Mgaloblishvili Kipiani Dzidziguri (MKD)
Paul Cooper, Counsel
15 February 2012, Tbilisi
Tax aspects of leasing and
property tax in Georgia
Tax aspects of leasing and
property tax in Georgia
I’m going to mix things up ...
Leasing is much more interesting than
property tax, so we’ll do that first …
My background is tax, so the presentation will
touch on legal and accounting considerations
only to provide relevant background …
Despite the topics, let’s try to have some fun!
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Tax aspects of leasing and
property tax in Georgia
Part 1: Lease taxation
Tax aspects of leasing and
property tax in Georgia
What is a lease?
Legal ≠ accounting ≠ tax ≠ layman’s concept
Contract
Owner
(lessor)
User
Property
(lessee)
(leased object)
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Tax aspects of leasing and
property tax in Georgia
Commercial considerations
Improves access to financing of equipment;
Lessees that may not be able to access bank
finance may be able to access leased assets.
Lessor may be able to assume larger credit risk,
because the lessor owns the equipment and can
recover value through repossessing and reselling
equipment.
Secondary market for previously leased assets
may enable new players to acquire equipment.
Think about aircraft.
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Tax aspects of leasing and
property tax in Georgia
Contract law under Civil Code
Ch. 1 – Purchase and sale. Exchange (477-523)
Ch. 2 – Donation (524-530)
Ch. 3 – Tenancy (531-575)
Ch. 4 – Leasing (576-5806)
Ch. 5 – Renting (581-591)
Ch. 6 – Lease of agricultural land (592-606)
Ch. 7 – Franchising (607-614)
Ch. 8 – Lend (free use) (615-622)
Ch. 9 – Loan (623-628)
Ch. 10 – Contract (629-656)
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Tax aspects of leasing and
property tax in Georgia
Leasing rules amended Oct 2011
Article 576. Concept – (1) Under a lease contract the Lessor
shall be required to transfer certain assets to the lessee in use
for a period, envisaged by contract, with or without the right
to redeem and the Lessee shall be liable to pay the fee
according to specified regularity, provided that:
(a) The Lessee identifies the assets and selects the Supplier
of the assets from which the assets will be purchased or
otherwise obtained;
(b) The Lessor purchases assets for leasing and the Supplier
is well aware of this fact.
(2) The Supplier may also be the Lessor, provided that the
ordinary business of the Supplier is the supply or lease of
assets. The assets may also be purchased from the Lessee.
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Tax aspects of leasing and
property tax in Georgia
Investor or
entrepreneur
may also be
the supplier
Art. 576 leasing
Supplier
Right to enforce
warranties
Payment for
equipment
Tripartite
agreement
Entrepreneur
(lessee)
Requests
finance
Investor
(lessor)
Repay through
Rental payments
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Tax aspects of leasing and
property tax in Georgia
Key themes for “leasing”
Supplier has duty to both lessor and lessee.
All parties must agree to contract variations.
The Lessee is required to take adequate care
of the leased object and to maintain it in good
condition, subject to normal tear and wear.
The lessor is entitled to return of the asset
and to dispose of it at the end of the lease.
– Doesn’t preclude predetermined sale to lessee.
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Tax aspects of leasing and
property tax in Georgia
How does leasing differ from ...
Under a contract of tenancy, the lessor is obliged to
transfer a thing to the lessee in use for a definite timeperiod. The lessee is obliged to pay a fixed rental to the
lessor.
Under a rent, the lessor is obliged to transfer to the
lessee a certain property in temporary use and to
secure a possibility of obtaining fruits within the period
of renting provided they have been obtained as the
profit as a result of the proper management of the
rented property. … The rules of a contract of tenancy
shall apply to a renting contract unless otherwise
provided by Article 581-606.
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Tax aspects of leasing and
property tax in Georgia
Taxation and leasing
Law was amended October 2011
Previous “leasing” definition (Art. 17) was deleted.
“Leasing” now means “leasing in the meaning of
the Civil Code of Georgia, when the object of lease
is a depreciable asset.” (Art. 8.38)
“Leasing Company” means “an enterprise for
which at least 70% of net income for a tax year is
revenues from the lease of assets. (Art. 8.39)
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Tax aspects of leasing and
property tax in Georgia
Leasing companies
A leasing company may deduct reserve
provisions for overdue claims stemming from
leasing (Art. 109.3).
The annual property tax payment for a leasing
company for leased taxable assets may not
exceed 0.6% of the initial book value of the
leased assets at the inception of the lease
(Art. 202.31).
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Tax aspects of leasing and
property tax in Georgia
Leasing company – property tax
Does 0.6% rule apply to aggregate assets or
individual assets?
Assume a leased asset costs GEL 10,000 and is
depreciated at 20% D.V. for financial reporting:
Normal property tax in year one is GEL 900 (based
on average of opening and closing book value).
Maximum property tax each year is GEL 600.
By year three, property tax falls below GEL 600.
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Tax aspects of leasing and
property tax in Georgia
Leasing and renting
Aside from provisions for leasing companies,
leasing and renting are now treated the same
way for tax.
Implication for non-residents:
 Exemption for income received from leasing
property that does not belong to the nonresident’s PE in Georgia still exists … but the lease
would need to fit the more narrow new definition
in Art. 576.1 of the Civil Code.
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Tax aspects of leasing and
property tax in Georgia
Hold that thought ...
Have the legislators and the Revenue Service
realised that the new definition of leasing in
the Civil Code will also flow through to
determining who is liable to account for
property tax on “leased” assets?
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Tax aspects of leasing and
property tax in Georgia
Taxation of leases (and rent)
Lessor depreciates the leased asset:
Each fixed asset is treated as a separate group.
Depreciation charges are deducted in amount of
discounted value of lease payments, calculated
with consideration of the lease terms and balance
value of the fixed asset.
Lessor now entitled to use 100% deduction rule.
Lease (rent) payments by lessee are
deductible.
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Tax aspects of leasing and
property tax in Georgia
Depreciation – implementing rules
In January 2012, lessor provided a car under a five-year
lease:
 Value at inception was GEL 23,040
 Lease payments are GEL 7,000p.a. (in arrears(!))
 Redemption payment defined as GEL 2,630
 Implied discount rate is 18%.
MOF position:
 Year 1 finance component is GEL 4,147 (i.e., 23,040 x 18%)
 Depreciation deduction is GEL 2,853 (i.e., 7,000 – 4,147)
 Year 2 depreciation will be GEL 3,366, etc.
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Tax aspects of leasing and
property tax in Georgia
VAT on leases
Follow the transaction:
Supplier will make a supply of goods.
Lessor renders services.
If supply of goods would be VAT exempt
without right of credit, provision of those
goods under lease will also be VAT exempt
without right of credit (Art. 168.2.h)
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Tax aspects of leasing and
property tax in Georgia
Cross-border leasing
Unless the lease falls under the new definition of
financial lease in the Civil Code, 10% withholding
tax would generally apply :
If the lessor has a PE in Georgia, tax would revert to
15% tax on net income
If the lessor does not have a PE, exemption may be
available under a tax treaty (depends on definition of
“royalties” under treaty). However, RCVAT still applies.
Make sure customs documentation is done so
that lessee can credit VAT on importation:
It appears that there is a double imposition of VAT
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Tax aspects of leasing and
property tax in Georgia
Concluding thoughts
Property tax on leases still to be discussed.
Key issue is that tax effects need to be priced
into the lease contract.
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Tax aspects of leasing and
property tax in Georgia
Part 2: Property tax
Tax aspects of leasing and
property tax in Georgia
General principles
Applies to individuals and legal entities
owning or leasing property in Georgia.
Property tax is a local tax.
Local authorities set the tax rates within limits
established by the tax code.
In the tax code, land tax falls under the
heading of “property tax,” but to all intents
and purposes is levied as a separate tax.
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Tax aspects of leasing and
property tax in Georgia
Taxable assets
For enterprises and entrepreneurs, property tax applies to:
 Fixed assets, non-assembled equipment, unfinished capital
investments and intangible assets listed on their balance
sheet.
 Assets leased to others.
Foreign enterprises are subject to property tax on the same
type of assets located in Georgia.
Organizations (not for profit entities) pay property tax on
the same type of assets used in profit-oriented activities.
Individuals are also subject to property tax on immovable
property.
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Tax aspects of leasing and
property tax in Georgia
Business property – general
The annual rate for enterprises and
organizations should not exceed 1% of the
average annual balance sheet value of the
taxable assets (excluding land).
The balance sheet value is the value reflected in
the financial statements of the enterprise. It is not
the tax value of the assets.
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Tax aspects of leasing and
property tax in Georgia
Business property – leased assets
The balance sheet value is adjusted for leased
assets:
A lessor is required to pay property tax on
assets that it has leased to other persons.
Leased assets are excluded from the balance
sheet of the lessee if the lessor is a Georgian
resident.
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Tax aspects of leasing and
property tax in Georgia
Business property – coefficients
For non-government-owned companies the value is
also multiplied by an indexation coefficient based on
the age of the assets.
Date of acquisition
Coefficient
Before 2000 (or if no acquisition information is available)
3
From 2000 to 2003
2
In 2004
1.5
An entity does not need to apply coefficients if it has
financial statements that record fixed assets using
revaluation methods (with the most recent
revaluation no more than four years ago) and that
have been audited by an approved audit company.
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Tax aspects of leasing and
property tax in Georgia
Business property – market value
During a tax audit, the tax authorities may
substitute market values for the values
reflected in the balance sheet.
The taxpayer may appeal the assessment.
If appeal is unsuccessful, the taxpayer must pay
taxes (but not interest and penalties) based on the
substituted values for the year(s) in question and
for the three succeeding years.
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Tax aspects of leasing and
property tax in Georgia
Personal property (excluding land)
The annual property tax rate for an individual on taxable property
(excluding agricultural land) varies according to the amount of
annual family revenue of the individual. The rates are applied to the
market value of the taxable property. The following are the annual
rates:
Annual Family Revenues (GEL)
Property tax rate
Exceeding
Not Exceeding
0
40,000
0%
40,000
100,000
0.05% to 0.2%
100,000
0.8% to 1%
The rates are not progressive (e.g., a family with income of GEL
100,001 would pay 0.8% to 1% tax on all property subject to
property tax).
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Tax aspects of leasing and
property tax in Georgia
Free Industrial Zone (FIZ)
All types of assets (including land) situated on
the territory of a Free Industrial Zone are
exempt from property tax.
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Tax aspects of leasing and
property tax in Georgia
Compliance – individuals
If the gross income of a family exceeds GEL
40,000:
Annual property tax return should be filed
before 1 May.
The return is filed at the tax authorities based
on the individual’s place of tax registration.
The tax should be paid before 15 November.
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Tax aspects of leasing and
property tax in Georgia
Non-individuals – returns
Enterprises must submit property tax returns
before 1 April of the year following the year
for which tax is being assessed.
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Tax aspects of leasing and
property tax in Georgia
Compliance – payments
Enterprises pay property tax in two installments.
An advance payment is made on 15 June, equal to the
property tax payable for the previous year.
• If the current tax year tax liability will be 50% or less
than the previous year’s liability, the taxpayer may
reduce or eliminate the advance payment if it informs
the tax authorities by 1 June.
• If the reduction in liability does not eventuate, the
taxpayer will be subject to a fine (interest) on the
underpaid tax.
The balance is due before 1 April of the following year,
when the property tax return for the year is filed.
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Tax aspects of leasing and
property tax in Georgia
Payments – new businesses
Enterprises that were incorporated after the
beginning of the calendar year are not subject
to the advance payment and pay property tax
in proportion to the part of the year in which
they were active.
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Tax aspects of leasing and
property tax in Georgia
“Land tax”
Annual property tax rate for agricultural land
varies according to the administrative unit and
the land quality.
The base tax rate per hectare varies from GEL 1.50 to
GEL 100.
The tax is further adjusted by a territorial coefficient
of up to 150%, depending on the location.
The base tax rate payable on non-agricultural
land that is used for economic activity (including
rent) is GEL 0.24 per m2, which is further adjusted
by a territorial coefficient not exceeding 1.5.
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Tax aspects of leasing and
property tax in Georgia
“Land tax” – exemptions
Certain assets are exempt from property tax,
including:
Roads
Communications and electronic transmission wires.
Property and land used for activities defined by the
Law on “Oil and Gas”.
Agricultural land plots not exceeding five hectares in
the ownership of an individual as of 1 March 2004
Property of medical establishments used for medical
activities, except land that is not under the medical
establishment.
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Tax aspects of leasing and
property tax in Georgia
Payments – “land tax”
The amount of property tax on land is subject
to assessment by the authorities.
Land tax must be paid before 15 November.
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Tax aspects of leasing and
property tax in Georgia
Questions
Open forum
Specific concerns of participants
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