Tax Structuring - the Tax You Lawfully Do Not Pay When the Structure Is Built Right
Georgia's tax system is relatively simple, yet the same business can lawfully carry three different tax burdens depending on its form, its status and the way money moves through it. A sole entrepreneur at 1% and an LLC at 15% profit tax, a virtual zone entity and an ordinary IT company, salary and dividend for the same owner - across a year's turnover the gap runs to tens of thousands of lari. And most businesses make that choice not by decision but by inertia.
This page describes what a tax lawyer does before any audit or dispute, when nothing has yet been assessed: which form and status fit the activity and on what condition they are lost, how the Estonian model works and where its hidden "distributions" sit, how an owner takes money out of the company at the lowest cost, when an advance ruling is worth requesting, and how to set up an investment so that the exit does not produce a surprise tax bill. The cross-border element (residency, treaties) has its own page.
Updated · Practice area: Tax lawyer
What Each Form and Status Costs - a Comparison in One Table
Every regime has a condition whose breach loses the status and triggers a retroactive assessment; those conditions, not the rate itself, are the lawyer's real subject.
A Structuring Project - the Stages a Business Goes Through With the Lawyer
Map the activity and the cash flows
Who the clients are (Georgian or foreign, businesses or individuals), what is sold (goods, services, IT product, licence), who does the work (employees, contractors, the owner), how money is taken out and what investment is planned. The structure unfolds from this map, not the other way round - a status that does not match the activity is lost at the first audit.
Run the regimes on real numbers
Together with the accountant, the lawyer compares three or four options in figures: the total burden (profit, dividend, salary, VAT, property, pension) on the annual forecast for each form, including the cost of obtaining and maintaining the status. Often the "cheapest" regime cannot actually be used because of its conditions, and the second option is more sustainable.
Test the risks against the regime's conditions
For every chosen status: which activity or client excludes it, what the threshold is, what substance is required, how reclassification happens (a sole entrepreneur into an employee, a virtual zone into an ordinary company). The lawyer compares the contracts and the actual activity with the conditions and corrects them - before the auditor makes the same comparison.
Build the documents and contracts
Charter, shareholders' agreement, contracts with clients and contractors, intra-group loan and licence agreements, dividend resolutions - all worded to match the chosen regime. The status application to the Revenue Service and its supporting documents.
Request an advance ruling on a doubtful point
Where the structure rests on an interpretation on which practice is inconsistent, the lawyer requests an advance ruling from the Revenue Service - paid and time-limited, but binding on the authority. This is worth it above all for a large transaction, a reorganisation or a new business model where a mistake means years of assessments.
Annual review
The law, the practice and the business itself change: a threshold is crossed, the client mix shifts, a new activity is added. Once a year the lawyer re-examines the structure - a status that was right three years ago may today be the basis for an assessment.
"Deemed Distributions" - Where a Company Pays Profit Tax Without Paying a Dividend
The Estonian model taxes profit only on distribution, and many entrepreneurs read it as: until I pay a dividend, I owe no profit tax. The Tax Code, however, equates several other operations with a distribution: expenses unrelated to the business (a private trip, renovating the owner's flat with company money), free-of-charge supplies, loans to a partner or a related party, representation expenses above the cap, payments to persons in preferential tax jurisdictions, and inventory shortfalls. Each is taxed at 15% in the month it occurs - and precisely these operations produce most of the assessments raised against "Estonian" companies during audits.
The typical traps are a loan to the owner that is not repaid for years (a distribution), a company car and phone in private use without paperwork, a "marketing" expense invoiced by a foreign company in a preferential jurisdiction, and a stock shortfall left without write-off documents. The lawyer's job is to identify these operations before the auditor writes them into the report, and for each either to document the business connection or to change the structure (repay the loan, formalise a salary, book the expense correctly).
The most frequent question about taking money out - salary or dividend - sits in the same logic: on a dividend the combined burden is 15% profit plus 5% dividend tax, on salary 20% income tax plus pension contributions, but salary is a deductible expense for the company and does not trigger profit tax. A combination (a market-rate salary for genuine management work plus dividends on the rest) is often optimal, and it also matters that a director-owner with no salary at all becomes an audit question in itself.
The Figures a Structuring Decision Rests On
- 1% / 3%
- The small business status rate on turnover up to the annual threshold and after exceeding it; the threshold is set by the Code, and exceeding it two years running loses the status. Expenses are not deductible - it suits high-margin services and often not low-margin trade.
- 15% + 5%
- Profit tax on distribution plus dividend tax - out of every 100 lari reaching the owner, roughly 19.25 lari goes to the budget; compare 20% on salary plus 2%+2% pension. Under the Estonian model, profit kept in the company is untaxed.
- 5% / 5% / 0%
- International company status: profit tax, salary income tax and dividends respectively. The status requires experience in a permitted activity and substance in Georgia; qualifying expenses (salaries, research) reduce the base further.
- 0% on exports
- Virtual zone: exemption from profit tax and VAT on IT products supplied abroad; easy to obtain, retained only with substance. Revenue from Georgian clients is taxed separately and must be segregated in the accounts.
- Advance ruling
- A binding written answer from the Revenue Service on a specific future operation, for a fee and within a set period; it holds as long as the facts described in the application remain unchanged. One ruling closes years of audit risk.
- 100 000 lari
- The VAT registration threshold, which structuring often hits "unexpectedly" - the choice of status and form takes this threshold into account separately, because the VAT regime changes the whole pricing of a business.
A Structuring Audit - the Questions the Lawyer Puts to the Business
- Does the chosen status match the real activity - prohibited activities, threshold, substance, client geography.
- Are the "sole entrepreneurs" working for the company really employees (a single client, a work schedule, company equipment) - the reclassification risk and income tax assessment.
- Which "deemed distributions" run through the books: loans to the owner, private expenses, free-of-charge transfers, shortfalls.
- How the owner takes money out and whether it is the cheapest lawful route - salary, dividend, loan repayment, rent from the company.
- Whether intra-group transactions (loan, services, licence) are documented and the price is justified.
- The investor entry and exit scenario: who pays what on a sale of shares, and whether an exemption applies.
Three Structuring Cases
An IT studio using the virtual zone "empty"
A studio served European clients under virtual zone status while its developers were registered as sole entrepreneurs and some worked from abroad. The lawyer's audit found two risks: lack of substance in Georgia and reclassification of the developers as employees. The solution was to move to international company status with 5% salary tax, employ the developers and open a real office. The total burden rose compared with the previous "zero", but the audit risk (estimated at three years of assessments at 20%) disappeared.
An owner who lived on "loans" from the company
The owner of a trading company took money as loans for five years, paid no dividend and drew no salary. Before any audit the lawyer calculated that the unrepaid loan is equated to a distribution, with penalty. The solution: formalise part of the loan as a dividend through a voluntary amendment (reduced penalty), repay the rest, and set a market salary. The following year's audit found no fault in the structure.
An investor entry that would have become a tax on exit
An investor was acquiring a stake in a start-up whose founders planned a sale within three years. The lawyer arranged the shareholding structure and holding period so that the individuals' gain on sale would meet the exemption conditions, wrote a dividend policy and salary rule into the shareholders' agreement, and requested an advance ruling on a doubtful point (taxation of employee options). The exit closed without an audit.
Questions About Tax Structuring
I am a consultant paying 1% as a sole entrepreneur. Is it likely my status will be revoked?
Consulting is on the list of activities excluded from small business status, and if your service falls within that category the status can be cancelled retroactively with an assessment at 20%. Much depends on the precise description of the activity in your contracts and returns; the lawyer checks the classification and, where needed, plans a move to an LLC or another regime before an audit does it for you.
My company has profit but I have not paid a dividend. Do I really owe no profit tax?
On reinvested profit, no. But if you paid private expenses with company money, lent to the owner, transferred property free of charge or paid into a preferential jurisdiction, those operations are equated to a distribution and taxed at 15% in that month. These "invisible distributions" are the most common assessment against Estonian-model companies at audit; the lawyer finds them in advance.
I have one business and want to split it into two companies to stay under the threshold. Is that legal?
Separation is lawful when the companies genuinely have different activities, clients, staff or risks; artificially dividing the same business solely to keep a threshold or a status lets the Revenue Service treat them as one taxpayer and assess retroactively. The lawyer checks whether a business reason for the split exists and how it is documented - tax saving as the only reason is not enough.
What does an advance ruling give me and what does it cost?
A written answer from the Revenue Service on a specific future operation that binds the authority as long as the facts described in your application remain unchanged. The fee and review period are set by law; for a large transaction or a new model the cost is a small fraction of the potential assessment. The lawyer's work is to write the application so that the facts are complete and accurate, otherwise the ruling will not protect the real operation.
A foreign investor is coming into the company. What should we consider on the tax side right now?
Three things: how their dividend will be taxed (the treaty with their country of residence and the withholding rate), how a sale of the stake will be taxed on exit (holding period and exemption conditions), and how intra-group transactions (loans, services) will be priced and documented. All three are written into the entry structure and the shareholders' agreement now - changing them at exit is too late.
Lawyers for Tax Structuring
Structuring is the part of a tax lawyer's work that prevents a dispute rather than conducts one, and it always costs less than an assessment. Inside 15 minutes the coordinator puts you in touch with a lawyer who works on statuses, the Estonian model and investment structures.
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Starting a Business, Choosing a Status, Taking on an Investor, or Wondering Why You Pay More Than Your Neighbour?
At a free consultation the lawyer tells you which regime fits your activity, which "deemed distributions" already sit in your books and whether an advance ruling is worth it in your case. Give it 15 minutes and the coordinator is already dialling your number.