Many American and European companies, including powerful technology firms, such as Intel, Microsoft, Google, IBM, and Cisco, have established operations in Armenia because of its skilled workforce, communications infrastructure, business friendly environment, and low costs of doing business. Armenia's outsourcing strengths include software development and service, programming services, consulting and integration, computer graphics, animation and multimedia programs, mobile applications, web programming and design, microcircuits design, engineering, research and experimental services. The country's tech sector has been growing by 20-25% annually.
The following structures for outsourcing your business to Armenia can be considered:
1. Contract for Services with a Third Party (Direct Outsourcing)
In this structure, the client company contracts with an Armenian provider, an independent contractor that uses its own infrastructure and employees, to perform the services. Careful due diligence must be done on the Armenian service provider to check its financial stability, employee mobility, intellectual property protection, adequate infrastructure, and performance on similar projects.
2. Indirect Outsourcing
This involves the client company entering into and outsourcing arrangement with an Armenian or other company, which then subcontracts with an Armenian service provider. The subcontractor is often affiliated with the intermediary. In such situations, the client company will want to include additional provisions in the vendor contract to protect itself from possible problems with the subcontractor.
2. Establishing a Subsidiary or a Branch Office
In this structure, the client company establishes (or acquires) a subsidiary or a branch office in Armenia that is wholly-owned or at least controlled by the client company. A subsidiary is a separate legal entity, while a branch office is an extension of the client company. This structure gives more control over the employees providing the services and implementing procedure for the handling of intellectual property and confidential information. The client company can integrate the subsidiary into its global systems, processes and culture. The greater degree of control may be a valuation element in an acquisition of the client company. However, this structure may also require more time and resources to oversee the subsidiary. The due diligence for this structure is primarily on the management team of the subsidiary. The subsidiary will usually have a local manager to run day-to-day operations as a practical matter. This person must be carefully chosen because the managing director may bind the subsidiary with third parties based on the legal theory of apparent authority, notwithstanding restrictions that may be placed on his authority by the subsidiary’s board of directors and/or in his employment agreement.
3. Dedicated Center or "Build, Operate and Transfer"
This structure is a hybrid of the first two structures. The Armenian service provider, and independent contractor, initially establishes a dedicated center (team) to provide services to the client company. The dedicated team may be segregated on a floor of the service provider's facility or in a separate facility. Managers, accountants and administrative type employees may not be solely dedicated to the team in order to reduce overhead costs. The client company has greater control over the vendor's choice of employees, their training, and the work they perform. In exchange, it accepts any increased risk and cost of these employees.
In the "Build, Operate and Transfer" (BOT) model the client company will have an option built into the agreement by which it can elect to purchase the business unit represented by the dedicated team. Alternatively, the client company may be granted the right to solicit and hire certain employees from the dedicated center.
1. Contract for Services with a Third Party
A master agreement may be entered into between the client company and the Armenian service provider when a multiple project relationship is contemplated. Each project to be performed for the client company can then be described on an exhibit attached to the master agreement. Many of the provisions of the agreement will depend on the type of services being produced. The agreement will include a detailed description of the services to be performed, including: detailed specifications of the work product; deliverables, delivery schedule and milestones for completing the work product; schedule of project meetings and reports to be provided by the service provider; and pricing.
2. Contract for Services with a Subsidiary
The relationship between the parent and subsidiary generally must be “arms-length” for tax purposes. This means the agreement must contain provisions that would be normally found in agreements between two unaffiliated parties. Thus, many of the provisions described under the third party service provider structure are also in the agreement with a subsidiary. Some of the key agreement provisions with a subsidiary that are different from or in addition to those in the third party service provider structure are as follows:
In Armenia, contractual requirements for obtaining ownership of results of outsourcing services differ for contractors and employees. A subsidiary is treated as an independent contractor service provider not an “employee.” Unless these requirements are met, the client company may not own the results of the work even if it paid for them.
Agreement after Completion of Work
Obligation to Exercise the Rights Assigned
Duration of Assignment
No unless assigned in writing
Armenia is a member country of the Berne Convention, TRIPS (WTO), WIPO Copyright Treaty, the Paris Convention, and Patent Cooperation Treaty (“PCT”). The Berne Convention provides for national treatment of an author of a member state. Armenian copyright law provides moral rights to an author of a work that cannot be waived or assigned.
Taxation of the Armenian Service Provider
Value Added Tax. IT services provided to a non-Armenian customer are considered to be provided outside of Armenia and are treated as VAT zero-rated export sales. It means that the Armenian company can apply for a refund of the input VAT, provided that the application for VAT refund is filed on time and is properly substantiated.
Corporate Income Tax. The Armenian service provider is normally taxed at 18% of its annual profits.
Tax Exemptions and Benefits. IT startups (i.e. newly registered software development or other IT companies) are generally granted tax holidays (currently effective until 2023) that effectively exempt the company from profit tax. After the tax holidays it is possible to take advantage of tax benefit for smaller companies: exemption from taxes if the annual sales to not exceed around $50,000, or a flat tax rate of 5% on gross sales if the annual sales do not exceed $240,000. For more information please check the page on taxation.
Tax exemptions and other benefits are also available to companies operating in free economic zones (FEZ), companies importing capital assets for government-approved investment projects, companies involved in space-related activities, etc.
No local taxes apply to Armenian service providers, except real property taxes if the provider owns such property. For more information please check the page on property.
Taxation of the Customer
There are no stamp duties or similar taxes on the outsourcing contract itself.
Withholding Taxes and Double Tax Treaties. Payments to the service provider could be subject to withholding taxes, depending on the treatment in the customer's jurisdiction. Withholding taxes may be reduced or eliminated if a double tax treaty exists between the two countries. Some tax planning may be necessary in designing the business group and selecting the jurisdiction for the holding company to reduce source income taxes and avoid double taxation.
Transfer Pricing. The relationship between the parent and subsidiary generally must be “arms-length” for tax purposes. The tax authorities may scrutinize transfer pricing among the companies. In Armenia, transfer pricing rules apply if the annual turnover between affiliated parties exceeds around $400,000.
Permanent Establishment. On a cross-border contract, the Armenian service provider may form a permanent establishment (taxable presence) of the customer in Armenia, for example, if the Armenian subsidiary exercises authority to conclude contracts, secure orders or deliver goods on behalf of the parent.
Employees v. Independent Contractors. In Armenia it is generally more advantageous for the customer to hire workers as independent contractors rather than employees. This is true in terms of taxation (e.g. 5% tax on services provided by contractors compared to 25,5% income tax and social payments to be withheld from an employee's salary) and contractual freedom. Independent contractor agreements can be customized without considering numerous restrictions imposed by the Labor Code. Employment agreements may be used either because services cannot be provided by an independent contractor (i.e. employment clearly exists because of the requirement to work on specific premises under customer's close control, in the order or sequence set by the customer, etc.) or because of other considerations, such as putting important professionals on the payroll to increase the value of the company.
Employment Agreement. The employment agreement shall be executed in writing, in the form of a single document, in two copies - one for the employee and the other for the employer. The agreement shall comply with the Labor Code and other labor regulations. Employment agreements can be for a fixed term or for an indefinite term. The probation period generally shall not exceed 3 months. It is not clear if restrictive covenants (non-compete, non-solicitation and similar clauses) are enforceable in Armenia. In practice the courts have upheld the validity of such restrictions with regard to independent contractors, and it is possible that they would also be enforceable against employees, provided that they are reasonably necessary to protect the employer's business interests.
Work Schedule and Leaves. The regular work week in Armenia consists of five working days, Monday to Friday. As an exception it is possible for the employer to opt for a six-day work week, normally Monday to Saturday. The duration of work shall not exceed 40 hours per week, irrespective of whether the employer has a five-day or a six-day work week. Employees are entitled to an annual leave of 20 working days (24 working days in case of a 6-day working week). Maternity leave normally lasts 140 days (70 days before and 70 days after the delivery). Currently Armenia has 16 non-working public holidays (Dec. 31 to Jan. 7; Jan 28, Mar. 8, Apr. 24, May 1, 9 and 28; Jul. 5, and Sep. 21).
Compensation. As of 2020, the minimum monthly salary in Armenia is AMD 68,000 ($142). The average monthly salary in Armenia is closer to $400 but IT professionals, especially in managerial positions, are generally paid significantly higher wages. Higher rates of compensation are required for overtime work, work on non-working days and night work.
Termination. Employment can be terminated by mutual agreement of the employer and the employee. Generally, an employee can terminate the employment agreement (fixed-term or indefinite-term) unilaterally by giving a 30-day notice. Employment for an indefinite term can be terminated at the initiative of the employer if at least one of the legal grounds for such termination exists, such as changes in economic conditions, employee's inability to meet the requirements of the job, long-term disability, regular failure by employee to perform his/her duties, loss of confidence in the employee, etc. For more information please check the page on employment.
Employees. Armenia is a popular destination for software developers and other professionals from foreign countries, such as India and Iran (Iranians can travel to Armenia visa-free while Indians qualify for e-visa). A foreign employee normally needs to apply for a work permit before taking up a job with a local Armenian employer. There are certain exemptions to work permit requirements, the most notable of which applies to IT specialists (computer technicians, web designers, etc.). Other exemptions extend to foreigners working in border areas, citizens of EAEU countries (Russia, Kazakhstan, Belarus, Kyrgyzstan, etc.), foreigners employed to install or repair equipment or to train local staff to operate such equipment. For more information please check the page on work permits. Once a work permit is obtained by the employer the employee may apply for a temporary extendable residence permit. It generally takes 20-30 days to obtain a work permit and 30-40 days to obtain a residence permit.
Employees of a Foreign Company Temporarily Assigned to Armenia. Employees that remain on the payroll of the foreign company (i.e. are not employed by the local Armenian company) are generally exempt from work permit requirements. However, they may stay in Armenia only for the duration of their visas (normally up to 180 days for foreigners who can stay in Armenia visa-free) and are unlikely to qualify for a residence permit.
Managers and Representatives. Foreign executive managers and other authorized representatives of Armenian companies can work in Armenia without a work permit and can obtain a residence permit on the basis of their employment alone.
Freelancers and Digital Nomads. Freelancers may stay in Armenia only for the duration of their visas (normally up to 180 days for foreigners who can stay in Armenia visa-free). A longer stay would require them to obtain a residence permit. This can be done if the freelancer registers with the Armenian tax authorities as a sole proprietor (private entrepreneur). Normally a 5% tax would be assessed on any income reported by the private entrepreneur together with flat taxes of around $23 per month.
Data protection is regulated by Personal Data Protection Act. It contains the procedural and substantive data protection obligations concerning the processing of personal data, i.e. information that can lead to identification of a natural person. Processing is a broad term encompassing the collection, input, systematization, organization, storage, use, alternation, restoration, transfer, rectification, blocking, and deletion of personal data. Personal data that relates to state and official secrets, banking, notarial, and insurance secrecy, legal professional privilege, anti-money laundering, and so on, are governed by special laws. Compliance with Personal Data Protection Act is overseen by the Personal Data Protection Agency of the Ministry of Justice. Non-compliance may result in administrative penalties (fines of up to $1,000) or criminal penalties in the form of monetary fines or imprisonment.
Apart from the regulatory regime, most outsourcing contracts contain extensive covenants concerning data ownership, data transfer, confidentiality, processing protocol, technological and information security practices, and indemnities for breaches.
Armenia has been a software development, electronics and semiconductor production center for many decades dating back to the Soviet era. Armenian developers are known by the quality of their solutions and their ability to deliver on time and on budget. The majority of IT specialists in Armenia have technical degrees in science, technology, math, and engineering areas and speak English. It is expected that by 2025 there will be 30,000 software developers in Armenia.
With a low cost of living, low crime rates and abundant culture Armenia attracts professionals from many countries, including Iran, India, and Russia. Liberal immigration rules make it easy to obtain work permits and acquire residence status.
Armenian businesses take advantage of low costs of workforce, rent, utilities, registration and other startup costs.There are no minimum capital requirements. The company's paid-up capital can be as low as $1. There are no government fees for registering or renewing the registration of a company. The company can be in good standing without paying recurring fees of filing reports. Inactive (dormant) companies do not pay taxes and do not file tax returns. There are no requirements to rent an office or hire local employees etc. Compliance requirements are brought to a minimum.
Newly registered IT companies can generally take advantage of tax holidays.
Zero-tax status is also available to micro-businesses, companies operating in free economic zones, industrial zones, certain border towns and villages. Other small businesses with annual sales of less than $240,000 are subject to sales (turnover) tax of only 1.5-5%. Dividends are generally taxed at 5% but this rate can be lower due to multiple double-tax treaties Armenia has signed. Armenia generally does not tax capital gains on the sale of securities, real estate or other assets.
Company registration can be done in a single day if you are physically present in Armenia and choose to use sample registration documents. Only minimum documents are required, such as the passports of the shareholders and directors. You will get a registration certificate with a taxpayer ID number, ready to start operating immediately. Foreigners can own 100% of an Armenian company. No local partners or agents are required. No restrictions apply to the citizenship or residency of the shareholders. All the directors and employees of an Armenian company can be foreigners. They are not required to reside in Armenia or have a local address. A foreigner can be the only director and the 100% owner of a company.
In addition to various tax holidays and other benefits, the government of Armenia can provide assistance to important investment projects in the form of privatization of real property, financing under public-private partnership, loans, guarantees and subsidies, export insurance, etc.
Armenia has adopted and enforces intellectual property (copyright, trade secrets, know-how, confidetional information, trademarks, etc.) and data protection laws in line with international best practices.
Armenia offers temporary, permanent and special residence to foreign business people as well as citizenship-by-exception to important investors.
DRAM ($1 = 480 AMD)
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