Tax Turnaround for Foreign Owners

This is stated in the Situational Instruction №1434 on property tax accounting for property owned by a non-resident individual, published on January 25 on the Revenue Service's website - internal clarifications of tax law norms that tax authorities are mandated to follow (the instruction text is available here).

According to Article 201 of the Georgian Tax Code, all property owners are obligated to pay property tax, regardless of citizenship and tax residency. As per Part 5 of Article 202 and Part 1 of Article 206 of the Tax Code, the tax liability and rate depend on the owner's income: up to 40,000 GEL – a tax exemption applies, and the taxpayer is not required to pay tax; 40,000-100,000 GEL – the rate is 0.05-0.2%, and above 100,000 GEL – the rate is 0.8-1% of the property's market value. The specific percentage within the range set by the Tax Code is determined by the municipality where the property is located. In the absence of a direct indication otherwise, income was understood to mean any income received by the owner, including global income – income received not from Georgian sources.

The Revenue Service could reliably verify property owners' income based on income tax declarations – employers and small business individual entrepreneurs report monthly on employees' incomes, and annually for individual entrepreneurs without special status and individuals. It is worth noting that the income tax in Georgia is generally 20% and is payable on incomes derived from Georgian sources. If a property owner does NOT have incomes from Georgian sources, they are NOT required to pay income tax in Georgia, and thus are not obliged to file an income tax declaration.

Thus, if the foreign owner voluntarily did NOT declare their global income (without paying income tax), the Revenue Service did NOT have justified information about the foreign non-resident owner's income level. Despite the tax authority's ability to request information on non-resident property owners' incomes based on conventions and international agreements, tax authorities applied the following approach to foreign owners: no declared income – property tax rate = 0.

To put it briefly, everything has changed. The new clarification by the Revenue Service has established a new presumption: foreign owners, who are NOT tax non-residents of Georgia and have NOT filed a property tax declaration, will be taxed at the maximum property tax rate of 0.8-1% of the property's market value.

To avoid paying tax at the maximum rate or to be exempt from it altogether, owners must file a property declaration and prove their income level.

Changes in the tax authority's approach could increase state budget revenues, but there is a risk of reducing the investment attractiveness of Georgian real estate for foreign investors. Since the tax code has not changed, and the Revenue Service's Instruction is a clarification of the application of existing norms, it is only speculative whether the new approach will apply to previous periods. The scope of tax inspection in Georgia is 3 years.