Dechert OnPoint: The New Elements of Produce 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.

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.

INTRODUCTION

On 1 June 2014 the Government of Georgia launched a state-sponsored program called “Produce in Georgia” (the “PG”). PG is supervised by the Ministry of Economy and Sustainable Development of Georgia (the “MoESD”). The program aims to facilitate competitive local production of goods and services by encouraging production in Georgia while guaranteeing high standards of quality. Since its commencement, PG has enhanced Georgia’s industrial and agricultural sectors by providing financial and technical support to entrepreneurs.

On 1 March 2016, Prime Minister of Georgia Giorgi Kvirikashvili introduced changes to PG (the “New Elements”) that include a new component to facilitate the development of Georgia’s hotel industry. The goal of this component is to support PG’s beneficiaries in starting their own businesses, attracting tourists to the country, creating new employment in the hotel industry and bringing investment to Georgia’s underdeveloped regions.

This edition of OnPoint provides an overview of PG’s New Elements while placing special emphasis on the hotel industry.

HOTEL INDUSTRY

Under PG, any building with respective infrastructure having at least ten guest rooms is qualified as a hotel. Entrepreneurs are free to establish or expand a hotel as well as to enter into franchising agreements to use international brand names. An international brand is defined as a trademark of a foreign company having at least fifteen hotels outside of Georgia.

The operation of hotels with or without an international brand name and located on the territory of Georgia (excluding Tbilisi and Batumi) is subject to financial support under PG.

FINANCIAL SUPPORT FOR HOTELS WITHOUT AN INTERNATIONAL BRAND NAME

In order to receive assistance from PG, the investor (the “Beneficiary”) should first apply to the Agency of Entrepreneurial Development, which operates under the auspices of the MoESD. The Beneficiary may benefit from PG’s co-financing of loans that it has obtained from Georgia’s commercial banking sector. The Program provides financial support in the way of: (i) co-financing the interest accrued on the loan; or (ii) backing the loan by granting a security.

Those Beneficiaries who receive a project loan from commercial banks in Georgia, in an amount between a minimum of GEL 500,000 (or equivalent in USD/EUR) and a maximum of GEL 1,000,000 (or equivalent in USD/EUR), are eligible to apply for PG assistance. The annual interest rate on loans denominated in GEL shall not exceed 17%, while loans denominated in USD shall not accrue more than 11% per annum. The precise interest rate depends both on the amount and currency of the loan granted.

PG co-finances the interest accrued on such loans in the following manner: (i) 10% per annum for loans issued in GEL (e.g., if a loan is established at 10% per annum, PG will assume 8% per annum and the Beneficiary the remaining 2%); or (ii) 8% per annum in cases of USD/EUR denominated loans. The financing period may not exceed 24 months. The Program also offers a security for the loan in an amount not exceeding 50% of the principal amount of the loan. In any case, the amount of the security shall not exceed GEL 500,000 (or 200,000 EUR/USD) and the term of the co-financing shall be 48 months.

FINANCIAL SUPPORT FOR HOTELS WITH AN INTERNATIONAL BRAND NAME

Beneficiaries who enter into franchising or management agreements with international brand names can access similar financial support arrangements to those explained above, with the following modifications: (i) they are eligible to obtain a loan in the maximum amount of GEL 5,000,000 (or the equivalent in USD/EUR); and (ii) they are entitled to request the granting of a security of which the amount shall not exceed GEL 2,500,000 (or 1,000,000 EUR/USD).

Under PG, the Beneficiaries are entitled to receive financial support for the royalty fees incurred by using an international brand name. Such co-financing is provided for a period of 24 months and the annual amount of such support is limited to GEL 300,000.

CURRENCY AND AMOUNT OF FINANCIAL SUPPORT

The New Elements of the PG also concern currencies used and the limits of financial support. Following introduction of the New Elements, the Beneficiaries are entitled to receive loans not only in GEL and USD, but also in EUR. Additionally, in order to satisfy the needs of smaller entrepreneurs, PG lowered the minimum amount of loans acquired by the Beneficiaries for the development of each and every industry (with the exceptions of the hotel and movie industries) from GEL 150,000 to GEL 75,000. As the Prime Minister declared, the purpose of the New Elements is to provide support to smaller-scale industries and help meet the needs of every sector of the Georgian economy.

TECHNICAL ASSISTANCE

In addition to financial assistance, the Beneficiaries also have the opportunity to benefit from technical assistance in the fields of marketing, business planning and product sales. The New Elements also include a detailed interpretation of technical assistance provided under the PG. Specifically, technical assistance means compensation for any and all costs related to the following services provided on the territory of Georgia: (i) informational and consultation services (excluding installation of fixed assets or/and instruction services with regard to other assets); (ii) training and consultation for management, increase of productivity and production volume, operation optimization, sales and marketing, research and development, financial accounting and legal matters related to the company/production; (iii) implementation of quality management and contemporary standards in production processes; (iv) preparation and execution of a technical assistance plan; (v) implementation of leading international and local environmental protection standards in the production process.

CONCLUSION

In sum, Produce in Georgia offers Beneficiaries access to a variety of tools to facilitate the production of goods and services in Georgia. The new hotel industry component of PG aims to support regional development, while other aspects of the program’s New Elements are designed to support the needs of smaller-scale businesses and sectors.