Why Businesses Overpay Taxes in Georgia and How to Avoid It
Why Businesses Overpay Taxes in Georgia and How to Avoid It
Georgia’s tax system provides both opportunities and challenges for businesses. In practice, it is common for companies to pay more taxes than required by law — not intentionally, but due to misinterpretation of regulations, lack of experience, or insufficient internal tax control.
Based on numerous tax audits conducted by our team, we have repeatedly identified cases where companies had overpaid taxes to the state budget. Through professional review, these overpayments were identified and, where applicable, successfully recovered or used to reduce future tax liabilities through appropriate legal mechanisms.
Practice shows that many companies are often unaware that they are paying more taxes than legally required.
Below are the most common real-life 10 cases of tax overpayments.
1. Incorrect taxation of non-resident services
A Georgian company had a contract with a foreign service provider. The company withheld non-resident income tax on payments, even though the services were performed entirely outside Georgia and did not constitute Georgian-source income.
Result:
The company overpaid taxes on each transaction, resulting in significant annual financial losses.
Issue:
Misinterpretation of when non-resident income is subject to taxation.
2. Failure to apply double taxation relief
A Georgian resident company received services from a non-resident entity and fully taxed the income in Georgia, despite the existence of a double taxation avoidance agreement with the relevant country.
Result:
The same income was effectively taxed twice.
Issue:
Failure to apply international tax treaties.
3. Incorrect taxation of individual entrepreneurs
A company received services from an individual entrepreneur but withheld 20% income tax on each payment.
Result:
The company overpaid taxes, even though the contractor was already operating under their own tax regime.
Issue:
Incorrect assessment of the contractor’s legal and tax status.
4. VAT proportional deduction errors (loss of input VAT credit)
A company had mixed activities:
taxable (18% VAT) operations
VAT-exempt operations without input VAT deduction rights
The company made purchases (goods, services, logistics) used for both types of activities.
Legally, an approximately 80% VAT deduction was possible, but the company applied only 60% due to incorrect proportional calculation.
Result:
The company lost tens of thousands of GEL annually in VAT credits.
Issue:
Incomplete use of legally available tax benefits.
5. Incorrect taxation of advance payments
Advance payments are often treated as automatically taxable events, even when they do not meet the legal criteria defined under applicable regulations (including Order No. 996 of the Minister of Finance of Georgia).
Result:
Taxes are paid prematurely, negatively affecting cash flow.
Issue:
Incorrect tax classification of advance payments.
6. Incorrect VAT adjustment on advance payments
In practice, it is common for companies to correctly account for VAT at the time an advance is received or paid; however, at a later stage—when the goods are delivered or the services are fully rendered—they fail to make the appropriate adjustment.
Specifically, when issuing the final invoice or upon completion of the supply, the VAT already paid on the advance is not taken into account, resulting in the same transaction being recorded for VAT purposes twice or incorrectly in the accounting records.
Typical errors:
VAT is accrued and declared upon receipt/payment of an advance;
Upon final delivery, the transaction is fully taxed again, without deducting the VAT already paid on the advance;
Alternatively, the advance is not properly offset against the final settlement.
Result:
VAT may be incorrectly duplicated or improperly reflected in accounting records.
Issue:
Failure to reconcile advance payments with final settlement.
7. Estonian tax model – incorrect classification
Under the Estonian tax model, a company automatically treated certain transactions as distributed profit.
Result:
In some cases, profit tax was paid on transactions that were actually service-related and should not have been taxed as distributed profit.
Issue:
Incorrect distinction between expenses and distributed profit.
8. Incorrect customs valuation and non-use of certificates of origin
In import operations, one of the most common errors is the incorrect determination of customs value and customs duties, which is often associated with both technical inaccuracies and the failure to apply available tax reliefs.
First, the improper calculation of customs value typically does not involve the artificial manipulation of invoices; rather, it is related to the incorrect classification of the transaction. In particular, companies often include in the customs value certain costs that, under applicable legislation, should not form part of the taxable base (for example: domestic transportation within Georgia, post-import services, or other non-relevant expenses).
Such practices result in an inflated customs value and, consequently, companies end up paying excess VAT and customs duties.
In addition, a significant practical issue is associated with the use of the Certificate of Origin.
Within the framework of free trade agreements between Georgia and a number of countries, the submission of a valid Certificate of Origin may allow for partial or full exemption from customs duties on imported goods.
Result:
Higher import VAT and customs duties
Loss of preferential tariff treatment
Unnecessary cash outflows to the state budget
9. Property tax miscalculation – failure to separate land and buildings
In the property tax declaration process, one of the common errors is the incorrect separation of land and building values, which directly affects the amount of tax payable.
In practice, it is common for a company to own real estate (land and the building located on it), however, for accounting and tax reporting purposes, these assets are not properly separated.
Result:
Companies may overpay property tax due to incorrect unified valuation.
Issue:
Incorrect aggregation of assets with different tax treatment.
10. Double taxation of dividends from foreign subsidiaries
In international corporate groups, one of the common errors is the incorrect taxation of dividends received from non-resident subsidiaries.
A Georgian tax-resident company receiving dividends from a foreign subsidiary often fails to apply the tax reliefs associated with corporate income tax already paid in the source jurisdiction.
Issue:
In many cases, companies:
do not take into account that the subsidiary has already paid corporate income tax in the relevant foreign country;
and in Georgia, tax the received dividends in full;
or fail to apply double taxation relief mechanisms, such as tax credits or exemptions.
Result:
The same profit is effectively taxed twice;
The company incurs additional tax liabilities that could be reduced or fully eliminated under applicable law;
The overall tax burden of the group increases.
In international structures, one of the most common errors in dividend taxation is the repeated taxation of already taxed profits.
In the case of dividends received from non-resident subsidiaries, the failure to apply available tax reliefs directly results in double taxation and imposes an unnecessary financial burden on the group.
Conclusion
Tax overpayment in business is rarely a technical error alone—it is usually the result of systemic inefficiencies.
Most commonly, companies:
fail to apply legally available tax exemptions
adopt overly conservative tax approaches
lack regular tax review and control processes
How to avoid overpaying taxes
Regular tax analysis
Internal tax audits
Pre-assessment of transactions
Use of international tax treaties
Professional tax advisory support
Want to check if your company is overpaying taxes?
Our team provides professional tax reviews and identifies opportunities for tax optimization and recovery of overpaid amounts.
Contact us for a consultation.