Pay 1% with Small Business Status Instead of 20% Tax! Act Now!
We bring you below, options for reducing your tax liabilities by sorting out your Georgian tax situation sooner rather than later.
How most freelancers fail is by coming to Georgia and not doing anything. As a result, most discover at the time of tax filing that all of their previous year’s income will be taxed at the full 20%. And that can be a hard pill to swallow.
But the few smart ones who consider their options in advance can often reduce that tax liability to as little as 1%.
The key here is registering for Small Business Status.
Who is granted the status of a small business
Small business status can be granted to an individual entrepreneur, regardless of whether he or she is required to register as an individual entrepreneur.
- If a natural person is not registered as an individual entrepreneur and intends to start an entrepreneurial activity:
- He/she is obliged to be registered as an individual entrepreneur in the register of entrepreneurial and non-entrepreneurial (non-commercial) legal entities;
- After registration, in order to be granted the status of a small business, a natural person is entitled to apply to the tax authority.
- If a natural person wants to carry out scientific or artistic activities, he/she applies to the tax authority:
- For tax registration purposes;
- For the purpose of granting a status of a small business.
Income taxable for a small business and rate
- Taxable income for small businesses consists of income earned from a Georgian-based source.
- Taxable income of a person having the status of a small business shall be taxed at 1%.
- Taxable income of a person having the status of a small business shall be taxed at 3% if his/her gross income received from the economic activities has exceeded GEL 500 000 during a calendar year (from the beginning of the month of excess to the end of the same calendar year).
- The calculation of the 500,000 GEL taxable income margin received by a small business during the calendar year does not take into account the income received as a salary by a small business and the types of income defined by a Georgian government decree, which is not taxed under a special tax regime and is subject to income tax.
The status of a small business shall be revoked if:
- A person applies to a tax authority with this request before the end of the calendar year;
- The gross income received from the economic activities of a person according to two calendar years does not exceeded GEL 500 000 in each calendar year;
Don’t Qualify for Small Business Status? Consider an LLC.
Naturally, many people won’t qualify for the Small Business Status described above, mostly due to exceeding the maximum income threshold or performing restricted activities.
Doing nothing and continuing to earn income as a Natural Person is the worst possible strategy.
Instead, you should consider registering a company (an LLC), and transferring your income there.
After all, incorporating here is a super quick process (usually 1-2 business days) and very cheap (less than $400 altogether, including professional help), and much of the process done for you.
The benefits of this are plentiful:
While the total tax leakage on funds taken out is going to be 20% in both cases (20% Personal Income Tax in the case of operating as a Natural Person, or 15% Corporate Income Tax + 5% Dividend Tax in the case of an LLC), the big difference is in the possibilities of tax deferral.
In short, Georgia employs the “Estonian model” of business taxation, which means that your profits are only taxed when paid out (some rare exceptions apply), and re-invested profits are free from taxation.
In practice, this means that any cash that you invest into assets, into growing your business, or indeed just keep in your company’s bank account as cash, will all be completely tax-free. In the case of investments, for example, your investment principle will be much larger as you can defer your tax indefinitely.
As a Natural Person, all of your business income will be subject to 20% taxation, without the ability to deduct any expenses.
An LLC, on the other hand, can deduct nearly all business-related expenses and not pay tax on that amount. Are you engaging in business travel? Using a part of your home as your office? Paying for online services? All of that would likely qualify as legitimate business expenses.
Limited Liability & Protection
As its very nature implies, an LLC (short for Limited Liability Company) provides you with limited liability.
This means that should a client, a supplier, a partner, or anyone else sue your business and win, their claim will only be toward the assets of your company, and nothing more.
However, in the case of operating as a Natural Person, their claim will be towards all of the assets that you own, anywhere in the world.
That’s something that will make a bigger difference to some than to others, but “better safe than sorry” is an excellent mantra to abide by in any case.
If you’re an expat in Tbilisi, Georgia, who’s spent long enough time here to trigger tax residency and whose income originates in any part from doing any work or providing any services (including managing a company that does this), then the odds are incredibly high that your income will be subject to the full 20% taxation rate.
That tax burden can be reduced significantly, but you’ll need to act fast as nothing can be done retroactively for income already generated.