Posted: 2 months ago

The State of Emergency and Business

How has the recently announced state of emergency  the Georgian business sector, and how prepared was the private sector in meeting the government’s instructions – BDO Legal Company’s partner David Gelashvili discussed these issues for the TV Program Business Partner. 

The state of emergency does not necessarily imply either a regime of force-majeure or the abolition of obligations agreed to by all parties. As noted by Gelashvili, the recently announced state of emergency raises certain questions in the private sector regarding property management, force-majeure or taxation. 

The state of emergency entitles the government to use hotels and related infrastructure, land and other forms of transport for quarantine or evacuation purposes. However, the government’s decision does not explain whether the owner of this infrastructure will receive compensation for these services, BDO’s legal partner noted. 

The decision does not include instructions about paying or not paying compensation. It only gives a general description of the rules of expropriation, and this means that the process implies the payment of an appropriate compensation, he said. 

“I cannot specify how this compensation will be determined, and when they will be given out, but as I was informed, the government had achieved an agreement with certain hotels prior to the  adoption of this resolution, and some properties have been already been transmitted for quarantine purposes, in exchange for a reasonable compensation”, Gelashvili said. 

As for force-majeure , the state of emergency does not mean force-majeure will be applied in all cases, Gelashvili noted. 

“To better understand how force-majeure works –it takes effect in certain conditions: Unexpected circumstances that cannot be prevented and changed by the relevant parties. The most important thing is that similar circumstances make it impossible to fulfill obligations. Consequently, if there are legal resolutions with no disincentives, the announced state of emergency cannot affect these obligations and, most likely, the parties will have to fulfill their obligations. However, if the transport traffic restrictions or closed facilities directly affect these obligations, naturally, this factor will be appraised in the context of force-majeure. This means that companies will not bear responsibility for their unfulfilled obligations”, Gelashvili said.

The government has already prepared certain preferences for injured business sectors, however, there are a lot of painful issues related to tax payments. Many issues remain unanswered, and the Tax Office should implement a single decision-making mechanism.

“As for tax payments, there is the decision that tax preferences have been determined for the organizations in the tourism industry, including – hotels, business operators, transport companies and their obligations for paying February-May incomes taxes, and 2019 property tax payments were postponed. We are waiting for other decisions that the government should take regarding other tax preferences. However, many painful aspects were underlined, and there are no responses to them”, Gelashvili said. 

Regarding leases, for example, he said. 

“This issue has touched empty offices, malls, trade outlets, the entertainment and restaurant infrastructure, leased real estate. They have to pay VAT on a monthly basis, because these relations remain in force and on the other hand, these relations have been disrupted in practice, because the business process has stopped, while this process is a key factor in paying this tax. In my view, when the state of emergency is over and we return to a normal, the relevant taxing organizations have very good instruments and mechanisms to take individual decisions in the form of tax agreements for specific cases”, Gelashvili said. 

Economic activities not related to the sale of products are not restricted, provided the business sector scrupulously follows obligatory safety norms that were enforced amid the pandemic, he added. 

As explained by law firm BDO, the government’s resolution on the state of emergency primarily bans business activity related to the direct sale of products. All other actors are able to continue activities by protecting safety standards.

“The record on the restriction of economic activities seems to be banning or closing all suppliers of goods or products. This list does include services. These two different restriction regimes seem to mean that bodies, enterprises, companies and other providers of services, not engaged in product sales, are not restricted in their work, and their activities are not limited. They must just fully protect safety standards, including a 2-meter distancing between employees and the protection the Heath Ministry recommends on hygiene”, Gelashvili noted. 

I believe that the Georgian private sector will have no problems with abiding by the government’s resolution. 

“The business sector should be ready. In practice, there are no unenforceable norms and naturally, first of all, we should take into consideration that this situation refers to the health and life of people. This is a priority issue, instead of mathematical calculations and finances. Consequently, despite the scale of the difficulties, these conditions should be observed. I think that the majority of businesses are trying to retool production, and get adapted to the new situation, and they have already finished this process”, David Gelashvili told Business Partner TV Program.