foreign direct investment : privatization and restructuring : investment policy and incentives : investment opportunities

Investment Policy and Incentives

The Law on Foreign Investments, effective since 1994, provides guarantees to foreign investors, as well as "grandfathering" for five years. There are currently no generalized investment incentive programs, but there are incentives available to exporters (no export duty and a VAT refund on goods and services exported), and the ability to carry losses forward indefinitely. Investments over AMD 500 mln (about US$ 920,000 enjoy a corporate tax holiday. There are no sectoral or geographic restrictions on investment. Some incentives exist for the earthquake zone.
Types of company that can be established in Armenia are defined in the Civil Code of the Republic of Armenia and the Law on Joint Stock Companies (1996).
Foreign investors can make investments in Armenia using the following legal forms: fully foreign-owned companies (including representations, affiliates, and branches), or the purchase of existing companies; joint ventures; and purchase of securities.
There are no limitations on the size and type of foreign ownership (except for the right to own land), the number of foreign employees, access to financial sources or any other discrimination. Although foreigners can only lease, but not buy land, a company registered by a foreigner as an Armenian business entity does have the right to buy land. Foreigners may obtain: permission to use land under long-term leases; a concession for the use of Armenian natural resources with the participation of an Armenian company; and other property rights.

Areas for further improvement

The government is strongly committed to fighting corruption. An anti-corruption program and corresponding regulations are now under preparation. Steps taken to counter corruption include tougher action to prosecute perpetrators (including senior government, customs and tax officials), and in 1999 the adoption of a new Criminal Code which addresses the issue of corruption in more detail than before, alongside reform of the courts and the commercial legal structure. A new Civil Service Law to be adopted this year will also impose limitations on the participation of state officials in business enterprises.
The regulatory system pertaining to business activities is one of the most developed in the CIS, yet it needs greater transparency. The lack of an anti-monopoly law has meant that some sectors are controlled by monopolies that are hard to break. Fair competition in trade is on occasion undermined for lack of adequate legislation to fight the shadow economy.

Taxation relevant to foreign investment

Foreign investment companies are subject to the same tax regime as Armenian companies. Specific privileges apply to corporate taxation if foreign investment in a company exceeds AMD 500 million (approx. US$ 920,000). These are: exemption from profit tax in the next two years after the investment is made; and a 50 per cent profit tax reduction from the third to the eighth year. The 50 per cent profit tax reduction period is set to decrease over time (and to be eliminated by 2003). For example, investments made in the coming year may benefit from the 50 per cent deduction only for four subsequent years. There are also some profit tax concessions for tax payers who specialize in agricultural production.

Taxation relevant to foreign investment

• Law on farms and collective farms (01/22/90)
  
• Land code (0 1/29/91)
  
• Lithosphere code (03/19/92)
  
• Water code (03/02/93)
  
• Law on patents (08/21/93)
  
• Customs code (01/01/2001)
  
• Law on commodities exchange (08/31/93)
  
• Law on the state register of enterprises (09/02/93)
  
• Law on the circulation of securities (09/08/93)
  
• Law on land tax (04/27/94)
  
• Law on the status of foreign citizens (06/17/94)
  
• Foreign investment law (07/31/94)
  
• Bankruptcy law (06/15/95)
  
• Advertisement law (04/30/96)
  
• Joint stock company law (04/30/96)
  
• Bank bankruptcy law (06/29/96)
  
• Law on banks and banking activities (06/30/96)
  
• Insurance law (11/19/96)
  
• Law on taxes (05/12/97)
  
• Standardization and certification law (05/27/97)
  
• Law on trademarks (06/10/97)
  
• Law on brand names (06/10/97)
  
• Law on value added tax (06/15/97)
  
• Law on profit tax (11/27/97)
  
• Law on the privatization and denationalization of state owned enterprises and unfinished construction projects (12/10/97)
  
• Law on mandatory social insurance contributions (12/26/97)
  
• Law on income tax (12/27/97)
  
• Law on state duties (12/27/97)
  
• Law on property tax (12/27/97)
  
• Law on intellectual property protection for microchip technologies (02/03/98)
  
• Law on transportation (02/03/98)
  
• Law on telecommunications (02/17/98)
  
• Law on arbitration and arbitration courts (05/05/98)
  
• Law on accounting (05/19/98)
  
• Civil code (06/17/98)
  
• Law on customs duties (12/15/98)
• Law on environmental fees (12/28/98)
• Law on customs fees (12/28/98)
• Law on property registration (04/14/99)
• Copyright Law (12/08/99)
• Law in inspections (05/17/00)
• Law on simplified tax (06/05/00)
• Law on excise tax (07/07/00)
• Law on Securities Market Regulation (07/06/00)

Social expenditure

The social safety net is being overhauled. According to the Law on mandatory social insurance contributions are paid at a rate of 28 per cent by employers (employees are liable for a 3 per cent contribution), with a ceiling of AMD 20,000 per month for the monthly wages up to AMD 200,000, and AMD 30,000 for monthly wages over that amount. In January 1999, the government introduced a new system of family allowances, aiming to cut the number of families receiving benefits and to redirect allowances to the most needy. On average, the monthly benefit was raised around 30 per cent to AMD 8,000 (US$ 16). As part of a decentralization effort, local governments were given more responsibility for the administration of poverty benefits, and the provision and financing of health and education services. The new State Health Agency, which started to operate in January 1999, is in charge of contracting out health care services to public and private sector providers. The first law on education in Armenia was adopted in April 1999, introducing new financing mechanisms and regulating the distributions of responsibilities between schools and other public bodies. Preparatory work for pension reforms was completed in 1999.

Bilateral investment treaties

Bilateral treaties on investment and investment protection exist with 23 countries including: Argentina, Canada, China, Cyprus, Egypt, France, Georgia, Germany, Greece, Iran, Kyrgyzstan, Romania, Turkmenistan, Ukraine, the US and Vietnam. Armenia is a signatory to the CIS Multilateral Convention on the Protection of Investor Rights. Twenty-six further treaties are under negotiation. Armenia is also a member of MIGA.
Double taxation treaties are effective with Bulgaria, China, Estonia, France, Georgia, Iran, Romania, Russia, Turkmenistan and Ukraine. Treaties are to be ratified with Belarus, Belgium, Canada, Egypt, Estonia, France, Greece, Indonesia, Latvia, Lebanon, Lithuania, Netherlands, Poland, Thailand and Uzbekistan, and the number of double taxation treaties is rapidly expanding.

Participation in international organizations

Armenia is a member of the following organizations: IMF, World Bank/IDA, IFC, BSEC, CCC, CIS, EBRD, ECE, ESCAP, IAEA, IBRD, ICAO, IDA, IFAD, ILO, IMF, INTELSAT, INTERPOL, IOC, ITU, NACC, OSCE, UN, UNCTAD, UNESCO, UNIDO, MIGA, UPU, WHO, WIPO, WMO, WTO (World Tourism Organisation). Armenia also has observer status at ADB, European Council, NAM, WTO (World Trade Organisation) and participates in NATO PFP.

Protection for companies, repatriation of profits

Funds may be converted and transferred through virtually all domestic banks. There are no restrictions on the conversion or repatriation of capital and earnings including branch profits, dividends, interest, royalties or management or technical service fees. There are no limitations on wire transfers. Cash exports are limited to US$ 10,000 or its equivalent. Foreign investors may freely repatriate their property, profits or other assets that result from their investment after payment of all due taxes. Interest and dividend income (except for the dividend income of nonresident legal entities) is not subject to any tax.
All forms of property and citizens' rights to own and use property are protected under the Constitution. The April 1999 Law on Property Registration regulates issues relating to registration of property rights. Under the Foreign Investment Law, in the event of a change in foreign investment legislation, foreign investments, in accordance with the investor's preference, may be subject to the laws existing at the time when the investments were made, for a period of up to five years. Foreign investments cannot be nationalized, confiscated or expropriated, except in extreme cases of a natural or state emergency, upon a decision by the courts and with full mandatory compensation.

Dispute settlement

All disputes arising between a foreign investor and the Republic of Armenia must be settled in Armenian courts. Since January 1999 commercial disputes may be settled either in state courts or through alternative dispute resolution mechanisms. Commercial or property-related disputes may be settled out of court through institutional or ad hoc panels of experts, for instance created by chambers of commerce or bank associations. Armenian courts are independent, though the justice system needs further reforms. Armenia is a signatory to the international convention on investment disputes and is a member of the International Center for the Settlement of Investment Disputes.