Jun 20, 2019

Economic substance for a business in Georgia – starting from 2 500 USD

The service price starts at US$ 2,500

Georgia is aiming to become an EU member state one day. Joining the club of elite economies would certainly strengthen the country’s position in the international commercial and political arenas. To achieve this ambitious goal Georgia has to come in compliance with the EU economic policies, and to be in keeping with various regulations. Being a developing economy, this Caucasian country still offers huge benefits to foreign business as attracting investment is, of course, among its top priorities. At the same time, Georgian Government has to toughen the rules businesses play by in the country.

Advantages of Georgia as a business residence country

Georgia is not a member of financial information automatic exchange group, nor does it intend to become one in the near future. Georgian tax authorities do not distribute the financial information about the country’s resident business companies to tax authorities of other states on an automatic basis. This allows businesses registered in Georgia to keep their figures (such as their balances and transactions) confidential. Transferring their funds to Georgian banks became especially popular with business people from the neighboring countries when Baltic States had to toughen their bank service requirements under the pressure of the UE economic authorities. All of a sudden Latvian, Lithuanian, and Estonian financial institutions started to deny service to foreign businesses or close their accounts without any notice. A suspicion in money laundering would usually serve as an explanation. Until recently Georgia was much more liberal towards foreign business people, and even though it has become a little harder to open a bank account in a Georgian bank if you are not a citizen of this country, the confidentiality of the account owner information is still guaranteed.

This said, Georgia has never been on the EU Black List of offshore territories, nor has it ever come close to being listed there (there is also a Grey List, and Georgia is not on this one either). Thus, the country’s standings in the European books are much stronger in comparison to those of some other jurisdictions.

One business instrument that Georgia offers to foreign investors looks especially inviting. There are four Free Industrial Zones (FIZ) in the country, which are specially designated areas with beneficial tax regimes. One such Zone is located in the capital city of Tbilisi, one in a port city of Poti, and two in Kutaisi that is the second largest city in Georgia. The primary advantage found in these Zones is the tax exemptions that are available there. Business companies registered on the territories of these FIZ do not have to pay the following taxes that are levied on regular Georgian companies:

  • The VAT – 18%;
  • The corporate income tax – 15%;
  • The dividend and interest tax – 5%;
  • The property tax – 1%.

Besides, FIZ companies do not pay the customs duties either, and those can be as high as 12% for mainland companies. Now, Georgia has made free trade agreements with more than fifty countries, and it is one of very few states that have signed such agreements both with the EU and with China. Thus, registering a company in a Georgian FIZ will open duty-free access to the markets with the population of over one billion people. The country’s geographical location is certainly advantageous for exporters. It is located at the border of Europe and Asia, so the exported goods can go both ways, and go both ways duty-free.

It must be noted though, that these fantastic tax exemptions hold only for business transactions with foreign partners, those residing outside Georgia. Any business deal with a Georgian resident individual or company is taxed 4% of the invoice price.

Any form of proprietorship is acceptable for a company registered in a FIZ. The Georgian legislation allows establishing the following types of business companies in the country:

  • A Limited Liability Company;
  • A Joint Stock Company;
  • An Unlimited Partnership;
  • A Limited Partnership;
  • A Cooperative.

In addition to these, private entrepreneurships can also be established in Georgia, which is the most popular form of company ownership among Georgian business people. As far as FIZ companies are concerned, the vast majority of them have limited liability.

Literally anyone can set up a company in a Georgian FIZ: a citizen of the country or a foreigner, a private person or a legal entity; a single person or company or a group of people or companies.

Infrastructure quality varies from Zone to Zone as some of them have been in operation for quite a few years now while others are still rather young. Anyway, every Zone Administration strives to attract more investors by improving the infrastructure as much as they can. There are traditional office spaces as well as smart offices in every Zone, there are also warehouses, access ways, round o’clock security services, and many other conveniences to be found there. In general, the business environment in the FIZ is very comfortable. One interesting peculiarity of the Zones, however, is that the Georgian legislation prohibits personal residence on their territories. This is not a big problem, though, because accommodations can be easily found in close vicinity.

Naturally, doing business in a Georgian FIZ does not come at no price at all, and every FIZ resident company has to buy a license that authorizes its business operations. The prices of the licenses, again, vary from Zone to Zone. For instance, a standard license that permits trade in one type of goods will normally cost US$ 4,000 a year. At the same time, every company registering in a Georgian FIZ will enjoy an ‘individual approach’, which means that all the terms and conditions of its operations including the license prices are negotiable.

What is attractive about Free Industrial Zones for medium- and large-scale international corporations is that the price of the license and the cost of establishing a business company in a FIZ are negligible in comparison to the savings on taxes that such company will enjoy. We will gladly assist you in incorporating a company in one of the Georgian FIZ. Please write to us to [email protected] and we will answer all your questions pertaining to setting up a business in this beautiful Caucasian country.

The effects of the current EU economic policies on Georgian business environment

Georgian FIZ are not treated as offshore zones and no anti-offshore sanctions are applicable to them de jure. However, the European Union is currently toughening its anti money laundering (AML) policies and Georgia has to adapt to these changes as it dreams of becoming an EU state someday. Why Europe is concerned with money laundry issues is quite understandable: the fight against terrorism has had to be put in the highest gear, and some offshore jurisdictions are known to have been used for financing terrorists. Thus, the EU is tightening the screws on the countries that used to offer easy access to their financial institutions, provide generous tax reductions for non-resident companies, and keep their financial information secret. Instead of fighting this huge and powerful machine, these countries find it wise to acquiesce to the EU demands and adapt their laws and practices to the new reality. So does Georgia even though it is far from being totally out of favor with the European economic authorities.

These authorities have lately began to impose the KYC (‘know your customer’) principle on European banks. This principle means that the banks should not provide service to any legal entity that applies for it. Thus, Georgian banks now take time (usually about one week) to check the prospective client company backgrounds. Unlike it used to be before, today they have to make sure that this client does not want to open a corporate bank account in Georgia for the sole purpose of evading (higher) home country’s taxes. The banks want the applicant company to have some economic substance in Georgia. Substance is comprised of tangible assets that would prove that the intended company is doing or going to do some real business in Georgia: to manufacture goods, to trade in certain commodities, to provide some kind of services, etc. Georgian banks are heavily dependent on their large international partner banks and the latter would not want to have anything to do with a bank that looks suspicious. And providing services to suspicious clients is exactly what makes the bank itself look suspicious in the eyes of its international partners.

These new practices are also in line with the Georgian Government policies. Georgia can hardly be called a rich country, and the state authorities are doing their best to gain the ‘promising economy’ status for the country. This involves making Georgian business leave the ‘shadow sector’ and become more transparent for the international community.

What counts as economic substance in Georgia?

Below please find the description of tangible assets that will serve as proof of your company material presence in Georgia and satisfy the compliance department of the bank you want to open an account with.

Major substance:

  • Legal address. According to the Georgian legislation, every business company in the country must have a legal address. The surest thing to have is a house, an apartment, or an office in Georgia in your property. The bank will be satisfied to see the purchase agreement and the extract from the Real Estate Registry certifying your ownership of the place. Its size is not as important as the fact of the proprietorship. The company can also have a legal address at a rented house, apartment, or office. The rent agreement with the rent price and agreement duration indicated in it has to be submitted to the bank in this case. However, a rented legal address might look suspicious to the bank. The compliance department will be satisfied if the place you are renting is large enough for your business operations, if it is located in a prestigious district of a large city, preferably Tbilisi, and if the rent is high enough to prove your honest intentions. If neither of these conditions is met, the bank might deny service to you.
  • Production facilities. If you own manufacturing premises and machinery in Georgia that are worth more than just a few dollars, it will make the compliance department absolutely happy. This is arguably the most reliable property to have as economic substance in the country.
  • Warehouse rent agreement. This is one more sure asset to have in Georgia. The rent agreement has to be submitted to the bank, and if the warehousing area is large enough and the agreement duration is long enough, the bank should be satisfied.

Minor substance:

  • Employees. Georgian laws do not require that a company have employees in case it is registered in a Free Industrial Zone. Companies residing outside FIZ are required to have employees even though for many types of business activities one employee – the director and the company owner simultaneously – is sufficient, according to the law. However, this number of employees – just one – is not going to impress the compliance department officer. It is highly recommended to have a more extended salaried staff, for example, a director, a deputy, an accountant, and a secretary. Generally, the number of the company employees should conform to the scale of its operations: the more business is done, the larger staff is expected. The bank’s loyalty will also increase if Georgian citizens are on the company staff. In addition to that, a Georgian company director would be a valuable asset when it comes to communicating with the tax authorities and other state regulatory agencies (the fire inspection would serve as one such example). It should be noted that Georgian laws do not specify the minimum amount of wages payable to the employees.
  • Registered capital. Again, Georgian legislation does not require that companies have registered capital. But it does not prohibit having a registered capital either, and if the company does have one, it will look more trustworthy to the bank.
  • Corporate phone and a website. It is a good idea to have a phone number registered in the company’s name. It is even a better idea to have a company website on a Georgian domain (with .ge in the address line). It is also highly preferable that the site be in the Georgian language.

Additional substance for a longer perspective.

Major substance described above is something absolutely necessary for opening a corporate account in a Georgian bank as things stand at the moment. Minor substance will add to the bank’s assuredness and increase your chances to obtain the service. However, as you continue your business operations in the country, the bank might want to receive further confirmation of your business credibility. The following documents will certify your company substance in Georgia:

  • Salary payments. If your company has employees, their salaries should be paid to their card or checking accounts in the bank. By providing the pay sheet, you will be able to prove to the bank that your company keeps on functioning as it is paying wages.
  • Taxes and other duties. Mainland companies in Georgia have to keep the books and file monthly reports as well as annual reports. Copies of these reports submitted to the bank will serve as your company substance. Now, companies registered in Georgian FIZ are not obliged to keep financial records, so they cannot submit this kind of substance proof. However, a copy of the receipt for the license renewal will certify that your company keeps on going.
  • Bank transfers to and from partners. Another powerful instrument of proving to the bank that your company is actively engaged in some real business is making payments to your business partners and receiving payments from them by use of your corporate bank account. If transactions are constantly going through this account, the bank will have no questions about your substance whatsoever.

Our services to those wishing to incorporate a company in Georgia

Our clients find that the tax exemptions and the possibility for duty-free trade with multiple countries that Georgian Free Industrial Zones offer greatly outweigh the costs of registering a company, opening a corporate bank account, purchasing a license, and even acquiring economic substance in Georgia. We will be happy to assist you with all of these and other matters related to establishing a business in this country. Here is a short pricelist for our company registration services:

  • Registering a regular business company outside the Free Zones – from US$ 1,000;
  • Registering a company with an IT Zone Company status (this is another tax reduction opportunity for IT businesses in Georgia) – form US$ 1,500;
  • Registering a company in one of the Free Industrial Zones – from US$ 2,000.

We can also open a bank account in Georgia on your behalf. The cost of opening a personal account starts at US$ 800, and we can also open a corporate account for you for US$ 3,999.

However, the times when opening a corporate bank account in Georgia was as easy as squeezing a lemon seem to have sunk into oblivion now. Today Georgian banks require substance before they agree to open an account for a business company. We can help with this too. The price of our substance service starts at US$ 2,500, and the ultimate price will depend on the types of economic substance that you require. We can rent an office for you and obtain a legal address for your company. We can hire employees – real or nominal ones. We have a nominee director service that would let you own and manage the company almost totally anonymously and having a Georgian citizen on your staff is always a good idea, as has been shown above. The price of this service starts at US$ 2,500 a year. We can also have a phone number registered in your company name, make a website in Georgian with the information about your business activities, and provide all other substance that the bank may require to open a corporate account. When your company is put into operation, we can also provide legal and accounting services for it.

Moreover, we can do all these and many other things without your personal presence in Georgia. Indeed, you do not have to leave home to establish a company in Georgia but instead follow these steps:

  • Make a service request to us by contacting us via e-mail: [email protected];
  • We will have to clarify your needs by asking you to fill out a short form that contains the basic information about your prospective company such as its name, its sphere of business, its constitutors and directors’ details, etc.;
  • After we come to an agreement with you about the types of our services that you want to make use of, we will issue a service bill that you will have to pay by any method you like – bank transfer, credit card, Western Union, Webmoney or any other payment system;
  • Then we will draft a power of attorney issued by you in the name of our Georgian representative and send it to you for signing and having it notarized;
  • Then you will send the notarized copy of the power of attorney back to us and we will launch the company registration process without delay.

Having a company registered in Georgia (including one in a Free Industrial Zone) still takes us only two working days. Opening a bank account takes longer than it used to, because we have to collect all the necessary substance before applying to the bank, and they have to verify it, which requires some time too. In any case, in a week or two you will have a company up and running in Georgia and you can start exploiting all the tax and other benefits that this country has to offer.

Please do not hesitate to ask us any questions pertaining to company registration or acquiring economic substance in Georgia by writing to [email protected]. We will be happy to give you the service of the highest possible level.