Capital increases and reductions are common corporate transactions in Georgia. While these actions primarily reflect changes in a company’s equity structure, they also carry specific tax consequences. Understanding how capital contributions and withdrawals are treated under Georgian tax law is essential for both shareholders and businesses to remain compliant and avoid unexpected liabilities.
Tax Consequences of Capital Increase
When a company’s capital is increased, the main tax aspects to consider are Corporate Income Tax (CIT) and Value Added Tax (VAT).
With respect to CIT, the Tax Code explicitly states that partner contributions that increase the net assets of the enterprise are excluded from income. Consequently, capital contributions are not treated as taxable income for CIT purposes. It is also important to emphasize that Georgia applies the Estonian model of corporate taxation, meaning that companies are not taxed on earned income until profits are distributed.
Regarding VAT, the law specifically provides that the transfer of assets into a company’s capital is not considered a supply of goods. Therefore, such contributions are not subject to VAT. It should be noted, however, that if a contributing partner is registered as a VAT payer, the recipient company must also register as a VAT payer before performing any VAT-taxable transaction. This registration must occur no later than 10 days after the contribution.
Tax Consequences of Capital Reduction
Capital reduction may lead to certain tax consequences, depending on the form of the reduction.
From a CIT perspective, capital reduction is not considered a profit distribution and therefore does not create an immediate tax liability. However, the amount of the reduction must not exceed the actual amount of contributions previously made by the partner. Any excess will be treated as distribution of profits, that is subject to CIT.
As for VAT, if the reduction is made in cash, it does not trigger VAT. However, where the reduction takes the form of assets, the transfer is considered a taxable supply of goods. As such, it will generally be subject to VAT unless an exemption applies. An exemption is available if more than 50% of the company making the transfer is owned by the state or a municipality, and the assets are transferred back to the state or municipality as part of the capital reduction. In all other cases, asset transfers through capital reduction are VAT-taxable.
Capital Reduction Following a Contribution in Foreign Currency
Special considerations apply where a capital contribution is made in foreign currency and later reduced. Under Georgian legislation, all foreign currency transactions, including capital contributions, must be accounted for in GEL.
Suppose at the time of contribution, the shareholder pays USD 10,000. Under Georgian law, the contribution is registered in GEL at the official exchange rate effective on the contribution date. For example, at contribution, the USD/GEL rate is 2.5, so the registered capital increase equals 25,000 GEL. Years later, the shareholder decides to reduce the capital and withdraw the same USD 10,000. At that moment, the USD/GEL rate is 3.0, so the company must return 30,000 GEL.
At first glance, it appears to be “USD 10K in and USD 10K out.” However, for tax purposes, the comparison is made in GEL: 25,000 GEL in vs. 30,000 GEL out. This means the reduction exceeds the original contribution by 5,000 GEL, which is treated as a profit distribution. The excess amount is subject to CIT.
In Georgia, capital increases generally do not create tax implications, while capital reductions must be carefully analyzed depending on whether the withdrawal is in cash or in kind. Contributions in foreign currency require particular attention, as exchange rate differences may result in taxable profit distributions at the time of reduction. Businesses and shareholders should therefore carefully structure capital operations and maintain proper documentation to ensure compliance with both CIT and VAT rules.
About Andersen in Georgia
At Andersen Georgia, we support businesses and shareholders in navigating the tax implications of capital increases and reductions in Georgia. Our team advises on compliance with corporate income tax and VAT rules, including complex cases involving non-cash contributions, asset withdrawals, and foreign currency capital operations. We help clients structure transactions in a tax-efficient manner while minimizing risks and ensuring full compliance with Georgian legislation.
For professional advice on capital contributions, reductions, and related tax consequences in Georgia, contact us at tax@ge.andersen.com.
Disclaimer: This article is based on Georgian legislation and publicly available information as of September 2025. It is intended for informational purposes only and does not constitute legal or tax advice. Readers should seek professional guidance tailored to their specific circumstances before acting on the information provided.