1. Introduction

In order to attract foreign investment and boost the economy chapter XII of the Tax Code of Georgia offers a special taxation regime for small business entrepreneurs, which imposes significant tax benefits. In general, according to Georgian lax legislation, the income of a natural person is taxed at 20% (with some exceptions) tax rate. However, in case of Small Business Entrepreneur tax certificate, personal income tax rate reduced to 1-3%.

2. The terms and conditions of granting the 1% Tax Rate Small Business Entrepreneur status

Tax agency grants the 1% tax rate small business entreprenur status, in particular the Revenue Service of Georgia. If it approves the application, issues a small business certificate within a reasonable time after receiving the application.
The status of a small business is granted to a person from the first day of the month following the month of the application for the status of a small business to the tax authority and the person is considered to have the status from that date.

The Small Business Certificate is issued for life and is valid unless the small business status of the individual has been revoked.

An individual must meet the following conditions for the status of a small business entrepreneur:

List of prohibited activities not applicable for the status of a small business:

In addition, to the above-mentioned activities, the legislation also establishes a list of activities in the case of which the income received by the small business individual entrepreneur taxed at 20% instead of 1% tax rate. Consequently, a natural person with the status of a small business, in addition to prohibited activities, can carry out several activities under the general rule and special tax regime at the same time, including receiving a salary from employment.

Types of income not applicable for the special tax regime:

3. Taxation of 1% Tax Rate Small Business Entrepreneur

In general, taxable income of small business is taxed at 1%. However, if the gross income from economic activities exceeds GEL 500,000, tax rate increases to 3%. A person with the status of a small business is taxed at a rate of 3% from the beginning of the relevant month of fixing the excess of the GEL 500,000 income limit until the end of the calendar year.

Example: George has been granted the status of a small business and carries out economic activities, in particular, he owns a “mini market”, where he is engaged in food retail trade. The taxable income received from this activity on October 20, 2019 exceeded GEL 500,000.

Analysis: Taxable income from trade by small businesses in Georgia is subject to special regime taxation, even though its income exceeds GEL 500,000. From January 1, 2019 to September 30 of the same year, the taxable income from trade in Georgia will be taxed at the rate of 1% set for small businesses, and the income received from October 1 until the end of the calendar year – at the rate of 3%.

1% Small business entrepreneurs file tax returns on monthly basis. The small business exemption applies only to income tax and it normally pays other taxes as required by law, including VAT and withholding tax.

Salaries paid by small businesses up to GEL 6,000 during the calendar year are not taxable at the source of payment as a withholding tax if there is one of the following conditions: a) Person was registered as an individual entrepreneur and was granted the status of a small business during the same calendar year; b) Total income received by small business entrepreneur during the previous calendar year does not exceed GEL 50,000.

The following measures of current tax control may be applied to persons with small business status:

• Control procurement of goods / services
• Visual inspection
• Control over observance of rules for using cash registers
• Time study
• Taking inventory

Requirements for entrepreneurs with small business status:

• Keep a special accounting journal, including in electronic form
• Use a cash register when receiving cash
• Use the consignment note when transporting and / or delivering goods
• Losses received during the tax year will not be carried forward to the following year unless a special tax regime is lifted

4. Revocation of the status

1% Tax Rate Small Business Entrepreneur status subject to cancelation if:

5. Obtaining 1% Tax Rate Small Business Entrepreneur status for foreign citizens

A foreign citizen Individuals, who become the resident of Georgia can also obtain the status of a small business. A resident of Georgia during the entire current tax year is a natural person who is actually present on the territory of Georgia for 183 days or more during any continuous 12 calendar months ending in this tax year. Accordingly, foreign citizens can travel abroad, do their business and enjoy the status of a small business if they stay in Georgia for more than 183 days during a calendar year. Of course, we must also take into account the terms of the double taxation agreement and how much it protects us to enjoy the small business status tax benefits.

6. Conclusion

Small Business Status really offers a very significant tax break to individual entrepreneurs in terms of income tax. If an individual entrepreneur exports goods/services abroad and the income received by him is considered as income from a source in Georgia, he will not pay VAT, therefore his income can be taxed at only 1%.

For more information or to get help with obtaining the Small Business Entrepreneur status contact us.