Small Business Status in Georgia (1% Turnover Tax)

After cancellation the status can be granted again — with a new certificate number. Registering the IE and obtaining the status are two separate steps.

Who can obtain it?

Small Business Status may be granted to a natural person who carries out entrepreneurial activity and is registered with the Revenue Service as an Individual Entrepreneur.

To qualify, the applicant must:

• be a natural person, rather than a legal entity;
• carry out entrepreneurial activity independently; and
• be registered with the Revenue Service as an Individual Entrepreneur.

Holding VAT registration does not prevent a person from obtaining or retaining Small Business Status.

A person is not eligible if they carry out an activity that is prohibited under the regime (see below). If a prohibited activity is undertaken, the Revenue Service may refuse to grant the status or revoke it.

How to activate the status

Registering as an Individual Entrepreneur and obtaining Small Business Status are two separate steps, and the second does not happen automatically.

Step 1 — be an Individual Entrepreneur. The status can be granted only to a natural person who is an entrepreneurial natural person and is on the tax register. If you are not yet registered, register the IE first — see remotely or in person.

Step 2 — apply to the Revenue Service. Submit the prescribed application form to the Revenue Service. In practice, the application is filed through the Revenue Service (rs.ge).

Step 3 — receive the Small Business certificate. The Revenue Service reviews the application and, if approved, issues the Small Business Status certificate. The certificate specifies the date on which the status takes effect.

The certificate does not expire. Once granted, Small Business Status remains valid for subsequent reporting periods until it is cancelled or revoked in accordance with the law. There is no renewal requirement.

Moving up from Micro Business Status. A person who already holds Micro Business Status may apply for Small Business Status using the same procedure. Upon approval, the Micro Business Status is cancelled and the Small Business Status is granted through the same application.

The tax rate

The standard tax rate under Small Business Status is 1% of income that falls within the special tax regime.

If annual income from economic activity exceeds GEL 500,000 during a calendar year, the rate increases to 3%. For persons engaged in wine tourism or agritourism, the relevant threshold is GEL 700,000.

The higher rate does not apply retroactively. Instead, the 3% rate applies from the beginning of the month in which the relevant threshold is exceeded and remains in force until the end of that calendar year.

Which income is taxed under the regime

The special tax regime applies to qualifying Georgian-source income from economic activity. Employment income (salary) is not covered by the regime and is taxed under the ordinary rules.

Not all income earned by a person holding Small Business Status is taxed at 1% or 3%. The law distinguishes between:

• qualifying income taxed under the Small Business Status regime;
• income specified by the Government that is excluded from the regime and taxed under the ordinary rules; and
• other income that is likewise taxed under the ordinary tax rules.

A person may therefore hold Small Business Status while also receiving income taxed under the ordinary rules.

The following income is excluded from the special tax regime:

• Income from leasing property / renting out immovable property.
• Income received from granting a loan.
• Profits received from the gambling business.
• Gift.
• Excess income received from the disposal of:
  • immovable property;
  • a motor vehicle;
  • securities.
• Income received in the form of property received by inheritance.
• Income received in the form of dividends.
• Income received in the form of interest.
• Income received in the form of royalties.
• Income received through forgiveness of debt.
• Excess received from the disposal of a partner’s share.
• Income from certain construction services, including residential and non-residential building construction, civil engineering and specialised construction services, where the recipient is an enterprise, organisation or entrepreneurial natural person.

##Prohibited activities

• Activities requiring a licence or permit, except for the activity provided for in the Law of Georgia on Licences and Permits (“Permit for the transportation of passengers by passenger car – taxi (Category M1) in the capital of Georgia”).
• Activities requiring significant investment (production of excisable goods).
• Carrying out foreign exchange operations.
• Medical, architectural, advocacy or notarial, auditing, and consulting activities (including those of tax consultants).
• Gambling business.
• Provision of personnel.
• Production of excisable goods.

To see where a specific activity code falls, use the Small Business Activity Checker.

“Medical, architectural, legal advocacy or notarial, auditing, consulting (including tax consulting) activities” is the one that catches most people out. “Consulting” is an ordinary word with a very broad meaning, and many foreigners register as Individual Entrepreneurs to provide advisory or professional services. Whether a particular activity falls within the prohibited category of consulting, or instead qualifies as a different activity that is eligible for Small Business Status, depends on its legal classification, not on how it is described in a contract or invoice.

If the Revenue Service later determines that you carried on a prohibited activity, your Small Business Status is revoked retroactively from the beginning of the calendar year in which the activity was carried out. As a result, the preferential 1% tax rate no longer applies for that year, and the ordinary tax rules apply instead.

If there is any doubt about how your activity should be classified, confirm it with the Revenue Service or tax adviser before relying on the regime.

Accounting obligations

Although Small Business Status significantly simplifies tax compliance, holders of the status must still:

• keep the Small Business accounting journal prescribed by the Revenue Service;
• file the required tax declarations;
• use a cash register, where required by law;
• issue and use waybills, where required under the Tax Code;
• retain tax and accounting documents for 3 years. The period is calculated from the end of the calendar year in which the relevant tax liability arose.

Declarations

A person with Small Business Status is not required to make advance income tax payments. Instead, they must file a monthly Small Business declaration no later than the 15th day of the month following the reporting month.

If the person also receives income that is taxed under the ordinary tax regime, they may additionally be required to file an annual income tax declaration by 1 April of the following year.

For a detailed overview of the ongoing obligations after starting business activities—including monthly reporting, VAT registration and compliance, employer obligations, pension contributions, and a practical compliance calendar—see tax obligations of a small business.

VAT registration

Small Business Status does not exempt a person from VAT. If a person becomes required to register as a VAT payer under the Tax Code, they must register in accordance with the ordinary VAT rules.

Upon VAT registration, the person may claim input VAT on inventory and other goods held on hand at the date of registration, provided the conditions prescribed by the Tax Code are met, including possession of the required supporting tax documents.

Hiring people

A person operating under Small Business Status may hire employees or engage other individuals to perform work or provide services. The regime does not prohibit hiring.

General rule

If a person with Small Business Status makes a payment from which the Tax Code requires income tax to be withheld at source, they must withhold and pay that tax under the ordinary rules.

This includes, in particular:

• salary paid to employees; and
• other payments where the Tax Code imposes a withholding obligation.

Limited relief (GEL 6,000 rule)

Remuneration paid to hired individuals of up to GEL 6,000 during a calendar year is not subject to withholding at source if either of the following conditions is met:

1. the person registered as an Individual Entrepreneur and obtained Small Business Status during the same calendar year; or
2. the person’s total income in the previous calendar year did not exceed GEL 50,000.

Once remuneration exceeds GEL 6,000, the ordinary withholding rules apply.

When the status is cancelled?

Small Business Status ends in the following circumstances:

• Income thresholds exceeded for two consecutive years. The status is cancelled from the beginning of the following calendar year if gross income from economic activity exceeds GEL 500,000 (or GEL 700,000 for wine tourism or agritourism) in each of two consecutive calendar years.
• Prohibited activity carried out. The person is treated as having left the regime from the beginning of the calendar year in which the prohibited activity was carried out.
• Repeated cash-register violations. If the person is fined at least three times within the same calendar year for failing to comply with the cash-register rules, the status is cancelled from the beginning of that calendar year.
• Voluntary cancellation. On request, the status is cancelled from the first day of the month following the month in which the application is submitted.
• Individual Entrepreneur registration cancelled. The status ends when the person’s Individual Entrepreneur registration is cancelled.
• Death of the Individual Entrepreneur.

Important: The effective date of cancellation depends on the reason. Voluntary cancellation takes effect from the first day of the following month, whereas cancellation for a prohibited activity or repeated cash-register violations takes effect retroactively from the beginning of the relevant calendar year. This means the person is treated as having been outside the Small Business Status regime for that period and becomes subject to the ordinary tax rules.

Getting the status back

Cancellation is not necessarily permanent. A person whose Small Business Status has been cancelled may apply for it again, provided they satisfy the statutory conditions. If the application is approved, the Revenue Service issues a new Small Business Status certificate with a new registration number.

The conditions for re-granting the status depend on the person’s turnover during the intervening period and whether they are registered as a VAT payer.

A note on verification

The legislation governing Small Business Status has been amended several times since the regime was introduced, including the income thresholds, tax rates and excluded activities. As the law and administrative practice may change, confirm the current position with the Revenue Service before relying on the regime, particularly if your activity is close to the boundary between permitted and prohibited activities or involves VAT registration. This guide provides general information only. It is not legal or tax advice.