CFC rules in Georgia

[backpacker]

Article 82.t of the tax code is about an exemption for Georgian companies

Article 82.t has been translated in a way that it no longer reflects its true meaning. The first sentence of Article 82 (1) starts with: "The following types of income of natural persons shall be exempt from income tax : ... ". Further down, subparagraph t1 in the messed English translation indeed mentions "income gained by a resident legal person". However, it should mean "Income received from ...".
The example of subparagraph t1 specifically refers to listings on the A- and B-Segment of the Georgian Stock Exchange (GSE). This can be verified by checking subparagraph t2 which refers to interest received from these GSE listed securities (mostly local bonds like M2 or Georgian Leasing).
Then comes subparagraph t3. This one is used in connection with NBG ordinance 108/04.

The aforementioned is not so much about the exemption of foreign sourced income. It is about the exemption of Georgian sourced income which -at an earlier stage- had been foreign sourced income:
For many years it was a problem for Georgian local brokerage companies to be competitive when operating under a tax code that only qualifies Non-Georgian sourced income as tax exempt. If a Georgian tax resident opens an account with a Georgian local broker (white label), dividends and capital gains from buy/sell operations would always be transformed into Georgian sourced income due to the fact that the Georgian broker receives everything in his account and then distributes to his clients on local sub-accounts.
The list of NBG ordinance 108/04 in connection with subparagraph t3 eliminates that disadvantage to a certain degree.

An unintended consequence of the aforementioned is that it gives an additional layer of safety, even for somebody who only uses direct foreign based brokerage like eToro or NAGA.

Also, Georgian lawyers don't always agree on the meaning.

This is a huge problem in Georgia: Present the very same case to six different lawyers and get six different answers. Same is valid for tax advise. It is the consequence of an extremely immature legal system.

 

[JohnLocke]

This is a huge problem in Georgia: Present the very same case to six different lawyers and get six different answers. Same is valid for tax advise. It is the consequence of an extremely immature legal system.

What is the outcome if you have paid for advise from a lawyer or tax advisor and you get trouble with the authorities there? or will the authorities only rarely interfering at any point?

 

[khinkali]

@Bagpacker that is interesting, about local brokerage companies.

Have you looked into hiring a Private tax advisor (an officer of the Georgian tax authorities who gives non-binding but presumably reassuring advice) or even asking for an Advance Tax Ruling? I have a call tomorrow to discuss trying to get one, following the public ruling on crypto.

The Advance Tax Ruling seems to cost about $3k and is legally binding on the Revenue Service.

 

[biz1]

@khinkali please tell what did the crypto ruling say

 

[khinkali]

@biz1 Ministry of Finance of Georgia Public decision №201 June 28, 2019

People say that it makes income and trading outside the scope of Georgian Taxation. I want to be sure that applies if you do 00s or 000s of trades per day, as similar rules in other countries don't apply due to "badges of trade" or similar.

There is a description of the decision on page two of this PDF from Deloitte.

 

[backpacker]

that is interesting, about local brokerage companies.

Yes, it is. When you check a bit around you might find a website which mentions the benefits of local brokerage. I was always wondering how this can legally be the case with a white-label-agreement. Then I digged a bit deeper and was told that local brokerage companies build their claim on "NBG recognized exchanges". After getting hold of ordinance 108/04 and comparing it with the Tax Code I got the point.

Have you looked into hiring a Private tax advisor (an officer of the Georgian tax authorities who gives non-binding but presumably reassuring advice)

I've looked into it and contacted a few. After a while of correspondence I figured that it is pointless because these people are unable to defend there own point-of-view.
I am now in contact with one of the "big 8" law firms in this country. That is what I would advise you to do, too. Check the list in Legal500 and pick one. You will experience a totally different atmosphere with knowledgeable people who can defend their point-of-view. These "big 8" law firms work with international companies and sometimes open their doors for private individuals. Then build up a relationship with them and things will work smoothly.
Do not go for one of these "internet tax advisors" without any brick & mortar office. Whatever they claim, in the end they can not defend you!

Regarding the Advance Tax Ruling: Well, it takes at least 4-5 months to get one. Moreover, this is not thought for private individuals (and not necessary at all). Save that money and contact a law firm which understands your specific case right from the spot.

On a more general note: Understand that there will be changes to the current tax code. I am not sure if you are aware that the tax code can fundamentally only be changed by plebiscite. This is in the making and many expect something like that to happen in 2023. Rest assured that it will pass. So, current tax exemptions are not here to stay. It is one of the reasons why Georgia joined the CRS. There was indeed no pressure on the country to join, they really did it voluntarily.
The overall goal is to bring the tax code in line with their "European partners" .

 

[backpacker]

People say that it makes income and trading outside the scope of Georgian Taxation. I want to be sure that applies if you do 00s or 000s of trades per day, as similar rules in other countries don't apply due to "badges of trade" or similar.

Again a case which is wide open for interpretation. If you really do such a high amount of trades (i.e. something similar to "high frequency trading") I am sure that this ruling will not apply. The high average number of trades per annum (in your case at least several 1000 trades p.a.) will be the pitfall.
Considering the huge number of single trades you intend to do I strongly advise to build up a permanent relationship with a reputable local law firm, as mentioned in my above post!

Hint: Georgian crypto-exchange Cryptal operates both locally and international. One of the founders is a veteran in the Georgian capital market, hence knows the pitfalls of local legal system. There must be a reason that Cryptal does not promote this ruling (i.e. public decision 208 of June28, 2019).

 

[khinkali]

I've looked into it and contacted a few. After a while of correspondence I figured that it is pointless because these people are unable to defend there own point-of-view.

That is quite surprising. The "private tax advisors" are employees of the Revenue Service so they should be able to ask the right people.

Regarding the Advance Tax Ruling: Well, it takes at least 4-5 months to get one. Moreover, this is not thought for private individuals (and not necessary at all).

This is even more surprising. The RS has different pricing on its website for legal vs natural persons.

Very odd, I'll see what I can discover.

 

[backpacker]

What is the outcome if you have paid for advise from a lawyer or tax advisor and you get trouble with the authorities there? or will the authorities only rarely interfering at any point?

Basically, if the advise is wrong you might end up with a large bill or -worse- in court. The latter being very slow in processing your recourse (might take several years!)
That is why I would only recommend a reputable brick & mortar law firm which works for international companies. It is as important to have an advisor who stands up for his opinion as it is to have somebody with a broad knowledge base. It is very dangerous to rely on the knowledge of "Zoom only" advisors.
Your question if authorities will rarely interfere depends on the "connections" and the ability of your advisor to defend his point-of-view. The legal system in Georgia is immature at best, nothing works without "connections".

 

[backpacker]

That is quite surprising. The "private tax advisors" are employees of the Revenue Service so they should be able to ask the right people.

That was my thinking, too. Later on I realized that my thinking was naive.
In an earlier post you already mentioned that "Georgian lawyers don't always agree on the meaning". That applies in this case, too. Or think the other way: If it would be that easy, why is there an abundance (considering the small size and tiny population of the country) of reputable law firms.
In short: The answer you might get from such a "private tax advisor" can be right or wrong. In any case he will never be able to defend his point-of-view because he just asked around to get an answer. Not exactly reliable.

This is even more surprising. The RS has different pricing on its website for legal vs natural persons.

Yes. It is there. As many things "are there" in this country. Still, it is not thought for private individuals and you might be one of the first who ever asks for it if you do it as a private individual. Think twice what that means ....
If you really want to ask for that Advance Tax Ruling do it at least through a third party (lawyer, advisor) without your name.

 

[backpacker]

That is quite surprising. The "private tax advisors" are employees of the Revenue Service so they should be able to ask the right people.


This is even more surprising. The RS has different pricing on its website for legal vs natural persons.

Very odd, I'll see what I can discover.

Were you able to discover anything new or noteworthy regarding this topic in recent days?

 

[khinkali]

I had a meeting that opened up some avenues I hadn't really considered before. Georgia might make sense for a company with a brokerage license. GE and AE are top of my list because although EE and CY are attractive, I have some long term concerns about establishing in the EU.

For now I'm just testing software so I'll trust decision 201 on the assumption that I'm not doing anything that creates Georgian sourced income.

 

[backpacker]

I had a meeting that opened up some avenues I hadn't really considered before. Georgia might make sense for a company with a brokerage license. GE and AE are top of my list because although EE and CY are attractive, I have some long term concerns about establishing in the EU.

For now I'm just testing software so I'll trust decision 201 on the assumption that I'm not doing anything that creates Georgian sourced income.

I fully agree with your concerns regarding establishing in the EU: Rather sooner than later politicians will agree on a European wealth levy (no, it is not a tax - just a levy for a limited time due to the *whatever* crisis).
Unfortunately, GE is trying it's best to follow guidance from Bruxelles. So, the current Georgian tax regime will undergo significant changes.

The UAE is probably your best bet in case you want to establish long term, without constant headache regarding ever changing tax laws. It's just a bit expensive when it comes to rent and everyday spending.

 

[khinkali]

@Bagpacker UAE is one of the top two on my list. But then, UAE formation guys here are eager to talk about "cashing out" and "non CRS", which is not the same thing as establishing a legal framework for a legitimate offshore fund.

"Edge of Europe" can have advantages. Georgia, Serbia and Ukraine all have the potential for EU (and other) access, without all the obligations.

Some people I talk to here assume that GE is on the path to be subsumed into EU regulation and bureaucracy quite soon. Others are not so sure.

( i want to ask, for comparison, what is the equivalent cost in Georgia vs UAE to establish a pure crypto fund with accredited investor capital. but i think we've gone far enough off topic for this thread... )

 

[backpacker]

"Edge of Europe" can have advantages. Georgia, Serbia and Ukraine all have the potential for EU (and other) access, without all the obligations.

Ukraine already has an uninteresting tax system. Serbia brought itself in line with neighbouring countries. Georgia will follow.

Some people I talk to here assume that GE is on the path to be subsumed into EU regulation and bureaucracy quite soon.

Let me tell you that these people are absolutely right! I already mentioned in two earlier posts what might happen in 2023.

we've gone far enough off topic for this thread

We can open a new one with a more broad based topic. Any idea for the headline?

 

[seabreeze]

Ukraine already has an uninteresting tax system. Serbia brought itself in line with neighbouring countries. Georgia will follow.

Let me tell you that these people are absolutely right! I already mentioned in two earlier posts what might happen in 2023.

We can open a new one with a more broad based topic. Any idea for the headline?

I wouldn't bury Georgia just yet. It's just Georgia is not a one-size-fits-all solution.

Georgia traditionally has a territorial tax system, it's not just a whim and won't go away as such.
I don't see anyone specifically specifically targeting territorial tax systems as a thing, and not that of Georgia in particular.
In general, Georgia is not pissing anyone off taxation or banking-wise - no non-resident banking, relatively leak and BPS-proof corporate and tax legislation, no glaring corruption and ML abuse...
Its tax regimes are not on EU abusive tax practices lists. It's got a few Free zone areas - so what, those are all over and represent state aid.

So... Georgia, generally murky in terms of law and clear application thereof, but not inherently unstable because not doing anything particularly risky IMHO.

 

[seabreeze]

@Bagpacker UAE is one of the top two on my list. But then, UAE formation guys here are eager to talk about "cashing out" and "non CRS", which is not the same thing as establishing a legal framework for a legitimate offshore fund.

"Edge of Europe" can have advantages. Georgia, Serbia and Ukraine all have the potential for EU (and other) access, without all the obligations.

Some people I talk to here assume that GE is on the path to be subsumed into EU regulation and bureaucracy quite soon. Others are not so sure.

( i want to ask, for comparison, what is the equivalent cost in Georgia vs UAE to establish a pure crypto fund with accredited investor capital. but i think we've gone far enough off topic for this thread... )

I am perplexed why you'd want to do that in either Georgia OR UAE at all?!
If it's professional investors (either proven or investing over 100k a pop), you can do whatever the hell you like in Luxembourg. Hell, you can even issue bankable securities and market-list them fin-regulation-free.
Also, essentially, tax-free, of course.

 

[khinkali]

@alexeikarp I agree in general but I would be cautious as some recent statements from high ranking politicians indicate less favourability to Georgia as a low tax location for exporters. Many people thought that Virtual Zone Entities meant "sell to foreigners tax free" and of course that was never true (it's more like an IP Box than a Free Zone). However, the new change to require that the development took place in Georgia was not indicated in the tax code or any advice I'd seen. Changing it is one thing, but they're making it retroactive. Perhaps someone will challenge the Revenue Service in court, but it's worrying.

you can do whatever the hell you like in Luxembourg

Thanks for the tip, I'll look into Luxembourg.

 

[Almouk]

@biz1 Ministry of Finance of Georgia Public decision №201 June 28, 2019

People say that it makes income and trading outside the scope of Georgian Taxation. I want to be sure that applies if you do 00s or 000s of trades per day, as similar rules in other countries don't apply due to "badges of trade" or similar.

There is a description of the decision on page two of this PDF from Deloitte.

Thanks for sharing the .pdf, @khinkali.

In my case, I was interested in trading crypto preferably as individual and as only sourced of income.

I wrote to Georgian Department of Revenue explaining what my situation will be and apparently I should be taxed at 0%, but as you know this answer is not binding and I have the same worries about the Ruling you have, because trading income is generated in the place you are trading and should be locally sourced income, the speculative nature of the asset and being very frequent transactions and youo inly source of income should be an obstacle for finally get taxed at 0%.

Apart of this, as my idea is not to form any company for trade from or make an real state investment, I don't know if I could have some problems as well to get the tax certificate -which you need for send to your country of origin and not being taxed more there- considering you are taxed at 0% finally, I suppose they should issue it if you stay over 183 days on Georgia and that it seems residence permit is not an issue as Georgia is offering visas for a year and as much as I know can be renewed when you get out of the country.

I raised all of this to one local firm that is formed by a guy that was working as tax inspector of the Georgian Deparment of Revenue several years, apart of writing about this topics in Bloomberg, so he must be informed. He told to me that were a chance to finally be taxed at 0% in my situation but staying only 183 days might not suffice.

I told to him again that my intention was not forming a company or make a real state investment, so please let me know before taking consulting for not waste my time and money. No answer.

In other free consultation, they told me other thing, so as @Bagpacker says, you can pay for several consulting services, have different answer/solutions and not even be sure of how you are going to be taxed in the future. Frustrating.

@biz1 Ministry of Finance of Georgia Public decision №201 June 28, 2019

People say that it makes income and trading outside the scope of Georgian Taxation. I want to be sure that applies if you do 00s or 000s of trades per day, as similar rules in other countries don't apply due to "badges of trade" or similar.

There is a description of the decision on page two of this PDF from Deloitte.

 

[khinkali]

Thank you for sharing your thoughts and experience so far @Almouk

trading income is generated in the place you are trading and should be locally sourced income

This would be the interpretation in many places, but how is Georgia taxing a natural person who trades foreign listed stocks or foreign currencies, on a foreign exchange without interacting with Georgian Lari? Georgia might have a narrower definition of locally sourced income, but my concern is the same of yours; interpretation could change.

I haven't contacted the guy you mentioned but I was going to ask him the same so it is interesting to read your feedback. I met with tax auditors who were fairly non-committal on the interpretation of PD 201 for making large volumes of trades as a natural person, but had the more general view that the RS isn't interested in foreign crypto transactions. (They seem to have a clear approach to trading via a company, which I am considering for later when I trade other folks' money).

I am interested that you wrote to the Revenue Service. Did they reply definitively about trading crypto as a natural person? If so, then an Advance Tax Ruling might be the right step, as that is legally binding on the Revenue Service.

My concern is not about paying 20% on actual profits so much as suffering bookkeeping or accounting standards in local currency. When making many thousands of trades per day and exploiting small inefficiencies in exchange prices, I don't see any nice way to account for that on a trade by trade basis in a third currency. If all trades made by a natural person (not involving a Lari, a Georgian exchange or coins that represent a security in Georgia) are considered to be happening outside of Georgia then great, no bookkeeping. Otherwise, a company might be cleaner (the RS taxes distribution, so isn't likely to care about the details of individual trades).

If you need a tax certificate for your country of origin or previous residence then I'm pretty sure that 183 days is a strict threshold and that you don't need a residence permit. When submitting a tax return, do you include foreign source turnover to be taxed at 0% or just omit it entirely?

He told to me that were a chance to finally be taxed at 0% in my situation but staying only 183 days might not suffice.

I assume that this is purely to do with rules in your old country?