1% Tax in Georgia: How the Small Business regime works, who it suits, and potential risks
For several years now, Georgia has remained one of the most popular jurisdictions for entrepreneurs from CIS countries and Europe. The primary reason is the special tax regime for small businesses, which allows paying only 1% income tax.
However, behind this attractive figure lies a system of conditions, limits, and tax nuances that are crucial to understand even before registering a business. Improper planning can lead to the loss of preferential status or additional taxation in other countries.
Below, we look at how the 1% rate works, who it is suitable for, what the restrictions are, and how to avoid risks.
Small Business Status criteria: what you need to know to qualify for the tax incentive
To take advantage of the preferential taxation, an entrepreneur must be registered as an Individual Entrepreneur in Georgia. This is an analog of the Ukrainian FOP. After registration, the entrepreneur can apply for Small Business Status.
This status allows paying a 1% tax on income, provided the following conditions are met:
annual income does not exceed 500,000 GEL (approximately 180,000 USD); for entrepreneurs in the field of wine tourism and agritourism — 700,000 GEL (approximately 255,000 USD);
the activity falls under the permitted types of activities;
the entrepreneur complies with the requirements of tax legislation.
However, it is important to understand that this is a preferential regime with clear boundaries.
If limits are exceeded:
If the turnover exceeds 500,000 GEL (or 700,000 GEL for wine and agritourism), a 3% rate applies to the amount of excess.
Systematic exceedance can lead to the loss of Small Business Status.
After losing the status, the entrepreneur switches to the general taxation system, where the rate can reach 20% of profit.
Thus, the 1% rate is not a universal tax, but a special regime with specific conditions of application.
Which activities fall under the 1% Regime?
Not all types of businesses can utilize Small Business Status.
The regime usually covers:
IT & Tech: software development, QA testing, tech support, network administration, Data Science.
Digital & creative: design (Graphic, UX/UI, Interior), copywriting, SMM, translations, video editing, illustration.
Trade: retail and wholesale of goods (except excise goods), including e-commerce and dropshipping.
Manufacturing: production of furniture, clothing, jewelry, food products (except alcohol), and other craft goods.
Education & personal services: Tutoring, private coaching (non-licensed), equipment repair, beauty services, photography.
Tourism: guide services, tour management, agro- and wine tourism (with higher revenue limits).
However, a number of professional and regulated activities are excluded from this regime.
Activities for which a person CANNOT use the special tax regime include:
Activities subject to licensing or obtaining a special permit.
Activities requiring significant investment, particularly the production of or operations with excise goods.
Foreign currency transactions and other financial services.
Professional services, specifically: medical activities; architectural activities; legal and notary services; auditing services; consulting activities, including tax consulting.
Gambling business and activities related to gambling.
Staffing and recruiting (employment of personnel).
Production of excise goods such as alcohol, tobacco, or fuel.
❗️Important: The Georgian Revenue Service looks at the actual content of your services, not just the title of the contract. If you defined “software development services” in the contract (which is allowed for 1%), but are actually providing “consultations” (which may be questionable), tax authorities can annul your preferential status. They use the General Anti-Avoidance Rule (GAAR), which allows them to ignore the document’s name and calculate taxes based on the real essence of your work
Are all incomes taxed at 1%?
The preferential regime applies only to income from entrepreneurial activity that meets the small business requirements. Other types of income are taxed under the general rules of Georgian tax law, even if the entrepreneur has Small Business Status.
Incomes that do NOT fall under the special 1% regime include:
- Income from property rental.
- Income from providing loans or lending.
- Profits from the gambling business.
- Gifts.
- Inherited property.
- Dividends.
- Interest on deposits or other financial instruments.
- Royalties (income from the use of intellectual property).
- Income from debt cancellation.
- Income from the sale of a partner’s share in a business.
Another key factor — Tax Residency
It should be noted that an individual entrepreneur in Georgia can be registered by both residents and non-residents. However, the 1% regime has an important feature.
Income must be considered as originating from Georgia.
As a rule, this means: the service must be provided while the entrepreneur is physically located in Georgia. If the entrepreneur actually works from another country or permanently resides abroad, then the income may be taxed in that other jurisdiction.
Questions may arise regarding:
Tax residency
Permanent establishment
Application of Double Taxation Avoidance Agreements (DTAA)
CASE 1
Entrepreneur — manufacturer and seller of handmade souvenirs and decor.
Registered in Georgia as a small business and lives in Tbilisi.
Sales are conducted through their own online store and local markets.
Annual income — $90,000, which is less than the 500,000 GEL threshold.
Activity type is permitted for small business.
Result: The entrepreneur receives Small Business Status and pays 1% tax on income.
CASE 2
Web development freelancer previously worked remotely from abroad (e.g., Poland). In the middle of the year, they move to Georgia and stay here for more than 183 days, becoming a tax resident.
Annual income — $120,000, which is less than the 500,000 GEL threshold.
Activity type is permitted under the small business regime.
Services are provided physically from the territory of Georgia.
Result: The entrepreneur receives Small Business Status and pays 1% tax on income.
CASE 3
Entrepreneur — a recruiter in Georgia helping international IT companies find employees.
Registered as a small business in Georgia.
Annual income — $80,000, less than the 500,000 GEL threshold.
Problem: Recruiting is on the list of activities excluded from the 1% regime.
Result: The entrepreneur cannot use the preferential rate; income taxes are paid at the standard 20% rate.
How to maintain compliance
To use the 1% rate and not lose Small Business Status, it is important to:
monitor annual turnover
maintain proper accounting records
file tax reports on time
monitor the VAT threshold
correctly determine tax residency.
The 1% small business regime in Georgia is an attractive opportunity for entrepreneurs, but its effective use requires attention to the type of activity, income limits, tax residency, and VAT rules.