to him.

Example 3:

The Tiz enterprise purchases goods outside of Georgia, assembles the purchased goods in the territory of Tiz, and then sells the said goods in Georgia and beyond.

Rate:

Taking into account that the free industrial zone is a type of free zone provided for by the Customs Code of Georgia, and according to the customs legislation of Georgia, it is possible to consider the free zone as permitted, for example, the importation, storage and export of the same goods from the free industrial zone, including any kind of Without going through the processing or production process, therefore, the entry, storage and export of the same goods from the free zone by the Tiz enterprise will be considered as permitted activities in the free industrial zone, and the distribution of profits from such activities will be applied to the distribution of profits established by Article 99 of the Civil Code Profit tax relief.

Example 4:

The Tiz enterprise purchases goods outside Georgia and then sells them outside Georgia, so that the goods do not fall under the free zone procedure.

Rate:

The purchase and delivery of foreign goods for the purposes of tax relief by the Tiz enterprise without entering the free zone procedure, according to Article 99 of the Civil Code, is not considered an activity allowed in the free industrial zone, and therefore, the distribution of profits from such activities cannot be applied to the distribution of profits from such activities. Profit tax relief established by Article E.

Also, based on the same argument, the relief provided for in Section 131 of Article 9 of the Civil Code cannot be applied and the distributed dividend will be subject to taxation at the source of payment at the rate of 5% income tax.

Example 5:

The Tiz enterprise purchased the goods from a legal entity registered under the legislation of Georgia, which does not represent the Tiz enterprise.

Rate:

According to Part 25 of Article 3 of the Civil Code, when delivering goods (except electricity, water and natural gas intended for on-site consumption and/or production) to a TIS enterprise by a person registered under the legislation of Georgia (except for a TIS enterprise) The enterprise is obliged to pay 4% of the market price of the delivered goods no later than the 15th day of the month following the month of delivery of the goods.

Accordingly, in the mentioned case, it is a direct requirement of the legislation that the Tiz enterprise should tax the market value of the goods delivered to it by a person registered under the Georgian legislation. In addition, Article 18 of the Civil Code defines that the market price of goods is considered to be the price that is formed in the goods market as a result of the mutual impact of the demand and supply of identical (or in its absence - similar) goods and on the basis of the transaction concluded in the relevant market between the persons who are in accordance with this Code. According to Article 19, there are no mutually dependent persons.

Based on the above, the Tiz enterprise is obliged to tax the market price of the goods delivered to it by a person registered under the legislation of Georgia at the rate of 15% no later than the 4th of the month following the reporting month.

Example 6:

The Tiz enterprise has paid salaries to both resident and non-resident physical persons of Georgia working for hire in the enterprise.

Rate:

In accordance with Article 154, Part 153, Sub-Clause "AA", Article 9, Part 2017 of the Civil Code and Resolution N15 of the Government of Georgia dated June 291, 15, the Tiz enterprise is obliged to comply with the wages paid to non-resident natural persons employed in the enterprise The function of the tax agent is to withhold the relevant tax from the source of payment and transfer it to the budget, and no later than the XNUMXth of the month following the reporting period, submit the relevant declaration to the tax authority.

In addition, a resident natural person working for hire in a Tiz enterprise is obliged to fulfill his tax obligation in relation to the income (salary) received as a result of hired work in a Tiz enterprise - to pay income tax every month, no later than the 15th of the month following the reporting month and by April 1 of the following year. to submit the annual income tax declaration to the authority (except when the Tiz enterprise, voluntarily and with the consent of the employee, fulfills the obligations of the tax agent and has declared this to the tax authority).

Example 7:

The non-resident legal entity provided services to the Tiz enterprise, and the income received by the non-resident, in accordance with Article 104 of the Civil Code, belongs to the income received from the source in Georgia.

Rate:

According to Article 134 of the Civil Code, income received by a non-resident from a source in Georgia, which does not belong to a permanent establishment of a non-resident registered in Georgia for tax purposes, is taxed

Without deductions at the source of payment. In addition, according to subsection "c" of the first part of Article 154 of the Code, the withholding tax at the source of payment is entrusted to the tax agent who is a legal entity, an enterprise/organization or an entrepreneurial natural person, in particular, a person who pays the amount defined by the first part of Article 134 of the Code payments.

Accordingly, in the case under consideration, the Tiz enterprise is obliged to perform the function of a tax agent - to withhold and transfer the relevant tax to the budget at the source of payment, and to submit a declaration to the tax authority no later than the 15th of the month following the reporting period.

Example 8:

The enterprise registered in the free industrial zone of Poti has selected 2000 m² On the plot of land, he built and put into production a factory of mechanical components of automobiles, which includes a workshop, a warehouse, an office and a canteen.

Rate:

The Tiz enterprise will benefit from property tax relief, in accordance with subsection "c" of the first part of Article 206 of the Civil Code.

Example 9:

The organizer of Kutaisi Free Industrial Zone allocated 230m for Kutaisi Tiz² Buildings were built in the territory and equipped with appropriate equipment. Also, the organizer of the Kutaisi Free Industrial Zone leased another building in this industrial zone along with the attached land to the Tiz enterprise.

Rate:

The organizer of the free industrial zone will benefit from the property tax on the first property (constructed building and land) in accordance with subsection "c" of the first part of Article 206 of the Civil Code, according to which the property in the free industrial zone is exempt from property tax.

And, the organizer cannot benefit from the property tax exemption for the property and land leased by him, in accordance with Article 206, Part 2 of the Civil Code

Accordingly, according to which, the property tax relief established by Article 206 of the Civil Code does not apply to a plot of land (or its part) transferred by a person to another person by lease, usufruct, rent or in any other such form and/or a building transferred by an enterprise/organization in the same form - on buildings (or their part).

2.3 New N2549 and N2550 Situation Guides on Capital Increases and Decreases

On January 2023, 12, two new situational guidelines were published, which describe the issues of taxation of capital increase/decrease operations, while the capital increase/decrease is not registered in the register of entrepreneurs and non-entrepreneurial (non-commercial) legal entities. Let's briefly review both of them:

1) In 100-2021, enterprise A, the owner of a 2022% share, contributed money to the capital of LLC B, which was founded by it, and within the framework of the contribution made in 2022, A reduced the capital of LLC B. Capital increase/decrease is not registered in the register of entrepreneurs and non-entrepreneurial (non-commercial) legal entities, although the decisions of the partner are drawn up and relevant accounting procedures are performed.

In such a case, the reduction of the capital of the enterprise within the scope of the contribution and the disbursement of money to the partner, despite the fact that the capital increase/decrease is not registered in the relevant register, is not considered as profit distribution and therefore will not be taxed.

2) The owner of 100% share registered as a VAT payer ind. In 2022, entrepreneur A contributed 2021 GEL commercial real estate to the capital of LLC B, founded by him in 120,000, which was registered in the name of LLC B in the register of rights to real estate. The capital increase is not registered in the register of entrepreneurs and non-entrepreneurial (non-commercial) legal entities, although the partner's decision has been drawn up and relevant accounting procedures have been completed.

In such a case, the transfer of real estate by A to LLC B, despite the fact that the capital increase is not registered in the relevant register, is not considered a supply of goods for VAT purposes and the transaction is not subject to VAT.

2.4New N1517 Situational Guidance on Taxation of Funding for Injured Persons

Another new situation guide was published on January 2023, 12, within the framework of socio-economic support for the population affected by the hostilities in Ukraine.

Against the background of the developments in Ukraine, the state bodies of foreign countries and international organizations are providing financing of socio-economic assistance to the population of foreign countries who entered Georgia due to hostilities.

If an organization registered in Georgia (a(a)ip) or a representative office of a foreign A(a)ip within the framework of the mentioned financing will perform only the role of an intermediary, which implies the obligation to transfer the money received by it to another person, and at the same time, the individuals who need such assistance identified are present and meet the established criteria for receiving aid, then neither the individuals receiving the money nor the tax-giving A(a)ip will not incur tax liability.

2.5New N2432 Situation Guide on Taxation of Money Withdrawn from System-Electronic Gaming Account

Another new situational guidance published on January 2023, 12 deals with the taxation of withdrawals from a system-electronic gaming account.

The factual situation is as follows: a natural person participating in gambling and/or winning games arranged in a system-electronic form has won the jackpot. In addition, he was given a cash prize for taking a prize place in the ranking (in the case of the "Leaderboard") and also a jackpot bonus in the double amount of the jackpot.

within the framework of the action publicly announced by the person (organizer) arranging the game. Both the won jackpot and the jackpot bonus amount and the funds received from the leaderboard were credited to the individual's system-electronic gaming account.

In such a case, the income received in the form of a jackpot based on the conditions fulfilled by the player/the result achieved is considered as the profit received from the relevant game. Accordingly, in case of withdrawing the mentioned amount from the gaming account, it will be taxed at the source of payment at the rate of 2%, Article 81, 3 of the Civil Code² According to the section.

As for the awarding of prizes (jackpot bonus, as well as leaderboard cash prize) to the player within the campaign, this is a reward that is free of charge for the recipient. Accordingly, the transfer of such prizes (if they exceed 1000 GEL) is subject to income tax at the source of payment, based on subsection "m" of the first part of Article 154 of the Civil Code at a rate of 20%. In addition, in case of depositing the said funds into the gaming account, the participant's withdrawal will also be subject to a 2% tax at the source of payment.

 

Ltd Creston Georgia

Managing Partner:  Davit Papiashvili

Head of Tax Audit Department: Chabukiani from Rusu