Issue 1, 2019. February-March



The Law on Contributory Pension significantly influences both individuals and businesses and, like most newly enacted legislation, has given rise to a number of practical issues. Some of these issues concern the wording of the Law itself, whilst others emanate from the absence of clear regulation.

Teona Makharashvili, Aleksandre Megrelishvili, Nino Goshkheteliani, Giorgi Khurodze

What is a Contributory Pension Scheme?

The Contributory Pension Scheme is a recently introduced occupational pension scheme under the Law in which an employee's own contributions, as well as their employer's and the state's contributions, credited to the individual pension account of the employee, are invested.

An individual will be entitled to use the pension assets (contributions and the accrued interest) upon reaching the retirement age or in other cases as provided by the Law.

How are Contributions made to the Pension Scheme?

Contributions to the Pension Scheme are made through an electronic system.

For employed individuals contributions are made upon the payment of the salary by:

i. An employee in the amount of 2% of their gross salary;

ii. An employer in the amount of 2% of the employee's gross salary;

iii. State in the amount of 2% of the employee's gross salary for the part of the employee's gross annual income that is less than GEL 24,000; 1% of the employee's gross salary for the part of the employee's gross annual income that is more than GEL 24,000 but less than GEL 60,000.

For the part of the employee's gross annual income that exceeds GEL 60,000, the state will not make any contribution.

Self-employed individuals, if they decide to engage in the Pension Scheme, will have to contribute 4% of their annual income. The same state contribution structure applies in this case.

Who is Automatically Involved in the Pension Scheme?

Employees who were under the age of 60 (or 55, in the case of women) on August 6, 2018 will be automatically involved in the Pension Scheme upon the receipt of their first Salary.

Do Automatically Involved Individuals have any Right of Withdrawal?

Yes, they do in limited circumstances. Namely, if an employed individual who has reached the age of 40 (both for men and women) prior to August 6, 2018 does not wish to be involved in the Pension Scheme, they may withdraw within five months after the automatic involvement but no earlier than three months from that date. An individual's failure to withdraw within this timeframe renders them a part of the Pension Scheme.

Who May be Involved in the Pension Scheme Voluntarily?

Employed individuals who have reached the age of 60 (or 55, in the case of women) prior to August 6, 2018 and self-employed individuals may get involved in the Pension Scheme voluntarily.

Can Foreign Nationals Participate in the Pension Scheme?

Yes, if they reside in Georgia on the basis of a permanent residence permit. The Pension Scheme does not apply to non-resident individuals, which includes foreign nationals (and stateless persons) staying in Georgia on a temporary basis and Georgian nationals who are not residing in the country. In other words, temporary resident permit holders in Georgia are not required to participate in the Pension Scheme. However, this also precludes them from engaging in the Pension Scheme, even if they so wish.

What are Some of the Key Challenges Associated with Administration of Pension Contributions?

The most prominent problem which companies face with administering pension contributions is probably the impossibility to correct declarations through the electronic system once a pension declaration has been submitted (which is an option for tax declarations).

In order to receive the pension contribution paid in excess, a company would need to file a written application to the pension fund to have the sum returned to the account it was paid from or, alternatively, request that the sum remain in the individual pension account, on the condition that it will be balanced in the next period.

In addition to the foregoing, the Law and its subordinate legislation do not provide guidance as to when employers must submit pension declarations. It may be argued that if a company provides a benefit to an employee, it is required to declare the pension immediately (and pay the relevant contribution), rather than wait until the salary is credited. Should this be the case, it would naturally increase the administrative workload for employers.

Are Individuals with Service Contracts Required to Pay the Pension Contribution?

The short answer is yes. Under the Law, the definition of the term "Employee" includes individuals who "perform obligations within the scope of the relations that are regulated by civil legislation of Georgia." This includes service contracts as well.

In such cases, the responsibility for administration of pension contributions lies with the Employer (under the Law, an "Employer" is a person who remunerates work performed by an Employee).

Does the Definition of "Salary" under the Law Include Benefits?

Yes, benefits fall within the definition of "Salary" under the Law. The term includes income received for provided services that are taxed at the source as well as any compensation or benefit received by an individual as a result of employment. For Employees, this means that 2% of gross value of every benefit (bonuses, discounts, health insurance, food vouchers, etc.) that they receive from their Employer will be deducted from their Salary. For Employers, this entails an additional 2% pension charge for the gross value of every benefit that they provide. For these purposes, secondment-related expenses do not fall within the ambit of the Salary, provided that the limits established by law are not exceeded; the 2% charge is also not applicable to income received through investment, royalty, rent, and lease.

The following example is a simplified version available in the Instruction to the Law dated November 30, 2018: suppose an Employee's monthly gross salary is GEL 1,000, and they also receive a gross GEL 100 monthly for fuel expenses (gross sums include personal income tax and the pension charge). The total gross salary, for the purposes of the Law, is GEL 1,100 (GEL 1,000 + GEL 100). The pension charge applicable in this case will be GEL 1,100*2%=GEL 22. In total, the pension contribution to the Employee's individual pension account from all three involved parties (the Employee, their Employer, and the state) will be GEL 22 + GEL 22 + GEL 22=GEL 66. As for the personal income tax, it would be equal to (GEL 1,100 - GEL 22)*20% = GEL 215.6. Consequently, the Employee will receive GEL 1,100 - GEL 22- GEL 215.6 = GEL 862.4.

In the context of paying the pension contributions, two options must be analyzed: a) a company decides to contribute, at its expense, the 2% pension charge to be paid by an Employee; or b) the company deducts it from the Employee's gross salary.

If a company elects the former option, an Employee will receive their income without the deduction of the pension contribution - the sum to be originally paid as a pension contribution will now be a benefit of the Employee, and we at Deloitte are of the view that it may be subject to personal income tax.

Are Pension Contributions Exempt from Personal Income Tax?

Yes, they are. However, personal income tax is payable in the following cases: a) an Employee engaged in the pension leaves Georgia permanently and withdraws their accrued pension assets; b) an Employee opts to withdraw their pension assets from their individual pension account, provided that they reach retirement age no later than five years after the date when they began making pension contributions; c) pension assets are transferred to the heir of a Pension Scheme participant as a lump sum payment (in lieu of transferring the assets to the individual pension account of such heir).

The issues raised in this article are by no means exhaustive. With time, new challenges may emerge which the government must tackle with a view to increasing the ease of doing business in Georgia.

The article is based upon Georgian legislation effective at the time of writing. The contents of this article represent Deloitte's subjective opinion regarding the applicable legislation, law enforcement practice, and assumptions known to us when this article was prepared. Deloitte accepts no responsibility or liability for any reliance placed on the views provided in the article.