What is income tax?

It can be said that income tax is the most widely spread tax in any country. It is paid by every resident of Georgia and all non-resident individuals who receive income from a source in Georgia.

However, there are also several categories of individuals who are exempt from this tax. We will discuss these exceptions at the end of the article.

Before that, we need to clarify a few issues.

First of all, let's define who is considered a resident of Georgia – this is any person (regardless of whether they are a citizen of Georgia or a foreigner) who has spent at least 183 days in Georgia during the last 12 months.

Now, let's say what this tax applies to and how.

According to the general rule, an individual's income is taxed at 20%, but there are exceptional cases when the legislation reduces this rate.

One such case is the rental of a residential apartment: if a person rents out residential space and notifies the tax authority about it, their income will be taxed at only 5%, but if they rent out commercial space, this benefit will no longer apply and it will be taxed at 20%.

Income received in the form of dividends is also taxed at 5%.

That is:

• Salaries – 20%
• Dividends – 5%
• Residential Area Lease – 5%
• Commercial area lease – 20%

Salary Taxation

In the case of salaries, things are relatively simple. However, to see the full picture, we should also mention the pension contribution. The pension contribution amounts to 6% of the total accrued salary, of which the employee, employer, and the state each pay 2%.

Accordingly, if your taxable salary is 1,000 GEL, you pay 20 GEL, the company pays 20 GEL, and the state pays 20 GEL.

It is noteworthy that not every employee may be enrolled in the funded pension system. This system is mandatory for everyone who was under 40 years old as of January 1, 2019. If you were over 40, then from April to June of the same year you had the opportunity to opt out of this system.

Naturally, those who opted out are not subject to the 2% rate.

It should also be clarified that the income tax is actually an indirect tax, which means that although this amount is deducted from the employee's salary, it is the employer who transfers it directly to the budget.

Thus, your employee's gross salary is 1,000 GEL, from which you will pay 20 GEL into the pension fund, from the remaining 980 GEL, 20% will go to the income tax budget, and the employee will receive 784 GEL. In addition, you will transfer another 20 GEL from the company's funds to the employee's pension account.

Here is an example Let's take a look

Nika is an employee of the company “Alpha.” His monthly taxable salary (as stated in the contract) is 1,000 GEL. To find out how much Nika will receive in hand each month and how much the company will have to transfer to the budget and Nika’s pension account, let’s perform two operations.

First, let’s find out how much of this 1,000 GEL will go to his funded pension account. For this, we need to calculate 2% of 1,000.

1000*2%=20

That is, the company “Alpha” must deposit 20 GEL into Nika’s pension account. We have 980 GEL left. Now let’s calculate 20% of 980 and find out how much Alpha will have to transfer to the budget (as income tax), i.e., how much Nika will pay to the state.

980*20%=196

196 GEL will be transferred from Nika’s salary to the budget, but Nika does not transfer this amount himself. According to the code, ensuring this process is the employer’s obligation. Therefore, in our example, the company “Alpha” will take 196 GEL from Nika’s taxable income and send it to the budget.

Individual entrepreneur

Up to this point it was simple, but everything gets complicated when it comes to individual entrepreneurs.

In the case of individual entrepreneurs, taxable income is the difference between total income and deductions.

Both of these terms need to be explained.

In the case of a resident, total income is the sum of all income received by an individual from any source (from Georgia or abroad).

For a non-resident – only the sum of income received from sources within Georgia.

As for deductions. Simply put, this is the money you spent to earn income: advertising expenses, purchase of fixed assets and inventories, etc. However, there are many rules and exceptions regarding deductions, so I would advise you to look directly at the tax code and read this chapter, as we cannot cover everything in the article.

That is, for individual entrepreneurs, taxable income is the difference between all income received from all sources and the money spent to earn that income.

Let's consider an example.

Nika is an individual entrepreneur and in the month of April his total income was equal to 100,000. In the same month, Nika spent 20,000 to purchase fixed assets, 30,000 on inventory, and 10,000 on advertising. Accordingly, his taxable income for April is calculated as follows:

100,000 – 20,000 – 30,000 – 10,000 = 40,000

Note that here we no longer take the pension rate into account, since this type of income is not subject to it. In April, Nika's taxable income was 40,000. Now let's calculate the income tax, again at 20%.

40,000*20%=8,000

Nika will transfer 8,000 GEL himself (since in the case of individual entrepreneurship, he is already his own employer) to the budget, and will keep 32,000 GEL in his pocket.

That's it. Now let's talk about the promised exceptions, that is, those individuals who are either exempt from this tax or are taxed under a special rule.

Income from tax is exempt:

• A person whose annual income in the form of salary does not exceed 3,000 GEL.
• A World War II veteran, a veteran of combat operations for the territorial integrity, freedom, and independence of Georgia, and a veteran of combat operations on the territories of other states who are citizens of Georgia.
• Single mother.
• A person who has adopted a child (within 1 year from the adoption).
• A person who has taken a child into foster care.
• A person with three or more children under the age of 18, permanently residing in a high-mountain settlement (who has three or more children under the age of 18 in their care), whose taxable income received as salary from a budgetary organization in a high-mountain settlement during the calendar year is up to 3,000 GEL.
• A person with one or two children under the age of 18, permanently residing in a high-mountain settlement (who has one or two children under the age of 18 in their care), the income received as salary from a budgetary organization in a high-mountain settlement during the calendar year up to 3,000 GEL is subject to a 50 percent reduction in income tax.
• A person with a disability from childhood, as well as persons with severe and significant disabilities, whose taxable income received during the calendar year is up to 6,000 GEL.
• Taxable income up to 6,000 GEL of a person who has suffered a serious health injury in connection with participation in international peacekeeping and security operations or other types of peacekeeping activities.

Special By rule Taxation

Individuals who have the status of a small or micro business are taxed under a special regime. An individual with micro business status is exempt from tax if their annual income does not exceed 30,000 GEL. A small business is taxed at 1% if its annual income is less than 500,000 GEL.

If this threshold is exceeded, then in that year a 3% tax applies. If in the following year the income again exceeds the threshold, the person will be required to revoke the small business status.