Dechert OnPoint: Beneficial Regulations for Hotel Operators in Georgia

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.

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Overview:

The legal framework for the Georgian hospitality sector offers a wide range of regulatory incentives to entrepreneurs active in the Georgian hotel construction and operation business. Regulatory incentives are applicable in three areas of the hospitality sector, namely: (a) construction and operation of middle or high-class hotels in free tourist zones; (b) construction of hotels for the purpose of supplying hotel assets; and (c) setting-up casinos on the premises of newly-built hotels. The respective regulations are incorporated in the Tax Code of Georgia adopted on 12 October 2010 (as well as its amendments) and in the Law of Georgia on Promotion of the Development of Free Tourist Zones (the “Law on FTZ”) adopted on 2 November 2010 (as well as its amendments), as well as various related decrees and orders issued by the respective state authorities. This article focuses on the terms and subsequent benefits for the construction and operation of middle and high-class hotels in Georgian free tourist zones.

Free Tourist Zones

The Law on FTZ establishes a legal framework for the establishment and operation of the free tourist zones. Various zones in Georgia may be assigned the title of “free tourist zone” by decree of the Government of Georgia. Currently, seven free tourist zones, located in Kobuleti, Anaklia and Ganmukhuri (all located on the Black Sea coast), allow entrepreneurs to construct and operate middle or high-class hotels and enjoy applicable benefits.

On the basis of the Law on FTZ, entrepreneurs are selected to become owners of a specified land plot in a Georgian free tourist zone and are subject to the construction obligations of a middle or high-class hotel. The decision on the transfer of the land plot into the ownership of the entrepreneur is taken by a special governmental commission established specifically for these purposes, which is chaired by the Minister of the Economy and Sustainable Development of Georgia. In case the entrepreneur fails to construct the hotel in the agreed timeframe, the Government of Georgia retains the right to claim the return of the land plot and the premises thereon into the ownership of the state.

The Law on FTZ provides the basis for related governmental decrees and ministerial orders which regulate and determine criteria for the assessment of hotel classes as well as requirements applicable to those entrepreneurs wishing to have the right to construct a hotel in the Georgian free tourist zones. Such entrepreneurs are subject to regulatory incentives as described in the following paragraphs.

Criteria for Middle and High-Class Hotels

Specific criteria for the definition of middle and high-class hotels are provided in the order of the Minister of Economy and Sustainable Development of Georgia dated 27 December 2010 (the “MoESD Order”). The MoESD Order defines standards necessary for such assessment, including the space of hotel rooms, access roads, access to utilities, sanitary conditions, guest registration and eating facilities for each hotel class. The same order makes reference to internationally-accepted specifications in terms of hotel equipment and service level and requires that entrepreneurs meet the standards established by international associations.

Eligibility for Registration

In order to be eligible for regulatory incentives, entrepreneurs building and operating a hotel in the free tourist zones are required to adhere to the following procedure:

Firstly, entrepreneurs shall complete the registration process established by the Governmental Decree of 23 June 2015. As a result of this registration, entrepreneurs will become tourist zone entrepreneurs and will be granted special status by the Georgian authorities;

Secondly, after the granting of this status entrepreneurs must be able to demonstrate that they invested at least one million (1,000,000) Georgian Laris in the construction of the hotel in the free tourist zone; and

Finally, entrepreneurs shall comply with the permitted activities of the hotel. The permitted activities include renting of hotel rooms and provision of related services as well as operation of dining facilities, swimming pools or casinos in the hotel building. Generally, all entrepreneurs registered in the free tourist zones shall ensure that their activities are in compliance with the terms and provisions of the Law on FTZ and other applicable regulations.

Applicable Benefits

Once the entrepreneurs comply with the above requirements they are subject to various legal and commercial benefits. Notably, the beneficial regulations continue to apply to subsequent owners of the hotel in the free tourist zone, provided that the subsequent owner maintains operation of the hotel.

The applicable benefits under the Law on FTZ and related legislation may be divided into two groups: one including benefits relating to infrastructure and another group relating to tax advantages for entrepreneurs. The first group consists of the following advantages: (i) land plots necessary for construction of the hotel will be transferred to the entrepreneur for the symbolic price of one (1) Georgian Lari; (ii) the Government of Georgia will provide necessary infrastructure (natural gas, water, sewerage, electricity) and construct/repair access roads to the hotel building; (iii) the process of obtaining the construction permit and status of significant real estate project will be granted via simplified procedures; (iv) the entrepreneur will be exempted from payment of construction permit fees; and (v) the entrepreneur will be provided with a free construction plan for the hotel.

In addition to the above infrastructure benefits, the free tourist zone entrepreneurs will enjoy several tax advantages, including: (i) exemption of the value of the purchased land plot from profit taxes; (ii) exemption of profits derived from the rendering of hotel services from profit tax until 1 January 2026; and (iii) exemption of the property related to hotel services from property tax until 1 January 2026.

Conclusions

The regulations established under the Law on FTZ intend to support the development of the hotel construction and operation business in Georgia. The general approach of legislators in this regard clearly demonstrates that the Government of Georgia is keen on attracting new investors and, for these purposes, is establishing various beneficial arrangements and favorable conditions for existing and potential investors.

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