Law on Tax Benefits for Newly Formed IT Companies

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The Law on Tax Benefits for Newly Formed IT Companies is a piece of legislation introduced in 2015 aimed at supporting and encouraging the growth of IT startups in Armenia.
What are the main aims and objectives?

The main objectives of the Law on Tax Benefits for Newly Formed IT Companies in Armenia are to support and encourage the growth of IT startups in the country and to make Armenia a more attractive destination for IT businesses. By offering tax exemptions the Armenian government aims to foster innovation, create new job opportunities, and boost the overall competitiveness of the country's IT sector. Additionally, these tax incentives are designed to help IT startups minimize their financial burden during their initial phase, allowing them to focus on developing their products and services. 

How does the program work?

The main features of the Law on Tax Benefits for Newly Formed IT Companies in Armenia are: 

  • Corporate income tax exemption: Certified IT startups are exempt from paying the standard 20% corporate income tax, allowing them to enjoy a 0% tax rate. 

  • Reduced income tax rate for employees: IT startups enjoy a reduced payroll tax rate of 10% for their employees, which is lower than the general rate. 

  • Applicable to specific IT activities: The tax incentives are available only for startups engaged in IT activities like software development and web development. 

  • Certificate requirement: Startups must obtain a certificate on a case-by-case basis to qualify for these tax incentives. 

  • Time-limited incentives: The Armenian Parliament has extended these tax incentives for IT startups until December 31, 2023. 

What is the overall cost?

There is currently no information available on how much the legislation cost to implement. The cost of the scheme will depend upon the amount of revenue forgone which can be roughly calculated by the number of companies taking advantage of the benefits and their annual revenues.  

How was it implemented?

The Law on Tax Benefits for Newly Formed IT Companies in Armenia was passed by the Parliament and approved by the President in December 2014, and came into force in January 2015. The legislation was implemented by the Ministry of Economy. The legislation was originally intended to expire on 31st of December 2022, however, it has been extended an extra year.  

What impact has been measured?

The Armenian government can demonstrate participation in the program up until 2018, as well as citing indicators of key economic metrics achieved: 

  • In 2014 just 16 IT companies had been established in Armenia 
  • Following the legislation, 2015 saw 59 IT companies register for tax privileges 
  • This trend continued to grow in 2016 with 98 registering  
  • In 2017 that number grew to 272 
  • 2400 new jobs were created through these companies 
  • With an average annual salary of 3-3.4 million AMD (approx. $6,000-$6,800) 

Despite their impressive results so far in overall improvement of the Armenian ecosystem, the governing agencies have not provided any metrics that prove the direct impact of the measures included in the law. Consequently, we cannot accurately judge the full extent of the legislation’s influence. 

What lessons can be learned?

Critics argue that the tax benefits alone may not be a sufficient condition for new startups to want to register their businesses in Armenia. While the tax breaks have indeed stimulated the IT sector and attracted foreign investment, some believe that other factors such as infrastructure, skilled workforce, market access, and favorable regulations are more crucial to the overall success of startups. 

It is worth noting also that the expiration of the tax benefits my discourage startups from registering their businesses in Armenia. A period of longer than a year would offer more clarity and stability for entrepreneurs.  

CURATED BY

Hayk Asriyants

President
Startup Armenia
Armenia