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Income Tax to be Replaced by a Tax on Dividends

The Georgian government intends to abolish the income tax and replace it with a tax on dividends. Currently several versions are under consideration and the so-called Estonian model is likely to be chosen.

According to Deputy Finance Minister Lasha Khutsishvili, there is an opinion that the tax on dividends should be increased simultaneously with the abolition of income tax, but the government does not intend to follow this path. “Estonian model does not provide the abolition of income tax and growth of tax on dividend payments but the creation of another tax on their base to be levied on the distribution ofprofit. Essentially, this tax should not be associated with a tax on  dividends, “- the official says. In his words, the increase in the tax on dividends includes  a number of risks, because of which it was decided not to resort to such a measure.

“In this case, no one pays attention to the fact that Georgia has double taxation agreements with 50 countries, in  10 of them dividends are not taxed. If we  increase   the tax on dividends, it turns out that all of the resulting profits, which will be withdrawn from Georgia, will remain outside the tax system,  as a result,  the budget will lose a lot of revenue. The next step will be that established in Georgia companies will be re-registered abroad, where dividends are not taxed. The third step will be the emergence of problems in terms of  income tax, which is directly linked to a tax on profits,”- Lasha Khutsishvili explains.

According to the Deputy Minister, the new initiative cannot be implemented in a couple of weeks and it will take a lot of time, including the  adoption of  a number of new laws. ” The initiative needs a comprehensive analysis and calculation as it includes  both positive and negative elements. For this reason  the Ministry of Finance announced a tender for the preparation of the document, which will evaluate all possible consequences of the adoption of the law. In particular, we are talking about the impact on the economy not only in terms of filling the budget, but also the economy as a whole, in terms of the employment rate, the liquidity of companies, etc,”- says Lasha Khutsishvili.

He adds that  the tender has already been announced and the winner will be revealed in the coming weeks. The evaluation document will be ready in mid-September, after which it is decided in what time frame profits tax will be canceled. “The process will not be quick, because the Tax Code contains many regulations relating to income tax that must be revised. In addition, 50% of administrative procedures concern income tax. So, much has to be changed. Apart from the abolition of many current regulations, a lot of new must be adopted, “- Lasha Khutsishvili concludes.