Small Business Status (Individual Entrepreneur / 1%)

The Individual Entrepreneur (IE) status with 1% turnover tax is one of Georgia's most attractive features for small businesses, freelancers, and digital entrepreneurs. This simplified tax regime provides exceptional benefits while maintaining straightforward compliance requirements.

IE 1% Tax System Overview

Individual Entrepreneur status allows qualifying business owners to pay just 1% tax on gross turnover instead of the standard 20% personal income tax on net profits. This revolutionary system eliminates complex accounting requirements, provides immediate tax savings, and creates one of the world's most favorable tax environments for small businesses and professionals.

The 1% rate applies to total gross revenue without any deductions for expenses. While this means expenses aren't deductible, the extraordinarily low rate makes IE status beneficial for most service businesses and professionals with reasonable profit margins. A consultant earning 100,000 GEL pays just 1,000 GEL in tax regardless of expenses, retaining 99,000 GEL before business costs.

The turnover threshold is 500,000 GEL annually (approximately $185,000 USD), providing substantial room for business growth before requiring transition to other tax structures. This threshold applies to total gross receipts from all business activities during the calendar year. Exceeding the threshold requires registration for VAT and typically transitioning to standard taxation or incorporating.

IE status includes no mandatory VAT registration under the threshold, eliminating 18% VAT complications for small businesses. No social contributions are required on IE income, further reducing the total tax burden to the absolute minimum of 1%. The simplicity and low cost make IE status the preferred choice for freelancers, consultants, and small service providers throughout Georgia.

Who Can Use IE Status

Freelancers and consultants providing professional services represent ideal IE candidates. Software developers, designers, writers, translators, marketing consultants, business advisors, and similar professionals benefit tremendously from 1% taxation. Service exports qualify perfectly - a Georgian resident developer serving international clients pays just 1% on all revenue, with most income potentially exempt as foreign-source under territorial taxation when properly structured.

Digital nomads and online business owners find IE status particularly attractive. E-commerce sellers, digital marketers, online educators, content creators, affiliate marketers, and dropshippers can operate with minimal tax burden. The lack of physical location requirements makes IE perfect for location-independent businesses operated remotely from Georgia or while traveling.

Service providers including photographers, videographers, event planners, coaches, trainers, tutors, and similar professionals benefit from simplified taxation and minimal compliance. Many creative professionals - artists, musicians, performers, and designers - use IE status for their income streams. Even part-time or side business activities can be structured as IE operations.

Anyone conducting business activities generating under 500,000 GEL annually should seriously consider IE status. The tax savings compared to standard taxation are substantial - 19% lower effective rate for most taxpayers. Over years of operation, these savings compound significantly, enabling faster wealth accumulation or business reinvestment than possible under higher tax regimes.

Detailed Tax Calculations and Comparisons

Consider a freelance consultant earning 200,000 GEL annually with 50,000 GEL in business expenses (25% expense ratio). Under IE taxation: total tax equals 200,000 × 1% = 2,000 GEL, leaving 198,000 GEL before expenses, or 148,000 GEL after expenses (99% retention before expenses, 74% after expenses).

Under standard personal income taxation on the same figures: net profit equals 150,000 GEL (200,000 revenue minus 50,000 expenses), tax equals 150,000 × 20% = 30,000 GEL, leaving 120,000 GEL after tax and expenses. The IE saves 28,000 GEL annually compared to standard taxation - nearly doubling the tax savings available for reinvestment or consumption.

For lower-expense businesses, IE advantages increase dramatically. A software developer earning 150,000 GEL with only 10,000 GEL expenses (7% expense ratio) pays: under IE taxation, 1,500 GEL tax (1% of 150,000); under standard taxation, 28,000 GEL tax (20% of 140,000 profit). IE saves 26,500 GEL annually - nearly 18 times the IE tax amount.

Break-even analysis shows IE becomes less favorable only at very high expense ratios. With expenses exceeding approximately 85-90% of revenue, standard taxation might provide better outcomes since expenses are fully deductible. However, most service businesses and professionals operate at 50-70% gross margins or better, making IE decisively superior.

Registration Process and Requirements

IE registration is remarkably simple and fast, typically completed online within one business day through the Revenue Service website. Required information includes personal identification, proposed business activities, and bank account information for tax payments. No business plan, capital requirements, or extensive documentation is needed for registration.

The step-by-step process: First, access the Revenue Service online portal and create an account if you don't have one. Second, complete the IE registration form specifying business activities from the approved list. Third, receive your IE registration confirmation and tax identification number, typically within 24 hours. Fourth, register with your bank for business banking if desired (not mandatory but recommended for clear record-keeping).

Registration fees are minimal - typically around 50-100 GEL, a tiny investment for access to the 1% tax regime. No minimum capital is required to establish IE status, unlike traditional corporate structures requiring capital deposits. Georgian residents, foreign residents, and even non-residents can obtain IE status, making it accessible to international entrepreneurs.

Both Georgian citizens and foreign nationals with Georgian residence permits can register as IEs. Even individuals on short-term visas may qualify for IE registration, though tax residency rules apply separately to determine actual tax obligations. Professional guidance helps navigate residency and registration requirements for international applicants.

Ongoing Compliance and Record-Keeping

Monthly tax reporting is required through the Revenue Service online system, though the process is simple compared to complex tax regimes elsewhere. IEs report gross monthly revenue and calculate 1% tax due. Payment deadlines fall on the 15th of the following month. Late payment triggers penalties, though rates are reasonable and focused on encouraging compliance rather than punitive collection.

Record-keeping requirements are minimal compared to standard business taxation. IEs must maintain records of all revenue received including invoices, receipts, contracts, and bank statements showing income. Expense documentation isn't required for tax purposes since expenses aren't deductible, though maintaining expense records supports business management and helps demonstrate legitimate business operations if questioned.

No certified accountant is legally required for IE operations, though many IEs voluntarily use accounting services for convenience. The simple tax calculation (gross revenue × 1%) can be performed by the IE personally without professional assistance. Many freelancers and consultants handle all IE compliance independently, dedicating just a few hours monthly to tax administration.

Invoice requirements for IEs include standard business information - IE name and identification number, client name and details, service description, amount charged, date, and invoice number. While detailed invoicing isn't legally mandatory in all circumstances, proper invoicing creates professional impressions and provides clear documentation for both IE and clients.

Restrictions and Limitations

The 500,000 GEL annual turnover threshold is the primary limitation. Exceeding this amount requires either switching to standard personal income taxation or incorporating. Some IEs approaching the threshold deliberately slow growth or incorporate proactively to avoid complications. Others accept exceeding the threshold as a positive indicator of business success worth the structural change.

Employment restrictions prevent IEs from hiring employees directly. IEs must operate solo or engage independent contractors and other IEs for assistance. This limitation suits most freelancers and consultants naturally working alone, though growing businesses eventually require incorporation to build employee teams. The restriction reflects IE status being designed for individual operators rather than traditional employers.

Certain licensed activities are excluded from IE eligibility including medical services requiring special licensing, legal services provided by attorneys, accounting and audit services requiring professional certification, and some financial services. These exclusions protect professional standards and public interests in regulated fields. Most other service activities qualify without restriction.

Retail operations face restrictions limiting IEs to operating from a single physical location or exclusively online. Manufacturing activities are generally excluded from IE status, requiring corporate structures. These limitations ensure IE status benefits service providers and small traders rather than large-scale operations more appropriately structured as companies.

Combining IE Status with Other Income

Individuals can maintain IE status while simultaneously having employment income from companies. Employment salary is taxed at standard 20% rate with required withholding, while IE income continues taxed at 1%. This allows professionals to maintain stable employment while building side businesses or consulting practices under favorable IE taxation.

Multiple income streams can be structured optimally - W-2 employment for stable income and benefits, IE activities for entrepreneurial pursuits and additional earnings, and investment income benefiting from territorial taxation on foreign securities. This diversification provides income stability while minimizing overall tax burden through strategic use of available regimes.

Foreign-source income remains eligible for territorial taxation exemption even for IEs. An IE providing services to foreign clients on foreign projects may claim foreign-source treatment for that income, potentially avoiding even the 1% IE tax. Proper documentation and substance supporting foreign source claims is essential for this advanced planning.

When to Transition from IE Status

Approaching the 500,000 GEL threshold signals time to consider incorporation. While incorporation triggers more complex compliance, it enables unlimited growth, employee hiring, and potentially favorable dividend taxation under the Estonian model. Many successful IEs incorporate at 300,000-400,000 GEL revenue to prepare for future growth rather than waiting until forced by threshold exceedance.

Needing to hire employees requires transitioning from IE status since IEs cannot directly employ staff. Businesses requiring team building must incorporate to hire legally. The trade-off - higher compliance complexity and potential tax increases - is often worthwhile for businesses requiring employee teams to scale operations effectively.

Significant asset accumulation or liability concerns may warrant incorporation for asset protection. While IEs have unlimited personal liability for business debts, corporate structures provide limited liability protection. High-risk activities or substantial asset accumulation often justify incorporation despite potentially less favorable tax treatment.

International Considerations

Foreign clients typically have no issues paying Georgian IEs for services. International wire transfers, PayPal, Wise, and other payment platforms work normally for IE accounts. Some IEs maintain both Georgian and international bank accounts for client convenience and currency management, though all revenue must be reported for Georgian tax purposes regardless of where received.

Digital nomads using IE status should carefully analyze home country tax obligations. Many countries tax citizens or residents on worldwide income regardless of where earned or taxed. US citizens face US taxation on IE income even after paying Georgian 1% tax, though foreign tax credits and exclusions may reduce US obligations. Professional cross-border tax planning ensures compliance everywhere.

Currency considerations affect IEs earning in foreign currencies. All income must be reported in GEL using official exchange rates at transaction dates. Currency fluctuations can affect actual tax burden when revenue is earned in USD, EUR, or other currencies then converted to GEL for tax calculation. Most IEs simply accept this as a minor complication outweighed by the 1% rate advantage.

Common Mistakes and How to Avoid Them

Failing to report all income is the most serious error. All revenue must be reported regardless of source, payment method, or client location. Cash payments, cryptocurrency receipts, foreign wire transfers - everything counts toward turnover and must be reported. Unreported income discovered during audits triggers back taxes, penalties, and potential criminal issues for serious violations.

Missing payment deadlines creates unnecessary penalties. Setting up automatic monthly reminders or using accounting software with deadline tracking prevents late payments. The Revenue Service online system makes payment easy - there's no excuse for missing deadlines given the minimal compliance requirements.

Exceeding the 500,000 GEL threshold without proactive planning causes complications. Monitor revenue throughout the year and plan transitions before hitting limits. Consulting tax advisors when approaching 300,000-400,000 GEL annual revenue allows time for smooth incorporation if needed.

Real-World Success Stories

A freelance software developer from Germany relocated to Tbilisi and registered as an IE, serving European and US clients remotely. Annual revenue of 180,000 GEL faces just 1,800 GEL tax (1%). In Germany, similar income would face 40-45% taxation totaling 72,000-81,000 GEL. The savings of 70,000+ GEL annually enabled purchasing an apartment within three years while maintaining comfortable lifestyle and building substantial savings.

An American digital marketer specializing in e-commerce used IE status while living in Batumi, managing client accounts and ad campaigns. Revenue of 250,000 GEL annually required just 2,500 GEL Georgian tax. Combined with foreign earned income exclusion for US taxes, total taxation remained under 5% versus 35-40% in the US, creating six-figure savings over five years of operation.

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