Transparent Taxation System in Georgia: Merging of Companies and Individual Entrepreneurs into One Category for VAT Purposes

Introduction: What Changes Were Made in Tax Legislation?

On October 16, 2024, amendments to the Minister of Finance of Georgia’s order №996, dated December 31, 2010, on “Tax Administration” came into force. The order was supplemented with Article 46(1), titled “Consideration of Several Persons as One Taxpayer for VAT Purposes in the Territory of Georgia.”

What Was the Situation Before? Uncertainty in Tax Regulations

According to Subparagraph "c" of Paragraph 9 of Article 73 of the Georgian Tax Code, the tax authority had the right to consider several persons based in Georgia as a single taxpayer for VAT purposes, regardless of their formal/legal independence, if the primary decisions regarding their activities and management were made by the same person, and if their business location, form, and content were identical. The application of this right and its procedure were determined by the Minister of Finance of Georgia.

The lack of clear criteria in the legislation led to potential subjective interpretations and legal uncertainty in business practices. For example, businesses operating in adjacent sectors could be arbitrarily merged, leading to an undue increase in taxes.

What Has Changed? Clear Criteria Instead of Ambiguous Formulations

Clear and specific criteria were introduced regarding the conditions under which multiple entities may be considered as a single taxpayer for VAT purposes. This change helps taxpayers understand how this rule is applied and how it affects their business, promoting the establishment of a transparent and fair tax system.

Main Criteria for Identical Activities:

The order now clearly defines that the tax authority has the right to consider several persons based in Georgia as a single taxpayer for VAT purposes, regardless of their formal/legal independence, if all the following conditions are met:

1.The primary decisions related to their activities and management are made by the same person.

2.Their place of business is identical.

3.The form and content of their activities are identical.

4.One of the group member is not registered as a VAT payer.

What is Meant by Identical Activities?

It is considered that primary decisions related to activities and management are made by the same person if the same individual makes decisions regarding at least two of the following matters:

·Selection of contractors and entering into agreements with them;

·Setting the price of goods/services;

·Selection of employees and defining the terms of employment contracts;

·Appointment and dismissal of senior executives;

·Distribution of dividends;

·Reorganization of the business;

·Making investments;

·Taking on obligations;

·Providing collateral for obligations;

·Other decisions essential to the operation or management of the business.

It is considered that the form and content of activities are identical if any of the following conditions apply:

·The entities supply the same or similar goods and/or services;

·The entities conduct the same or similar core activities related to the same economic sector;

·Their activities target the same customer base;

·They share or use the same core assets;

·Other circumstances that indicate the activities’ form and content are identical.

Additional Information:

The term “group of persons” is defined by Subparagraph "a" of Article 157 of the Georgian Tax Code, including:

·Individuals,

·Enterprises or organizations,

·Associations of persons that participate independently in legal relationships but do not have the status of a legal entity.

In the case of discussing a group of persons as a single taxable entity, for the purpose of mandatory VAT registration of each member of the group, when determining the total amount of taxable transactions, the total value of the transactions involving the delivery of goods or the provision of services by each group member is considered, excluding the value of transactions involving the delivery of goods or provision of services between the members of the same group.

Each member of the group is considered a VAT taxpayer starting from the moment (including that moment) when the total amount of taxable transactions conducted by the persons within the group exceeds 100,000 GEL. After registering as a VAT taxpayer, each group member acquires all rights and obligations related to the value-added tax as prescribed by the tax legislation of Georgia.

The identification of the group is carried out within the framework of a tax audit.

How Will the Criteria Be Applied in Practice? An example based on new codification:

An individual entrepreneur, registered in February 2024, started a business. In June of the same year, he registered a company, LLC "Gaga", which he wholly (100%) owned. In July, he co-founded LLC "Guga" with his wife, each holding 50% of the shares. The activities of all three entities are identical, and none of them are registered for VAT. It was determined that "Gaga" made the key decisions for both its own operations and those of the other companies. The turnover they have generated amounts to:

The tax authority has the right to consider the individual entrepreneur, LLC "Gaga," and LLC "Guga" as a single taxpayer. Therefore, the combined turnover of all their transactions will be considered as a single entity’s turnover for VAT purposes. VAT registration will become mandatory once the total turnover exceeds 100,000 GEL, calculated based on all transactions, including the August 2024 operation that triggered VAT registration for all entities in the group.

Thus, the mandatory VAT registration date for the individual entrepreneur, LLC "Gaga," and LLC "Guga" is set for August 20, 2024, when their total turnover exceeded 100,000 GEL. The tax authority must register all group members for VAT.

Benefits and Advantages for Businesses:

·Reduced Risks from Arbitrary Decisions: The new regulations minimize the risks that the recognition of unity can be misinterpreted without basis

·Tax Regulation Transparency: Clear criteria allow businesses to predict whether they will be considered a single taxpayer for VAT purposes, enhancing the predictability of the tax system.

·Fairer Tax System: Businesses are better protected from arbitrary mergers, which ensures fair competition and equal conditions in the market.

·Improved Business Environment: The changes create transparent conditions for both local and foreign investors, boosting trust in the tax system.

Legal Aspects: Key Dates and Documents

·Order Amendment

·Order №996

Conclusion: A Step Towards Stability

The amendments to Order №996 represent a significant step towards creating a transparent tax system. These changes help businesses clearly understand their tax obligations and protect them from subjective decisions by the tax authorities. The specification of criteria reduces the risks of unnecessary interpretations, enabling businesses to predict whether they will be considered a single taxpayer for VAT purposes. This makes the tax system more stable and predictable, benefiting both local businesses and foreign investors.