If your Armenian subsidiary ends the tax year with negative tax equity, none of the interest it accrued during that year on loans from its foreign parent, or from any other lender that is not a bank or credit organisation, can be deducted for profit tax. The test is taken on the last day of the tax year, which for most companies is 31 December, so the weeks before year-end are when a parent can still change the figure.
Մի հայացքով
- Tax Code Art. 114(1)(2): negative tax equity on the last day of the tax year disallows the whole year’s accrued interest on borrowings from lenders that are not banks or credit organisations.
- With positive tax equity, that interest is deductible only up to twice year-end tax equity (nine times for banks and credit organisations as borrowers).
- Tax equity is assets minus liabilities as calculated under the Tax Code. Registered charter capital is a different figure.
- Repaying principal from cash leaves tax equity unchanged. A completed capital contribution or a valid debt conversion raises it.
- A loan agreement must be in writing; one that is not is void (Civil Code Art. 878).
What the rule says and when it bites
Article 114(1)(2) of the Armenian Tax Code limits the deduction of interest on money borrowed from anyone other than a bank or credit organisation. The limit is set by the borrower’s own capital (սեփական կապիտալ) measured on the last day of the tax year:
- Positive tax equity: interest accrued in the year on those borrowings is deductible up to twice year-end tax equity for an ordinary company. The excess is added back.
- Negative tax equity: none of that interest is deductible for the year.
It is an annual interest limit, not a debt-to-equity ratio. The comparison is the year’s interest against year-end equity; the size of the loan principal enters only as a liability inside the equity figure. Calling it a “2:1 thin-capitalisation rule” misdescribes it, and so does saying Armenia has no equity-based interest restriction.
Who is caught
The lender test is institutional. A foreign parent, a sister company, an individual shareholder and an unrelated investor are all caught if they are not a bank or credit organisation. The provision does not require the lender to be a shareholder or a related party, and the disallowance is separate from transfer pricing: an arm’s-length interest rate does not protect the deduction.
The disallowed amount is the full year’s accrued interest on the affected borrowings. It is not limited to interest accruing after equity turned negative, and it is not capped at the size of the deficit.
What counts as tax equity
The article defines equity, for this purpose, as the difference between assets and liabilities calculated under the Tax Code. Financial-statement equity cannot simply be copied across, and registered charter capital is not the figure either. A company with substantial charter capital can still have negative tax equity once accumulated losses have absorbed it. The parent’s loan principal and any accrued unpaid interest sit on the liability side; long maturity or foreign ownership does not turn an existing repayment obligation into equity.
The tax year is the calendar year. Companies registered or liquidated part-way through a year have shorter first or last tax periods, so the test date for them may differ.
The only two exceptions
- Loans from international development organisations on the Government’s list (Government Decision 619-N of 8 June 2017, applied from 1 January 2018). The list is closed; whether a renamed or successor organisation qualifies automatically has not been established.
- Funds raised through a public placement of debt securities. Privately placed bonds are not covered.
There is no exception for shareholder loans, start-ups, temporary losses or loans used in the business. Interest that a company capitalises into the cost of an asset under its accounting rules has a statutory exclusion only for the separate on-lending tests in points (3) and (4) of the same article; no equivalent exclusion from the negative-equity test has been found. Where tax equity is exactly zero, the text covers neither case expressly and no tax authority guidance has been located.
Two other interest limits in the same article
- Interest on any loan above twice the Central Bank of Armenia’s settlement rate in force on 31 December of the tax year is not deductible. This is tested loan by loan, and it applies on top of the equity test.
- A company that lends on interest-free or below its own borrowing cost faces further restrictions under points (3) and (4), with their own calculation.
Options for the parent before 31 December
Each option below changes the 31 December balance sheet differently. The effects follow from the assets-minus-liabilities definition and assume the transaction is legally completed and recognised by year-end.
| գործողություն | Effect on year-end tax equity | Main open points |
|---|---|---|
| Keep the loan as it is | Ոչ մեկը | The year’s interest is disallowed if equity stays negative |
| Repay principal from the subsidiary’s cash | None: cash and liability fall by the same amount | Reduces future interest only; interest already accrued this year stays disallowed |
| Parent makes a cash capital contribution | Rises by the amount contributed, if nothing is repayable | Which milestone counts (payment, resolution or registration) for a December contribution |
| Convert the loan into a participation | Rises by the liability extinguished | Available only for loans that were convertible from signing; vote thresholds; converted interest treated as paid |
| Parent waives the loan | Rises before tax, if the waiver is valid | Civil-law validity between two companies and the tax charge on the release |
Keep the loan
If the projected year-end figure stays negative even after realistic action, keeping the loan costs the deduction for this year’s interest and nothing else under this article. The interest still accrues and stays payable to the parent. A subsidiary in its early loss-making years often has no taxable profit to shelter in any case, so the decision depends on when it expects to become profitable and how much interest is at stake.
Repay the principal
Take a subsidiary with tax-basis assets of 100 and liabilities of 90 (equity 10). It repays 30 of parent loan principal from its own cash: assets fall to 70, liabilities to 60, and equity stays at 10. Repayment cuts the interest that will accrue next year. It does not raise the ceiling for this year, and it does not undo interest already accrued. Paying accrued interest has the same neutral effect on equity.
Repayment helps only if the cash comes from a fresh capital contribution, and then the improvement comes from the contribution.
Inject capital
A completed cash contribution raises tax equity by its amount, provided nothing is repayable to the parent. For an LLC, a capital increase by additional contributions follows the LLC Law, and the existing charter capital must be fully paid first. Charter amendments take effect against third parties on state registration.
Whether a contribution paid in December but registered in January counts in the 31 December figure has not been settled. The law attaches different consequences to payment, the participants’ resolution and registration, and no tax authority guidance links any of them to the Article 114 test. The safest working assumption is that every step should be complete before year-end. Contributions booked to equity reserves other than charter capital may also be treated differently for profit tax, so the accounting entry needs agreeing before the money moves.
Convert the loan
Since 12 June 2025 the Civil Code (Art. 886.2) allows a loan to an LLC or JSC to provide that, instead of repayment of principal or payment of interest, the lender receives shares or a participation. The convertibility must be stipulated when the contract is concluded, and the 2025 amending laws apply to contracts concluded after they entered into force. A loan signed as an ordinary loan before then, or after then without a conversion clause, is not clearly within the regime. Whether an existing ordinary loan can be amended to add conversion is being confirmed.
For an LLC borrower, the decision to enter into a convertible loan, and any decision to amend one, needs a unanimous resolution of all participants at the general meeting under LLC Law Art. 33.1. The LLC Law gives no charter option to lower that threshold; a JSC charter may set it at no less than three-quarters of all voting-share owners. The contribution is treated as fully paid once the capital-increase decisions are adopted, and those decisions are due within 60 days after the lender’s conversion application (or after any agreed conditions are met). The vote needed for the implementation decisions themselves has not been settled. For a foreign-currency loan, the dram value of the contribution is fixed at the Central Bank average market rate on the day the conversion demand is received.
Conversion is not automatically tax-neutral. Accrued interest that is converted into a participation is treated for tax purposes as paid at conversion. The current law on convertible loans is covered in more detail in our guide to convertible loans under the Civil Code.
Waive the loan
A waiver removes a liability without paying away an asset, so on paper it raises equity. It is the option with the most unresolved law, and it should not be assumed to work. The Civil Code restricts gifts between commercial organisations and treats a gratuitous release from a debt as a gift; no recognised exception for a parent and its subsidiary has been found. Separately, the Tax Code lists amounts arising from the forgiveness of obligations among a company’s income, and its exclusion for contributions to equity other than charter capital reaches only as far as prior-year tax losses. Whether a parent’s waiver is valid, and whether it is taxed as income, are both being confirmed. Until they are, a waiver may leave the subsidiary with a tax charge on the released amount, and possibly with no valid release at all.
Waiving interest before it accrues, by amending the loan for future periods, is a different transaction from releasing interest already owed.
Paperwork and approvals
- The loan itself. Civil Code Art. 878 requires a loan agreement to be in writing. A receipt or other document showing the transfer of the money may evidence the agreement and its terms, but failure to observe written form makes the agreement void. A parent loan made on an exchange of emails and bank transfers alone needs reviewing before any conversion or waiver is built on it.
- Interest rate at signing. The Civil Code caps contractual interest at twice the Central Bank settlement rate on the date the contract is concluded. The tax deduction ceiling uses the rate on 31 December of each tax year, so a rate that was valid at signing can still be partly non-deductible later.
- Capital increase. A participants’ resolution, the contribution itself, the charter amendment and its state registration. Each has its own date, and the file should record all of them.
- Փոխարկում: The unanimous general-meeting resolution for entering into or amending the convertible loan, the lender’s application, and the capital-increase decisions. Where the loan is an interested-party transaction, the non-interested participants must also approve it unanimously.
- Group documentation. Intercompany loan files sit alongside the service and cost-sharing records described in our guide to intercompany documentation.
Negative net assets also raise a company-law issue separate from the tax test. An LLC whose net assets fall below its charter capital at the end of its second or any later financial year must decide on a capital reduction, and one whose net assets are negative is exposed to liquidation. That test uses the company’s own accounts, so a subsidiary can fail one test and pass the other.
Who models what: lawyer and accountant
The accountant builds the projected 31 December tax balance sheet: reconciling financial-statement assets and liabilities to Tax Code values, including accrued interest, and running each option through it. Items whose tax value is unclear, such as deferred tax balances, lease assets and accounting-only revaluations, should be flagged at this stage. The quarterly reporting pack a foreign parent receives from its subsidiary is the natural starting point.
The lawyer confirms which options are legally available and when each becomes effective: whether the loan agreement is valid in form, whether it was convertible from signing, which resolutions are needed and by whom, and what must be registered. The two pieces of work need to meet before the parent commits funds, because a contribution that is not legally complete by 31 December may not change the tax figure. Our tax practice և company registration and corporate team handle the legal side together.
Plan the work for November. The general meeting, the payment and any registration all take time, and the test date does not move.
Հաճախակի տրվող հարցեր
Does Armenia have thin-capitalisation rules?
Does the rule apply only to loans from related parties?
Is all of the year’s interest lost, or only interest after equity turned negative?
Will repaying part of the parent loan before 31 December fix the problem?
Can we sign the capital increase in December and register it in January?
Can our existing shareholder loan be converted into a participation?
Is a debt waiver by the parent tax-free?
Does the rule apply to loans from the EBRD or IFC?
Վերջին թարմացումը ՝ 21 թվականի հոկտեմբերի 2026-ին
