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Taxation of Dividends Received by Organization

Civil Society Institute has lobbied the issue of taxation of dividends received by non-entrepreneurial (non-commercial) legal entities, which was adopted by the Parliament of Georgia at the third hearing.

In November 2011 the Parliament of Georgia has examined at the third hearing and adopted the bill of amendments to the Tax Code. Taxation of dividends of non-entrepreneurial (non-commercial) legal entities represented one of the key issues of the draft bill.

Pursuant to the effective text of the Tax Code and the draft Code, dividend received by an organization is taxed at the 15% rate of profit tax, whereas the dividend received by the Georgian enterprise from the other enterprise is not taxed at all. Moreover, dividends received by the payer of all other taxes are taxed by the Code for a certain period of time at 5%, then 3%, and since 2014 - 0% rate, while the tax rate for dividend received by organizations is 15%.

Such regulation of the issue is discriminatory towards the organizations. Accordingly, CSI started searching for the ways to regulate the issue. CSI has prepared draft amendments to the Tax Code, which provided for two possible options of regulating the issue: under the first option, dividends received by an organization were not subject to profit tax, similar to the enterprises; under the second option, dividends received by organizations were to be taxed similar to the taxation regime (5%, 3%, 0%) of other taxpayers (physical persons, foreign enterprises).

CSI has actively lobbied these amendments for a long period of time. As a result, following the technical expertise with PMCG, draft amendment to Article 130 of the Tax Code was submitted with the Ministry of Finance. The Ministry of Finance has formulated the above amendment as one draft law together with the other amendments to the Tax Code, while the Government of Georgia has transferred this draft law to the Parliament of Georgia for consideration. As already mentioned, the Parliament of Georgia has adopted the draft law at the third hearing and handed it to the President of Georgia for signature.

In accordance with the final version of the draft law, organizations were placed in equal terms with the other taxpayers (physical persons, foreign enterprises) and the taxation of dividends received by them was placed under the same regime - "dividends paid by the resident enterprise to a physical person, non-entrepreneurial (non-commercial) legal entity or non-resident enterprise shall be taxed from 1 January 2011 until 1 January 2013 with the source of payment at the rate of 5% of the paid amount, while from 1 January 2013 until 1 January 2014 - at the rate of 3%".

Further, it is noteworthy that pursuant to the draft law, since 2014 "dividends paid by the resident enterprise to a physical person, non-entrepreneurial (non-commercial) legal entity or non-resident enterprise shall be taxed with the source of payment at the rate of 0% of the paid amount. Dividends received by a non-entrepreneurial (non-commercial) legal entity, which were taxed with the source of payment, shall not be included in the joint income of this person and shall not be subject to further taxation.