On taxation of contractors located in Turkey and performing work for a Georgian company

12.12.2023

• Taxation of contractors' income under Georgian law
• Taxation of contractors' income in accordance with Turkish law
• Thus, the tax burden is as follows

It is not uncommon for persons performing work for a Georgian company to reside in the territory of another state.

Consider the following case study. A person performing work for a Georgian company resides in Turkey and is not a citizen or tax resident of Georgia.  Q: What tax consequences arise for each party.

Taxation of contractors' income under Georgian law

• Taxation of persons working for a Georgian company under a labour contract
  1. Under Georgian legislation, a company must withhold income tax (20%) as a tax agent from the salary accrued to an employee.
     The amount of income tax does not depend on whether a person is a tax resident of Georgia or not, as well as on whether such person works remotely. 
      
  2. A Georgian company does not bear the cost of pension payments at the rate of 2% for its non-resident employee. The employee may request contributions to the pension fund on his behalf if he has a Georgian permanent residence permit. 
      
• Taxation of contractors working for a Georgian company under a civil law contract
  If a civil law contract is concluded with a person who is not a tax resident of Georgia, the Georgian company (customer) must withhold income tax for the non-resident contractor at the rate of 10% of the remuneration paid. Also, the Georgian company will have to pay reverse VAT (18%), or credit the amounts of reverse VAT in accordance with Georgian legislation.

Taxation of contractors' income in accordance with Turkish law

• Taxation of persons working for a Georgian company under a labour contract
  
  In accordance with Turkish law, wages paid to employees by foreign employers in foreign currency, legally registered and operating outside Turkey, as well as those paid on the basis of income earned by employers outside Turkey, are exempt from income tax in Turkey.
  
  In this regard, in order to avoid taxation of the income of employees of a Georgian company located in Turkey, the following criteria must be met in the aggregate:
  1. The employer must not have a legal entity, branch or representative office in Turkey;
  2. Wages must be paid in foreign currency (in any currency other than Turkish Lira);
  3. The employer must not receive income from activities in Turkey.

• Taxation of contractors working for a Georgian company under a civil law contract
  
  There will also be no taxable base if the combination of the conditions set out in clause 2.1 is met.

• Taxes in the case of the provision of services by a Georgian company to an IE from Turkey

  1. If the contractor is registered as a sole proprietor in Turkey, he will be obliged to pay taxes in Turkey. The tax rate will depend on the activity carried out by the sole proprietor.

  2. According to Article 14 of the Double Taxation Avoidance Agreement concluded between Georgia and Turkey, income received by an individual entrepreneur who is a tax resident of Turkey is taxable only in Turkey, unless the individual entrepreneur has a fixed base regularly available in the other contracting state (Georgia) for the purposes of carrying out his activities. If he has such a fixed base, the income may be taxed in that other state (Georgia), but only insofar as it relates to such fixed base.
     
     Therefore, an individual entrepreneur who is a tax resident of Turkey, in the absence of a permanent base in Georgia, will pay taxes only in Turkey. 

     In order to confirm to the Georgian tax authority that a person is a tax resident of Turkey, a tax residency certificate must be submitted.

Thus, the tax burden is as follows

1. In case the employees of a Georgian company work from the territory of Turkey, the company will be obliged to pay income tax at the rate of 20% to the budget of Georgia, as well as pension contributions in Georgia at the rate of 2% in case the employee has a residence permit and submits a relevant application to the employer.
    
2. In case of performance of works for a Georgian company by persons located on the territory of Turkey under a civil law contract, the company will be obliged to pay to the budget of Georgia income tax in the amount of 10%, as well as reverse VAT in the amount of 18%, which can be offset in accordance with the legislation of Georgia. 
    
3. In case a person located in Turkey and registered as a sole proprietor in Turkey performs works for a Georgian company, the said person will be obliged to pay taxes in Turkey.

Income tax is not payable in Georgia provided that a Turkish tax residency certificate is provided to the Georgian tax authority. 

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