Implementation of Estonian CIT Model in Georgia

The objective of this report is to explain the legislative aspects of the Estonian CIT model, including comparison with Georgian legislation, and provide recommendations on the possible amendments to the Georgian legislation. The Estonian CIT model is unique, introduced in 2000, when the current Income Tax Act came into force. The main difference of the Estonian system from traditional systems is that profits are not subject to tax at the moment when they are earned. Instead, taxation is deferred until the distribution of profits. The Estonian CIT system is easier to comply with both for taxpayers and for the tax administration. The main goal of the CIT reform in Estonia was to facilitate the development of enterprises and attract investors. The Estonian CIT expert worked with the following materials: the Estonian Income Tax Act, the Tax Code of Georgia, and relevant other Estonian and Georgian normative acts. The expert made a detailed overview of the Estonian CIT model in the course of a workshop and several meetings with representatives of the Ministry of Finance and Revenue Service, Georgian tax experts, and the Government of Georgia. The report provides a comparison of the Georgian and Estonian CIT models, highlighting the differences and similarities. The Estonian CIT model has several key features, including tax residency for legal entities based on incorporation and place of management, a taxable period of calendar month, and a territorial scope of worldwide income. The report also discusses tax exemptions, including tax exemption for dividends received from resident and non-resident companies, interest income, and capital gains from securities. The report concludes that the Georgian and Estonian definitions of tax resident differ, but there is no inevitable need to change the Georgian law for implementing the Estonian CIT law. The report recommends introducing the calendar month as the taxable period, as it is easier for companies to declare and settle any CIT amounts together with payroll taxes on a monthly basis. The report also suggests considering taxation under general rules for interest income and capital gains from securities, rather than providing special exemptions. The implementation of the Estonian CIT model in Georgia would require several changes to the Georgian legislation, including adjusting the wording of the law and tax declaration forms for tax exemption for dividends received from resident and non-resident companies. The report provides recommendations on the possible amendments to the Georgian legislation, taking into account the Estonian CIT model and its implementation in Georgia.