What is Small Business in Georgia?

The FINANCIAL — Until now there has not been a legal definition of small business in Georgia. A definition of Micro and Small Businesses will be legally adopted from January 1, 2011, after activating the new Tax Code.

The classification of business in Georgia is by the type of business not the size according to the National Agency of Public Registry.

According to NAPR the number of total registered business entities is 33,601 businesses since 2010, from which 32,892 are industrial enterprises and 709 – non-industrial entities.

The highest number of those registered is individual enterprise – 14,993, followed by Limited Liability Company – 5178 registered LLCs. Then there were 451 non-commercial juridical individuals registered since the year 2010, followed by the foreign industry office – 31, Joint Stock Company – 13, Cooperative – 12, foreign non-commercial juridical individuals’ office – 8, Joint Responsibility Company -7 and only one Commandite Company.

According to Income Tax Department the company will be registered as big scale tax payer if the annual turnover will reach 3 million GEL. 

Moreover, if the company trades with excise goods with the revenue of 1.5 million GEL the entity can be registered as large scale tax payer.

The number of registered entities increased by 32.6% in September 2010, compared to the previous month, and consisted of 4,277 entities.

The new tax code has brought a new model of legislative definition of micro and small businesses.

Micro business is considered an individual with annual turnover of 30,000 GEL who does not use the work of labour.

The status of small business might be given to a physical individual enterprise whose annual turnover from economic work is between 30,000-100,000 GEL during the calendar year. 

“In Georgia there is no regulation of small business. Practically, before adopting the new tax code, Georgian legislation did not consider even the concept of small and medium size business and consequently a concrete and special state strategy and governmental vision did not exist towards this type of business,” said Levan Kalandadze, CEO of Georgian Small and Medium Enterprises Association.

GSMEA was founded only 2 weeks ago, and the registration of companies started just 1 week ago. According to Kalandadze, from preliminary talks there was demand for membership from 150 small and micro industries. Kakheti and Imereti regions are especially active. 

According to Kalandadze micro and small businesses have a social-economical role.

“The tax regime of big-scale companies does not differ from small and medium size companies’ taxation. The big scale companies are registered at large-scale taxpayer inspection which controls them. There is no actual difference from the taxation point of view between companies,” says Kalandadze.

“Practically, the existing legislation does not consider any privileges and advantages for small businesses, if we do not consider that this business sector is taxed with an easier tax regime,” declared Kalandadze.

The taxable income of small business, except considering article 2, is taxed with 5% according to the new Tax Code.

The taxable income of small business is taxed with 3% if a physical individual enterprise has the documentation to prove 60% of expenses of total income (except the salary expense of employed). Moreover if a physical individual enterprise with small business status operates only in special trade zone territory it is taxed with 3%.

The taxable income of small business consists of the total income from existing sources in Georgia, except salary income.

“It is pretty good that these terms and concepts are in the frame of the new legal regulation, however the new model of small business could not come closer to European and American classical models,” declared Kalandadze.

“The new concept is spread over only physical individuals and is not spread over for example small industries, firms and cooperatives,” said Kalandadze.

The second problem with the new legislation is the turnover amount of 100,000 GEL.

“100,000 GEL is such a small limit that it partly does not reflect the real image of Georgia. For example, from a classical approach, small business is considered a company with annual turnover of 10 million in the modern business world,” declared Kalandadze.

“Considering this fact and the Georgian reality, the turnover of small industry should be considered in the range from 100,000 GEL to 2 million GEL, in the better case 1 million GEL. And industries below 100,000 GEL should be considered micro business. In other cases, the existing model would not bring economical and social outcomes to society,” Kalandadze added.

In America the legal definition of small business is determined by the US Small Business Administration. Title 13, Part 121 of the Code of Federal Regulations sets forth in detail the criteria to be used by the SBA in making small business determinations.

If we take the American model of defining small business, different sectors have different criterions for determining small business; criterions such as number of workers employed by a business, annual receipts and the nature of the any relationship with affiliates.

The most common size standards used for defining small business in the U.S. is the following. From the employment side – 500 or fewer employees for most manufacturing and mining industries (a few industries permit up to 750, 1,000 or 1,500 employees), 100 or fewer employees for all wholesale trade industries.

As for the annual turnover, different sectors have set different incomes for defining small businesses. Companies for most retail and service industries with sales receipts of 6 million USD per year are considered small businesses.

In Georgia, the telecommunication service provider Silknet has annual turnover of approximately 12 million GEL. Silknet, which is one of the biggest companies in Georgia, might be considered a small one by the American market.

Moreover, companies with 27.5 million USD per year in sales receipts for most general and heavy construction industries, as well as 11.5 million USD per year in sales receipts for all special trade contractors and 0.5 million USD per year in sales receipts for most agricultural, forestry and fishing industries are considered small businesses in America.