Tax and Legal Implications of Engaging Freelancers for Businesses in Georgia

1) What are the tax risks for businesses when hiring freelancers instead of full-time employees?

Under the Tax Code of Georgia there are no significant risks for hiring freelancers instead of full-time employees.  In general tax agent liabilities of businesses applicable to taxation of payments to freelancers, which are not registered as individual entrepreneurs, and employees are similar. 

Task risks may be associated with claiming tax benefits under the Double Taxation Treaties (DTT), as freelancers could be eligible for such benefits.

No withholding liabilities apply to payments made to freelancers:

• Individuals registered as VAT payers.
• Individuals having micro and small business status(with respect to payments made for the relevant business).
• Individuals having a fixed tax payer status (with respect to payments made for the relevant business).

2) How do tax authorities determine whether a freelancer arrangement should be reclassified as employment?

Under the relevant court practice in Georgia the main criteria for differentiation are:

• Control and Subordination:
  
  • Employee: Is subject to the control and direction of the employer.
  • Service Provider: Works autonomously. They are hired to deliver a specific result.
• Integration into the Business
  
  • Employee: Is an integral part of the business's core operations. 
  • Service Provider: Provides ancillary or specialized services. They operate their own independent business and are external to the client's core structure.
• Financial Reality & Economic Risk
  
  • Employee: Receives a regular, fixed remuneration (salary/wage). The employer bears the financial risk and covers business expenses.
  • Service Provider: Is paid per project or via invoice. They bear the risk of profit and loss, cover their own expenses, and can work for multiple clients.

3) What are the employer’s withholding or reporting obligations when working with freelancers?

• Personal Income Tax 20%.
• Pension contributions with respect to payments made to Georgian citizens and permanent residents: 2% withholding liability plus 2% payable by the employer.

4) Are withholding taxes applicable when engaging cross-border freelancers?

Yes, unless DTT eliminating WHT  applies.

5) How do double taxation treaties impact taxation of payments to foreign freelancers?

Double taxation treaties (DTT) may exempt the employer from withholding tax liability. To benefit from a DTT, the freelancer must provide a tax residency certificate from their country of residence.

6) What compliance documentation should businesses maintain when working with freelancers?

• Tax residence certificate of a freelancer, if benefits under DTT apply.
• Documents supporting the criteria for classifying an individual as a freelancer rather than an employee (contract, invoices, payment records, tax registration information, if any.

7) What compliance requirements must companies meet when engaging freelancers?

The compliance requirements are linked to maintaining the relevant documentation.

8) What are the legal and contractual best practices for structuring freelancer engagements to minimize tax risks?

Best practices for structuring freelancer engagements to minimize risks are as follows:

• Well structured service contracts, emphasizing delivery of the work or final result.
• Payment on the basis of invoices issued by the freelancer.
• No employee benefits.
• Avoiding any association of a freelancer with the employer (such as corporate email).

Author: Sofia Roinishvili