The FINANCIAL — I. SHARE TRANSFERS IN LLCs
All Georgian Limited Liability Companies (LLC) are required to submit to the National Agency of Public Registry of Georgia not later than December 1, 2009 detailed information about the share transfers that took place within the Company from May 10, 2008 till December 1, 2009.
The information about the share transfers that will be made from December 1, 2009 till December 31, 2009 should be reported by January 1, 2010.
Moreover, since January 1, 2010 the share registries of the LLCs shall be maintained by the National Agency of the Public Registry of Georgia. That means that starting January 1, 2010 the share registries of the LLCs may no longer be maintained by the LLCs themselves or by independent share registrars.
In practical terms it means that the National Agency of the Public Registry of Georgia will review and study all share transfers made from May 10, 2008 till December 31, 2009 in all Georgian LLCs.
II. JOINT AND SEVERAL LIABILITY
OF THE SHAREHOLDERS
Limited liability was first introduced by Section 44 of the Law of Georgia “On Entrepreneurs” on October 24, 1994 which provided that liability of a shareholder would not be beyond the amount on his/her shares.
Limited liability companies have become the most popular form of business entity in Georgia because of the number of benefits of limited liability. For example, limited liability was an incentive for investors. The limited liability principle encouraged passive and inexperienced investors to make an investment without getting directly involved in management of the company and without placing their personal assets at risk.
This concept was changed so that the shareholder becomes jointly and severely liable if he/she misuses the form of the limited liability. This concept was introduced by Section 3.6 of the Law of Georgia “On Entrepreneurs”.
This quite vague clause can be interpreted so that if an LLC has creditors, the courts of law may obligate the shareholder(s) of the LLC to be jointly and severely liable.
It also means that a claimant may pursue an obligation against any one party as if they were jointly liable and it becomes the responsibility of the defendants to sort out their respective proportions of liability and payment. This means that if the claimant pursues one defendant (i.e. a shareholder or shareholders) and receives payment, that defendant must then pursue the other obligors for a contribution to their share of the liability.
III. CHANGE IN VAT TREATMENT
OF THE SALE OF BULDING LAND
Sale of land was traditionally exempted from VAT in Georgia.
According to the amendments to the Tax Code on Georgia (Section 243.4) which became effective in August, 2009 the sale of the land and the buildings connected to it shall be regarded as a supply of the building.
It means that if a person purchased land and commenced construction activities there, the sale of such land may not be regarded a VAT exempt transaction.
IV. LAND TAX OF NON-RESIDENTS
According to the amendments to the Tax Code of Georgia, non-resident natural persons that own non-Agricultural land in Georgia and do not have income from Georgian sources of more than 40,000 GEL per year, shall not pay property tax (around 0.19 GEL per each square metre of land).
These amendments were made on July 17, 2009 but took effect retroactively from January 1, 2009.
V. INVESTMENT GUARANTEES
The following substantial provisions (Articles 7.3 and 16.2 of the Law of Georgia “On the Investment Activity Promotion and Guarantees” 1996 were amended in July, 2009.
Before the amendments took place, these sections were formulated as follows:
Article 7.3
A decision of requisition of investment as well as the compensation terms may be appealed against in court as well as under the procedure established by Article 16 of this law, should the investor be a foreigner.
Article 16.2 Procedure for Dispute Resolution
2. A dispute between a foreign investor and a state agency shall unless the procedure for its resolution is not defined by way of their agreement, be subject to resolution in courts of Georgia or in the International Centre for the Resolution Investment Disputes. Unless the dispute is considered in the International Centre for the Resolution of Investment Disputes, a foreign investor shall be entitled to apply to any international arbitration body which has been set up by the Commission of the United Nations for International Trade Law – UNCITRAL to resolve the dispute in accordance with the rules established under the arbitration and international agreement.
The current version of these sections of the Law of Georgia “On the Investment Activity Promotion and Guarantees” do not have a reference to the International Centre for the Resolution Investment Disputes and UNCITRAL.
The foreign investors:
a) foreign citizens;
b) stateless persons temporarily residing on the territory of Georgia;
c) Georgian citizens permanently residing abroad;
d) legal persons (companies) registered beyond Georgia
shall not be able to submit a dispute to the International Centre for the Resolution Investment Disputes, unless it is agreed with the Georgian authorities or is regulated by the relevant international treaty of Georgia.
In practical terms it means that purely from the Georgian law perspective investors from countries that are not Members of the UN Convention on the Settlement of Investment Disputes Between States and Nationals of Other States or signed but not ratified, accepted or approved the Convention (Canada, Poland, Russia, Moldova, Tajikistan, Thailand, Belize, Dominican Republic, etc.) will not be able to commence the international arbitration proceedings.
Zurab Vanishvili & Jane S. Wiegand
Partners, ZURAB VANISHVILI LAW FIRM
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