Double Tax Treaties

Georgia has signed double tax treaties with over 55 countries to prevent double taxation and provide certainty for international businesses and individuals. These treaties create significant benefits for cross-border income and investment flows while protecting against tax avoidance.

Understanding Double Tax Treaties

Double tax treaties (also called Double Taxation Avoidance Agreements or DTAs) are bilateral agreements between countries preventing the same income from being taxed twice. Without treaties, cross-border income could face taxation in both the source country (where income is generated) and residence country (where taxpayer resides), creating effective tax rates exceeding 50-60% and severely hindering international commerce and investment.

Treaties allocate taxing rights between countries, specifying which country can tax specific income types and at what rates. Some income becomes taxable only in the residence country, while other income faces taxation in the source country with reduced rates or credits available in the residence country. This framework creates predictability and prevents excessive taxation on international activities.

Georgia's treaties generally follow OECD Model Tax Convention principles, creating consistency across the treaty network. While specific provisions vary between treaties, common themes include dividend/interest/royalty withholding rate reductions, business profit taxation rules, permanent establishment definitions, capital gains allocation, and tie-breaker provisions for dual residents. This standardization simplifies planning for businesses operating across multiple treaty countries.

Georgia's Treaty Network

Georgia maintains active double tax treaties with over 55 countries, covering most major economies and trading partners. The network includes European Union member states (most major EU countries), China and other Asian economic powers, Middle Eastern countries including UAE and Saudi Arabia, CIS countries throughout the former Soviet space, major Western nations including UK and Switzerland, and growing treaty relationships with emerging markets.

Key treaty countries frequently relevant for international businesses include: Germany, France, Italy, Spain, and other major EU economies; United Kingdom (despite Brexit); Switzerland; China, India, Singapore, and other Asian markets; UAE, Saudi Arabia, Qatar, and other Gulf states; Turkey as a major regional trading partner; Poland, Czech Republic, and other Central/Eastern European nations; and CIS countries including Russia, Kazakhstan, Ukraine, Azerbaijan, and Armenia.

Treaty coverage continues expanding as Georgia negotiates new agreements and updates existing ones. Recent years have seen treaty network expansion into new markets and modernization of older treaties to reflect current international standards. The government prioritizes treaty relationships with major trading partners and investment sources, recognizing that comprehensive treaty coverage attracts foreign investment and facilitates Georgian businesses' international operations.

Treaty Benefits and Provisions

Dividend withholding rate reductions represent a primary treaty benefit. Without treaties, dividend payments might face 15-25% withholding tax in the source country plus full taxation in the residence country. Treaties typically reduce withholding to 5-15% depending on shareholding levels, with lower rates (often 5%) for substantial shareholdings exceeding 25%. The residence country then provides credit for foreign tax paid or exempts foreign dividends, eliminating or minimizing double taxation.

Interest withholding rates are often reduced to 0-10% under treaties compared to standard 15-20% rates without treaty protection. Many treaties completely eliminate source country taxation on interest, allowing full taxation only in the recipient's residence country. This benefits international lending, bond investments, and cross-border financing arrangements by reducing tax friction on capital flows.

Royalty payments for intellectual property use typically benefit from reduced withholding rates under treaties, often 0-10% compared to higher rates without treaty coverage. Some treaties eliminate source taxation on royalties entirely. This creates favorable conditions for technology licensing, patent monetization, and IP-based business models operating across borders.

Business profits taxation is generally allocated to residence country unless the enterprise maintains a permanent establishment (PE) in the source country. Treaties define PE precisely - typically requiring fixed place of business maintained for sufficient duration or dependent agents with authority to conclude contracts. Without PE, business profits are taxable only in the residence country, even if some activities occur in the source country. This enables service businesses to operate internationally without triggering taxation in every country where services are performed.

Capital gains allocation varies by asset type under treaties. Gains from immovable property (real estate) are typically taxable in the country where property is located. Gains from shares may be taxable in residence country or source country depending on shareholding percentage and other factors specified in each treaty. Gains from movable property and other assets are usually taxable only in the residence country.

Permanent Establishment Definitions

Permanent establishment (PE) determination is crucial for business taxation under treaties. PE exists when an enterprise maintains a fixed place of business including offices, branches, factories, workshops, or construction sites exceeding specified durations (often 6-12 months). PE also exists through dependent agents who regularly conclude contracts on the enterprise's behalf.

Avoiding PE creation enables businesses to operate internationally without triggering source country taxation. For example, a Georgian IT company providing services to German clients without German office or employees generally has no German PE, allowing all profits to be taxed only in Georgia. If the same company opens a German office or employs German sales agents with contracting authority, PE is created and profits attributable to that PE become taxable in Germany.

PE thresholds create planning opportunities and compliance obligations. International businesses must carefully structure activities to avoid inadvertent PE creation in countries where they want to avoid taxation. Activities like maintaining warehouses, conducting preparatory or auxiliary activities, or engaging independent agents often don't create PE, allowing business operations without tax presence.

Claiming Treaty Benefits

Obtaining treaty benefits requires establishing Georgian tax residency and documenting this status to foreign tax authorities. The first step is confirming Georgian tax resident status - either through physical presence exceeding 183 days or through HNW status. Residency must be genuine with substance; paper residency without real presence or connection to Georgia won't qualify for treaty benefits under anti-abuse rules.

Georgian tax residency certificates are obtained through the Revenue Service, documenting resident status for specific periods. Applications require demonstrating residency qualification and typically process within 10-15 business days. Certificates must be provided to foreign tax authorities when claiming treaty benefits, either for reduced withholding rates on payments received or for exemptions from foreign taxation.

The claiming process varies by country and income type. For withholding tax reductions, recipients typically submit residency certificates and treaty benefit claim forms to foreign payers before payments occur, allowing reduced withholding at source. For exemptions or refunds, procedures vary - some countries grant exemptions proactively while others require filing refund claims after full withholding with supporting documentation.

Maintaining substance in Georgia is essential for treaty benefit security. Tax authorities in treaty countries increasingly scrutinize treaty claims to prevent treaty shopping - using favorable Georgian treaties without genuine Georgian business substance. Demonstrating real presence through office space, employees, business activities, and decision-making in Georgia supports treaty benefit claims and withstands scrutiny during audits.

Treaty Shopping and Anti-Abuse Rules

Treaty shopping refers to structuring arrangements primarily to access favorable treaty benefits without genuine business substance in the treaty country. International efforts to combat treaty shopping have led to anti-abuse provisions in modern treaties, including limitation on benefits (LOB) clauses, principal purpose test (PPT) provisions, and beneficial ownership requirements.

Limitation on benefits clauses restrict treaty access to residents with sufficient connection to the treaty country. Qualifying as a resident under domestic law isn't sufficient - LOB provisions require meeting additional tests proving genuine economic connection. These tests examine ownership, activities, and whether the resident is created primarily to access treaty benefits.

Principal purpose test denies treaty benefits when obtaining benefits was one of the principal purposes of the arrangement. Even if all technical requirements are met, treaty benefits can be denied if the arrangement appears primarily tax-motivated. This subjective test requires demonstrating genuine commercial rationales for structures beyond tax savings.

Beneficial ownership requirements prevent treaty benefits for mere conduit entities that receive payments but immediately pass them to non-residents without treaty access. The beneficial owner must be a resident genuinely entitled to the income, not a nominal intermediary. This prevents using Georgian entities as conduits for routing income from other countries to ultimate beneficiaries in non-treaty jurisdictions.

Tie-Breaker Rules for Dual Residents

Individuals who qualify as tax residents in both Georgia and a treaty country must apply tie-breaker rules to determine treaty residence. These rules create a hierarchy: first, residence is where the person has a permanent home available; if permanent homes exist in both countries, residence is where personal and economic relations are closer (center of vital interests); if this can't be determined, residence is where the person habitually lives; if habitual abode can't be determined, residence is determined by nationality; finally, competent authorities resolve residency through mutual agreement.

Practical application requires analyzing individual circumstances. Someone with family, property, and primary business in Germany but spending 200 days in Georgia might be treaty resident in Germany despite Georgian domestic law residency. The center of vital interests test examines where personal and economic life is more strongly established, often determining treaty residence even when domestic law creates dual residency.

Resolving dual residency is essential for proper tax treatment. Treaty residence determines which country's domestic law applies to taxation and which country must provide relief from double taxation. Failure to resolve dual residency properly can result in excessive taxation or compliance failures in one or both countries.

Exchange of Information Provisions

All modern treaties include exchange of information provisions enabling tax authorities to share information about taxpayers' cross-border activities. These provisions support treaty enforcement and combat tax evasion. Georgia participates in automatic information exchange under the Common Reporting Standard (CRS), sharing financial account information with participating countries annually.

Information exchange increases transparency but shouldn't concern compliant taxpayers. Those properly reporting income and paying tax in all relevant jurisdictions benefit from reduced audit risk as tax authorities have tools to verify compliance. Non-compliant taxpayers face increasing detection risk as information sharing expands.

Practical Applications and Examples

A German resident receiving Georgian dividends without treaty would face 15% Georgian withholding plus German taxation of full dividend amount. Under the Germany-Georgia treaty, Georgian withholding reduces to 5% or 10% depending on shareholding, and Germany provides credit for Georgian tax paid, significantly reducing total taxation.

A Georgian resident providing consulting services to UAE clients without UAE office or employees has no UAE permanent establishment under the treaty. All consulting profits are taxable only in Georgia, benefiting from territorial taxation if services are performed outside Georgia. Without the treaty, UAE might attempt to tax a portion of profits as UAE-source income.

An individual moving from UK to Georgia can use the treaty to prevent double taxation during transition periods. Tie-breaker rules determine treaty residence, ensuring only one country taxes worldwide income. The treaty provides mechanisms for eliminating any double taxation that might arise during the transition year when domestic laws of both countries might claim full taxation rights.

Recent Developments and Future Outlook

Georgia actively participates in international tax cooperation initiatives including the OECD/G20 Base Erosion and Profit Shifting (BEPS) project. While not an OECD member, Georgia aligns with international standards through treaty modernization and domestic law updates. Recent treaty negotiations increasingly incorporate BEPS recommendations including stronger anti-abuse provisions and updated PE definitions.

The Multilateral Convention to Implement Tax Treaty Related Measures (MLI) allows simultaneous modification of multiple treaties. Georgia's participation in the MLI brings anti-avoidance measures and dispute resolution improvements to its treaty network without bilateral renegotiation of each treaty. This reflects Georgia's commitment to international tax standards while maintaining an attractive business environment.

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