A new model of corporate income tax (CIT) opens doors for reinvestment

“Today, I’m hopeful that our children and grandchildren will take over a prosperous business. This is how I see our enterprise in the long-term.”

April 2019 - Entrepreneurs dream of building a sustainable and lucrative business. Sophie Jikiya, an art historian from Tbilisi, Georgia, and a founder of Chirifruit Ltd, had long-time aspirations of starting a family-owned business to create financial freedom and unite the family under a shared goal. However, to achieve such success with Georgia’s limited small business financing options is a daunting challenge that Sophie would have to face.

In 2015, Sophie’s father, always keen on new ideas and experiments, purchased a small food dehydrator and began to dry kiwi and persimmon which had gone uneaten.. When Sophie sampled the dried fruits herself, she liked it so much that she decided to produce dried fruit candies. She defied her husband’s skepticism over the competitiveness of the product and shared her idea with her sisters Mariam and Maiya. Together they’ve launched the business with Sophie leading sales and marketing, Maia as the accountant, and Mariam leading production and packaging. “In this new effort, the three of us applied all the skills and knowledge we had acquired working in different spheres with great enthusiasm and hope,” stated Sophie.

The first month’s sales from local, small supermarkets showed that the product had potential, prompting them to add chocolate to the dried fruit which quickly became popular. “Our initial capital was marginal and pooled from our monthly salaries, therefore, whatever we received from sales we reinvested in the company,” stated Sophie.

With access to finance being a challenge for small businesses, Georgian entrepreneurs must frugally manage their finances. Under the former tax system, profits were taxed as they were earned, inhibiting small business development. The Government of Georgia realized that they needed to stimulate small business development and economic growth by improving the tax system.

Since 2015, USAID project “Governing for Growth (G4G) in Georgia” supported the Government of Georgia in Corporate Income Tax (CIT) Reform based on the Estonian CIT Model. Under the new system enacted in 2017, profits are not subject to tax at the moment when they are earned. Instead, taxation is deferred until the distribution of profits is realized. This reduces the tax burden on businesses as they can reinvest profits without being taxed on the invested portion.

“The new CIT system was beneficial and provided great relief for the business. We were able to reinvest 20% more than we could before. As a result, our 2017 sales increased by 60%, followed by 100% growth in 2018,” said Sophie.

Now, Chirifruit has opened sales points at a popular shopping mall in Tbilisi and the capital’s airport. Growth in sales has enabled the sisters to buy a land plot where they are now planning to build a factory. Although they built the company without paying themselves initially, after three years, they were able to earn enough income to work for the family business on a full-time basis.

“We have great plans for the future and plan to build a factory on the land plot we bought. Therefore, we still do not distribute shares and, like other employees, only get salaries. This enables us to keep investing untaxed income back into Chirifruit to achieve higher standards and enter the international market,” Sophie said. 

According to the Ministry of Finance of Georgia, CIT Reform has contributed to real gross domestic product (GDP) growth by over 1.40% in 1.5 years, and reinvestments by businesses have increased by more than 100 million USD.