Tax Code of Georgia Introduces Rules on thin Capitalization

Issues III, 2009

As of January 1, 2011 the rules on thin capitalization will enter into force. The purpose of the said rules is to contravene the excessive debt financing within the companies, inter alia, debt financing by the shareholders of the company.

Therefore, the companies will be required to maintain certain ratio between debt and equity of the company. Specifically, per article 1923 paragraph 1 of the Tax Code of Georgia the permissible ratio of the debt of the company towards its equity may not exceed 3 (debt) : 1 (equity) proportion. Breach of the said ratio entails reclassification of the accrued interest to so called constructive dividends, accordingly, preventing the company to deduct the said interest from the taxable profit.

For the purposes of thin capitalization, debt is defined as any liability whereon the respective interests are accrued. The notion of debt within the meaning of thin capitalization does not embrace the loans extended by state or by international financial institutions. The list of international financial institutions shall be defined by the respective decree. Georgian Tax Code defines equity as follows: a) for the Georgian resident company as the difference between the assets and liabilities of the company subtracted by liabilities owed by the shareholders to the company; b) for nonresident companies and nonresident permanent establishment the difference between assets and liabilities.



The Law of Georgia on Occupied Territories (the Law) adopted on 23 October 2008 in the aftermath of Russo-Georgian war aims to define the status of territories occupied as a result of the military aggression of the Russian Federation and to establish a special legal regime on such territories. The legal regime laid out under the Law is meant to be effective until full restoration of the jurisdiction of Georgia on the occupied territories.

Occupied Territories and Territorial Waters

The Law defines and gives geographical description of the occupied territories and territorial waters (The Occupied Territories). Thus, Occupied Territories cover: (i) territory of the Autonomous Republic of Abkhazia and adjacent water of the Black Sea (including its floor and resources); (ii) Tskhinvali region (territory of the former Autonomous Region of South Ossetia); (iii) the air space over the territories stipulated in paragraphs (i) and (ii). 

Special Legal Regime

During the validity period of the Law, special rules and special legal regime shall be in force on the Occupied Territories that will include limitation and/or prohibition of the following activities:


Limitation of Free Movement. Foreign citizens shall be allowed to enter the Occupied Territories only from determined destinations (routes), namely:

    (i) to the territory of the Abkhazian Autonomous Republic - from the territory of Zugdidi Municipality;


    (ii) to the territory of Tskhinvali region - from the territory of Gori Municipality.

Movement of foreign nationals to the Occupied Territories from any other directions shall be prohibited and will trigger criminal liability under the Criminal Code of Georgia in a form of fine or imprisonment up to 5 years.

In extraordinary cases, and on the grounds of protection of state interests of Georgia, promotion of peaceful resolution of the conflict or serving the de-occupation or humanitarian purposes, a special permission to enter the Occupied Territories may be granted by the Georgian Government.

Transactions related to Real Estate Property. Any transaction related to real estate property being concluded in violation of the applicable Georgian legislation shall be deemed null and void from the moment of conclusion and shall not give rise to any legal consequences. This prohibition extends to real property related relations on the Occupied Territories since 1990.

Limitation of Economic Activities. The following types of activities shall be prohibited on the Occupied Territories:

    (i) any  economic activity,  regardless whether or not it is implemented for receiving profit, income or compensation, if under the Georgian legislation a
        license, permit, authorization, registration or approval is required for the implementation of such economic activity but such has not been granted;
    (ii) import and/or export of military or dual use products;
    (iii) international air traffic, maritime traffic and railway traffic, as well as international automobile transportation of cargo;
    (iv) use of national resources;
    (v) organization of cash transfer; 
    (vi) financing or any type of support of activities listed in Paragraphs (i) – (v) above.

In exceptional cases, and on the grounds of the protection of state interests of Georgia, promotion peaceful resolution of the conflict or serving the de-occupation or humanitarian purposes, implementation of activities stipulated in paragraphs (i) – (vi) above, shall be allowed only under the special permission of the Georgian Government.

Violation of the prohibition on conducting illegal economic activities shall lead to criminal liability under the Criminal Code of Georgia in a form of fine or imprisonment up to 6 years. In addition, legal entities involved in the illegal activities shall be subjected to fine, deprivation of right to conduct relevant activities or fine and liquidation.

Legal sanctions provided for in the Georgian legislation for implementation of activities on the Occupied Territories referred to above, shall also be extended to related persons i.e. persons directly or indirectly participating in the capital and/or influencing decisions of entities involved in the said illegal activities.

Illegal Authorities (Officials)

Any body (official person) performing de-facto legislative, executive or judicial functions or any other activities that belong to the sphere of authority of the national government or local self-government bodies of Georgia shall be deemed illegal if such a body is not formed or a person is not appointed/elected pursuant to the requirement of Georgian legislation . Any act issued by the said authorities shall be deemed invalid and shall not lead to any legal consequences. 

Finally, the Law envisages intention of the Government of Georgia to conclude bilateral agreements in order to ensure that other states - parties to such agreement – shall use proper sanctions stipulated in its own legislation against the persons violating the provisions of the Law. 


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