New model of Corporate Income Tax (Profit Tax) shall come into force from 1 January 2017. The purpose of this taxation model is simplification of the tax administration, promotion of business development and economic growth.
The main amendment under the new model of Corporate Income Tax is postponing taxation of corporate income until distribution of net income. This will increase availability of the funds and promote reinvestment of earned profits into the same or new activities.
Corporate Income Tax rate remains the same as before - 15%, technically, the 15%/85% rate will be applied to the amount of taxable object. In addition, instead of annual charge, Corporate Income Tax shall be charged on monthly basis, no later than 15th day of the following month.
The new model of Corporate Income Tax will be applied to all types of businesses having legal form, excluding commercial bank, insurance companies and micro-finance organisations, credit unions, pawn brokers, as well as the companies receiving income from Oil and Gas Operations and bookmakers operating with systematic-electronic forms.
According to the new model of Corporate Income Tax, the objects of taxation are following transactions/actual payments:
- Payment of dividends
- Differences between contract price and market price
- Expenses not related to economic activity
- Payments not related to economic activity
- Free of charge supply and gifts
- Representative expenses above limits
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Like dividends, the remaining transactions/payments shall be taxed according to the actual date of payments. The principles of taxation of payments vary according to the type and the receiver of payment:
Payment of dividends
Dividend is taxed at the moment of the payment, in case it is distributed to individuals, non-profit entities, non-residents or entities exempt from Corporate Income Tax. Distribution of dividend to the resident enterprise subject to the new-model of taxation is not taxable. The same rules apply to the re-distribution of dividends.
At the time of taxation of distributed dividend, specific year of earning of distributed profit is irrelevant. However, to avoid double taxation, the enterprise is entitled to fully or partially offset the Corporate Income Tax accrued and paid in the past period while distributing the net income of 2008-2016.
Differences between contract price and market price
According to the new model of taxation, differences between contract price and market price is taxed with Corporate Income Tax, if the transactions are made with interdependent persons, companies registered in off-shore jurisdiction and companies exempt from the Corporate Income Tax.
The difference related to purchase transaction will be taxed at the moment of payment of higher price than market price. The difference related to the sale transaction will be taxed at the moment of delivering the good/service at lower price than the market price.
Difference between the contract price and market price is not taxable with Corporate Income Tax, in case the party of the transaction is an enterprise subject to the new model of taxation or the budget organization.
Expenses not related to the economic activity
According to the new model of Corporate Income Tax, expenses which are not related to economic activity or which are not deemed to be such will be subject to taxation, particularly:
- Expenses not documented
- Expenses not incurred for the generation of profit, revenues or compensation
- Expenses incurred on the goods or services procured from an individual operating under the status of micro business or persons under the status of fixed tax payer
- Interests paid on loans above the limit
Payments not related to economic activity
Several types of payments, which will not be deemed as related to the economic activity for taxation purposes under new amendment, will not become subject to taxation, particularly:
- Payment of the loan principal to natural persons or non-residents or enterprises exempt from Corporate Income Tax
- Payment for procurement of the share or increase of capital of non-resident enterprise, or the capital of the enterprise exempt from Corporate Income Tax
- Advance payments or liquidated damages to the persons registered in the off-shore jurisdiction or enterprises exempt from Corporate Income Tax
It should be noted, that reimbursement of above-mentioned payments, for instance refund of the loan principal or procurement of goods in exchange for advance payment, are subject to Corporate Income Tax credit and due refund from budget.
Taxation of free-of-charge supplies and gifts
According to the new model of Corporate Income Tax, free of charge delivery of goods/services, losses and transfer of funds as a gift will be subject to taxation. However, some of these operations shall not be taxed, including the following:
- Free of charge delivery of goods/services or transfer of funds as a gift, which are subject to personal income tax and are withheld at source
- Free of charge delivery of goods/services or transfer of funds as a gift to the public authorities
- Donations made to the charity organizations during a calendar year, within the limit
- Delivery of goods or services free of charge, which are aimed to generate profit, revenues or compensation
Representative expenses above limits
According to the new model of Corporate Income Tax, representative expenses above limit will be subject to taxation. Similarly to previous limits, representative expenses incurred during a year are 1% of the generated revenues or expenses incurred in the previous calendar year.
Contact Person: Shalva Kilasonia, Tax Specialist at BDO
Mob.: 595 034 950 email: skilasonia@bdo.ge