Estonian Tax Model in Georgia: Complete Guide 2025

Georgia adopted the Estonian tax model in 2017, creating one of the most attractive corporate tax systems in the world. Under this system, companies pay 0% tax on retained earnings and only 15% on distributed profits. This guide explains how it works and how your business can benefit.

What is the Estonian Tax Model?

The Estonian tax model, officially known as the "distributed profit tax" system, fundamentally changes how corporate taxation works:

Traditional System: Companies pay corporate income tax annually on their profits, regardless of whether the money stays in the company or is distributed to shareholders.

Estonian Model: Companies pay 0% tax on profits that remain in the company. Tax is only triggered when profits are distributed to shareholders as dividends.

This approach encourages reinvestment and business growth by allowing companies to use 100% of their profits for expansion, equipment purchases, or reserves.

How Does It Work in Georgia?

Tax Rate Structure

When profits are distributed, the tax is calculated using a "gross-up" method:

Scenario	Tax Rate
Retained Earnings	0%
Distributed Profits (Dividends)	15% (gross-up: 15/85)
Non-business Expenses	15%

Practical Example

Let's say your company earns 100,000 GEL profit:

If you keep the money in the company: You pay 0 GEL in corporate tax. The full 100,000 GEL remains available for business use.

If you distribute 50,000 GEL as dividends: You pay 15% tax on the distributed amount. Tax = 50,000 × 15/85 = 8,824 GEL. The shareholder receives 50,000 GEL net.

Who Uses the Estonian Model?

All Georgian LLCs and JSCs: The Estonian model (distributed profit tax) is the standard corporate tax system for all limited liability companies and joint stock companies in Georgia since 2017.

Individual Entrepreneurs: IEs do not use the Estonian model. They pay income tax under different regimes (Micro 1%, Small Business 1-3%, or standard 20% on net income).

Exceptions: Certain financial institutions like banks, insurance companies, credit unions, and microfinance organizations use different tax regimes with traditional annual profit taxation.

What Triggers Tax Payment?

Under the Estonian model, tax is due when profits leave the company. This includes:

Dividend Distributions: Any payment to shareholders from company profits.

Non-Deductible Expenses: Expenses not related to business activities are treated as profit distribution.

Transfer Pricing Adjustments: Below-market transactions with related parties may trigger taxation.

Loans to Related Parties: Loans to shareholders or related persons may be treated as distributions in certain cases.

Benefits of the Estonian Model

1. Cash Flow Advantage

Your company keeps 100% of profits until distribution. This is especially valuable for growing businesses that need capital for expansion.

2. Simplified Tax Planning

No need for complex year-end tax optimization. Tax is simply paid when dividends are declared.

3. Reinvestment Incentive

The model naturally encourages reinvesting in your business rather than extracting profits.

4. Flexibility

You control when to take profits and when to pay tax. Bad year? Keep the money in the company tax-free.

Common Questions

Can I use retained earnings later without tax?

Yes, as long as the money stays in the company or is used for business purposes. Tax only applies when profits are distributed to shareholders.

What about salaries?

Reasonable salaries to employees (including director-shareholders) are deductible business expenses and don't trigger the distribution tax. However, they are subject to income tax and social contributions.

Are there any monthly tax obligations?

Yes, companies must file monthly tax declarations and pay the distribution tax when dividends are paid. VAT and payroll taxes follow their normal schedules.

What if I don't distribute profits for years?

There's no forced distribution requirement. You can accumulate profits indefinitely without paying corporate tax.

Comparison with Other Countries

Country	Corporate Tax	Model
Georgia	0% / 15%	Estonian
Estonia	0% / 20%	Estonian
Germany	~30%	Traditional
USA	21%	Traditional
UK	25%	Traditional

Georgia's 15% rate on distributed profits is lower than Estonia's 20%, making it one of the most competitive in the world.

Tax Optimization Strategies

1. Salary vs. Dividend Planning: Balance between taking a salary (immediate tax but deductible) and dividends (deferred tax but no social contributions).

2. Timing Distributions: Plan dividend payments around your personal tax situation and cash flow needs.

3. Reinvestment Focus: Use the tax-free accumulation period to grow your business before taking profits.

4. Multi-Year Planning: Consider your long-term exit strategy when deciding on distribution timing.

Record Keeping Requirements

Even with 0% tax on retained earnings, Georgian companies must:

• Maintain proper accounting records
• File monthly tax declarations
• Prepare annual financial statements
• Document all transactions
• Keep records for 6 years

Get Expert Tax Advice

The Estonian tax model offers significant benefits, but proper implementation is crucial. At Modern Consulting, we help businesses:

• Structure operations for maximum tax efficiency
• Plan optimal salary/dividend mix
• Ensure compliance with all requirements
• Handle monthly tax declarations
• Prepare for tax audits