Dechert OnPoint: Georgian Tax Residency

Dechert Georgia, through the contribution of partners Archil Giorgadze and Nicola Mariani, joined by senior associates Ruslan Akhalaia and Irakli Sokolovski, as well as Ana Kostava and Ana Kochiashvili, is partnering with Georgia Today on a regular section of the paper which will provide updated information regarding significant legal changes and developments in Georgia. In particular, we will highlight significant issues which may impact businesses operating in Georgia.

Dechert’s Tbilisi office combines local service and full corporate, tax and finance support with the global knowledge that comes with being part of a worldwide legal practice.

Dechert Georgia is the Tbilisi branch of Dechert LLP, a global specialist law firm that focuses on core transactional and litigation practices, providing world-class services to major corporations, financial institutions and private funds worldwide. With more than 900 Lawyers in our global practice groups working in 27 offices across Europe, the CIS, Asia, the Middle East and the United States, Dechert has the resources to deliver seamless, high quality legal services to clients worldwide. For more information, please visit www.dechert.com or contact Nicola Mariani at nicola.mariani@dechert.com.

In recent years, more and more individuals have become interested in acquiring Georgian tax residency status. This is caused primarily by rising tax rates in developed countries. By contrast, Georgia offers the following advantages: (i) Georgian income tax rates on individuals are relatively low (usually 20%) and even lower tax rates (5%) apply to certain types of income (e.g. dividends, interest); (ii) Georgia does not tax income from non-Georgian sources earned by Georgian resident individuals; and (iii) Georgia has treaties for the avoidance of double taxation (the “Treaties”) with more than 45 countries. The treaties provide important benefits to Georgian tax residents who receive income from sources in Georgian Treaty partner countries (the “Treaty Partner Countries”). Given these Treaty benefits and the fact that Georgia does not tax the foreign source income of its tax resident individuals, in certain instances non-Georgian source income earned by Georgian residents is not taxed in any country.

Thus, there are some compelling reasons for acquiring Georgian tax residency, and Georgian tax regulations show flexibility on the granting of residency status.

Georgian Tax Residency for High Net Worth Individuals

Georgian residency is, in most cases, granted to individuals who are present in Georgia for 183 or more days during any consecutive twelve-month period. However, some individuals are not interested in spending this amount of time in Georgia but still have an interest in acquiring Georgian tax residency. To accommodate such persons, Georgian policymakers introduced a special regime for the granting of Georgian tax residency to high net worth individuals (the “Special Residency Regime”).

For Georgian tax residency purposes, the individual is deemed to be a high net worth individual if: (i) the value of his or her confirmed property exceeds GEL3,000,000 (three million Georgian Laris), or (ii) his or her annual income has exceeded GEL200,000 (two hundred thousand Georgian Laris) during the last three years (the “High Net Worth Individuals”).

In order to receive Georgian tax residency status under the Special Residency Regime, the High Net Worth Individual must also satisfy certain additional requirements. In particular, under the Special Residency Regime, Georgian tax residency status is granted to a High Net Worth Individual only if: (i) he or she has either a Georgian residency permit or Georgian nationality; or (ii) he or she verifies receiving more than GEL25,000 (twenty-five thousand Georgian Laris) of Georgian source income during a single year. A High Net Worth Individual may request Georgian tax residency on the basis of any of these two grounds. Which of these grounds is preferable for any given individual depends on personal circumstances. For instance, if the High Net Worth Individual has neither Georgian nationality, nor a Georgian residence permit, then he or she may claim Georgian tax residency on the grounds set out under item “ii”. If that option is not suitable for a specific individual (e.g. the individual does not have required the GEL25,000 Georgian-source income), then he or she may resort to the option set out under item “i”.

High Net Worth Individuals submit their applications for Georgian tax residency to the Revenue Service of Georgia along with documents confirming their meeting of all other requirements for the granting of Georgian tax residency, as set out above. If the application documents comply with legal requirements, the Revenue Service shall forward the application to the Minister of Finance for approval. The Minister of Finance makes the final decision on the granting of Georgian tax residency.

Notably, Georgian tax residency is granted for a one-year term only. Respectively, if the High Net Worth Individual wants to maintain Georgian residency status, he or she must re-apply after one year. It should also be noted that re-application is not required if the individual becomes a tax resident of Georgia under the general rules on tax residency (i.e. the individual spends at least 183 days in Georgia during the relevant period).

As noted in this article’s introduction, there could be compelling reasons for a High Net Worth Individual to receive Georgian tax residency under the Special Residency Regime. The Revenue Service, however, received only a handful of applications and few individuals have been granted such status.

Prospects of Special Residency Regime

Under the Tax Code, currently both Georgian and non-Georgian residents are taxed only on Georgian-source income. Therefore, receipt of Georgian tax residency status does not offer a significant advantage with regards to Georgian personal income taxes to High Net Worth Individuals. The same is true (subject to certain exceptions) with respect to Georgian property taxes as residents and non-residents alike pay such taxes on property located in Georgia. This may be one reason why only a handful of individuals have applied for Georgian tax residency.

At first glance, Georgian tax residency may also be beneficial from an international tax perspective. Specifically, an individual holding Georgian tax residency may claim benefits under Georgia’s relevant Treaty. For instance, under some Treaties, the Treaty Partner Country may not tax dividends received by a Georgian resident from a source in the Treaty Partner Country. Thus, upon gaining Georgian tax residency, an individual holding such status may avoid taxation of its dividends received from a source in such Georgian Treaty Partner Country.

However, some jurisdictions do not recognize the residency status of individuals and companies claiming Treaty benefits if such status is granted merely on formal grounds and there is no material economic connection between the individual and the country granting residency status. Each country makes a decision on this matter based on its own law and practice. High Net Worth Individuals who gain Georgian tax residency status under Georgia’s Special Residency Regime run the risk of a Georgian Treaty Partner Country not recognizing such residency for treaty purposes and, respectively, denying Treaty benefits to such individuals. Georgia’s Special Residency Regime may thus prove to have material limitations despite its offering of tangible tax benefits to High Net Worth Individuals.

Note: this article does not constitute legal advice or tax advice. You are responsible for consulting with your own professional tax advisors concerning specific tax circumstances for your business.