Income received from a source in Georgia

One question settles the matter: where the income arose — and not where the funds were transferred.

Article 104 is one of the key provisions of the Tax Code: it establishes which income is considered to be received from a source in Georgia. This is precisely what defines the territorial boundary of Georgia's taxing jurisdiction — and for a non-resident, it is not just a boundary, but the taxable base itself.

Two-step logic: first residency, then source

Any analysis of income tax and profit tax begins with two questions.

The result is fundamentally different. For a resident, the issue of source mainly arises in the context of exemptions and the tax credit for taxes paid abroad. As for a non-resident, the Code directly establishes that their gross income consists of income received from sources in Georgia — that is, Article 104 outlines the entire perimeter of the taxable base for them.

List method

Instead of a general, abstract definition, the Code uses a list of categories: Article 104, Part 1, lists in the form of sub-clauses the types of income that are considered to be received from a source in Georgia. Each category has its own attachment criterion — some use the actual place of activity, some the residency of the payer, and some the location of the property or asset.

A few examples that clearly show this different logic:

• Employment — income is considered to be received from a source in Georgia if the work is performed in Georgia. The place of work performance is important, not where the employer transfers the salary from;
• Realization of a share — the surplus income received from the alienation of a share in the capital of a Georgian enterprise is from a Georgian source, even if both the seller and the buyer are foreigners;
• International transportation and expedition — regulated by a separate sub-clause, practically the most problematic category.

Example of international carriage

Here, the route is decisive, not the identity of the counterparty. According to the definition of terms in the Code, international carriage is the carriage carried out between two points located in different states, one of which is Georgia. Whereas carriage only between points located outside the borders of Georgia — is not.

Income from services rendered by a non-resident carrier in the Baku-Tbilisi direction is from a Georgian source and is taxed at the source of payment; however, carriage between two foreign points — is not. According to the methodological instruction of the Revenue Service, the same rule applies to income received by a freight forwarder from organizing carriage.

Why is this qualification so important

The answer lies in the mechanism. Income received by a non-resident from a source in Georgia, which is not attributable to its permanent establishment, is taxed at the source of payment — that is, the obligation to withhold the tax and transfer it to the budget lies with the Georgian payer as a tax agent. This is precisely why the analysis of Article 104 is primarily a risk for the Georgian party: If the amount was transferred to a foreign counterparty without withholding tax, the liability shall be imposed on the Georgian company.

The situation is changed by the existence of a permanent establishment. If a non-resident carries out economic activities in Georgia through a permanent establishment (Article 29 of the Code), their income is attributed to this establishment, and the taxation regime is also different. Therefore, the practical sequence is as follows: first, the issue of a permanent establishment, then — taxation at the source of payment.

What should be checked for a specific operation

• Whether the counterparty is a resident or a non-resident;
• Which category of Article 104 the income falls into and by what criterion — place of activity, location of the asset, or residency of the payer;
• Whether a permanent establishment has arisen for the non-resident in Georgia;
• Is there a double taxation avoidance agreement with the relevant state and what does it establish for this type of income;
• Who is responsible for withholding the tax and at what rate.

Conclusion

Article 104 establishes a simple, yet often overlooked truth: what matters is where the income originated, and not where the contract was signed or from which bank the funds were transferred. Making this qualification before settlement is in the interest of the Georgian company — it is the one that bears responsibility for the result.

Since the list in the article changes periodically, the current version of the provision must always be checked for a specific transaction.

Nikoloz Pkhaladze

Attorney · Founder, Managing Partner

24g Al. Kazbegi Ave., AXIS, 10th floor, Tbilisi · +995 597 117 795 · www.pkhaladze-law.ge