Introduction

According to the order of the head of the Revenue Service N33543 of December 29, 2022, the methodical instruction on taxation of  Free Industrial Zone Enterprise was approved.

The methodical reference explains the rules of activity of the Free Industrial Zone Enterprise, including the permitted and prohibited activities, and the rules for using tax benefits, as well as defines the tax obligations and rights within this status.

Example 1

A non-resident enterprise in a free industrial zone carries out activities allowed for a Free Industria Zone 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.

Evaluation:

For the purposes of extending the tax relief in the profit tax, it is essential that the Free Industria Zone Enterprise carries out the permitted activities in the free industrial zone and distributes the profits received from the permitted activities in the free industrial zone, therefore, the established tax relief cannot be extended to the activities of the Free Industria Zone Enterprise outside the free industrial zone.
Taking into account the above-mentioned legal norms and the fact that a non-resident enterprise through a permanent establishment in a free industrial zone carries out the activities allowed for a Free Industria Zone Enterprise, the benefit established in the profit tax by the non-resident enterprise attributed to its permanent establishment will be applied to the deduction of profit attributed to its permanent establishment according to Tax Code.

Example 2

The Free Industria Zone Enterprise provided advertising services to the non-resident enterprise and distributed the profit from the said operation as a dividend to the shareholders.

Evaluation:

According to Tax Code of Georgia, profits received by the Free Industria Zone Enterprise from the activity permitted in the free industrial zone is exempted from profit tax. 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.

Taking into account that the government of Georgia has not determined the list of types of services to be provided by the Free Industrial Zone Enterprise to non-residents and, accordingly, the list of activities allowed in the free industrial zone, therefore, the established tax relief cannot be applied to the advertising activities

Example 3

The Free Industria Zone Enterprise purchases goods outside of Georgia, assembles the purchased goods in the territory of Free Industrial Zone, and then sells the said goods in and outside Georgia.

Evaluation:

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 established tax relief will be applied to the activities of Free Industrial Zone Enterprise.

Example 4

The Free Industrial Zone Enterprise purchases goods outside Georgia and then sells them outside Georgia, so that the goods do not fall under the free zone procedure.

Evaluation

In this case, considering that the Free Industrial Zone Enterprise does not bring goods into the free zone procedure, bring goods into the free industrial zone, and take the same goods out of the zone, the activities carried out by it cannot be considered as permitted activities in the free industrial zone, and the tax relief cannot be applied to such activities.

Example 5

The Free Industrial Zone Enterprise purchased the goods from a legal entity registered under the legislation of Georgia, which does not represent the Free Industrial Zone Enterprise.

Evaluation

The use of the market price by the Free Industrial Zone Enterprise for the purposes of the 4% tax on the goods delivered to it by an entity registered under the legislation of Georgia is an obligation established by the Tax Code, and not a right. The tax should be determined from the market price of the goods.
In addition, the Free Industrial Zone Enterprise is obliged to submit to the tax authority the tax calculation for the taxable operations carried out no later than the 15th of the month following the reporting month.

Taxation of income received from the Free Industrial Zone Enterprise at the source

1. In some cases, the income received from the Free Industrial Zone Enterprise is subject to taxation by the person receiving the income, and in some cases, such income is not taxed by the person receiving the income either. In particular:

a) the dividend received from the Free Industrial Zone Enterprise in the free industrial zone is not taxed at the source of payment and will not be included in the collective income of the recipient of this dividend;

Example 6

The conditions are the same as in Example 3 and Example 4.

Evaluation

Considering that the activity carried out by the Free Industrial Zone Enterprise cannot be considered as an activity allowed in the free industrial zone, the dividend paid from the profit obtained from such activity will be taxed at the source of payment according to the general rule established by the legislation.

b) The interest received from the Free Industrial Zone Enterprise in the free industrial zone is not taxed at the source of payment and will not be included in the collective income of the person receiving this interest.

2. When paying salary to a resident employee of Free Industrial Zone Enterprise, it is not required to withhold tax at the source of payment.

3. According to the Resolution N291 of the Government of Georgia of June 15, 2017, the rule of income tax is regulated for the individual resident of Georgia hired by the Free Industrial Zone Enterprise. And the manner of taxation of wages paid to a non-resident natural person of Georgia hired by the Free Industrial Zone Enterprise is determined in accordance with the tax legislation of Georgia.

4. The employee is obliged to pay income tax on the income (salary) received as a result of employment by a resident of Georgia as a result of employment at the Free Industrial Zone Enterprise, no later than the 15th day of the month following the reporting month. In addition, he is obliged to submit the annual income tax declaration to the tax authority every year, until April 1 of the year following the reporting year.

5. The Free Industrial Zone Enterprise can, with the consent of the hired person, voluntarily fulfill the obligations of tax calculation, withholding, and payment in the budget according to the established procedure. He must notify the tax authority in advance about the assignment of tax agent functions. In addition, the measures of responsibility defined by the Code, including tax sanctions, are not applied to the performance of this function.
In such a case, the subject of tax liability is considered to be the employee, on whose behalf the Free Industrial Zone Enterprise fulfilled the obligation to pay income tax.

Example 7

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

Evaluation

In accordance with the Tax Code and the Resolution of the Government of Georgia N291 of June 15, 2017:

a) The Free Industrial Zone Enterprise is obliged to perform the function of a tax agent in relation to the salary paid to non-resident natural persons working for hire in the enterprise – to withhold the relevant tax at the source of payment and transfer it to the budget, and no later than the 15th of the month following the reporting period, to submit a declaration to the tax authority regarding the taxation of the taxes carried out.

b) A resident natural person working for hire in a Free Industrial Zone Enterprise is obliged to fulfill his tax obligation in relation to the income (salary) received as a result of hired workers in a Free Industrial Zone 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.

Example 8

The non-resident legal entity provided services to the Free Industrial Zone Enterprise. In accordance with the Tax Code, the income received by a non-resident is classified as income received from a source in Georgia.

Evaluation

In the case under consideration, the Free Industrial Zone Enterprise is obliged to perform the function of a tax agent – to withhold the relevant tax at the source of payment and transfer it to the budget, and not later than the 15th day of the following month of the reporting period, to submit a declaration to the tax authority regarding the taxation of the performed taxes.

Taxation of Free Industrial Zone Enterprise property

1. According to the Tax Code, property in the free industrial zone is exempt from property tax according to the relevant taxation object.

2. The tax relief does not apply to the land plot (or its part) transferred by a person to another person by lease, usufruct, rent, or in any other such form and/or to the buildings and structures (or their part) transferred by the enterprise/organization in the same form, except in the case, When real estate is transferred by a higher education institution established by the state and the transferred real estate is used in higher education activities and/or for providing services related to higher educational activities.

3. According to the Tax Code, the property includes taxable property and land.

Example 9

The enterprise registered in the free industrial zone of Poti has built and put into production a car mechanical components enterprise, which includes a workshop, warehouse, office, and canteen, on a selected 2000 m2 plot of land in the mentioned area.

Evaluation

The Free Industrial Zone Enterprise will benefit from property tax relief, in accordance with the Tax Code.

Example 10

The organizer of the Kutaisi Free Industrial Zone built buildings and equipment on the territory of 230,000 square meters designated for the Kutaisi Tiz.

Evaluation

The organizer of the free industrial zone will benefit from the property tax (taxable property and land) benefit, in accordance with the Tax Code.

Example 11

The organizer of the Kutaisi Free Industrial Zone leased the building and the land attached to it to the Free Industrial Zone Enterprise.

Evaluation

According to the Tax Code, the organizer will not be able to benefit from property tax relief on the said property and land plot.

Conclusion

According to the order of the head of the Revenue Service N33543 of December 29, 2022, the methodical instruction on taxation of  Free Industrial Zone Enterprise the many previously unknown topics were answered.

For more information or/and questions about the taxation of  Free Industrial Zone Enterprise please contact us, we are always ready to help you.

1. Introduction

One of the most privileged and popular statuses among other statuses provided by Georgian tax legislation is the Free Industrial Zone Enterprise (hereinafter “FIZ Enterprise” or ”FIZ Company”). Entities with this status are exempt from almost any taxes and enjoy favorable customs framework. That’s why the temptation and demand for this status are very high, but along with the benefits, it has strict restrictions and conditions to follow as well. The main purpose of this post is to get to know the FIZ Enterprise status more closely and write down the benefits it has. First of all, let’s define the Free Industrial Zone Enterprise.

2. Definition

According to Law of Georgia on Free Industrial Zones a FIZ Enterprise may be an enterprise of any legal structure and any form of ownership registered within a free industrial zone (hereinafter “FIZ Area”) according to enterprise registration norms defined by Georgian legislation.

Free Industrial Zone is the type of a free economic zone envisaged by the “Tax Code of Georgia” where the business-friendly regulations, favorable tax, and customs regulations apply. It is a special territory in Georgia exceeding 10 hectares, with defined borders and a special status granted by law. A free industrial zones are designated for economic activities for a certain period of time, and entities within the zone shall be governed under special economic and legal regime as determined by the Law.

There are five free industrial zones operating in Georgia in the following cities: Poti (sea port), Kutaisi (third largest city) and Tbilisi (capital city):

• Poti Free Industrial Zone
• Kutaisi Free Industrial Zone
• Tbilisi Free Zone
• Hualing Free Industrial Zone
• Tbilisi Technological Park

Activities within a free industrial zone shall be conducted by enterprises registered in that zone. Enterprises registered outside of free industrial zone (both Georgian and foreign) may conduct activities within free industrial zone through permanent establishments registered in that zone, except for Georgian enterprises distributing electricity, water, and natural gas, as well as providing communication and sewerage services and conducting related activities within a free industrial zone.

A free industrial zone enterprise shall conduct activities in other territory of Georgia (outside of free industrial zone) as a permanent establishment of a foreign enterprise.

3. Benefits of Fee Industrial Zone Enterprise

The main privileges of FIZ Enterprises enjoy and which makes it attractive for investors are significant tax exemptions and favorable customs framework, which are as follows:

• Corporate Income Taxes (CIT) (15%) Exempt on dividend distribution;
• Value Added Tax (VAT) (18%) Exempt on exporting and selling goods within FIZ area;
• Dividend Tax (5%) Exempt to act as an income tax agent on paid Dividends;
• Salary Tax (20%)Exempt to act as an income tax agent on paid salaries;
• Interest Tax (5%)Exempt to act as an income tax agent on paid interests;
• Property Tax (1%)Exempt on the properties being within FIZ Area;
• Reverse VAT (18%)Exempt;
• No VAT applies to goods produced in foreign countries which are imported in FIZ;
• No import tax applies to goods produced in other country which are imported in FIZ;
• No VAT applies to the transactions carried out among FIZ entities;
• Export of the goods produced in FIZ within territory of Georgia is free from Customs duty;
• Payment in the free industrial zone can be made in any currency.

The question is, if FIZ Enterprise don’t pay for all this taxes, what taxes does it pay for? Almost no taxes are left with just one or two exemptions, which may be the Income taxes on received services from nonresidents and other Corporate income taxes on operations under tax code of Georgia. For example, if the FIZ Enterprise uses the international shipping, or transportation service from nonresident entities of Georgia it should pay source income tax of 10% in Georgia, or if FIZ Enterprise has no documented expenses it should pay of 15% corporate income tax on these kind of expenses.

Please note that selling of goods produced in Georgia to the FIZ Enterprise is considered to be an export operation for the purposes of the Tax Code of Georgia and are free from VAT. This means that if Georgian entities sell their goods placed in export mode to FIZ Enterprise with proper customs declarations there will not be VAT. Otherwise, if selling of goods are made simply without customs declaration it is not treated as an export operation and will be taxed as usual.

FIZ Enterprise is not considered as a tax agent in relation to paid salary, dividend and interest and does not have to withhold income tax at the source of payment. This does not mean that the beneficiaries receiving these types income are also exempt from income tax. They have to declare these taxes themselves and pay to the budget.

Due to the above-mentioned benefits, utility fees for electricity, gas, etc. are 18% cheaper than in other territory of Georgia which is also important and very attractive factor for businesses.

4. Restrictions of Fee Industrial Zone Enterprise

We have pointed out from the outset that giving so along with so many benefits, FIZ Enterprises has strict restrictions and conditions to follow as well. Let’s first begin with one of the most important issues. There was from the beginning and it is today a record in the Tax Code of Georgia (Article 25) that –

• The FIZ Enterprise may not provide services to a person (other than a FIZ Enterprise) registered under the legislation of Georgia
• The Government of Georgia has the right to determine the types of services to be provided by a FIZ Enterprise to a non-resident (other than a permanent establishment of a non-resident in Georgia), which will be considered as a permitted activity in the free industrial zone by the FIZ Enterprise.

Based on these records, many people thought that FIZ Enterprises would be able to provide services to non-residents for the FIZ Enterprise and would be exempt from taxes. However, in 2020, the Georgian Revenue Service issued a special situational guidance where FIZ Enterprises are not allowed to provide any services because the Government of Georgia has not yet determined the types of services, which could be provided by a FIZ Company. So, we should remember that when we are talking about free economic zones or FIZ Enterprise we imply the production & processing of goods, not providing any kind of services.

The FIZ Company is prohibited from providing any kind of services to both local and non-resident entities (except to FIZ Enterprise within FIZ Area).

The following activities are prohibited within the FIZ Area and therefore for the FIZ Enterprises:

• Hotel and residential buildings;
• Import, storage, production, or/and sale of arms and munitions, defense technology;
• Import, storage, production, or/and sale of nuclear and radioactive substances;
• Import, storage, production, or/and sale of Narcotic and psychotropic substances;
• Import, storage, production, or/and sale of Excise goods (Tobacco products, Alcohol and etc. except for personal use).

A FIZ Enterprises are not allowed to purchase services from a person (other than other FIZ Enterprise) except for:

• Auto-tech services;
• Fast food service;
• Postal service;
• Medical care;
• Advertising services;
• Laboratory services;
• Design, design services;
• Expeditionary services;
• Fire services;
• Examination services;
• Cleaning and waste management services;
• Main equipment repair services
• Security services and/or services related to letting or leasing out property provided by an organizer and/or administration of the Free Industrial Zone;
• Transport, communication, sewage, audit, and/or consulting services, execution of financial transactions and/or delivery of financial services by a licensed financial institution, as well as services relating to installation, assembly, and/or construction of fixed assets;
• In addition to the listed services above, any kind of service, if the total cost of these types of services (s) (excluding VAT) does not exceed 2% of the annual income or expenditure (of its choice) of the FIZ Enterprise.

According to the Tax Code of Georgia (Article 25):

• If a FIZ Enterprise supplies goods to a person (other than a FIZ Enterprise) registered under the legislation of Georgia, the FIZ Enterprise shall pay 4% of the revenue received/receivable from the supply of such goods (if the supply of goods is made free of charge – 4% of the market price of such goods) not later than the 15th day of the month following the month in which the goods are supplied.
• If a person (other than a FIZ Enterprise) registered under the legislation of Georgia supplies goods (other than electricity, water and natural gas intended for local consumption and/or production) to a FIZ Enterprise, the FIZ Enterprise shall pay 4% of the market price of the supplied goods not later than the 15th day of the month following the month in which the goods are supplied.
• If a person (other than a FIZ Enterprise) registered under the legislation of Georgia delivers goods to a FIZ Enterprise, the market price of the supplied goods shall be used for taxation purposes.

FIZ Enterprises are isolated from other ordinary enterprises and are limited to operations with them but not completely. FIZ Enterprise can have an office and a certain part of its staff can work normally outside FIZ Area, but if it has production, it must have within Free Economic Zone.

5. Obtaining Fee Industrial Zone Enterprise Status

A free industrial zone enterprise may be an enterprise of any legal structure and any form of ownership registered within a free industrial zone according to enterprise registration norms defined by the legislation of Georgia.

FIZ Enterprise status is granted by the Georgian tax authorities as a result of the request of an authorized representative of the enterprise. To apply for this status, you have to be a Georgian enterprise incorporated by Georgian Legislation and registered in a free economic zone. To register within FIZ Area you have to contact to Free Economic Zone organizer (The five industrial zones mentioned above are in Georgia today) pay annual fee (which is not so expensive) and get a special license.

The Organizer and/or an administrator shall not be a free industrial enterprise and it must be registered in another territory of Georgia (outside the free industrial zone) as determined by the legislation of Georgia.

6. Conclusion

Georgia has a free trade agreement with the European Union which means that Georgian goods can be exported without tariffs compared to Asian goods. Therefore, the FIZ Enterprise status is a good way to produce and export goods for the EU market.

Many countries, including Georgia, have free economic zones to develop their production and economy. Although Georgia adopted the Law on Free Industrial Zones in early 2007, the Free Industrial Zones have not been as successful as expected. There are several factors and reasons for this. First of all, the tax legislation is already liberal, and it is easy to obtain entrepreneurial licenses and permits in Georgia. Also, there are already successful free economic zones in the region, including neighboring Turkey, which is difficult to compete with. Moreover, according to the law on Free Industrial Zones, an investor leases an object within a FIZ Area and does not have the right to take ownership of the object (for the period for which the Fee Economic Zone was created), which reduces its interest in FIZ Enterprise status. One of the reasons also can be that the Georgian government is not promoting it at the appropriate level.

For more information or to get help with obtaining a status contact us.