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13.4.1. Main Rules

The Income Tax Act provides for general transfer pricing (‘TP’) provisions. However, Georgia adopted specific TP rules in the year 2011 (updated in 2019) for transactions between related parties, which are based on the 2017 OECD guidelines.

The Ministry of Finance has issued an “Instruction on Valuation of International Controlled Transactions” in 2013, which further clarifies the application of TP rules and provisions.

The Act, along with the TP rules and instructions, regulates the TP provisions. The primary rule is that the arm's length principle must be applied for transactions between any related parties.

The TP rules apply to cross border transactions between a resident company and a foreign company, which is a related party or a resident of an offshore/ low tax jurisdiction. It also applies to transactions between a resident company and its permanent establishment.

Definition of Related Parties

For TP purposes, two persons are related if one of the following conditions is satisfied:

  • One person / two or more persons are, directly or indirectly, involved in management, control, or capital of another person / other two persons, i.e. holds more than 50% of the company;
  • A person holds / controls the majority of the voting rights or controls the composition of the board of directors or is entitled to  more than 50% of the  profits of a company;
  • The total amount of loans granted by a person to a company and loans of that company guaranteed by the person is greater than 50% of the company’s total assets' value;
  • A company is owned or carried on by a relative of the person; or
  • Control over business decisions of the company can be evidenced by facts and circumstances.

Applicable TP Methods

Georgian TP rules provide for five methods for determining whether transactions are at arm’s length. These methods are similar to methods provided by the OECD guidelines:

  • Comparable uncontrolled price (‘CUP’) method;
  • Resale price method;
  • Cost plus method;
  • Net profit margin method; and
  • Profit split method.

Generally, the “best method” rule applies. However, the CUP method will have priority over other methods.

Use and Availability of Comparable

The concept of the use of comparable in the benchmarking study as per the TP rules is consistent with the OECD guidelines. There is a marked preference for the inclusion of local comparable in the benchmarking study. However, comparables from other geographies, including foreign comparables, are also accepted after making the appropriate adjustments to account for geographic differences and other factors that affect price and profitability.