Georgia is one of the most attractive countries for crypto investors in Eastern Europe and Western Asia due to tax benefits for crypto transactions and specific local legislation. As of 2023, the Georgian government is actively working on new crypto market regulations in line with the European Union directives.
Let’s take a look at the current legal framework governing digital assets and opportunities for blockchain companies and individuals in Georgia.
Legislative Framework for Cryptocurrency Regulation in Georgia
On December 20, 2017, the National Bank of Georgia (NBG) released a statement outlining the government’s position on regulating the industry. Specifically, the NBG representatives said:
- any activities related to digital assets aren’t regulated by local legislation;
- the National Bank of Georgia doesn’t regulate the digital assets market;
- cryptocurrency isn’t a legal means of payment in Georgia;
- operations with digital assets pose legal and financial risks for users.
The statement of the National Bank of Georgia also pointed out that the risks in crypto operations are caused by constant fluctuations in the rate of digital assets, the decentralized nature of the sector’s functioning, and the lack of regulation of exchanges.
In 2019, the Ministry of Finance of Georgia published a document defining that
“cryptocurrency is a digital expression of a value not issued by a central bank.”
According to the Ministry’s explanation, in some cases, digital assets can be used as an alternative to money. The issuance, storage, and exchange of digital assets are done through a decentralized consensus mechanism. The ownership of the digital asset is confirmed by means of cryptographic methods. These transactions don’t require any supervisory authority.
Therefore, this document was the only legislative act determining the status of digital assets and tax requirements for transactions until 2022 inclusive.
In August 2022, the Georgian government agreed on an updated legal framework for the financial sector. Levan Davitashvili, Minister of Economy of Georgia, stressed that the new regulatory rules would also affect the digital business sphere and operations with digital assets. Moreover, the updated regulatory framework envisages convergence with three EU directives on crypto transactions:
The Minister said that convergence with the EU acquis in the crypto sector regulation is particularly important to form a sustainable legal base.
The document was expected to be approved by the Georgian Parliament by the end of 2022 once the necessary amendments were passed. But at the time of writing (January 10, 2023 — ed.), the amendments haven’t been adopted, so the updated regulatory framework for the financial sector should be anticipated in the foreseeable future.
Cryptocurrency for Legal Entities
Until the updated regulatory environment for the sector comes into force, legal entities whose activities involve digital assets aren’t required to obtain special licenses. However, some digital assets engaged in the activities of blockchain companies may be regarded by the National Bank of Georgia as securities or assets with features characteristic of securities. In this case, blockchain firms must obtain a special financial license in Georgia.
Financial licenses can be issued to companies established as LLCs or JSCs. The licensing process starts with the submission of an appropriate application and a set of documents to the central bank, which includes:
- an extract from the state registry;
- a receipt on payment of the state duty;
- confirmation of the absence of a criminal record of the company’s owners;
- a financial report of the company for the last six months;
- details of the company’s capital.
The financial license may be given to the company, whose owner can be a citizen of Georgia or a foreign person. One of the main requirements of the National Bank of Georgia for companies willing to get financial licenses is to have a capital of 250,000 GEL or more. Besides, the company must be accountable to the Georgia Department of Revenue and notify the central bank about any structural changes inside the organization. After successfully obtaining the financial license, blockchain companies are allowed to perform the following services:
- account transactions involving withdrawals or deposits;
- issuance and transactions with various financial tools, including e-money;
- funds transfers;
- e-money transactions through mobile devices on the Internet;
- token issuance, ICOs, and other services.
The Georgia Department of Revenue stipulates that businesses registered in the country are subject to VAT at a rate of 18%. Moreover, if the company is engaged in industrial mining, the VAT rate is also paid for the electricity provided for mining.
Additionally, when distributing profits related to international income, legal entities are liable to a special corporate tax at the rate of 15% and a dividend tax at the rate of 5%.
Free Industrial Zone for Companies
Interestingly, blockchain companies registered in Georgia can legally obtain tax exemptions for their operations. According to the Tax Code of Georgia, there are so-called free industrial zones (FIZ), areas with a special legal status. Businesses located within FIZs may be exempt from VAT, corporate tax, and dividend tax if their activities are coordinated with the Georgia Department of Revenue.
Notably, by conducting special inspections, the Georgia Department of Revenue independently determines the compliance of the company’s activity with the rules established for enterprises operating in the FIZ. Such companies can produce and process various kinds of goods or provide any services, but only within the FIZ. Commercial activities outside the free industrial zone deprive businesses of tax exemptions.
Regarding the taxation of companies engaged in digital asset mining within the FIZ, such businesses may be obliged to pay an 18% VAT on the electricity provided for mining. It all depends on how the Department of Revenue defines such operations. For example, if mining is considered a service provision, the company must pay the VAT rate on the electricity received. If the Department of Revenue determines that the company is engaged in manufacturing or processing, the VAT rate isn’t charged.
Given the current approach by the Department of Revenue concerning companies working in the FIZ, some legal entities are often forced to reconsider their type of activity or agree to pay certain taxes.
Cryptocurrency for Individuals
According to the aforementioned document of the Ministry of Finance, the legislation doesn’t prohibit individuals from conducting any transactions with digital assets. So, when receiving income from crypto transactions, users are exempt from some types of taxes, such as:
- an exemption from personal income tax on sales of cryptocurrencies;
- the exchange of digital assets for conventional money, including national currency, is exempt from VAT;
- provision of technical equipment for further mining of cryptocurrency assets is also exempt from VAT.
Importantly, the user doesn’t have to pay VAT when selling the mining equipment to an individual residing outside Georgia and not having a permanent establishment in the country. Selling equipment to users residing in Georgia or having a local representative office is subject to VAT.
It’s worth noting that the Georgian Parliament is working on a new regulatory framework for the crypto sector. Its approval is expected in 2023. Since the document overlaps with the main provisions of the European Union directives, crypto transactions for private individuals may be fully exempt from VAT.
According to CoinATMRadar, over 70 crypto ATMs are operating in Georgia. More than 60 of them are located in Tbilisi, the capital of the country. ATMs can also be found in Batumi, Rustavi, and Kutaisi.
The government’s broadband development strategy states that by 2025, Georgia can become a digital hub connecting Europe and Asia. The government expects to maximize the digitalization of logistics and tourism as an anticipated outcome of the policy.
Due to free industrial zones and a flexible tax system, Georgia has a relatively favorable environment for blockchain companies. Almost all digital asset transactions are tax-free for individuals. Besides, the local government’s commitment to bringing industry regulation in line with European Union standards can strengthen economic ties between Georgia and the EU. This also applies to the development of blockchain financial tools. Not without reason, Binance views the Georgian market as one of the most promising in the region and plans to invest actively in the local blockchain industry.
