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Representation expenses in Georgia

What are representation expenses and what costs can be attributed to them?
Anna Davidson, Founder and Managing Partner of JUST Advisors
November 29, 2022
What are representation expenses and what costs can be attributed to them? Is it possible to organize corporate lunches at the expense of the company, pay with a business card for a taxi and in a store, pay for corporate gifts, as well as tea and coffee for Employees? How to properly substantiate and confirm representative expenses and are there limits for them? What is the risk of breaking the rules? We will talk about this in this article.

What is representation expenses

According to Art. 8 clause 33 of the Tax Code of Georgia (as amended on 06/23/2022) representative are expenses incurred by the company in connection with the implementation of economic activities. Representation expenses within the established limits are not taxed and can be attributed to the company’s expenses for the purposes of determining the tax base for income tax.

What expenses can be classified as representative

These are expenses incurred on behalf of the company
a) expenses for events (juices, mineral waters, soft drinks, tea, coffee, breakfast, lunch, dinner, banquet) held on behalf of the person (presentations, receptions);
b) expenses for excursion and cultural entertainment events;
c) expenses for the purchase of souvenirs;
d) the cost of providing services to guests, including:

— expenses for consular services (issuance of visas, prolongation of their term);
— expenses for meeting and seeing off at the airport (VIP-hall services);
— the cost of transport services;
— expenses for hotel services (reservation of places, cost of living);
— expenses for receptions, receptions (juices, mineral waters, soft drinks, tea, coffee, breakfast, lunch, dinner, banquet).

The list is closed. Other expenses not included in this list cannot be classified as representation.

Representative expense limit

It is established annually for a calendar year and amounts to an amount equal to:

1. 1% of income received during the previous calendar year OR
2. 1% of expenses incurred if expenses incurred exceed income received OR
3. in the calendar year of establishment of the enterprise — 1% of expenses incurred before the end of this calendar year (Article 984 of the Tax Code of Georgia).

How to justify the representative nature of expenses

1. Stock up on documents confirming the purpose of spending, for example:
— agreements signed with Partners during a business lunch;
— the order and documents on the business trip of the Employee for whom the visa was obtained;
— a Memorandum signed with a non-resident customer for whom you booked a hotel and ordered a transfer from the airport.

2. Remember about primary documents (cash receipts) if expenses were paid in cash, and not from a bank account or business card.

Procedure for carrying out representative expenses

Payment of expenses that are representative in nature can be made from the company’s bank account, as well as by business card or in cash from the company’s cash desk or from the employee’s personal funds with their subsequent reimbursement.

A report on the performance of representative expenses. Cost recovery

In order to correctly reflect entertainment expenses in the company’s accounting, especially if representative expenses were incurred in cash from the Employee’s own funds or at the expense of the company’s cash desk, it is advisable to provide the company’s accountant with a report on representative expenses. It is recommended to include in the report:

1. the purpose of spending (justification) — for example, a meeting with a Partner in order to conclude an Agreement;
2. the nature of the costs — for example, paying for a business lunch;
3. the procedure for paying costs — for example, in cash from the Company’s cash desk;
4. the amount received by the Employee under the report from the Company’s cash desk to pay expenses;
5. the amount actually spent by the Employee;
6. the amount to be refunded (or an additional amount to be reimbursed to the employee if the amount of expenses turned out to be higher).

It is also necessary to attach primary documents confirming the costs.

Taxation of representative expenses

According to Art. 97, paragraph 1 of the Tax Code "g" the objects of taxation by the profit tax of a resident enterprise are incurred representative expenses in an amount exceeding the maximum amount established by the Tax Code. Thereby:

1. within the established maximum amount, representative expenses are not taxed;
2. In excess of the established limit, entertainment expenses are subject to a 15% income tax

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MARIA GUSEINOVA
Leading Manager of Commercial Department