The concept of deduction is no longer applicable for the companies and PEs operating under the new CIT system, since they follow IFRS.
Under the old CIT system, expenses connected with the receipt of income generally are deductible from income, provided sufficient primary documentation is available.
Note that the deduction rules provided below are applicable for taxpayers who continue operating under the old CIT system.
The declining-balance method of depreciation applies to fixed assets for tax purposes. The maximum rate of depreciation is 20% for most fixed assets, though buildings and construction are subject to depreciation at the rate of 5% (please contact us for additional information regarding other groups and rates).
A taxpayer is entitled to fully deduct costs of fixed assets (excluding those contributed to capital) in the year when the fixed assets are put into operation (a form of capital allowance). In case the taxpayer employs the right of full deduction in this manner, this method may not be changed for five years.
Amortisation of intangible assets
Intangible assets (e.g. goodwill) are amortisable in proportion with the period of beneficial use. However, intangible assets of value less than GEL 1,000 are fully deductible from gross income.
If the period of beneficial use of an intangible asset cannot be defined, it is amortisable at the rate of 15%.
Expenses incurred before registration of an entity as a taxpayer (e.g. public registry fee) are not deductible under Georgian tax legislation.
Interest paid on loans is deductible within the limits established by the Finance Minister, unless it is paid on loans received from domestic licensed banks and microfinance organisations. The annual deductible interest rate limitation established by the Minister of Finance of Georgia for the year 2020 is 24%. No limits are established on loans received from domestic licensed banks and microfinance organisations.
A taxpayer is entitled to deduct bad debt only if all of the following conditions are met:
- The bad debt is related to the taxpayer’s goods or services sold.
- Income receivable from the sale of goods or services was previously included in taxable gross income.
- The bad debt has been written off and recorded as such in the taxpayer’s accounting records.
- Certain documents prescribed under the Georgian tax code are available confirming that the debt is irrecoverable.
Charitable contributions are deductible, up to 10% of taxable profit.
Fines and penalties
Fines and penalties paid to the state budget are not deductible.
CIT is disallowed for deduction.
Other significant items
The following other expenses are not deductible:
- Expenses not related to the generation of income.
- Expenses related to the receipt of income exempted from CIT except for the costs incurred for generating profit from the sale of debt securities of the state, of the National Bank of Georgia, the Legal Entity under Public Law – the Deposit Insurance Agency or of an international financial institution and expenses incurred for deriving profit in the form of interests received from those securities, as well as costs for earning profit from the interest accrued to the funds placed on the accounts with the National Bank of Georgia.
The deduction of certain expenses is subject to limitations, including:
- Representation expenses, up to 1% of gross income.
- Repair expenses, up to 5% of the book value of the relevant asset at the end of the year. Any excess must be capitalised and deducted through depreciation.
Net operating losses
Losses may be carried forward for five years but may not be carried back.
A taxpayer may elect to extend the carryforward period to ten years. However, this also results in the statute of limitations period being extended from six to 11 years.
Payments to foreign affiliates
There is no special tax regime in Georgia for payments made to foreign affiliates; as such, general rules will apply. Payments may be classified as equity, financing, or service fee. Any such transaction will need to be at arm’s length in accordance with the Georgian transfer pricing rules.