Internationally controlled transactions in Georgia
Makuna Esakia
by Makuna Esakia
Reclassification of loans as equity in internationally controlled transactions
The valuation of internationally controlled transactions, commonly referred to as transfer pricing, is a critical tax consideration for Georgian companies engaged in business activities with foreign-related entities and/or offshore companies, regardless of their relationship.
On 02 October 2024, an amendment was introduced to the instruction “on the Valuation of Internationally Controlled Transactions”, originally approved by Order No. 423 of the Minister of Finance. This amendment establishes a formal procedure for reclassifying a loan as a capital contribution.
Key changes and implications
Under the revised framework, the Georgian Revenue Service has the authority to reclassify a loan obtained from a founder or other related parties as a capital contribution if certain criteria are met. As a result, any interest paid on such reclassified loans will be fully subject to profit tax.
According to Georgian tax legislation, a loan encompasses various financial instruments, including:
Credit/loan agreements;
Overdrafts;
Letters of credit;
Credit lines;
Guarantees; and
Debt securities.
Criteria for reclassifying a loan as a capital contribution
For tax assessment purposes, the following criteria will be considered to determine whether a loan transaction should be reclassified as a capital contribution:
Fixed repayment schedule: Does the loan have a predefined repayment schedule for the principal and interest, aligned with market conditions?
Interest obligation: Is the borrower contractually required to pay interest?
Enforceability: Does the loan agreement include enforcement mechanisms in case of default?
Borrower’s capital structure: Is the borrower's loan-to-equity ratio within an accepted market range?
Necessity and use of funds: Is there a genuine need for the loan, and are the funds being used accordingly?
Management participation: Does the lender have rights that influence the borrower's strategic or operational decisions?
Financial capacity: Does the borrower generate sufficient operating profit to meet its loan obligations?
If at least three of these criteria are met, the Revenue Service may requalify the loan as a capital contribution.
Effective date and business impact
This regulatory amendment does not apply to loans issued before 01January 2025. However, it introduces a more stringent framework for evaluating international transactions, significantly impacting foreign investors looking to establish and finance businesses in Georgia through loan mechanisms.
For businesses engaged in cross-border financing, understanding these changes is essential to ensure compliance tax efficiency.
Established in 2009, TMC provides businesses with a comprehensive range of professional services, including accounting, audit, legal services, outsourced financial management, and appraisal. In 2019, TMC successfully passed the Quality Control Monitoring System assessment conducted by the Service for Accounting, Reporting, and Auditing Supervision (SARAS), further solidifying our commitment to excellence.
GGI member firmTMC LLCTbilisi, GeorgiaT: +995 32 224 24 99Auditing & Accounting, Tax, Advisory
Makuna Esakia serves as the Operations Manager of the Accounting Department at TMC. She leads a team of skilled accountants, overseeing tax and financial matters to ensure compliance and efficiency. Contact Makuna.
