Your Georgian Company and Your Home Tax Office: Management, CFC Rules and Permanent Establishment

Georgia will tax your Georgian LLC as a Georgian company. Whether the country where you live will tax it too is decided there, by three questions on which Georgia has no say: where the company is really managed, whether you control a low-taxed foreign company, and whether your work gives the company a taxable presence at home. A registration certificate from Tbilisi answers none of them. Below: the three as principles, what evidence of management in Georgia looks like, and what paperwork cannot fix.

A Georgian LLC is a Georgian taxpayer, and that is only half the answer

The Tax Code of Georgia treats as a Georgian enterprise any enterprise whose place of business or place of management is in Georgia, and it fixes the place of business at the place of state registration. An LLC registered at the Public Registry is therefore a Georgian taxpayer from its first day, wherever its owner lives. It pays profit tax when it distributes profit, not as it earns it, and Georgia has no general controlled-foreign-company regime of its own. None of this binds another state. Your country applies its own law to its own residents and to work done on its soil.

Place of effective management can make the company resident where you live

Many countries treat a company registered abroad as their own tax resident when it is managed from their territory. The label varies; the idea does not: a company lives where its key management and commercial decisions are really taken. For a company with one founder who is also the only director, that place is usually wherever the founder sits. Georgia's own rule, set out above, is the mirror image: a foreign company managed from Tbilisi becomes a Georgian enterprise. If your country makes the same claim on your Georgian LLC, the company is resident in two states at once, and the second one taxes its profit under its own rules, usually year by year and whether or not anything was distributed.

What a treaty tie-breaker does

Where a tax treaty exists between Georgia and your country, it contains a rule for a company that both states claim. The classic wording gives the company to the state where its place of effective management is. The 2017 OECD model replaced that with agreement between the two tax authorities, looking at the place of effective management, the place of incorporation and other factors; until they agree, the company may be refused treaty relief. The multilateral convention Georgia signed in 2017 offers the same change, but Georgia reserved against that article when it ratified, so the convention did not rewrite its existing treaties on this point; a treaty concluded or revised since 2017 may still contain it. The factors the OECD commentary lists are factual: where the board meets, where the senior managers work, where day-to-day management is carried on, where the accounting records are kept. A tie-breaker is therefore not a shelter: it sends the company to Georgia only if the facts are in Georgia. Each treaty must be read itself. Where there is no treaty, nothing breaks the tie, and both states may tax.

CFC rules tax the shareholder, not the company

Controlled-foreign-company rules work differently. They leave the Georgian company alone and tax its resident shareholder on profit the company has not distributed. The usual ingredients are control, measured by shares or votes, and low taxation, often measured by comparing the tax the foreign company actually paid with the tax it would have paid at home. Some regimes catch only passive income; some exempt a company with real staff, premises and activity in its own country. A Georgian LLC is exposed to this kind of test because, in a year when it keeps its profit, it has paid no profit tax on it yet, and a company with Virtual Zone status pays none on its exported IT income. The deferral that makes Georgia attractive is exactly what a CFC rule is written to look through. Whether your country has such a rule, at what level of ownership and with what exceptions, is a question for an adviser there.

A permanent establishment follows the place where the work is done

The third doctrine does not need the company to be resident in your country at all. Under the OECD model, on which the Ministry of Finance says Georgia's treaties are based, a state cannot tax the business profits of a foreign enterprise unless the enterprise carries on business there through a permanent establishment, and then it taxes the profit that belongs to it. A permanent establishment is a fixed place of business through which the business is wholly or partly carried on, such as a place of management, a branch or an office. A home office can qualify. The OECD commentary's own example is a consultant who stays in a state for an extended period and runs most of her consulting enterprise from an office in her home there: that office is at the enterprise's disposal. A person who habitually concludes contracts for the company or, in the model's 2017 wording, plays the principal role in concluding them, can create one without any premises. Preparatory or auxiliary activity does not, and merely owning the company is not enough.

Georgia applies the same idea in the other direction. At the time of writing its Tax Code treats as a permanent establishment in Georgia a fixed place through which a foreign enterprise carries on its activity, its place of management or office, and the management of the foreign enterprise by another person on its behalf for more than three months. Expect your own country to have an equivalent, with its own periods and exceptions. The same reasoning applies to a team: employees or long-term contractors who do the company's core work from a third country can give the company a taxable presence, and payroll obligations, in that country.

What evidence of management in Georgia looks like

• A director who lives in Georgia, or who is demonstrably there when decisions are taken, and who decides rather than signs.
• Resolutions and minutes made where the decision was made, dated and signed in Georgia, with travel records that agree with them.
• Contracts negotiated and signed, and bank payments approved, from Georgia by a person with authority to bind the company.
• A workplace in real use, with the accounting records and the bookkeeping kept in Georgia.
• People in Georgia, employed or contracted by the company, who perform its core work, with the payroll and local costs that follow.
• A certificate of tax residence for the company from the Revenue Service, requested through rs.ge: evidence of the Georgian position, not an answer to another country's claim.

When a Georgian company does work for a foreign founder

• You move to Georgia, become tax resident here under the 183-day rule, and have actually ceased to be resident at home under that country's rules.
• The company has its own management and team in Georgia and you are an investor abroad who does not run it day to day; controlled-company and dividend questions remain, the management question does not.
• A foreign group sets up a real Georgian subsidiary with local management; Georgia then applies the arm's length principle to its dealings with related foreign companies.

1. 1

   Write down where you will live for the next two years, and where each person who will manage or work for the company will sit.

2. 2

   Put three questions in writing to a tax adviser where you live: is the company resident or managed here, do controlled-foreign-company rules apply to me, does my work or my team create a permanent establishment. Ask about reporting duties for owning a foreign company too.

3. 3

   Check whether your country has a treaty with Georgia and read its rule for a company resident in both states; the Ministry of Finance publishes the texts.

4. 4

   Decide what will really be in Georgia: the director, the workplace, the people, the books.

5. 5

   Only then choose the Georgian form and tax status, and keep the evidence of management from the first resolution onward.

What this article does not answer

It does not tell you what your country's rules are: its ownership thresholds, its low-tax test, its exceptions, its reporting forms or its penalties. Nothing here is a statement of any foreign law. On the Georgian mechanics, our article on Georgia's double tax treaties covers the residence certificate and treaty relief at source, and our article on digital nomads covers the tie-breaker for individuals. We form and maintain the Georgian company and keep its management documents in order; the home-country answer has to come from an adviser who practises there.