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.