Georgia's 1% tax applies to Georgian-source income. That sentence appears in nearly every guide to the regime, including our own, and then the guide moves on to the turnover cap and the prohibited-activities list. It should not move on, because Georgian-source income decides whether any of those other rules ever get to apply at all. Register an Individual Entrepreneur, get Small Business Status, and invoice a client in Berlin, and the honest answer to "do I owe 1%" runs through a specific statutory test before anything else on this site. Here is that test in full, what a contract needs to show to survive it, and what happens when the Revenue Service checks.
Why this rule matters more than the turnover cap
Small Business Status taxes turnover at 1%, but only the turnover that counts as Georgian-source. Income that does not meet that test is not covered by the 1% at all, in either direction: it is not taxed at 1%, and depending on your own residency position, Georgia may have no claim on it whatsoever. That is a very different situation from crossing the 500,000 GEL threshold or running a prohibited activity, where the income is unambiguously Georgian and the only question is which rate applies to it.
Source is the gate everything else walks through. Get it wrong and the turnover cap, the monthly declaration and your activity code are all questions about the wrong pool of money.
The legal basis: Article 104 of the Tax Code
The source-of-income test is not folklore, and it is not a judgment call left to individual tax inspectors. It is written into Article 104 of the Tax Code of Georgia, "Georgian source income," which lists the categories of income treated as Georgian-sourced. Two cover almost everyone reading this: income from employment in Georgia, and income from services delivered in Georgia.
The employment limb is straightforward. The services limb is where nearly all of the confusion in this market actually lives, because the Tax Code does not simply say "wherever the work happens." It sets out eight specific conditions, any one of which is sufficient on its own, under which a service is deemed to be delivered in Georgia. The two that matter for almost every freelancer, agency and remote contractor reading this are:
- Services are actually rendered in Georgia - the plain physical-performance test.
- The service provider and the service recipient are in different countries, and the service provider is a Georgian resident - unless the provider can show the work was delivered through a permanent establishment in another country.
Everything below follows from the fact that these are two separate, independent tests, and which one actually protects you depends on whether you are personally a Georgian tax resident.
The other six conditions, briefly
The remaining conditions cover narrower cases worth knowing exist even if most contractors never hit them: services tied to Georgian property or securities, culture/education/tourism/sport services delivered in Georgia, cargo or passenger transport starting or ending in Georgia, and a non-resident delivering services here through its own permanent establishment. None of these change the analysis for a typical remote service business, but an unusual arrangement among them is worth checking against the actual text rather than assumed.
The physical-performance test: why "where you sit" is the default answer
For most people who register Small Business Status, the physical-performance test is the only one that matters. Small Business Status has no residency requirement attached to it - you can register an Individual Entrepreneur and get the 1% rate without ever crossing 183 days in Georgia. That means most SBS holders are, for Tax Code purposes, non-residents even while running a fully compliant Georgian business.
The residency-based sourcing rule described below only helps a Georgian resident. If you are not one, it does not apply to you at all, and the physical-performance test - services actually rendered in Georgia - is the entire basis on which your income can be Georgian-source.
A designer who lives in Tbilisi, works from a desk there, and invoices a client in Berlin is rendering services in Georgia. That income is Georgian-source under the plain wording of the test, regardless of where the client sits or where the money is wired from. The same designer who registers a Georgian IE and Small Business Status, then spends the year working from an apartment in Lisbon, is not rendering services in Georgia under this test. The invoice can say whatever it likes; the test is about where the work actually happened.
The residency-based test almost nobody explains
This is the part of Article 104 that gets skipped entirely in most English-language coverage of the 1% regime, and it cuts the other way from what most guides imply.
If you are a Georgian tax resident - meaning you have actually crossed 183 days in a rolling 12-month period, or qualify through the HNWI route - and you deliver a service to a client in another country, that income is deemed Georgian-source under Article 104(1)(c) even if you personally did some or all of the work while travelling, unless you can show the service was delivered through a permanent establishment you maintain in that other country. Residency, not your location on a given Tuesday, is what carries the source determination for a genuine Georgian resident dealing with a foreign client.
"Where you physically sit" is not the universal test for Georgian-source income. It is the fallback test for anyone who has not actually become a Georgian tax resident, which describes most Small Business Status holders. For someone who has genuinely crossed 183 days and holds a Tax Residency Certificate, a business trip abroad to see a client does not, by itself, move that income out of Georgian source. The two tests answer different questions, and using the wrong one is how people either over-worry about ordinary travel or under-worry about a structure that was never resident in the first place.
Practically, the designer working from Lisbon has two separate paths back to a defensible position, and they are not interchangeable: perform the client work while physically in Georgia, or actually become a Georgian tax resident and rely on the residency test - the real 183-day count, not an assumption that registering a business quietly confers it. Neither path is available to someone who has done neither, which is the situation a surprising number of "register and pay 1% from anywhere" setups are actually built on.
Which test applies to you
| Your situation | Test that applies | Georgian-source? |
|---|---|---|
| Living and working in Georgia, billing a foreign client | Physical performance (104.1.c.a) | Yes |
| Georgian tax resident (183+ days), briefly travelling while billing a foreign client, no foreign PE | Residency (104.1.c.g) | Yes |
| Registered SBS, not tax resident, working the whole year from another country | Neither test is met | Very likely no |
| Georgian tax resident with a genuine permanent establishment abroad handling the work | Excluded by 104.1.c.g's own exception | Depends on facts - check before assuming |
Foreign-client income: the myth about where the money comes from
The single most common misreading of this rule is the assumption that a foreign client automatically makes the income foreign-source. It does not: Article 104(2) states directly that the place where income is received is not taken into account in determining its source. A Wise transfer from a US company, a wire from a German client, an invoice in euros - none of it matters. What matters is which condition in Article 104(1)(c) is actually satisfied, and the currency and the client's location are not among them.
This cuts both ways. A Tbilisi-based developer billing an American company in dollars has clean Georgian-source income, exactly as if the client were Georgian. But a Georgian IE holder living abroad cannot make foreign work Georgian-source simply by routing the invoice through a Georgian entity. The registration is not the test. The work, and in a resident's case the residency, is.
Contract structuring: what the paperwork actually needs to show
Contracts and invoices do not create source of income. They are evidence of it, because the Revenue Service is not in the room while you work. What it can see is what you signed and billed, so those documents should describe reality rather than aspiration.
A few practical points that hold up:
- State where the work is performed, if that is your basis for Georgian source. A services agreement that specifies delivery from Georgia, alongside genuine evidence of presence, supports the physical-performance test directly.
- Keep evidence that supports the test you are actually relying on. For physical performance, that is travel records, a lease or utility bills, and correspondence showing you were in Georgia while the work happened. For the residency-based test, that is your day count and, ideally, a Tax Residency Certificate - see getting a Georgian tax residency certificate for how that document is obtained.
- Do not describe the work as consulting if it is not, and do not describe it as consulting if it is. This is a separate rule from source of income - the prohibited activities list excludes consulting from Small Business Status entirely, regardless of source - but the two issues compound. A contract sloppy enough to mischaracterise the activity is usually sloppy enough to leave the source question unclear too.
- If you maintain a genuine foreign permanent establishment, document it properly rather than assuming the label protects you. The exception in 104(1)(c.g) requires you to actually confirm the fact, not merely assert it.
The audit position: what actually happens when this is checked
There are two genuinely different failure modes here, and conflating them is how people misjudge their own risk.
The activity is Georgian-source but excluded from the regime. This is the prohibited-activities situation - the work clearly happened in Georgia, but the activity itself, consulting being the classic case, cannot hold Small Business Status. The income stays inside Georgia's tax net, simply reassessed at the standard 20% personal income tax rate instead of 1%, with underpayment interest and penalties potentially added under the Tax Code's general provisions.
The income never met the source test at all. This is the harder case, and the one this article is mostly about. If a Small Business Status holder is not a Georgian tax resident and did not actually perform the work in Georgia, that income was arguably never Georgian-source, whatever was declared. The consequence is not a straightforward switch to 20% Georgian tax - it is that Georgia's claim to tax that income at all becomes questionable, while the country where the work was actually performed, or where the person is actually resident, likely has the stronger claim. Reference guidance on how Georgia's income-tax rules apply, including to non-residents, is set out in PwC's Georgia tax summary.
That second scenario is worse than it sounds: years of 1% declarations were never protecting anything, and the real exposure was sitting with whichever country the person actually lived and worked in, quietly accumulating while the Georgian filings looked tidy. We go through exactly how this plays out, and why "I registered in Georgia" does not answer the question a home tax authority actually asks, in 1% tax without living in Georgia.
Permanent establishment sits on the other side of the same coin. Georgia's own rule for taxing a non-resident's activity here largely follows the OECD model, according to PwC's summary of Georgian corporate residence, and most countries apply an equivalent test to their own residents working abroad. A Georgian IE holder working day after day from an apartment elsewhere is, under that country's own version of the same logic, a strong candidate for having created a taxable presence there - which is precisely why the source-of-income question and the permanent-establishment question tend to arrive together.
Where an LLC changes the analysis, and where it does not
Switching from an Individual Entrepreneur to an LLC does not sidestep Article 104. Georgia treats any company it incorporates as a Georgian tax resident regardless of where it is managed from, which is a different question from where the LLC's income is sourced. What an LLC changes is the shape of the residency question, not the source question, and that trade is worth understanding before making the move, particularly if the reason for considering it is an unresolved source-of-income position.
Getting this right before you register
The cleanest position, by a wide margin, is the simplest one: perform the work in Georgia, or become a genuine tax resident before relying on the residency-based test for a year spent partly abroad. Everything else is a defensible position that depends on facts holding up, not a guarantee.
If your situation is anything other than "I live in Georgia and bill foreign clients from here," it is worth having the actual source-of-income question answered before you register, not after a year of declarations have already gone in on an assumption. That is exactly the kind of case-by-case question a free eligibility check is built for, and it is considerably cheaper than finding out the answer from an audit.
We'll check your actual contracts, your travel pattern and your residency position against Article 104 before you rely on the 1% rate for a year of foreign-client income. Written summary included, so you have something to show a bank or a foreign tax authority if they ever ask.
See what it costs
If the source position does not hold up, that is not the end of the road. It usually means either adjusting how and where the work is done, or accepting that the honest answer is closer to when the 1% actually fails than to the marketing version, and planning around that rather than against it.
Key takeaways
- The 1% only applies to Georgian-source income. Get the source question wrong and the turnover cap and the prohibited-activities list are questions about the wrong money entirely.
- Article 104 of the Tax Code sets out two tests that matter for most people: services actually rendered in Georgia, and services delivered by a Georgian tax resident to a foreign client absent a foreign permanent establishment.
- Most Small Business Status holders are not Georgian tax residents, since there is no residency requirement to register. For them, only the physical-performance test is available.
- A genuine Georgian tax resident can travel and still keep foreign-client income Georgian-source, because residency, not location on a given day, carries that test.
- Where the client sits, and what currency they pay in, does not affect source. Article 104(2) says the place of receipt is irrelevant.
- Contracts and invoices are evidence of the test you rely on, not a substitute for it. They should describe what actually happened.
- Failing the source test entirely is a different and worse outcome than simply owing 20% instead of 1%: Georgia's claim on the income becomes questionable, and the real exposure usually sits with the country where the work was actually done.
Frequently asked questions
What does "Georgian-source income" actually mean?
It means income that Article 104 of the Tax Code treats as arising from Georgia, based on specific tests rather than a general impression. For services, the two tests that matter to most people are physical performance in Georgia and, for genuine Georgian tax residents, delivery to a foreign client without a foreign permanent establishment.
Does having a foreign client make my income foreign-source?
No. Article 104(2) states directly that the place where income is received is not considered in determining its source. What decides the question is where the service was actually delivered under the tests in Article 104(1)(c), not where the client is based or what currency they pay in.
Do I have to live in Georgia for my income to count as Georgian-source?
Not necessarily, but you need one of two things: you are actually performing the work while physically in Georgia, or you are a genuine Georgian tax resident under the 183-day test, in which case foreign-client income generally stays Georgian-source even during travel, absent a foreign permanent establishment.
I registered an IE and Small Business Status but I live abroad. Is my income Georgian-source?
Very likely not, if you are not a Georgian tax resident and are not physically performing the work in Georgia. Neither of the two tests that matter is met in that situation, and the Georgian registration itself does not change that. This is the single most common way the 1% ends up not applying to income people assumed it covered.
What happens if the Revenue Service decides my income was not Georgian-source?
Georgia's claim to tax that income becomes questionable rather than automatically converting to a higher Georgian rate. The practical risk moves to wherever you actually live and work, which usually had the stronger claim all along and may not have known it.
Is this the same issue as the prohibited activities list?
No, and the difference matters. The prohibited activities list disqualifies certain activities from Small Business Status even when the income is clearly Georgian-source, reassessing it at 20% instead of 1%. The source-of-income question is about whether Georgia has any claim on the income at all in the first place.
Can I structure my contract to make foreign income Georgian-source?
You can only document a test that is actually true. A contract can state that work is delivered from Georgia, and that statement is useful evidence if it is accurate. It does not create Georgian source on its own if the work is not actually happening in Georgia and you are not a Georgian tax resident relying on the residency-based test.
What is a permanent establishment and why does it come up here?
It is the concept that decides whether working inside another country's borders creates a taxable presence there. It tends to arrive alongside a failed source-of-income position, because a person working day after day from another country is often creating the same kind of taxable presence abroad that Georgia would recognise if the roles were reversed.
Should I worry about occasional business travel if I am a Georgian tax resident?
Generally, no, provided you are genuinely resident and are not delivering the work through a permanent establishment you maintain abroad. The residency-based test exists precisely so that a real Georgian resident is not penalised for a client trip, which is a different situation from someone who has never actually become resident at all.
How do I know which test my business actually satisfies?
By checking your actual day count, where the work is genuinely performed, and what your contracts say against the specific wording of Article 104, rather than assuming either the favourable or the unfavourable answer. It is worth having this checked before a year of declarations goes in on an assumption rather than after.