“Small Business” status allow entrepreneur physical persons to carry out their economic activities with the minimum tax burden. Revenues up to GEL 500,000 is subject of 1% Personal Income Tax and over GEL 500,000 tax rate is 3% (for details see articles 88-95 of TCG). First “Small Business” tax regime appaired in Georgian Tax Legislation back in 2011. The main aim of this regime is to reduce “shadow activities” and give incentives to physical persons legally carry out their economic activities. However, 2010 Government’s Resolution #415 defines types of activities restricted for “Small Business” entrepreneurs as well as those activities that will be taxed with general tax rates (for details see 2010 Government Resolution #415).

How fairly is “Small Business” tax incentive used in practice and where is the threshold?

In some cases, the line between paid employment and provision of services is quite blurred. Such cases are often met in construction sector, IT services etc. Physical person with “Small Business” status might have service contract with a company but, the nature of its service(s) can be very similar to paid employment. Revenue Service has elaborated questionnaire “Paid Employment or Provision of Services”. It helps to define interaction between company and physical person is qualified as employment or, provision of services. This questionnaire gives a hint what circumstances will be taken into account by the Tax Authority during tax inspection.

Article 73, paragraph 9 of the Tax Code of Georgia gives the right to the Tax Authority “to change the classification of a business transaction based on its form and substance if the form of the transaction does not correspond with its substance”. Tax Authority might take the following circumstances into account: Type service physical person provides to company; Maturity of contract between physical person and a company; Percentage share of income from a company into physical person’s total income; if a physical person had an employment contract with that company in the past etc.

Taking into account the abovementioned, a company that had absolutely no intention to avoid taxes might occur under the tax penalty risks. Therefore, its strongly advised to evaluate all the abovementioned risks before signing service contract with “Small Business” status entrepreneurs, taking into account that “Small Business” tax regime was introduced to give incentives to entrepreneur physical persons and not to save costs of companies.