On Business Establishment and Certain Peculiarities of Taxation in the Republic of Armenia
According to the results of the monitoring conducted by the World Bank at the beginning of 2017 Armenia has significantly strengthened its position in the international Doing Business ranking, rising from 43rd to 38th place from a list of 190 countries.
We present brief information about the peculiarities of doing business through a legal entity, some aspects of taxation and tax preferences for businesses in the Republic of Armenia.
Registration of the legal entity
The initial phase of setting up a business in Armenia is registration of a commercial organization in the State Registry Agency of Legal Entities. It is necessary to gather the necessary documents and submit them to the officials of the Agency. After submitting all the necessary documents, the Agency registers the Legal Entity within 2 days.
The law gives the possibility to choose one of the following legal forms of legal entities:
- Registration of a limited liability company
- Registration of joint stock company (open, closed)
- Registration of general and limited partnerships (limited liability companies)
- Registration of the production cooperative
The fundamental documents for registering a corporation are:
- Protocol of the meeting of founders (decision of the sole participant)
- The Charter
- Declaration of real beneficiaries of the company
- Copies of founders’ passports (if founders are physical persons)
- Notarized copies of the Charter, Registration Certificate (Extract from the Register) of Legal Entities; the document that confirms the authority of the management body of the company-founder (if the founder is a legal entity)
- Copy of the director’s passport
Documents issued or legalized by foreign officials must also undergo the procedure of consular legalization or have an apostille stamp (depending on whether the country is a party to the 1961 Hague Convention abolishing the need for consular legalization of documents). Documents issued in Georgia, Russia, Kazakhstan, Belarus and a number of other countries are not subject to consular legalization or apostille because of the international treaties of those countries with the Republic of Armenia.
There is a possibility of accelerated registration of a Legal Entity within one day from the date of filing the documents subject to payment of additional state duty.
In addition, it is possible to complete registration on the day of filing documents, provided that the founders of the organization are only individuals who have personally come to the agency to register the company. In this case, the founders submit only their identity documents to the agency, and they are issued a standard charter and a protocol of the meeting of founders (decision of the participant) of the form established by the Ministry of Justice.
Upon completion of registration, the legal entity is automatically assigned a taxpayer number, as well as the state registration number. The applicant is given an extract from the register of legal entities, a sample charter (or several samples) and minutes of the meeting of founders (decision of the participant). A legal entity is entitled to have its own stamp, but its presence is not obligatory.
The minimum amount of the authorized (share) capital of the legal entity by the Armenian legislation as a general rule is not established, except in special cases where the minimum amount of the authorized capital is provided by the legislative acts. Joint-stock companies, among other things, need to issue and distribute shares, but this issue will not be discussed in this article.
Taxation of legal entities
From the first day of its activity the company is given the right to choose its own taxation system. Under the basic system (profit tax) of taxation, a legal entity pays 20% of the profits earned during the year. Within 20 days after registration of a legal entity or before February 20 of a calendar year, the executive body has the right to apply to a local tax office for registration as a turnover tax payer.
The tax rate of investment funds is equal to 0.01 % of the net assets of the organization.
The legislation of the Republic of Armenia establishes exemptions, as well as reduced rates of income tax for companies. Let us have a look at some of them.
Agriculture and carpet weaving
Organizations producing agricultural products are exempt from profit tax on the income gained from sale of agricultural products, as well as on income derived from sale of fixed and other assets, if the share of the latter in the gross income does not exceed 10 percent.
The taxpayers involved in the production and sale of hand-made carpets are exempt from profit tax.
Insurance companies engaged in compulsory liability insurance from the use of motor vehicles in terms of all revenues channeled to the insurance fund, as well as other income derived from investments made from the insurance fund are exempt from the duty to pay income tax.
Implementation of business programs approved by the RA Government
Residents implementing business programs, which have been approved by the decision of the Government of the Republic of Armenia, within two reporting years from the commencement of the program enjoy income tax privileges. Thus, the amount of income tax for the first 2 reporting years from the start of the business program is reduced in terms of jobs created under the program by the amount of all additional salaries and equivalent payments, but not more than 30% of the calculated for the reporting year amount of income tax.
Profit tax for organizations operating in free economic zone
When carrying out activities as a resident in the free economic zone, the amount of profit tax is not collected. In order to obtain the right to carry out activities in the free economic zone, it is necessary to obtain the permission of the Government of the Republic of Armenia. For that purpose an application should be submitted to the Government together with the program of the applicant’s activity in the free economic zone.
Reduced tax rate for some big businesses
For taxpayers carrying out activities in the framework of export programs approved by the Government of RA, the income tax rate is set at 5%, if:
- Among the group of taxpayers there are no taxpayers carrying out activities in the sphere of production and/or sale of excisable goods, extraction and/or processing of metallic minerals, processing and/or sale of precious stones, production and/or sale of gold products, as well as sale and/or production of precious metals;
- Among the group of taxpayers, during the reporting period goods (or if services were provided from the territory of Armenia to non-resident organizations) with customs value (in case of services – value) of not less than 40 billion AMD were exported (or transported to the territory of EAEU member states) from the territory of Armenia under the “Export” customs procedure. Meanwhile, taxpayers must ensure minimum customs value of goods during the current year within the framework of export program.
- During the current year, no less than AMD 40 billion of foreign currency has been credited to the bank accounts of taxpayers opened with resident banks of the Republic of Armenia in the framework of the export program activities.
- Persons included in the group of taxpayers do not have income to be received from supply of goods or rendering services in the territory of Armenia in the current reporting year, except for interest income from issued loans.
If among a group of taxpayers during the reporting period goods (or if services are rendered from the territory of Armenia to non-resident organizations) with customs value (cost) of not less than AMD 50 billion are exported or transported to the territory of EEU member countries in the “Export” customs order, as well as all the above mentioned conditions are met, the income tax rate is set at 2 percent.
Also the income tax rate of 5 percent is set for the organizations-residents of the Republic of Armenia operating in the framework of programs approved by the Government, if their activities are carried out exclusively outside the territory of the Republic of Armenia in the field of construction or construction installation.
Taxation of the sphere of information technologies
As for tax rates effective in the sphere of information technologies, the Armenian legislator has established a zero rate of income tax for business entities, excluding the income received from the sale of information technologies from the framework of comprehensive income. Certified tax agent (employer) during the validity period of the certificate calculates income tax from the wages of employees at a rate of 10%. Certified persons are required to submit reports on their activities to the Certification Board each semester by the 20th day of the month following the reporting semester.
The turnover tax is an alternative tax that replaces the value-added tax and/or profit tax for individual entrepreneurs and commercial organizations.
Annual turnover of the taxpayer shall not exceed AMD 115.000.000.
Rates of turnover tax in the Republic of Armenia:
- Income from commercial activities – 5%
- Income from production activity – 3.5 %
- Rental income, interest, royalties, disposal of assets (including real estate) – 10
- Income from notarial activities – 20 %
- Income from other activities – 5 %
Value added tax
The rate of Value Added Tax is 20% on taxable turnover of goods and services. If the annual turnover of the company exceeds 115.000.000 AMD, then it is a payer of value added tax.
Transactions on supply of goods, provision of services, free of charge consumption (with partial refund), free of charge provision of goods or services by VAT payers or supply of goods or provision of services at a significantly low price, import of goods under the customs procedure “Admission for domestic consumption”, supply of goods and provision of services as a contribution to joint activity without forming a legal entity are subject to VAT.
The taxable base does not include:
- amounts of state duties;
- transactions on gratuitous guarantee of the sold goods, transfer of a share or interest from the authorized or share capital to another person, as well as transactions on privatization;
- transactions for the reorganization of legal entities; turnover on the sale of ownerless, escheat values and treasures, or the transfer of subsidies, subventions, cash incentives, upon receipt of which the person has no counter obligation to provide goods or services;
- import of personal belongings by individuals;
- export of goods imported into the Republic of Armenia under the customs procedure of “re-export”;
- rental of real estate by individual entrepreneurs and individuals who are not notaries, as well as a number of other transactions and income received.
VAT is payable on import of goods from abroad, although, for example, import VAT is not payable on certain groups of agricultural products. Goods exported from Armenia are fully exempt from VAT. When importing goods into the territory of Armenia through customs procedures of “re-export” and exporting goods through customs procedures of “re-export”, as well as when transiting foreign goods through the territory of Armenia, business entities are exempted from paying VAT.
Family entrepreneurship means profit-seeking activities of members of a family. For the purposes of family entrepreneurship family members are spouses, children, parents and siblings.
Family entrepreneurship is organized through the registration of an individual as a sole trader or the establishment of a legal entity in which all shares of the share capital belong to the subject of family entrepreneurship or his family members.
Annual turnover of the business must not exceed 18.000.000 drams. Often the activities of business entities must be in the production of goods. In this case, the subject of the family business has no right to engage in trading activities (sale and purchase), the production of excisable goods, organization of gambling houses, auditing or accounting services, the purchase and sale of foreign currency, as well as to have in the share capital of a company other commercial organization share more than 20 percent.
Application for registration as a family business entity should be submitted before February 20 of each year or within 20 days after registration as a private entrepreneur (registration of legal entity)․