Your options as a solopreneur, freelancer or contractor - 1% Tax
September 8th 2023
If your plan involves operating a sole proprietorship in Georgia, you can take advantage of the remarkable tax advantages provided by the Small Business Status (SBS) for Individual Entrepreneurs.
The Small Business Status (SBS) is a tailored tax program specifically designed for Individual Entrepreneurs (IEs) who are registered in Georgia. Under this scheme, eligible IEs can apply for the SBS and pay a flat 1% tax on their annual turnover, capped at a maximum annual turnover of 500,000 GEL. This results in substantial tax savings for many freelancers and solopreneurs.
The Small Business Status (SBS) is a tailored tax program specifically designed for Individual Entrepreneurs (IEs) who are registered in Georgia. Under this scheme, eligible IEs can apply for the SBS and pay a flat 1% tax on their annual turnover, capped at a maximum annual turnover of 500,000 GEL. This results in substantial tax savings for many freelancers and solopreneurs.
Key highlights
Take advantage of exceptionally low tax rates ranging from 0% to 3% (typically 1%) on your gross turnover by becoming an Individual Entrepreneur with Small Business Status (or micro business status) in the country of Georgia.
You could qualify for these highly favorable tax rates if your business meets the following criteria:
Foreigners from over 90 countries, including the EU, UK, USA, NZ, and AUS, are welcome to utilize Georgia's one-year visa-free entry program, allowing them to legally work, reside, and establish a business in Georgia or relocate their existing business to the country.
You could qualify for these highly favorable tax rates if your business meets the following criteria:
- Your business has an annual turnover of less than 500,000 GEL (approximately $165,000 USD).
- You are the sole proprietor of the business.
- Your business activities are not on the list of prohibited activities, and you are genuinely self-employed.
- You are not required to be a legal resident or citizen of Georgia.
Foreigners from over 90 countries, including the EU, UK, USA, NZ, and AUS, are welcome to utilize Georgia's one-year visa-free entry program, allowing them to legally work, reside, and establish a business in Georgia or relocate their existing business to the country.
Individual Entrepreneur & Small Business Status Registrations
Individual entrepreneurship simplified options vs legal entities
Individual Entrepreneur registration does not constitute the creation of a legal entity; rather, it involves the enrollment of an individual as a business entity. This means that you, as an individual, bear responsibility for debts and legal matters related to this business classification.
Registering as an Individual Entrepreneur (IE) alone does not automatically grant you the 1% tax rate. To access the tax advantages described earlier, you must utilize your Individual Entrepreneur status to apply for Small Business Status at the Revenue Service. This application can be made either in person or through a representative. Small Business Status entails a 1% tax rate and is available to those with an annual turnover below 500,000 GEL. It's permissible to have employees in this structure, but tax withholding applies to their salaries.
Additionally, individuals with an annual turnover of less than 30,000 GEL have the option to apply for Micro Business Status, which comes with a 0% tax rate. However, this status does not allow for the employment of staff (Resolution 415). Notably, IE registration is not mandatory for obtaining Micro Business status.
The Small Business Status is an excellent choice for freelancers, self-employed individuals with foreign income, and anyone else running a sole proprietorship in Georgia, provided their activities are not on the list of prohibited activities (including consulting, medical, architectural, legal, and more). Moreover, you must not be an employee or a contractor masquerading as an employee under a service contract.
If your annual turnover surpasses the 500,000 GEL threshold during a tax year, you will be subject to a 3% tax on turnover for all income earned from the month in which the threshold was exceeded until the end of that tax year. If your turnover exceeds 500,000 GEL for two consecutive years, your Small Business Status will be revoked starting from the subsequent tax year. Alternatively, significantly exceeding the annual threshold could potentially lead to the revocation of your status within the first year of operation. In such cases, you can continue operating with a flat tax rate of 20% on net profits. However, it may be advisable at this point to consider forming an LLC or another business structure.
Registering as an Individual Entrepreneur (IE) alone does not automatically grant you the 1% tax rate. To access the tax advantages described earlier, you must utilize your Individual Entrepreneur status to apply for Small Business Status at the Revenue Service. This application can be made either in person or through a representative. Small Business Status entails a 1% tax rate and is available to those with an annual turnover below 500,000 GEL. It's permissible to have employees in this structure, but tax withholding applies to their salaries.
Additionally, individuals with an annual turnover of less than 30,000 GEL have the option to apply for Micro Business Status, which comes with a 0% tax rate. However, this status does not allow for the employment of staff (Resolution 415). Notably, IE registration is not mandatory for obtaining Micro Business status.
The Small Business Status is an excellent choice for freelancers, self-employed individuals with foreign income, and anyone else running a sole proprietorship in Georgia, provided their activities are not on the list of prohibited activities (including consulting, medical, architectural, legal, and more). Moreover, you must not be an employee or a contractor masquerading as an employee under a service contract.
If your annual turnover surpasses the 500,000 GEL threshold during a tax year, you will be subject to a 3% tax on turnover for all income earned from the month in which the threshold was exceeded until the end of that tax year. If your turnover exceeds 500,000 GEL for two consecutive years, your Small Business Status will be revoked starting from the subsequent tax year. Alternatively, significantly exceeding the annual threshold could potentially lead to the revocation of your status within the first year of operation. In such cases, you can continue operating with a flat tax rate of 20% on net profits. However, it may be advisable at this point to consider forming an LLC or another business structure.
IMPORTANT! When to register for 1% tax
Please be aware that these favorable tax rates do not have retroactive application for the entire tax year. They take effect only from the 1st day of the month following your successful registration.
For the months of the tax year during which you automatically become a tax resident and have earned income while working remotely in Georgia or locally before obtaining Small Business Status, you will be liable for a 20% tax on your gross income. This income must be declared and paid by March 31st of the year following the reporting year.
If you spend more than 183 days (or a shorter duration in some cases) in any tax year in Georgia, most double taxation avoidance treaties may not provide protection. This means that even if you are paying taxes elsewhere, you might also be obligated to pay taxes in Georgia. It's important to note that this is not unique to Georgia; it is a common rule in many countries worldwide.
For this reason, it is crucial to register your business as soon as you arrive in Georgia. Failure to do so may result in you paying a 20% tax on your income rather than the more favorable 1%, and you may also end up paying unnecessary taxes in other locations, which could be challenging to recover after the fact.
For the months of the tax year during which you automatically become a tax resident and have earned income while working remotely in Georgia or locally before obtaining Small Business Status, you will be liable for a 20% tax on your gross income. This income must be declared and paid by March 31st of the year following the reporting year.
If you spend more than 183 days (or a shorter duration in some cases) in any tax year in Georgia, most double taxation avoidance treaties may not provide protection. This means that even if you are paying taxes elsewhere, you might also be obligated to pay taxes in Georgia. It's important to note that this is not unique to Georgia; it is a common rule in many countries worldwide.
For this reason, it is crucial to register your business as soon as you arrive in Georgia. Failure to do so may result in you paying a 20% tax on your income rather than the more favorable 1%, and you may also end up paying unnecessary taxes in other locations, which could be challenging to recover after the fact.
Overview
Micro Business Small Business
Structure
Natural person or Individual Entrepreneur
Turnover
<30,000 Gel for a calendar year
Employees
No employees
What taxes should you pay?
Exempt from personal income taxes. 0% (on gross turnover) rather than 20% (on net income).
VAT
As a Micro Business, you are not eligible to become a VAT taxpayer.
Tax Declarations
Submit a simplified annual income tax declaration prior to April 1st of the year following your reporting year.
Cash register (point of sale)
No obligation to use the cash register.
Accounting Requirements
No requirements except the annual declaration.
Revocation of status
Your Micro Business status will be revoked if:
*You become a VAT payer.
*Total gross income received by the natural person during a calendar year >30,000 GEL.
*You start hiring employees.
*Balance of your inventory items exceeds 45,000 GEL (GTC Article 85).
*In that case, a Micro Business can submit an application to become a Small Business.
Structure
Natural person or Individual Entrepreneur
Turnover
<30,000 Gel for a calendar year
Employees
No employees
What taxes should you pay?
Exempt from personal income taxes. 0% (on gross turnover) rather than 20% (on net income).
VAT
As a Micro Business, you are not eligible to become a VAT taxpayer.
Tax Declarations
Submit a simplified annual income tax declaration prior to April 1st of the year following your reporting year.
Cash register (point of sale)
No obligation to use the cash register.
Accounting Requirements
No requirements except the annual declaration.
Revocation of status
Your Micro Business status will be revoked if:
*You become a VAT payer.
*Total gross income received by the natural person during a calendar year >30,000 GEL.
*You start hiring employees.
*Balance of your inventory items exceeds 45,000 GEL (GTC Article 85).
*In that case, a Micro Business can submit an application to become a Small Business.
Small Business
Structure
Individual Entrepreneur
Turnover
< 500,000 Gel for a calendar year
Employees
Can have employees (If their salary is under 6000 GEL annually, and your business turnover was below 50k GEL in the previous tax year, no tax is due on employee salary. If salary is above 6k, then 20% tax withholding is due on total salary).
What taxes should you pay?
* Gross turnover is taxed at 1%;
* Gross turnover taxed at 3% if it exceeds 500,000 GEL in a calendar year.
Example: A small business exceeds the turnover of 500,000 GEL in September, the tax is 3% from September to December. If that situation happens within two consecutive years, the status of the Small Business will be canceled the following year.
VAT
If your VAT taxable transactions exceed 100,000 GEL during any continuous 12 calendar months, you have to register as a VAT taxpayer promptly and pay VAT on all future transactions that qualify for VAT.
VAT is 18%.
Certain activities are completely exempt from paying VAT, but you can still register for VAT if you choose, no matter your turnover, so you can claim back VAT on eligible business purchases and claim reverse VAT.
Tax Declarations
Submit monthly income tax Declarations between the 1st and 15th of each month.
If you are a VAT taxpayer, submit your VAT Declarations before the 15th of each month
Cash register (point of sale)
Need to use a cash Register for receiving cash payments.
(some banks offer a mobile terminal that allows for both card and cash payments).
Accounting Requirements
Need to keep a Special Journal (a record of expenses) of Small Business accounting (see GTC Article 91 (1)).
Revocation of status
Your Small Business status will be revoked if:
*Total gross income received by the small business during a calendar year exceeds 500,000 GEL for 2 consecutive years.
*If a Small Business was fined 3 times in a calendar year, due to not using a cash register.
Structure
Individual Entrepreneur
Turnover
< 500,000 Gel for a calendar year
Employees
Can have employees (If their salary is under 6000 GEL annually, and your business turnover was below 50k GEL in the previous tax year, no tax is due on employee salary. If salary is above 6k, then 20% tax withholding is due on total salary).
What taxes should you pay?
* Gross turnover is taxed at 1%;
* Gross turnover taxed at 3% if it exceeds 500,000 GEL in a calendar year.
Example: A small business exceeds the turnover of 500,000 GEL in September, the tax is 3% from September to December. If that situation happens within two consecutive years, the status of the Small Business will be canceled the following year.
VAT
If your VAT taxable transactions exceed 100,000 GEL during any continuous 12 calendar months, you have to register as a VAT taxpayer promptly and pay VAT on all future transactions that qualify for VAT.
VAT is 18%.
Certain activities are completely exempt from paying VAT, but you can still register for VAT if you choose, no matter your turnover, so you can claim back VAT on eligible business purchases and claim reverse VAT.
Tax Declarations
Submit monthly income tax Declarations between the 1st and 15th of each month.
If you are a VAT taxpayer, submit your VAT Declarations before the 15th of each month
Cash register (point of sale)
Need to use a cash Register for receiving cash payments.
(some banks offer a mobile terminal that allows for both card and cash payments).
Accounting Requirements
Need to keep a Special Journal (a record of expenses) of Small Business accounting (see GTC Article 91 (1)).
Revocation of status
Your Small Business status will be revoked if:
*Total gross income received by the small business during a calendar year exceeds 500,000 GEL for 2 consecutive years.
*If a Small Business was fined 3 times in a calendar year, due to not using a cash register.
Overview of taxes you will need to declare and pay each month
With the Small Business Status, you are required by law to declare and pay taxes by the 15th day of each month. The declarations you need to make:
Should you register for VAT? If all your income derives from B2B transactions from foreign clients and/or B2C digitally rendered to foreign customers, and you have any business expenses where you pay VAT or reverse VAT, then the answer is typically YES.
As you can see from this breakdown, if you are an Individual whose clients are based outside of Georgia, if your service purchases, contractors, etc. are from treaty countries, you are VAT registered, and have no employees, you will likely only pay 1% on turnover, claim back most or all of your reverse VAT.
The taxes are great, but there is a lot of monthly declarations and record keeping which need to be performed.
- Income Declarations (1% on turnover).
- IF registered for VAT, you must make monthly VAT turnover declarations – including VATable (18%) and non-VATable (0%) turnover). Being registered means you can claim back VAT on purchases where it is collected at source (so long as you attain “qualified” VAT status).
- Reverse VAT declarations (18% on all international service purchases) (Mandatory on international purchases, even if you are not VAT registered). If VAT registered, you can claim this 18% back and effectively pay 0%.
- Salary tax (20%) + 2+2% pension, for Georgian employees. Salary tax is dependant on where your employees are based. Salary income tax is due if the employment is exercised in the territory of Georgia (DTA exceptions apply).
- Keeping of the general journal (effectively a spreadsheet of your business expenses). This is not a tax to pay, it is simply a mandatory record keeping requirement. In the event of an audit, the journal must be supplied. It does not need to be submitted to the RS at any other time.
Should you register for VAT? If all your income derives from B2B transactions from foreign clients and/or B2C digitally rendered to foreign customers, and you have any business expenses where you pay VAT or reverse VAT, then the answer is typically YES.
As you can see from this breakdown, if you are an Individual whose clients are based outside of Georgia, if your service purchases, contractors, etc. are from treaty countries, you are VAT registered, and have no employees, you will likely only pay 1% on turnover, claim back most or all of your reverse VAT.
The taxes are great, but there is a lot of monthly declarations and record keeping which need to be performed.
Which Status Do You Qualify For and how to calculate turnover, understanding how much tax will you pay?
When calculating and reporting your monthly and annual turnover as an individual entrepreneur, certain personal income can be excluded (note: tax may still be due elsewhere on that income):
- Leasing of property/renting out immovable property.
- Income from loans.
- Profits from a gambling business.
- Gifts.
- Capital gains derived from the sale of the following property: A) real estate; B) vehicle; C) securities.
- Income received in the form of inherited property.
- Income received in the form of dividends.
- Income received as interest.
- Income received in the form of royalties.
- Income from debt forgiveness.
- Capital gains from the sale of shares (From an additional business – as Individual Entrepreneur registration cannot include partners).
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