{"id":89317,"date":"2021-04-13T14:03:52","date_gmt":"2021-04-13T10:03:52","guid":{"rendered":"https:\/\/forbes.ge\/small-business-status-1-taxation-in-georgia-does-not-apply-to-employment-contracts-what-to-know\/"},"modified":"2025-08-15T12:47:31","modified_gmt":"2025-08-15T08:47:31","slug":"small-business-status-1-taxation-in-georgia-does-not-apply-to-employment-contracts-what-to-know","status":"publish","type":"post","link":"https:\/\/dev.forbes.ge\/en\/small-business-status-1-taxation-in-georgia-does-not-apply-to-employment-contracts-what-to-know\/","title":{"rendered":"\u201eSmall Business\u201c Status (1% Taxation) in Georgia Does Not Apply to Employment Contracts. What to Know?"},"content":{"rendered":"

Forbes Blog is a non-editorial category created by individuals with diverse interests and ideas. The texts published within this category represent the views of the authors and may not reflect the position of Forbes Georgia\u2019s editorial team.<\/em><\/p>\n

<\/h5>\n
Introduction<\/strong><\/h5>\n

If an individual qualifies under a \u201csmall business\u201d status, he\/she can enjoy 1% taxation in Georgia. Although, there are several important preconditions an individual entrepreneur needs to meet for qualifying under 1% tax rate. I discussed these factors in detail in my previous paper<\/a> and I suggest to read it.<\/p>\n

In this brief article I will provide information on currently strengthened control by the Georgian Revenue Service (GRS-Georgian tax and custom administration) on the taxpayers with \u201csmall business\u201d status, aiming to qualify their business activities as employment than service provision notwithstanding the title of their \u201cservice\u201d agreements (if there are sufficient reason for it).<\/p>\n

Service fee or wages?<\/strong><\/h5>\n

Currently, GRS pays more attention to analysis of individual taxpayers\u2019 contracts to find out whether they are \u201cservice\u201d or \u201cemployment\u201d agreement, regardless the title.<\/p>\n

The reason for such analysis is that if an agreement is qualified as \u201cemployment\u201d, 20% tax rate will be applicable (retrospectively) instead of 1% even for individuals with \u201csmall business\u201d status.<\/p>\n

As you might already know, apart 0.5-mln-GEL annual income threshold applicable for \u201csmall business\u201d there is a list of services (and other business activities) that do not<\/em><\/strong> qualify under such tax incentive. For example, consultation service represents a \u201cforbidden\u201d activity and \u201csmall business\u201d status does not apply to it.<\/p>\n

Besides, \u201csmall business\u201d status and 1% tax rate do not apply to an income from employment. A total of 20% is payable on employment income. Yes, this income is not considered a foreign-source income<\/em><\/strong> if you meet employment contractual obligations while being in Georgia.<\/p>\n

For more clarity, the salary reception does not prevent you from obtaining and benefiting from a \u201csmall business\u201d status regarding other permitted business activities (if any); however, your wages will be taxed at 20% rate in Georgia if you live in and work from here.<\/p>\n

Notably, it is not enough to merely change the title of your employment contract to \u201cservice agreement\u201d and declare your earnings as \u201cservice fee\u201d (to which 1% taxation regime might apply) instead of \u201csalary\u201d (to which 1% taxation does not apply). Besides, it is crucial that the terms of the contract and the real conduct correspond to the title; otherwise, tax admiration of Georgia might requalify your service contract as the employment. Such requalification risk is greater if you provide services to only one or two clients.<\/p>\n

It is the reason for which Georgia\u2019s tax administration started paying more attention to the real conduct and terms of contracts instead of the title to determine the real qualification of the contract (whether it is employment or a service-related).<\/p>\n

For this purpose, \u00a0GRS developed a specially designed questionnaire, available at www.rs.ge<\/a> (official website of GRS), where up to 40 questions are to be answered by taxpayers.<\/p>\n

The questionnaire determines whether the terms of your business relationship with your client(s) (or the employer) is closer to the typical terms of employment or service provision. When you fill in the questionnaire, on the website you will receive one of the following answers: \u201cEmployment\u201d or \u201cService\u201d.<\/p>\n

For example, some questions listed in the questionnaire are as follows:<\/p>\n