Double Taxation Avoidance Treaty (DTA): What benefits does it have for business and how to apply it

The primary objectives of the Double Taxation Avoidance Treaty (DTA) and the Prevention of Fiscal Evasion are to foster economic collaboration between nations and attract foreign investment. 

DTAs help to avoid taxing the same income in both Georgia and the treaty partner country, reducing the tax burden on individuals and businesses operating internationally.

Georgia’s treaties are largely modeled after the OECD Model Tax Convention, which outlines how taxing rights are shared between treaty partners. Currently 58 Treaties on the ”Avoidance of Double Taxation and the Prevention of Fiscal Evasion” are in force. 

Taxing Rights: The OECD model assigns taxing rights based on the nature of income and where it is generated. For instance, active income (like business profits) is usually taxed in the country where the activity is performed, while passive income (like dividends, interest, or royalties) may be taxed both in the source country and the resident’s home country, with a credit given to avoid double taxation.

Permanent Establishment: For businesses, DTAs typically include provisions about “permanent establishment” (PE). A PE refers to a fixed place of business where substantial activities are carried out, such as an office or factory. A country can tax a foreign business only if it has a PE in that country.

Types of Income Covered

DTAs categorize different types of income and set rules for how each is taxed. Common types of income covered include:

• Business Profits: Typically taxed in the country where the company operates, unless the company has a permanent establishment in the other country.
• Dividends, Interest, and Royalties: These may be taxed in both the source country and the resident country, but the resident country must offer tax credits to avoid double taxation.
• Capital Gains: Gains from the sale of assets may be taxed in the country where the assets are located, but the tax treatment can vary depending on the treaty.
• Employment Income: Generally taxed in the country where the employment is carried out, though exceptions exist for short-term work in some treaties.
• Pensions and Annuities: These are usually taxed in the country of residence, but treaties may vary in their approach.

For example, if a Georgian company earns income from a foreign country that has a DTA with Georgia, the income is taxed either in Georgia (country of residence) or in a foreign country (country of source), or the tax paid in the foreign country is credited against Georgian taxes.

Mutual Agreement Procedure (MAP)

DTAs often include a Mutual Agreement Procedure (MAP), which allows taxpayers to resolve disputes about how the treaty is applied. If the taxpayer believes they have been unfairly taxed under the DTA (for example, if they are taxed in both countries on the same income), they can ask their tax authority to work with the other country’s tax authority to resolve the issue.

The United Arab Emirates (UAE) and Cyprus are often considered to have the most favorable tax treaties with Georgia due to their 0% withholding tax rates on dividends, interest, and royalties, making them highly advantageous for cross-border investments. These treaties not only reduce tax burdens but also provide clarity and certainty for international investments, enhancing Georgia’s appeal as a business hub.

Georgia has currently concluded 58 “Double Taxation Avoidance” Treaties. Conditions with the United Arab Emirates and Cyprus are considered most favorable.

United Arab Emirates (UAE)

• Dividends: The DTA with the UAE allows for 0% withholding tax on dividends, which is extremely beneficial for investors.
• Interest and Royalties: The DTA also stipulates 0% withholding tax on interest and royalties.
• Business Profits: The treaty provides a favorable environment for Georgian businesses operating in the UAE, with clear rules for taxing business profits.

The absence of withholding taxes in the UAE makes this one of the most attractive treaties for individuals and companies.

Cyprus

• Dividends: The DTA with Cyprus provides a 0% withholding tax on dividends, which is highly advantageous for Georgian investors.
• Interest and Royalties: Interest and royalties are also taxed at 0% under the DTA, making it one of the most favorable treaties for financial and intellectual property-related transactions.
• Capital Gains: The DTA allows for favorable treatment of capital gains, with many gains taxable only in the country of residence.

Source: https://mof.ge/en/5128 

Authors: Svanidze Melano

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