Losing Small Business Status: How It Happens and What It Costs Backwards

There are five ways to lose Small Business Status in Georgia, and only one of them is the turnover threshold everyone talks about. The other four catch people who never came close to GEL 500,000.

The expensive part is not the higher rate going forward. It is that most of these routes reach backwards, and the recalculation lands on a year you have already spent, already declared, and already stopped keeping receipts for.

First, the 3% rule is not what most guides say it is

This matters before anything else, because it is the number people plan around and it is widely published wrong.

When your taxable income crosses GEL 500,000 during a calendar year, the 3% rate does not apply only to the excess above 500,000. It applies to all of your taxable income from the beginning of the month in which you crossed the threshold, through 31 December.

A worked example. You cross GEL 500,000 on 20 October. Income from 1 January to 30 September is taxed at 1%. Income from 1 October to 31 December is taxed at 3%, including the portion of October's income that fell below the threshold.

Compare the two readings on a business that earns GEL 600,000, evenly spread, crossing in month ten:

• “3% on the excess” reading: GEL 5,000 at 1% on 500,000, plus GEL 3,000 at 3% on 100,000. Total GEL 8,000.
• Actual rule: GEL 4,500 at 1% on the first nine months (450,000), plus GEL 4,500 at 3% on the last three months (150,000). Total GEL 9,000.

And if the GEL 600,000 arrives as a single recognised transaction, the whole 600,000 sits in the month of crossing and is taxed at 3%. That is GEL 18,000, more than double what the “excess only” version predicts.

For agritourism and wine tourism businesses the threshold has been GEL 700,000 since 1 January 2025, with the same mechanic.

Route 1: Two consecutive years above the threshold

Crossing GEL 500,000 once costs you the 3% rate for the rest of that year. It does not cost you the status.

Crossing it in two consecutive calendar years does. The status is revoked from the beginning of the following year, and you move to the general regime: 20% income tax on income minus documented expenses.

This is the only one of the five routes that is genuinely forward-looking. You know it is coming, you have a full year of warning, and the transition happens on a date you can plan around. If this is your situation, the question is not how to keep the status. It is whether an LLC under the distribution model is now the better structure.

Route 2: Prohibited activity

Government Resolution N415 lists activities for which Small Business Status cannot be granted. Among them:

• Activities requiring a licence or permit
• Production of excisable goods
• Currency exchange operations
• Medical services
• Architectural services
• Legal and notarial services
• Audit and consulting services, including tax consulting
• Gambling
• Staffing and recruitment

Consulting is where most people fall. It is a word that appears naturally in service contracts written by people who are not doing anything a Georgian tax inspector would call consulting, and it is also a word that accurately describes what a good number of Small Business Status holders actually do all day.

The consequence is not a warning. Where the Revenue Service establishes that you were carrying on a prohibited activity, the status is cancelled, the tax on the affected income is recalculated under the general regime, and a fine of GEL 500 applies.

The recalculation is the part that hurts, and the reason is in the next section.

Route 3: The construction exclusion most people missed

In December 2024, Resolution N415 was amended. Income from services related to the construction of residential and non-residential buildings (classification code 41.2), civil engineering (code 42) and specialised construction activities (code 43) no longer falls under the regime where the recipient is a Georgian company, organisation or individual entrepreneur.

That income is taxed at the general rate of 20% on the difference between income and expenses, and is reported in the annual declaration rather than the monthly one.

Note the shape of this. It is not a ban on the activity, and it does not necessarily cost you the status. It carves specific income out of the 1% regime based on who your customer is. The same construction work billed to a private individual and billed to a Georgian LLC are treated differently.

If you work in construction and bill Georgian businesses, and your monthly declarations since 2025 have been reporting all of it at 1%, that is a live exposure.

Route 4: Reclassification

The Revenue Service can look past the label on a contract and tax a transaction according to its substance. Two situations account for almost all of this in practice.

The contractor who is really an employee. One client, fixed monthly amount, set hours, the client's equipment, the client's direction, no other customers, no ability to send a substitute. That relationship can be recharacterised as employment, which pulls the income out of the 1% regime and into 20% withholding, and creates obligations on the client's side too.

The service contract that is really a prohibited activity. Naming a contract “marketing support” when the work delivered is advisory does not change what was delivered. Practitioners in Georgia consistently advise avoiding consulting language in contracts, which is sensible, but it treats the symptom. What decides the outcome is what you actually did and what the evidence shows you did.

Route 5: Voluntary exit, with a trap in it

You can apply to give up the status. The application states the reason: personal choice, ceasing activity, having exceeded the limit twice, or having engaged in a prohibited activity.

The trap is timing. Voluntary revocation takes effect only from the first day of the following calendar year. If you decide in March that the status no longer fits, you do not exit in March. You carry it, and its restrictions, until 1 January.

If the reason you want out is that you have started doing something prohibited, waiting for January does not protect the intervening months. Those are already exposed.

What “costs backwards” actually means

Here is the mechanism that makes retroactive loss so much worse than people expect, and it is not written down in any guide I have found.

Small Business Status taxes turnover. Expenses are not deducted. So there is no reason to keep expense documentation, and most status holders correctly do not bother. Receipts are not filed, contractor invoices are not chased, the laptop bought in a foreign currency has no Georgian document behind it.

The general regime taxes net profit: income minus documented expenses.

So when a year is recalculated after the fact, you are moved onto a regime that allows deductions, at exactly the moment when you have no evidence to support any. In practice a retroactive recalculation often lands close to 20% of gross, not 20% of profit, because the deductions exist economically and not on paper.

On GEL 300,000 of turnover, that is roughly the difference between GEL 3,000 paid and GEL 60,000 assessed, before penalties and late-payment interest.

The lesson is unglamorous. Keep expense documentation you do not currently need. It is the only insurance available against every route on this list.

What changed in 2026

Order N38 of the Minister of Finance, published on 6 February 2026 and in force from March, amended the instruction governing special tax regimes.

The most useful change: Small Business Status now takes effect immediately on registration. Previously it began on the first day of the month following registration, which meant anyone registering early in a month carried a gap taxed under general rules. Guidance published before spring 2026 still describes the old rule, so check the date on anything you read about this, including calculations someone did for you last year.

The same package clarified cancellation procedures and how income earned before a status change is taxed.

If it has already happened

Establish which route, and which dates. The consequences differ sharply. A threshold breach is arithmetic. A prohibited-activity finding is a legal characterisation you may be able to contest. Reclassification is evidential and depends on documents you may still be able to gather.

Find every expense document for the affected period before you engage. Bank statements, invoices, contracts, foreign card receipts. Every documented lari reduces a 20% assessment. This is the highest-value work available to you and it gets harder every month you wait.

Do not keep filing at 1% on income you now know is outside the regime. Continuing to declare it that way after you know is a different and worse position than having declared it wrongly in ignorance.

Check whether you have a VAT problem underneath the income tax problem. Small Business Status holders still owe reverse-charge VAT at 18% on services bought from non-residents, whether or not they are VAT-registered, and cannot deduct it if they are not. This frequently surfaces alongside a status review and is a separate liability.

Decide the destination, not just the fix. If the status is gone or going, the realistic choices are an IE under the general regime or an LLC under the distribution model. Those have different tax outcomes, different reporting obligations, and different costs to run.

Can you get it back?

Where the status was lost for reasons other than crossing the threshold twice, reinstatement is possible in principle, and the February 2026 amendments tightened the procedural rules around cancellation and reapplication. What you cannot do is retroactively repair the period during which the disqualifying condition existed. The application looks forward; the exposure stays where it is.

The practical order is: fix the underlying activity or structure first, document the change with dates, then apply. Applying while the disqualifying condition is still running produces a second refusal and a worse record.

EFS Group handles Small Business Status registrations, monthly declarations, and status reviews for individual entrepreneurs in Georgia, and represents clients where the Revenue Service has questioned a status or recalculated a period.

This article is general information and not legal or tax advice. Rates, thresholds and the list of prohibited activities change, and Resolution N415 has been amended twice since December 2024. Verify the current position against the Tax Code of Georgia, Government Resolution N415, and the instructions issued by the Minister of Finance.