During the month of January 2024 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 2024.

Table of Contents

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

1.1 Combined income and deductions of the banking institution, credit union and microfinance organization 

1.2 Withholding and profit tax declaration form for persons engaged in gaming business 

1.3 Change in the rule of cancellation of registration as a VAT payer 

1.4 Change in commodity codes 

1.5 Change in the rule of write-off of commodity-material values 

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

2.1 New Situational Guidelines 

 

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

1. 1.1. Combined income and deductions of the banking institution, credit union and microfinance organization

On January 2024, 17, an amendment to the "Tax Administration" instruction approved by Order No. 996 of the Minister of Finance was published and entered into force immediately after publication. The change refers to the procedure for filling the annual profit tax by organizations of the financial sector.

According to the amendment, the new edition of Article 41, Clause 8 of the Order "A", according to which the banking institution, credit union,  The amount shown by the microfinance organization in line 2023 of the declaration (combined income) for the reporting period of 15:

AA) increases with the interest income that is not recognized in the consolidated income of the accounting periods until 2023 and is not subject to reflection in the consolidated income in the following accounting periods according to the International Financial Reporting Standards (IFRS);

A.b) increases as a result of the cancellation of the rule of deducting reserves for possible loan losses from joint income, effective until January 2023, 1, with taxable profits/income received as a difference in reserve balances;

A.c) is reduced by the interest income that was recognized in the consolidated income of the reporting periods until 2023 and is subject to reflection in the consolidated income in the following reporting periods according to the International Financial Reporting Standards (IFRS).

The essence of the above-mentioned change is to include in the joint income the incomes not disclosed in the declarations of the accounting periods until 2023 by the mentioned persons, and also to prevent the inclusion of the expenses disclosed before 2023 in the 2023 profit tax declaration. The aforementioned risks were caused by a well-known change introduced into the Tax Code of Georgia, according to which, from January 2023, 1, the joint income and expenses of the aforementioned persons were recorded from the general rules established by the CSC to the rules established according to the International Financial Reporting Standards (IFRS). Here we remind you that the banking institution, credit union,  As a result of the repeal of the rule in effect until January 2023, 1 on the deduction of reserves for possible loan losses from the joint income of the microfinance organization, 2023  Taxable profit/income earned in the form of difference in reserve balances arising during the accounting period of the year is taxed at 15%.

In addition to the above, subsection 112 was added to Article 68 of the order, according to which, banking institution, credit union,  In relation to the loans issued by the microfinance organization, for which in accordance with the International Financial Reporting Standards (IFRS) the loan is subject to accounting at fair value and no reserves for possible losses are created, the loss received from the impairment of the loans is deducted from the joint income as an expense related to the receipt of joint income and subject to deduction according to the Tax Code of Georgia in accordance with established general rules.

1. 1.2. Withholding and profit tax declaration form for persons engaged in gaming business

On January 2024, 30, an amendment to the "Tax Administration" instruction approved by Order No. 996 of the Minister of Finance was published and its effect was extended to legal relationships arising from January 2024, 1.

The above-mentioned change is caused by the change introduced in December 2023 in the already well-known Georgian Tax Code, according to which the regime of profit and income tax taxation of gaming machine operators (who do not engage in the mentioned activity in a system-electronic form) was determined, and the system-electronic game operator was also changed. The rate of taxation of winnings and income tax of individuals and the rate of taxation of income tax at source on withdrawals made by players. You can get a detailed overview of the mentioned change in the publication prepared by us for the month of December 2023.

According to the above-mentioned change, in order to bring it into compliance with the norms of the SSC, the form of the declaration of profit and taxes to be withheld at the source of payment of persons engaged in gaming business and the manner of their filling have been changed.

1.1.3. Change in the rule of cancellation of registration as a VAT payer

On January 2024, 22, an amendment to the "Tax Administration" instruction approved by Order No. 996 of the Minister of Finance was published and entered into force immediately after publication. In particular, the amendment concerned Article 47 of the said order, which regulates the procedure for canceling the registration of a taxpayer as a VAT payer.

According to the above-mentioned change, it was determined that the registration as a VAT payer is canceled not only after the publication of the court's ruling on the opening of the bankruptcy regime, but also, the registration as a VAT payer is also canceled after the publication of the court's notice of admissibility of the application for insolvency.

In particular, according to the new edition of Article 47, Clause 3, Sub-Clause "D",  Registration as a VAT payer is canceled upon the opening of the bankruptcy regime in accordance with the law of Georgia "On Rehabilitation and Collective Satisfaction of Creditors" - from the publication of the decision on the admissibility of the declaration of insolvency issued by the court and the opening of the bankruptcy regime.

1. 1.4. Change in commodity codes

On January 2024, 26, an amendment to the "Tax Administration" instruction approved by Order No. 996 of the Minister of Finance was published and entered into force immediately after publication. In particular, the change affected the mentioned order No. III-19³ Annex defining the types of works of art, collectibles or antiques for VAT purposes. In addition, the above amendment affected Order 77¹_, 77², 78, 79, 79¹, 79²_, 80¹, 81² and Article 112, which determines the excise duty on certain goods and the rates of taxation on said goods.

As you know, from January 2024, 26, the "National Commodity Nomenclature of Foreign Economic Activities" prepared on the basis of the 2024 edition of the International Convention "On the Harmonized System of Commodity Description and Coding" approved by the Order No. 26 of the Minister of Finance of Georgia of January 21, 2022 came into force. and the SES ESN approved by the Minister of Finance on November 2020, 18 was cancelled. Accordingly, from the named period, the identification and classification of goods should be carried out according to the new SES ESN.

The purpose of the change in the instruction approved by the order of the Minister of Finance No. 996 was to bring the said instruction into compliance with the new SES ESN. Accordingly, in the above-mentioned articles of Order No. 996, commodity codes were changed and brought into compliance with the new SES ESN.

1. 1.5. Change in the rule of write-off of commodity-material values

On January 2024, 12, an amendment to the instruction approved by the order of the Minister of Finance No. 994 was published and entered into force on January XNUMX, XNUMX - "Concerning the conduct of ongoing control procedures, write-off of goods and material values, repayment of recognized tax debts, implementation of measures to ensure the payment of tax debts, approval of the procedure for the prosecution of violations of law".

The change affected Chapter VIII of the Order, which regulates the procedure for write-off of commodity-material values. 37 was added to the mentioned chapter²²Article, according to which the taxpayer is entitled, without applying to the Revenue Service, to write off the expired and/or unfit for use or further delivery of the goods and material values ​​purchased and/or imported by him and within the scope of fulfilling the obligations stipulated by the Waste Management Code, Provided free of charge to the extended producer responsibility organization (EPO). Such goods and material values ​​include the following goods:

• batteries and accumulators - "On the approval of the technical regulation on waste management of batteries and accumulators" in accordance with the technical regulations approved by the resolution No. 2020 of the Government of Georgia of May 25, 324;
• tires - "On the approval of the technical regulation on tire waste management" in accordance with the technical regulation approved by the resolution No. 2020 of the Government of Georgia dated May 25, 325;
• Electrical and electronic devices - "On the approval of the technical regulations on waste management of electrical and electronic devices" in accordance with the technical regulations approved by the Resolution No. 2020 of the Government of Georgia of May 25, 326;
• oils - "On the approval of the technical regulations for the management of waste oils" in accordance with the technical regulations approved by the resolution No. 2020 of the Government of Georgia dated May 25, 327.

In addition, it is allowed to write-off by a person in the tire section, provided free of charge to the organization:

      a) by the importer Imported during the previous calendar year Used tires Not more than quantity/purchase value 5%and, if the person is registered in the current calendar year, in the amount of no more than 5% of the number/purchase value of used tires imported during the current year, in total during the calendar year;

b) by the importer Imported during the previous calendar year new tires not more than 0,5% of the quantity/purchase value, and if the person is registered in the current calendar year, not more than 0,5% of the quantity/purchase value of new tires imported during the current year, in total during the year;

c) "Regarding the approval of the technical regulation on tire waste management" by the resolution No. 2020 of the Government of Georgia of May 25, 325, under the subparagraph "m" of the first paragraph of Article 3 of the technical regulation provided by the operator (producer, distributor, collection points and centers, collector, recycler or other type of processing operator ((except importer)) in the amount of 0,5% of the total number of tires/purchase value (without VAT) purchased during the previous calendar year, And if the person is registered in the current calendar year, in the amount of not more than 0,5% of the total number of tires (new and used) purchased during the current year/purchase price (without VAT), in total during the calendar year.

With the implemented change, the basis for the write-off of commodity values ​​is the document signed by the taxpayer with the producer's extended liability organization, which confirms the transfer of the corresponding commodity values. The taxpayer is obliged to submit the new appendix N10 to the tax authority in electronic form no later than 24 working days after signing the document confirming the transfer of the SMFs signed with the organization⁷ in the form of an authorized user page of the Revenue Service.

In relation to tires, the general rule of write-off of goods-material values ​​applies to write-off scraps in an amount greater than the percentage rate determined by the change (5%, 0,5%). In this case, the person from the side of the authorized user must submit a statement - "Confirmation of the document of write-off of expired and/or unusable commodity-material value".

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

   1. 2.1. New Situational Guidelines

On January 2024, 25, two new situational guides were published:

• N1519 Situation manual, which explains the income tax rate at which the additional income received from the sale of commercial space used for residential purposes should be taxed.
• N1434 Situation manual, which explains the principle of accrual of estimated property tax for a non-resident person who does not have Georgian citizenship, but owns real estate in the territory of Georgia.

Below is a detailed discussion of each of them.

N1519 – Realization of space used for residential purpose

The given situational guide focuses on the fact that in case of taxation of the surplus received by the supply of the apartment/house, for the purpose of determining the tax rate, it is not the registered status of the property, but its actual purpose that is important.

As you know, according to Article 81 of the Civil Code, the taxable income of an individual is taxed at 20%, except in exceptional cases. Such exceptional cases include surplus income earned by an individual from the supply of a residential flat/house and land attached to it, and such income is taxed at 5%. And the additional income received from the supply of a non-residential (commercial) flat/house and the land plot attached to it is taxed in the usual manner, i.e. at 20%.

In addition, according to subsection "f" of part 82 of Article 1 of the Civil Code, a residential apartment/house owned by a natural person for more than 2 years with the land attached to it and also an asset owned for more than 2 years are exempted from income tax. (if 2 years have passed from the moment of its use in economic activity to its delivery), the surplus received by delivery.

According to the example given in the situational guide, if a natural person sold a property owned for less than 2 years, which is recorded as a commercial property in the extract from the public register, although the said property is used by the owner as a residential property, which was confirmed during the tax audit against this person, as well as In the event of a tax dispute, the surplus arising from the sale of such property is taxed at the rate of 5%. The mentioned approach is based on subsection "b" of part 73 of Article 9 of the Civil Code, which gives priority to the content of the operation over its form.

In addition, in the situation manual we have an indication that it does not regulate the issue of the origin of the tax liability in VAT. As you know, for VAT purposes, the supply of a residential apartment/house is not subject to VAT in most cases, while a commercial building is subject to VAT (subject to a threshold of 100 GEL). Accordingly, we think that the situational guidance, on the one hand, adds more clarity to the issue of taxation of real estate sales with income tax, however, on the other hand, the indication that it does not regulate the taxation of the same issue with VAT, raises questions and ambiguities for taxpayers. This reference raises the doubt that the supply of residential space, if it is recorded as a commercial space in the public registry extract, may be taxed by the tax authorities with VAT, regardless of the content of the economic operation, which does not correspond to its form.

In addition, we read in the situation manual that a natural person must submit an annual declaration for the purpose of taxation of the sale of space, which is not in accordance with the recent requirements of the tax legislation. In particular, from January 2024, 1, an amendment came into effect and part 153 was added to Article 12 of the Civil Code, according to which, in case of receiving excess income by providing property/asset within the scope of non-entrepreneurial activity, a natural person is obliged to submit a declaration on income tax to the tax authority no later than the reporting month. on the 15th of the following month, instead of the 1st of April of the following year.

N1434 – property tax on property owned by a non-resident

According to the new approach, the Revenue Service will charge property tax at a higher rate to non-resident natural persons who do not have Georgian citizenship, who own property subject to property tax in the territory of Georgia, in case of failure to submit a property tax declaration, and demand payment of said tax.

As it is known, according to subsection "c" of Article 201, Part 1 of the Tax Code, a natural person is taxed with property tax (except for land):

• real estate (including unfinished construction);
• yacht, boat;
• helicopter, airplane;
• light vehicles;
• other property.

Both resident and non-resident natural persons (regardless of citizenship) who own the above-mentioned property in Georgia are subject to property tax, if the income of such natural persons (their family) exceeds 40 GEL during the calendar year. In case of recording income over 000 GEL, taxation is done from the market value of the property:

• For families with income from 40 to 000 GEL, at the rate of 100% to 000% of the market value of the property.
• For families with an income of 100 GEL or more, the market value of the property -  at a rate of 0.8% to 1%.

It is known that in general, the above-mentioned income of a natural person includes all types of income, including both those received from sources in Georgia and those received from sources not in Georgia.  M.S. Without taking into account the tax benefit (except for non-resident citizens of Georgia, in which case only local income is taken into account).

Therefore, when calculating the income of a non-resident natural person for estate tax purposes, generally all types of income should be taken into account. However, it should be noted that unlike resident natural persons, information about the incomes of non-resident natural persons is less available to the Revenue Service, therefore, in case of failure to submit a property tax declaration by a non-resident natural person, the Revenue Service considers that the income of such a non-resident natural person exceeds 100 GEL, as a result, the Revenue Service Non-resident natural persons who, for example, own an apartment or a house in Georgia, will be taxed at the maximum rate if they do not submit a declaration.  (from 0.8% to 1%) and requires the payment of property tax on properties assessed at the highest rate.

In the case of later submission of the annual property tax return, the estimated property tax will be subject to reduction, however, in this case, the person may be subject to appropriate sanctions. Although there is no mention of the sanction in the situation manual.

As a result, non-resident natural persons who own the above-mentioned property in Georgia should take into account all of the above-mentioned and themselves should timely declare and pay the above-mentioned tax or properly substantiate that their income during the calendar year did not exceed 40 GEL.

Creston Georgia Ltd

managing partner                                                             Davit Papiashvili

Head of Tax Audit Department                     Chabukiani from Rusu