Interpretation of Article 21 of the Tax Code

When starting a business, the most frequently asked question is: in what form should I register? The answer does not depend solely on commercial considerations — it also carries legal consequences. Article 21 of the Tax Code of Georgia defines who is considered an enterprise — and, accordingly, to whom the tax regime established for enterprises applies.

Who is Considered an Enterprise

According to Paragraph 1 of Article 21, enterprises are entities that carry out economic activity or are established to carry out economic activity. Specifically:

  • Legal entities established in accordance with the legislation of Georgia (LLC, JSC, GP, LP, Cooperative);
  • Corporations, companies, firms and other similar entities established under the legislation of a foreign country — regardless of whether they hold the status of a legal entity; as well as a permanent establishment of a foreign enterprise;
  • Associations, partnerships and other similar formations that do not fall under the preceding two categories.

The Criterion is Function, Not Form

The core logic of the provision is that the defining feature of an enterprise is not its legal form or the fact of registration. The criterion is the performance of economic activity — or creation for such purpose. That is precisely why foreign entities that may not hold legal entity status at all fall under this concept. This reflects the principle of substance over form characteristic of tax law.

Exception: Individual Entrepreneur

Paragraph 2 of Article 21 explicitly establishes: an individual entrepreneur does not constitute an enterprise. This is not accidental and is systemically linked to the Law of Georgia on Entrepreneurs, according to which an individual entrepreneur is not a legal entity — they exercise rights and fulfill obligations in business relations as a natural person, and bear liability to creditors for obligations arising from entrepreneurial activity personally, with all their property. Practical outcome: an individual entrepreneur is taxed as a natural person, whereas an enterprise is subject to corporate income tax.

Terminological Trap

Attention: The new Law on Entrepreneurs, effective from January 1, 2022, uses the term “enterprise” in a different sense — according to its Article 2, an enterprise is an organized system for carrying out entrepreneurial activity, whereas an entrepreneur is considered a natural or legal person that owns an enterprise. Thus, in corporate law, an “enterprise” is an organized system, whereas in tax law it is a taxable subject. When drafting documents, it must always be clarified in which law's sense the term is used.

Conclusion

Article 21 is not merely a definitional rule — it defines the scope of taxable subjects. When selecting a legal form for a business, this analysis must be conducted prior to registration — subsequent adjustments prove much more costly.

Normative Sources and Literature

Tax Code of Georgia, Arts. 21, 22, 30, 36 · Law of Georgia on Entrepreneurs (in force as of Jan 1, 2022), Arts. 2, 3 · Civil Code of Georgia, Art. 24.5.

Nadaraya L., Rogava Z., Rukhadze K., Bolkvadze B., Commentary on the Tax Code of Georgia, Book I (§§ 1–155), Art. 21, pp. 196–201.

Nikoloz Pkhaladze | Attorney at Law, Law Firm “Pkhaladze & Partners”

+995 597 117 795 · nikushapkhaladzelawyer@gmail.com · www.pkhaladze-law.ge