Convertible Notes in Armenia: The 2025 Framework Under HO-114-N and HO-116-N

What are convertible notes and why did Armenia need a framework?

A convertible note is a short-term debt instrument that converts into equity in the borrowing company at a later date, usually when the company raises its next round of funding or when the note reaches maturity. Convertible notes have become a standard tool for early-stage startups worldwide because they allow founders and investors to defer the difficult question of company valuation until a later financing event.

Before 2025, Armenian startups faced a legal gap. There was no dedicated provision in Armenian corporate law that explicitly recognized convertible loan agreements. Founders who wanted to raise seed capital through convertible instruments had two imperfect options: structuring the arrangement as an informal loan agreement with no guaranteed conversion mechanism, or restructuring their company as a joint-stock company (JSC) to access existing securities provisions — a process that was more expensive and complex than most early-stage startups could justify.

The 2025 convertible notes framework closes this gap. Armenia is the first country in the CIS region to formally establish a legal mechanism for convertible loan agreements that covers both limited liability companies (LLCs) and joint-stock companies, making it significantly easier for Armenian startups to raise capital using instruments familiar to international investors. If you are considering registering a business in Armenia, understanding this framework is essential for planning your fundraising strategy.

What the 2025 framework establishes

The framework consists of three parliamentary laws adopted on May 12, 2025, all of which took effect on June 12, 2025. HO-114-N amends the Civil Code to introduce a formal definition and legal mechanism for convertible loan agreements (new Article 886.2). HO-115-N amends the Law on Limited Liability Companies, adding Article 33.1 on convertible loans to LLCs. HO-116-N amends the Law on Joint-Stock Companies to align JSC-specific provisions with the new framework (new Article 35.1), including rules on share placement following conversion.

Together, these laws accomplish several important things. They formally define what a convertible loan agreement is under Armenian law. They establish that both LLCs and JSCs can enter into such agreements. They set out the legal requirements for how conversion from debt to equity must be carried out, including the necessary corporate approvals and registration steps. And they clarify the relationship between convertible loan agreements and existing provisions on interest rates and capital contributions.

The framework does not create a separate regulatory regime or licensing requirement. Instead, it integrates convertible loan agreements into Armenia’s existing corporate law structure, which means that companies can use these instruments without navigating an entirely new set of regulatory approvals.

Which Armenian companies can use convertible loan agreements?

Both LLCs and JSCs are eligible to enter into convertible loan agreements under the 2025 framework. For most startups in Armenia, this means the LLC — the most commonly used business structure — can now accept convertible note financing without restructuring as a JSC.

LLC requirements

An LLC must obtain a unanimous decision of its general meeting of participants to enter into a convertible loan agreement. This is consistent with the existing requirement under Armenian law that capital changes and charter amendments require participant approval. If the lender is not already a participant in the LLC, the company’s charter must not contain a prohibition on capital increases through third-party contributions. Companies planning to use convertible notes should review their charter in advance to ensure no such restriction exists.

JSC requirements

JSCs can also enter into convertible loan agreements. Under the 2025 amendments to the Law on Joint-Stock Companies, the company must issue and place the conversion shares within 60 days after it receives the lender’s written conversion demand or, where conversion depends on conditions set in the agreement, after those conditions are met and the demand is received (JSC Law Article 35.1(6)). The JSC route may be more relevant for companies that have already structured themselves for larger-scale equity financing or that are considering a public offering in the future.

Central Bank (CBA) registration

Ordinary non-financial private companies — both LLCs and JSCs — do not need CBA notification, registration, or approval to enter into a convertible loan agreement. The CBA’s role in this context is limited to publishing exchange rates (relevant for foreign-currency-denominated notes, which use the CBA average exchange rate for conversion calculations). However, under the 2025 framework, financial organizations regulated under the CBA Law may only conclude convertible loan agreements in accordance with CBA normative acts. If your company is a regulated financial entity, separate CBA guidance applies.

How convertible loan agreements work in practice

Key terms

The specific terms of a convertible loan agreement — including conversion triggers, valuation caps, and discount rates — are largely contractual. The 2025 framework does not prescribe specific conversion events; instead, parties are free to define what triggers conversion. Common triggers include the company’s next qualified equity financing round, the note’s maturity date, or a change-of-control event.

While conversion terms are flexible, interest rates are subject to mandatory limits under Armenian civil law. The interest rate on a convertible loan may not exceed, at the time the agreement is concluded, twice the bank-interest calculation rate set by the Central Bank of Armenia (Civil Code Article 879(1)). Any contractual provision setting a higher rate would be void. This is an important consideration for structuring the note’s economics, particularly for foreign investors accustomed to markets where interest rate caps are uncommon.

Conversion mechanics

When a conversion event occurs, the process follows a defined sequence. The lender submits a conversion request. The company then needs to carry out a capital increase, amend its charter to reflect the new participant (for LLCs) or new shares (for JSCs), and file the amendment with the State Register. Under Armenian law, the State Register processes charter amendments within two working days after all required documents are submitted. Registration is not free. The state duty is AMD 10,000 (~USD 28) for registering charter amendments and AMD 20,000 (~USD 55) for registering a change in an LLC’s participants (State Duty Law, Article 16, item 1.12(5) and (7)); check which items apply to your filing.

For JSCs, the converted shares must be placed within 60 days after the company receives the conversion demand. For LLCs, participants have statutory pre-emptive rights on any transfer of participatory interests. Companies should address how pre-emptive rights interact with note conversion in the convertible loan agreement itself to avoid disputes at the conversion stage.

Tax and accounting implications

The tax treatment of convertible loan agreements in Armenia involves several layers that both the issuing company and the investor need to understand. For a broader overview of the Armenian tax system, see our guide to taxes in Armenia.

Interest deductibility

Interest payments on the convertible loan are generally deductible for corporate income tax purposes, provided the funds are used for business activities. However, under Armenian tax law, interest above twice the Central Bank’s bank-interest calculation rate in force on 31 December of the tax year is not deductible, tested loan by loan (Tax Code Article 114(1)(1)). This is a rate cap, not a thin-capitalisation rule; Article 114 contains further limits, including one tied to the company’s equity for loans from lenders that are not banks or credit organisations. Companies should structure their note terms with this cap in mind to ensure full deductibility.

Withholding tax on foreign investors

When the borrower pays interest to a foreign (non-resident) investor, Armenian law imposes a 10% withholding tax on the interest payments. Armenia has double taxation treaties with more than 50 countries, and these treaties can reduce the withholding rate to 5–10% depending on the treaty partner. For example, the rate under the Armenia–Russia treaty is 10%, while the Armenia–Cyprus treaty may reduce it to as low as 0–10% depending on the specific conditions. Foreign investors should review the applicable treaty before structuring the note. If you need to set up a local account for transferring funds, our guide on banking in Armenia covers the process.

Tax treatment at conversion

At the point of conversion, accrued but unpaid interest is deemed paid for tax purposes, which triggers the withholding obligation on that amount. The principal amount of the loan is treated as a capital contribution to the company at the Central Bank exchange rate on the date of conversion. No capital gains tax arises on the conversion itself. This treatment is favorable for both parties: the company receives equity without an additional tax event, and the investor’s cost basis in the new equity position reflects the principal contributed.

IFRS accounting

Under IFRS, a convertible loan agreement is generally classified as a compound financial instrument with both a liability component (the loan) and an equity component (the conversion option). Companies reporting under IFRS should ensure their accounting treatment separates these components from the outset, as this affects both the balance sheet presentation and the interest expense recognized over the life of the note.

Convertible notes vs. other investment instruments in Armenia

The 2025 framework gives Armenian startups a new option, but it is worth understanding how convertible loan agreements compare with alternatives that were available before and remain available today.

The key advantage of the new convertible loan agreement is that it provides legal certainty for conversion within an LLC structure — something that was not available before 2025. For startups that want to stay as an LLC (avoiding the cost and complexity of operating as a JSC), this is a significant development.

Frequently asked questions