When starting a business in another jurisdiction, the question arises as to how it is more appropriate to formalise relations with individual contractors and what tax consequences are entailed by the choice of certain methods.
When starting a business in another jurisdiction, the question arises as to how it is more appropriate to formalise relations with individual contractors and what tax consequences are entailed by the choice of certain methods.
In Georgia, the following ways can be distinguished:
Employment of a person under a labour contract.
- A company should withhold income tax (20%) as a tax agent on wages accrued to an employee.
The amount of income tax does not depend on whether a person is a tax resident of Georgia or not, and the tax burden does not change in case the employee's labour is remote.
- As a general rule, a Georgian company is not obliged to make pension payments on behalf of its employee. The employee may request contributions to the pension fund on his/her behalf if he/she has a Georgian permanent residence permit.
Formalisation of a civil law contract (hereinafter referred to as "CLC").
- If a Georgian tax resident individual and a Georgian company conclude a contract of employment, the latter is obliged to withhold income tax (20%) from the remuneration accrued to the individual as a tax agent.
- An individual becomes a VAT payer (18%) if his/her income exceeds GEL 100,000 in a calendar year. VAT will be levied on income starting from the moment of accrual of the amount, as a result of which the individual's income exceeds GEL 100,000 in a calendar year.
- If such a person is not a tax resident of Georgia, the Georgian company which has concluded a contract with him must withhold income tax for the non-resident service provider at the rate of 10% of the remuneration paid when paying remuneration. The Georgian company will also have to pay reverse VAT (18%).
Formalisation of a GPH contract with a person having the status of a sole proprietorship. э
- A sole proprietor performing work/services for a Georgian company under a GPH contract is obliged to pay tax (20%) on the income received once a year.
An individual entrepreneur with small business status is obliged to pay tax (1%) on income received. Submission of a declaration and payment of tax in such a case is carried out by an individual entrepreneur on a monthly basis.
Conclusion of a GPH contract with an individual entrepreneur with small business status carries the risk that the Georgian tax authority will reclassify the relationship as an employment relationship, which will result in additional tax charges of up to 20% of the revenue received by the individual entrepreneur. The risk is particularly high if the sole proprietor has only one counterparty - a Georgian company.
However, not all activities can be engaged in when a person has the status of a small business. Income derived from activities prohibited for small businesses will be taxed at a rate of 20%.
Also, a sole proprietor is obliged to pay VAT (18%) if his/her income exceeds GEL 100,000 in a calendar year. VAT will be levied on income starting from the moment of accrual of funds, as a result of receipt of which, at the end of the calendar year, the sole proprietor's income exceeded GEL 100,000 in the calendar year.
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