What are dividends?
Dividends are any income (including – in the form of interest from preferred shares) of the shareholder from the shares or rights (shares) received as a result of the distribution of profits and distributed by the legal entity to shareholders in proportion to the shares/rights in the capital owned by them.
Shareholders can make different decisions about what to do with the profits. They can use it for development, to buy assets, or they can pay dividends.
Dividends are taxable. Also, if a company decides to pay dividends for the current year the company must have profits.
What taxes must be paid?
The dividend tax amounts to 5% and is calculated based on of the Estonian accrual model. It is paid by the company (LLC). The payment is levied at the same time as the income tax when the company withdraws the income to the personal account of the beneficiary (company founder, co-founder).
Dividend tax is subject to a monthly declaration. The tax agent is a company, not an individual.
Do the tax rates change if the shareholder is a non-resident?
If a shareholder is a tax resident of another state, the tax rate amounts to 5%.
Dividends paid to foreign companies are taxed at the rate of 5% unless an agreement on avoidance of double taxation provides otherwise.
It is possible to set off paid taxes from the income received by the beneficiary – non-resident in the country of residence in the presence of an agreement on avoiding double taxation between Georgia and the country of residence.
Non-standard situations with payment and taxation of dividends
Dividends can be paid in different ways. This also affects the taxation of dividend income.
The main examples of such difficult situations are:
- Payment of past dividends;
- Payment of dividends upon withdrawal of a recipient from the founders;
- Payment of dividends in kind (non-monetary) form.
Payment of past dividends
Can a company pay dividends out of profits earned in previous years but not paid or distributed? The law allows such payments. It is not necessary to wait until the end of the reporting period to make such payments. The year for which dividends are distributed must be specified in the decision on payment.
Dividends upon withdrawal of a recipient from the founders
The Tax Code provides for the payment of dividends in proportion to shares in the authorised capital stock. Non-proportional payment before distribution of profit share among the remaining founders is possible only if it is stipulated by the charter or such a decision is made by the founders themselves.
The amount which exceeds the amount of payment proportional to the share of participation in the authorised capital stock shall not be recognized as dividends for the calculation of taxes. Other rates of personal income tax are applied for such amounts as:
- income of a resident individual will be taxed at the rate of 20%;
- The income of a non-resident individual will be taxed at 20%.
Payment in non-monetary form
The law does not prohibit companies from paying dividends in property form.
However, when such payments are made, it is necessary to draw up everything correctly to avoid disputes arising with the tax inspectorate.
To avoid disputes, it is recommended to provide for the non-monetary payment of dividends in the authorised capital stock or to approve it by the decision of the general meeting of participants.
In this case, the value of the transferred property must be clearly defined in monetary terms to accurately calculate income tax on its basis. Personal income tax in this form of dividends is paid by the recipient himself.
When is dividend tax not payable?
Dividends received by persons defined by the first paragraph of Article 2 of the Law of Georgia "On Entrepreneurs" (except for an individual enterprise) shall not be subject to withholding tax and shall not be included in the total income of the enterprise receiving the dividends.
Dividends received by persons under paragraph 3 of Article 2 of the Law of Georgia "On Entrepreneurs" (except for an individual enterprise) shall not be subject to withholding tax and shall not be contributed to the total income of the enterprise receiving the dividends.
Dividends received by a resident individual subject to withholding tax shall not be included in that individual's total income and shall not be subject to further taxation.
Until 1 January 2023, dividends received by members of agricultural cooperatives from these cooperatives (except for dividends from profits derived from activities under paragraph 2 of Article 6 of the Law of Georgia on Agricultural Cooperatives) shall not be subject to withholding tax and shall not be included in the total income of the persons receiving the dividends.
Dividends paid to the state by a resident enterprise shall not be subject to withholding tax.
Dividends from a FIZ enterprise in a free industrial zone shall not be subject to withholding tax and shall not be included in the total income of the person receiving the said dividends.