Georgia's parliament passed a corporate tax reform on April 15 that will eliminate tax on non-distributed profit for corporations. Starting in January 2017, profits that are reinvested or retained will be untaxed, which experts believe will increase the liquidity of the Georgian private sector by GEL500mn (€192.8mn) a year.
Georgia has been seeking ways to boost its private sector and attract foreign investment in its small economy, which has been hit by the economic slowdown in Russia and Central Asia and by a wave of currency devaluations. The government has long mulled a corporate tax reform based on the Estonian reforms passed in the late 1990s and early 2000s, and even intended to enforce the law before the end of the year, but pushed back the date to facilitate accounting for private companies.
Unlike other businesses, the law will only apply to banks, insurance companies, microfinance institutions and pawn broking businesses starting in 2019.
One of the concerns in passing the law is the government's reliance on taxes for the state budget, with corporate taxes ranking as the third main contributor to the budget after value added tax (VAT) and individual income tax. However, in boosting private sector growth, the reform aims to increase the ratio of corporate tax contributions as a percentage of GDP, just like it did in Estonia over a decade ago.
In the short-term, Tbilisi will have to cover an estimated GEL600mn (€237.4mn) shortfall in tax income in 2016 and GEL300mn-400mn (€118.7mn-€158.3mn) in 2018, Lasha Khutsishvili, deputy finance minister, has said. At GEL980mn (€387.7mn), corporate taxes account for 12.3% of forecast tax revenues in 2016, and 11% of budget expenditures. By the fourth year, the reform is expected to pay for itself, the official has said.
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