ARMENIA COUNTRY COMMERCIAL GUIDE

MARCH 1999

CHAPTER 7: INVESTMENT CLIMATE

7.1 OPENNESS TO FOREIGN INVESTMENT

Basic provisions regulating the investment climate are set by the Bilateral Investment Treaty (BIT), signed by the United States and Armenia on September 23, 1992, and by the Law on Foreign Investment adopted by Armenia on July 31, 1994. Under the term Foreign Investor, the law recognizes any foreign company, citizen, a person without citizenship, an Armenian citizen permanently residing outside of Armenia, or an international organization which invests in Armenia. Foreign Investment is any form of property including financial means and intellectual property which is invested by a foreign investor directly in the territory of Armenia in any economic or other venture. A Foreign Investment Company is a company of any legal form recognized under Armenian Law which is founded by a foreign investor, or in which he is a participant.

Foreign investors are allowed to make the following types of investments in Armenia:

- World currencies including the Armenian dram.
- Real estate, other property and related property rights (except for the right to own land).
- Securities.
- Money orders or other orders for implementation of obligations/agreements that have defined value.
- Any form of intellectual property rights.
- Right to conduct any economic activity specified by legislation or by an agreement with the republic of Armenia.
- Paid services.
- Other types of investment allowed by Armenian legislation.

Basic types of companies are described in the 1992 Law on Enterprises and Entrepreneurial Activity and 1996 Joint Stock Company Law. The following legal forms may be used by foreign investors to make investments in Armenia:

A. Establishment of fully foreign-owned companies, or representations, affiliates, branches, or purchase of existing companies.
B. Establishment of new joint companies with the participation of Armenian companies or citizens, or the purchase of a portion of shares in an existing company.
C. Purchase of different types of securities officially recognized by Armenian legislation.
D. Procurement of permission for use of land, or a concession agreement for use of Armenian natural resources with participation of an Armenian company or Armenian citizens.
E. Procurement of other property rights.
F. Other allowed forms including those based on agreements with Armenian companies or citizens.
Foreign investors take responsibility for any violation of Armenian laws and regulations. Foreign investors can use their property to satisfy their obligations in accordance with these responsibilities.

7.2 RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT

Foreigners have no right to own land - they can only lease it or temporarily use it by agreement. However, foreigners have a right to own all other types of property and have equal rights with Armenian citizens to establish different types of companies. Also, a company registered by a foreigner in Armenia as an Armenian business entity has the right to buy land. Exploitation of natural resources is to be made only upon concession agreements with the government of Armenia or other appropriate state bodies.

7.3 PROTECTION OF PROPERTY RIGHTS

Property rights of U.S. businesses in Armenia are protected by the Armenian law "On Property", by the Trade Agreement, the Bilateral Investment Treaty, and the Armenian Foreign Investment Law. According to the latter, foreign investments cannot be nationalized or confiscated. Investors must be compensated for any damage or profit loss resulting from actions of the state bodies or state officials.

7.4 FOREIGN TRADE ZONES/FREE PORTS

None at the moment. The government and the local business community are exploring the possibility of establishing several industrial parks that would involve the international airport, and existing large electronics companies, such as Mars or Transistor. The parks may also enjoy FTZ regime in the future.

7.5 PERFORMANCE REQUIREMENTS/INCENTIVES

Foreign investment companies pay taxes and are subject to same general tax privileges as Armenian companies. Specific privileges are applied only in the area of corporate taxation if foreign investments in a company exceed one million dollars (see Profit tax in para 7.6 "Taxes"). No limitation on foreign ownership, number of foreign employees, access to financial sources, or other discrimination is imposed.

7.6 TAXES AND OTHER FEES

The new "Law on Taxes" was adopted on May 12, 1997, complementing a Law on Duties adopted on July 19, 1996. These two laws replace the Law on Taxes and Duties of April 19, 1992. The Law on Taxes establishes six different types of taxes. These include a profit (corporate) tax, income tax, value-added tax, excise tax, property tax, and land tax. Other payments required of employers include mandatory social security fees. At the end of 1997, Parliament adopted separate laws and amendments on most of the listed taxes to modify the main law. The Armenian government is currently working on a universal Tax Code, which may be ready by 1999. Until then, Parliamentary changes should be followed. Interested businesses should contact the State Tax Administration or Ministry of Industry and Trade for updated information on current tax legislation.

Profit Tax: A new Law on Profit Tax was adopted on September 30, 1997 (and was ratified by the President on November 27, 1997) to replace the previous profit tax law of January 18, 1992. This tax is similar to the U.S. corporate tax, and is levied on the profits of legal persons, resident or non-resident, operating in Armenia, including foreign legal entities. The taxable profit is calculated as the difference between the gross revenue and expenses which include costs of production and sale, related expenses, as well as VAT, excise taxes and other taxes if applicable. The law provides detailed definitions for items and transactions to be considered income or expense. Investment by participants (shareholders, stockholders, members) in ownership capital, positive difference between the allocation price of shares and their face value, capital combined for a joint activity, and capital gains which result from revaluation of foreign currency or assets valued in foreign currency shall not be considered income.

Depreciation is calculated per the following terms:

a) buildings, structures, and transmission devices --20 years
b) building and structures of hotels, motels, recreation complexes, and resorts -- 10 years
c) computer equipment, production lines, and robot equipment -- 3 years
d) other fixed assets, including livestock; plants; and capital investment in land improvement -- 5 years

Taxation of Residents

The tax is calculated against the taxable profit (gross revenues minus VAT minus excise tax minus cost and expenses, including other taxes) in accordance with the following:

Taxable Profit and Tax Rate:
a) less than 7 million dram --15 percent of taxable profit
b) over 7 million dram -- 1.05 million dram plus 25 percent of the amount of the taxable profit exceeding 7 million dram

The rate of the profit tax levied on income generated from gambling activities and lotteries is 70percent (this may be substituted by a fixed tax). For various types of activities of special payers and their groups, the law may specify presumptive fixed payments to replace profit tax. The fixed payments may sometimes combine a profit tax and VAT, and are used in such or similar areas as retail, catering services, or operation of slot machines. Because of frequent changes in legislation, companies should check with a local tax administration whether regular or fixed payments should be applied to a particular type of business. A taxpayer who performs different kinds of activities subject to different rates of profit tax (including presumptive tax), shall pay tax at different rates and keep separate accounting for each kind of activity.

Tax Incentives

General Incentives: Tax payers specialized in agricultural production are exempted from the profit tax levied on income generated from sales of agricultural products, as well as sales of fixed and other assets, and other incomes if the income from the latter does not exceed 10percent of the gross income. For this purpose, the agricultural products that are considered finished or semi-finished products are:
- cereals and legumes
- industrial crops
- tuberous vegetables, water melons, melon and gourd growing
- forage crops
- other products of fodder crops
- products of gardens, vineyards, orchards, floriculture
- tree and bush seeds, fruit seeds
- tree and bush saplings
- animal produce
- pig-breeding products
- sheep-breeding and goat-breeding products
- poultry-keeping products
- horse-breeding, donkey-breeding, mule-breeding products
- reindeer-breeding, camel-breeding products
- rabbit-breeding, breeding of animals for furs, products of hunting
- fish-breeding, bee-keeping products.

If the income from agricultural production can not be estimated exactly, it may be calculated on the basis of presumptive rates. This privilege is not available for industrial agricultural enterprises such as greenhouses, animal-breeding farms, and for the part of their profits generated from sales of the industrially processed agricultural products.

Tax Incentives for Foreign Investment Enterprises: The law encourages large foreign investment. If the share of a foreign investor in the statutory capital of a resident company is at least AMD 500 million ($1 million at current exchange rate) the following tax deductions are made.

a. 100percent of the profit tax for the next two years after the investment is made.
b. 50percent of profit tax starting from the third year and until the tenth year after investment

In case of taxpayer's liquidation during the tax-privilege period, the profit tax for the entire period of operation will be charged in full. All tax privileges given by the law or a special decree to the enterprises and banks with foreign investments before January 1, 1998 remain valid until the expiration of the tax privilege period. The law can provide for lifting of the profit tax or establish other tax privileges defined by the tax legislation of Armenia.

Taxation of non-residents

The incomes generated by non-residents from Armenian sources are taxed by a tax agent at the source of the income. The incomes are taxed through a procedure described in the law at the following rates:

Type of Income Rate Dividends, Interest 15 percen Insurance fees, Freight 5 percent Royalty; Rental on lease of property; Increase of property value, 15 percent other passive income (except the income from freight); as well as other income from Armenian sources

The above amounts charged by tax agents are considered the final amount of a profit tax paid by non-resident in Armenia, except for the case when non-resident operates in Armenia through its branch or through a site recognized by the tax authority, and the income is generated as a result of the activity of that branch or the site.

Income Tax: The new Law on Income Tax was adopted on December 27, 1997 (ratified by the President on December 30, 1997), and replaced the income tax law of February 8, 1995. The tax applies to individuals with permanent residence in Armenia (i.e. who have lived in Armenia over 183 days during a 12-month period), or with business interests centered in Armenia, and those without permanent residence who earn income in Armenia. Income subject to tax includes that from salaries and wages; royalties; winnings and bonuses from lotteries and games, as well as prizes; business earnings, fees and other compensation from rent; income from other civil agreements and contracts, and in-kind income.

Deductions include grants; contributions from NGOs; property or cash inherited from or gifted by a physical person; winnings, bonuses and prizes not exceeding 10,000 drams, proceeds from selling personal property, scholarships and stipends, certain insurance benefits, proceeds from selling agricultural products by taxpayers involved in agricultural activities, charity contributions to certain entities not exceeding 5 percent of taxable income, as well as expenses incurred as a result of entrepreneurial activity or execution of civil agreements. Also deducted (after the above deductions are made) from taxable income are the compulsory social insurance payments to the Pension and Employment Fund of Armenia. In case of registered entrepreneurial activities, the taxable income is additionally reduced in the amount of expenditures incurred directly and exclusively for profit. Incomes below eight thousand drams (approx. $ 16) per month, or 20 thousand drams for certain privileged groups, are not taxable. Presumptive determination of income is allowed for certain taxpayers and activities. If a taxpayer's only income is from one tax agent and it does not exceed 120,000 dram or if its activities are subject only to presumptive tax, the individual is not required to file an income tax return with the tax authorities.

Avoidance of double taxation: For residents, income received outside of Armenia is included in the total amount taxable in Armenia. Income tax levied in Armenia shall be reduced by the size equal to the income tax paid in another country. This does not apply to taxes paid in other countries on types of income which would not be taxable under Armenian legislation. In all cases, the deductable sums (taxes paid to other country) cannot exceed the tax amounts due to payment in Armenia.

Income tax rate:

Annual taxable income, dram tax rate up to 120,000 15 percent from 120,000 to 320,000 inc. 18,000 drams plus 25 percent of the amount exceeding 120,000 drams over 320,000 68,000 dram plus 30 percent of the mount exceeding 320,000 drams

Taxation of foreign citizens: Income of foreign citizens who are not residents of Armenia and/or are not involved in entrepreneurial activities in Armenia is to be taxed at the source of income at the following rates (these rates do not apply to salaries, wages and similar payments, including those below eight thousand drams. These are still taxed at the above described rates):

Type of income                            tax rate

equity interest, interest                 15 percent     

insurance benefits and freight charges    5 percent

royalty, rent, gains from property price   15percent
increase and other passive revenues 
(other than freight charges), as well as 
other incomes (including enterprise 
income) from Armenian sources

These taxes are considered final and are levied on gross income with no deductions to be made.

Value-Added Tax (VAT): The new Law on Value Added Tax was adopted on May 14, 1997 (ratified by the President on June 15, 1997) and replaced the old law on VAT of June 30, 1993. This is a tax on the supply of goods, labor, and other services, by legal persons and their branches, and by individual entrepreneurs. VAT liability is determined as the difference between the VAT charged on sales and the VAT paid on purchases, up to the retail level. At the retail level it is paid on the gross margin (an equivalent tax-inclusive rate of 16.67 percent applies to the gross margin). The tax base is price plus excise taxes on domestic goods and the import price for imported goods. VAT is not charged if gross annual revenues of a business do not exceed two million dram or approx. $ 4,000 (this does not apply to imports to Armenia). VAT for imported goods is collected upon crossing the border of Armenia, or within 10 days after that. No VAT is charged on imports of goods that are not subject to customs tariffs. As a part of the "destination country" principle, no VAT is levied on exports from Armenia. Those Armenian companies which buy products on the territory of Armenia from foreign agents (companies, individuals) not registered with Armenian tax authorities are considered tax agents and have to deduct and pay the VAT for the above agents when making payments to them.

The VAT rate currently is 20 percent.

Tax exemptions apply to a number of the activities and services that include: imports of equipment and machinery to form the statutory capital of a company; public electric transportation services; tuition fees paid to schools and universities; sales of scientific and technical literature; scientific research; sales of baby food; sales of chemicals used in production of fertilizers and veterinary pharmaceuticals, as well as sales of veterinary pharmaceuticals, counter-insect chemicals, fertilizers, and seeds to producers of agricultural products; sales of pharmaceuticals and medical equipment; health care services; sales of agricultural products by Armenia-based producers; services provided by orphanages, homes of elderly and disabled, and pre-school institutions; radio and TV broadcasts if those are not compensated by users; sales of newspapers and magazines; services provided by cemeteries; conduct of religious rituals, and sales of religious items to and by religious organizations; postal services; sales of lottery tickets at their face value; insurance and re-insurance services; pensions; financial intermediaries; ownership transfers, restructuring, sale of mazut (heavy heating fuel), circulation of currency and securities, lease of state or communal homes and apartments; fees paid for communal services by owners of private apartments; services provided by condominiums to their members; activities associated with granting of patents, copyrights, and licenses, production or assembly of goods (to be further exported) upon order and from items or materials imported to Armenia by a foreign entity; humanitarian assistance and charity; procurement of items or services performed during the preparation stage under credit or grant programs implemented by international financial institutions; imports of personal belongings by individuals not exceeding amount limitations established by law; imports of personal belongings by persons arriving for permanent residence in Armenia.

The VAT law has been amended frequently since its adoption. Embassy recommends consultations with the tax administration regarding current tax exemptions.

VAT paid by foreign citizens for goods purchased in the territory of Armenia can be reimbursed to them by the Customs Department upon the export of the goods.

Excise Tax: A new law on Excise Tax was adopted on May 30, 1997 (ratified by the President on June 24, 1997) and replaced the law of June 6, 1992. This tax is assessed on the production or importation of specified products, and is payable on the proceeds of sale of products manufactured in Armenia, and on the declared value of products imported to Armenia. Exports are not subject to excise tax. The law sets the following tax rates for both domestic and imported products:

                                 
CODE                ARTICLE                                 RATE, percent

1604 30 10          Caviar                                  200  
2203                Beer                                    50
2204, 2205, 2206    Grape Wine and wine syrup               50   
2207, 2208          Alcohol and spirit beverages            125
2402                Cigars, cigarellas, and cigarettes
                    with tobacco or tobacco substitutes     100
2710 00 270         Gasoline                                35
2710 00 290
2710 00 320
2710 00 340
2710 00 360
2710 00 590         Diesel fuel                             10
42 03               Apparel and accessories from natural leather 25
43 01, 43 02, 43 03 Natural furs, products and apparel made of furskins, 25
                    including
43 03 10 300        Worker and army clothes made of  sheep fur 0
6911, 7013 31       Porcelain and crystal                     25
7113, 7114, 7115,   Jewelry, fancy (bijouterie) articles      15
7116, 7117
8703                Passenger cars                            15

For imported articles under code 2203, the excise tax must be no less than $0.35 per liter; for articles under codes 2204, 2205 and 2206, the excise tax must be no less than $0.5 per liter; for articles under codes 2207 the excise tax must be no less than $1.2 per every liter; for articles under code 2208 the excise tax must be no less than $3.75 per every liter; and for articles under code 2710 00 590 the tax must be no less than $15 per ton. On July 1, 1997, the Cabinet passed a temporary resolution introducing fixed payments replacing VAT, customs and excise taxes on tobacco products. On December 30, 1997, the Cabinet also introduced fixed payments replacing VAT and Excise tax for imported gasoline in the sum of $120 per ton. As these limitations and fixed payments change frequently, businesses should contact local tax authorities for updated information.

Excise tax for imported products must be paid to the customs department within 10 days after importation.

Exports are not taxed. Transit of goods or import of personal belongings not exceeding limitations set by the government are not taxed. For the imported products listed above, the government has the right to introduce flat excise taxes. If an intermediary purchases a locally manufactured product and exports it, the excise tax paid will be reimbursed.

All alcoholic beverages and cigarettes imported to Armenia should have excise stamps on them (available from the customs).

Property Tax: The new Law on Property Tax was adopted on December 27, 1997 (ratified by the President on January 13, 1998) and replaced the old law of February 3, 1995. The property taxed includes:

a) residential, public and industrial buildings and structures
b) motor vehicles, except for those operating under business licenses
c) wheeled or caterpillar self-propelled machines and mechanisms (except for those used in agriculture)
d) floating transportation means

The tax base for buildings and structures is their value (this is calculated differently for residential, public and industrial buildings), and for transportation means it is the engine power measured in hp or KWt.

For buildings and structures the tax rates are as follows:

Type of property                                  Annual tax rate

a)   public and industrial buildings              0.6 percent
b)   summerhouses and stand-alone garages owned
          by individuals                          0.2 percent
c)   other residential buildings(apartments, homes, etc.) 
          and structures with the tax base:  

     up to 3 million dram                         0 percent
           
from 3 million to 10 million dram                 100 dram plus 0.1percent of the 
tax base amount exceeding 3 million dram

from 10 million to 20 million dram                7,100 dram plus 0.2 percent of the 
tax base amount exceeding 10 million dram

from 20 million 30 million dram                   27,100 dram plus 0.4 percent of 
the tax base amount exceeding 20 million dram

from 30 million 40  million dram                  67,100 dram plus 0.6 percent of 
the tax base amount exceeding 30 million dram

above 40 million dram                             127,100 dram plus 0.8 percent of 
the tax base amount exceeding 40 million dram

For transportation means the tax rates are as follows:

Type of property                                  Annual tax rate     

a)   floating transportation means                150 dram per hp or
                                                  204 dram per KWt

b)   wheeled or caterpillar self-propelled  
machines or mechanisms                            50 dram per hp or 68 dram per KWt

c)   passenger motor vehicles for up to 10 passengers 
  with engine of:
- up to 120 hp                                    200 dram per hp
- from 120 to 250 hp                              400 dram per hp
- above 250 hp                                    500 dram per hp

d)   cargo and passenger motor vehicles for more
     than 10 passengers with engine of:
- up to 200 hp                                    100 dram per hp
- above 200 hp                                    200 dram per hp

For all motor vehicles of more than three years old, the tax is reduced by 10 percent for the fourth and each consecutive year but by no more than 50 percent.

Tax exemptions include: linear transportation structures (roads, railroads, etc.), if use of those is not compensated; mobile construction and road building machinery; water reservoirs; temporary residential cabins/houses; and officially recognized historical monuments. Tax exemptions exist for persons serving in the Armenian army or in the army of an ally state. Also, certain tax privileges can be established by local communities.

Land Tax: The Law on Land Tax was adopted on April 27, 1994. Taxable areas also include those occupied by buildings and structures. The tax is paid by permanent or temporary users of land, or by a lessor in case of lease. For agricultural land, the tax is 15 percent and is based on net income, determined by the land cadaster valuation. For non-agricultural lands, the tax is based on the land cadaster value as follows:

1.0percent . . . . . . . within settled areas
0.5percent . . . . . . . outside of settled areas
1.0percent . . . . . . . land for forest stock
1.0percent . . . . . . . other land

Full exemption is granted to a number of entities including: state-owned organizations; national parks, botanical parks; and lands of historical and cultural significance, except for lands allocated for lease or commercial use; land of public use in populated areas (squares, streets, passages, roads, public gardens, reservoirs, etc.); newly established orchards, vineyards - for a certain period of time; single and collective farms established in the process of land reform and privatization - for two years after the transfer of the ownership title. 50 percent reductions exist for agricultural and forestry research organizations and citizens exempted from paying income tax.

Social Security fees: The new Law on Mandatory Social Security Payments was adopted on December 30, 1997. These mandatory payments, made by enterprises are tied to the Minimum Wage, MW (currently 1,000 dram or $ 2) and employees' actual wages or salaries as per the following:

Salary, wage             Social Fee

up to 8 x  MW            32 percent

above 8 x MW to 16 x MW  40 percent of the MW + 27 percent of the salary/wage

above 16 x MW            120 percent of the MW + 22 percent of the salary/wage

Employees themselves also must make the social security payments in the amount of 3 percent of their salaries/wages. These amounts are deducted from the salaries/wages by employers and paid to designated state accounts.

Some exceptions exist. Foreigners do not have to pay the tax. For organizations in which 50 percent or more employees are disabled the fee is 5 percent. Farmers pay 12 percent of the official cadaster net income for the particular year for the land they own. Individual entrepreneurs, as well as persons performing scientific or artistic works shall pay 20 percent of their annual income, but no less then 1.5 x MW and nor more than 13 x MW per month.

In most cases, the fees are paid on monthly basis. The law establishes a ceiling for the fees. Monthly payments made by an employer for its employee and by the employee itself cannot exceed 13 x MW (or approx. $ 26 at the current exchange rate).

For more information on these and other taxes and duties, contact:

State Tax Administration (Director - Mr. Artashes Tumanyan, Foreign Tax Relations Section Chief Suren Adamian)
3 Movses Khorenatsy Street, Yerevan 375015; Tel: (374-2) 538-101, 538-065, 53-81-92 Fax: (374-2)151-967.

No duties are paid by a foreign investor for the import of goods which constitute his investment in the enterprise or for materials to be used by the foreign investment company for production. Personal use items imported by foreign personnel of companies with a foreign investment are also non-dutiable. Nor are duties levied on export of products (goods, services) manufactured by foreign investment companies, or on import of products (goods, services) for internal use by these companies, except in cases specified by Armenian legislation and/or international agreements.

7.7 TRANSPARENCY OF THE REGULATORY SYSTEM

The Armenian regulatory system pertaining to business activities, though one of most developed in NIS, still lacks the desired degree of transparency. Some critical laws are still missing, such as an antimonopoly law. This, along with the fact that some activities are still controlled by the state has lead to a situation where certain sectors, though officially open (aviation and telecom are examples), maintain near monopolies that are hard to break. Lack of adequate laws and mechanisms to fight the shadow economy, especially in the area of trade, often undermines fair competition, especially affecting small companies. Changes in legislation are rarely anounced or pulicly disclosed before implementation. There is a new independent energy regulatory commission, and plans exist for an independent securities and exchange commission.

Labor, safety and health requirements, remaining from the Soviet period, can not be considered as impeding investment activities. General tax and accounting systems are based on Soviet style models, however the country is slowly turning to international accounting standards.The law provides tax incentives for foreign owned firms and joint ventures, as well as facilitates some of the tax reporting procedures. Bureaucratic procedures may appear burdensome and time consuming when an investor is negotiating a contract with the Armenian government, as the contract may require approval by several ministries and usually goes back and forth many times.

Key business laws and regulations affecting business environment:

Date Legislation

7/28/98 Civil code
10/31/90 Law on Ownership in the Republic of Armenia
1/22/90 Law on Farms and Collective Farms (amended 3/30/92)
1/29/91 Land Code
3/14/92 Law on Enterprises and Entrepreneurial Activity
3/19/92 Lithosphere Code
3/92/23 Water Code
12/10/97 Law on Privatization and Denationalization of State Owned Enterprises and Unfinished Construction Projects (periodically amended)
6/29/93 Law on Privatization of State and Public Housing Stock
8/21/93 Law on Patents
8/27/93 Customs Code
8/31/93 Law on Commodities Exchanges
9/2/93 Law on the State Register of Enterprises
9/8/93 Law on the Circulation of Securities
12/27/93 Individual Businessmen Law
4/27/94 Law on Land Tax
6/17/94 The Law on the Status of Foreign Citizens
7/31/94 Foreign Investment Law
5/19/95 Basic Principles for Retail Trade
6/15/95 Bankruptcy Law
11/15/95 Mortgage Law
1996 Advertisement Law
1996 Copyrights Law
1996 Stock Exchange Law
1996 Joint Stock Company Law
6/11/96 Law on State Duties
6/29/1996 Banks Bankruptcy Law
6/30/1996 Law on Central Bank
6/30/1996 Law on Banks and Banking Activities
7/19/97 Law on Duties
11/19/1996 Insurance Law
05/12/97 Law on Customs Duties
05/12/97 Law on Taxes
05/27/1997 Standardization and Certification Law
05/27/1997 Metrology Unification Law
06/10/97 Law on Trademarks
06/10/97 Law on Brand Names
06/15/97 Law on Value Added Tax
06/24/97 Law on Excise Tax
11/27/97 Law on Profit Tax
12/27/97 Law on Income Tax
1/13/98 Law on Property Tax

7.8 CORRUPTION

Armenia has inherited the corrupt practices that had been common throughout the USSR state-controlled economy. After the country became independent in 1991, these practices continued in the new Republic. Factors such as the wartime period of 1989-1993, the corresponding sharp decrease in economic activities and real income of the population, a fast growing gap between rich and poor, the predominant use of cash in the economy, flaws in the newly adopted laws and the absence of effective law enforcement mechanisms have aggravated the situation. In late 1996, the Armenian government openly admitted that corruption had grown beyond previous limits and had become a major problem. However, the government has recently taken some anti-corruption steps. A number of senior government officials have been arrested and are under investigation. Also, many high ranking officials in the Customs and Tax Inspectorate Offices have been recently replaced. The US Government is providing increasing assistance to address these problems. It is, however, too early to tell whether a serious anti-corruption effort will be launched.

Armenia continues to use an amended version of the Soviet era criminal code in most areas. The code contains several articles pertaining to corrupt practices: Articles 182 and 183 relate to Abuse of Power and Exceeding One's Authority (related to state officials). These are punishable up to 2-8 and 3-10 years imprisonment respectively. Accepting, mediating and giving bribes is a criminal offense (articles 185, 186) and is punishable by up to 8-15 years of imprisonment plus by confiscation of personal property for repeated crimes. In 1998-1999, the government plans to adopt new criminal and civil codes that will address the issue of corruption in more detail, while reforming the courts and the economic/commercial legal structure. New versions of the criminal code and criminal procedure code are currently under discussion in the parliament. They will have to be adopted by the time a new court structure is in place - January 12, 1999.

Despite severe penalties, bribery is widespread and the most common form of corruption. Heavily involved sectors include government procurement, all types of transfers and approvals as well as business-related services such as company registration, licensing, and land or space allocation. It may also take a bribe and/or a word of a high-ranking acquaintance to get certain positions, the amount depending on the position's "money generating" potential.

Relationships between high ranking government officials and the emerging private business sector is another phenomenon, encouraging influence peddling between officials and private firms from which they benefit. Powerful officials at the federal, district or local levels acquire direct or indirect control, or partial control over emerging private firms. Such control may be exercised through a hidden partner position, or through majority ownership in prosperous private companies. The involvement can also be performed indirectly - through close relatives and friends. These practices promote protectionism, creation of monopolies or oligopolies, hinder competition and undermine the image of the Government as a facilitator of private sector growth.

The new civil service law is expected to set limitations for the participation of state officials in business enterprises. Also, reform efforts are underway in the legal and judicial systems, which include the drafting of a new Commercial Law, and training for lawyers and judges. Corrupt practices are widely spread within the private companies as well, mostly in the form of defaulting on tax obligations and unregistered business activities. The shadow economy was estimated in June 1997 by Armenian authorities to make up 40 to 53 percent of GDP. Embassy estimates that this figure can be as much as 70 percent or higher in the growing wholesale and retail sector and consumer services.

The Embassy receives very few complaints by U.S. firms operating in Armenia regarding corruption. Related problems include non-transparent competition practices; merciless attitudes of the Armenian tax authorities; poor cooperation, cumbersome procedures, and bribes solicited by Customs officials, and unauthorized, groundless intervention of law enforcement agencies into a company's daily operations. The Embassy will take action upon request of the US firm to try to resolve these types of problems.

The U.S. Embassy regularly conveys to the Armenian government the unacceptability of corrupt practices. The Embassy also will not provide assistance to those U.S. firms whose private projects involve Armenian business partners who occupy government positions.

7.9 LABOR

The 1992 Law on Employment guarantees employees the right to form or join unions of their own choosing without previous authorization. However, the number and influence of labor unions is minimal. The Law prohibits forced labor. The statutory minimum age for employment is 16. A standard work week has 40 hours. The minimum annual paid leave is 15 working days (predominant practice is 24 days). Minimum wage is set by governmental decree and was increased periodically during 1993. Wages are normally paid biweekly. Female employees are granted privileges which include: prohibition against hard and hazardous jobs, night shift-work (in certain cases); overtime, work on holidays, and business trips for women with children under age of 2; maternity leave of a minimum of 140 days, to a maximum one year partially paid and a further one year unpaid; prohibition of dismissal of pregnant women and women with children under the age of 18 months.

There is a significant supply of qualified specialists both in research/engineering and production in the following domains: electrical and electronic components and devices; electrical components and appliances; software electric motors and generators; optics, including space optics; apparel production; chemistry; architecture and construction; jewelry; arts and crafts, and food processing.

7.10 EFFICIENCY OF CAPITAL MARKETS AND PORTFOLIO INVESTMENT

Current policies do not restrict flow of capital resources in the product and factor markets. Credit is allocated on market terms. However, the number of credit instruments is mostly limited to high-interest, short term commercial lending from local banks, and different subsidized programs established by international financial institutions and foreign governments, including the U.S. The Yerevan Stock Market is in its earliest stage of formation, with only a handful companies trading locally. Physical ownership of stock shares or bonds is rare as these instruments are just beginning to enter into circulation. Until recently, share registries were kept by the corporations themselves. However, on April 23, 1997, the government passed a resolution requiring all corporations with more than 50 shareholders to keep their registries with the National Share Registry. No restrictions exist for foreign investors to invest in existing companies and corporations. Also, no regulations exist that would limit or prohibit foreign investment, participation or control at the time of incorporation. A new comprehensive form effort is planned create capital market mechanisms over the next two years, with substantial US assistance.

The private banking system is developing from near chaos and more than 90 very weak banks (1991-1993) to a structure that would allow only relatively strong and solvent banks to function. The required level of bank capitalization is being systematically increased, with a requirement of $1 million expected in 1999. By July 1, 1998, total assets of all banks in Armenia did not exceed $252 million. IMF assistance has helped to establish regular audits and competent Central Bank supervision. After consolidation, a core of 15-25 solid banks is predicted.

7.11 CONVERSION AND TRANSFER POLICIES

In 1994-1995, Armenia lifted practically all limitations on conversion and transfer of funds which can be accomplished through Midland Armenia Bank as well as domestic institutions. On the technical side, most of the banks can transfer funds internationally within 2-4 days. Almost instant transfers are available through Western Union which has been operating in Armenia since 1996. Companies in Armenia may convert currency without any limitation through resident banks. They can open hard currency accounts in Armenian or foreign banks. There are no transfer limitations. Cash exports are limited to $10,000 or its equivalent. Foreign investors can freely repatriate their property, profits or other assets that result from their investment after all due taxes (profit tax, VAT, excise tax, etc.) are paid.

7.12 EXPROPRIATION AND COMPENSATION

According to the Foreign Investment Law, in the event of a change in 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 5 years. Foreign investments cannot be nationalized. They also cannot be confiscated or expropriated except in extreme cases of a natural or state emergency, upon a decision by the courts and with full mandatory compensation. Investors should be compensated for any damage incurred to their investment, or loss of profit resultant from the actions of the state bodies or state officials.

7.13 DISPUTE SETTLEMENT

According to the Foreign Investment Law, all disputes that arise between a foreign investor and the Republic of Armenia must be settled in Armenian courts. All other disputes to which the Armenian government is not a party can be considered by the Armenian courts or other bodies entitled to settle economic disputes, or by intermediary courts unless otherwise provided for by international laws or by preliminary agreements of the parties involved. Provisions for dispute settlement between a U.S. company and the government of Armenia are similarly set by the Bilateral Investment Treaty (BIT).

Legislation
The provisions governing the resolution of commercial and other disputes are contained in the Civil Code, Civil Procedures Code, Law on Arbitration Court and Arbitration Procedures, and the Law on Enforcement of Court Verdicts and Decisions. The Codes and other laws will go into effect January 12, 1999. Current legislation and regulations are still in effect until they are replaced with the new laws and regulations. The transition period is likely to cause delays in addressing any disputes that may arise.

Mechanisms
Until the completion of the judiciary reforms, the end of December 1998, all commercial disputes have to be resolved at the people's courts (in cases when at least of the litigants is an individual) or the Economic Court (in cases when both litigants are legal entities). Effective January 1999, commercial disputes can be resolved either at the state courts or through alternative dispute resolution mechanisms. Any court of first instance can take cases involving commercial or economic disputes. The verdict of a court of first instance can be appealed to a Court of Appeals. One of three Courts of Appeals will hear commercial cases only, with the second considering matters of civil litigation and the third - military and criminal matters. Finally, a verdict of a Court of Appeals can be appealed to the Court of Cassation which is the supreme court in Armenia.

The Law on Arbitration Courts and Arbitration Procedures allows any legal entities functioning in Armenia to settle their commercial or property-related disputes outside the court system, through institutional or ad-hoc panels. The law recognizes that business and commercial organizations, such as chambers of commerce, banks associations, etc. can set up panels of experts - institutional panels - which will be authorized to settle any disputes between legal entities - members of their organization, should the entities choose to settle the dispute in this manner. Also, the two entities may specifically spell out in the contract that any disputes between them should be settled by an ad-hoc arbitration panel. In case of a dispute, both sides nominate a member of the arbitration panel, who, in turn, select a third panelist. The decision of the arbitration panel is final, and may be revoked by a court of first instance only if the court finds that the legal procedures were not properly observed.

If one of the sides fails to implement the verdict of the arbitration panel, the other side can appeal to a state court with a request to enforce the decision. After the court of first instance reviews the case to ensure that the panel procedures have been properly followed, it will issue a court order to a marshal requesting to enforce the decision. The marshals are part of the Justice Ministry.

OTHER ASSISTANCE
The U.S. Embassy may help facilitate the process in certain cases. For more information contact:

Ministry of Justice (Minister - Mr. David Harutyunian); 8 Khorhrdarani Street, Yerevan 375010
Tel: (374-2)582-157; Fax: (374-2)582-449.

Economic Court, 18 Paronyan Street, Yerevan 375015; Tel: (374-2)532-411; fax: (374-2)582-449.

Ministry of Industry and Trade. Information Center. 5 Hanrapetutyan St., Yerevan-10: Tel:(374-2)538-082, Fax:(374-2)588-321, 151-081.

7.14 POLITICAL VIOLENCE

No incidents involving politically motivated damage to projects or installations have been observed. It is not likely that civil disturbances, if they occur, would be directed against U.S. businesses or the U.S. community. Armenia is currently experiencing an influx of residents from neighboring Iran, mainly for trading purposes. No incidents involving Iranian citizens directed against U.S. or other businesses have been observed.

7.15 BILATERAL INVESTMENT AGREEMENTS

A Treaty Between the Republic of Armenia and the United States of America Concerning the Reciprocal Encouragement and Protection of Investment (BIT) was signed on September 23, 1992. This Treaty was ratified by the Armenian Parliament in September 1995 and signed into effect by Ambassador Peter Tomsen and Minister of Foreign Affairs Vahan Papazyan.

BIT sets forth investment conditions for investors of each party to be no less favorable than for national investors; it protects investment against expropriation and nationalization, and regulates dispute settlements between the companies and the governments of each party.

Armenia has also signed similar agreements with Argentina, Bulgaria, Canada, China, Greece, Iran, Kyrgizstan, Ukraine, United Kingdom, and Vietnam.

7.16 OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS

The "Investment Incentive Agreement between the Government of the Republic of Armenia and the Government of the United States of America", signed in 1992, provides a legal framework for OPIC's operations in Armenia. Armenia has also joined Multilateral Insurance and Guarantee Agency.

7.17 CAPITAL OUTFLOW POLICY

Residents and non-residents can open accounts in foreign banks with no restrictions. They can make many of the common transactions used in international banking practice and can repatriate balances from their accounts. All restrictions on capital outflow for both residents and non-residents have been eliminated. The only remaining restriction relates to cash exports - these cannot exceed $10,000 or its equivalent.

7.18 FOREIGN DIRECT INVESTMENT

In 1997, the number of fully owned foreign companies grew from 305 to 434. The number of joint ventures grew from 380 to 608, bringing the total number of firms with foreign investment to 1,042. Over 70 percent of these are involved in trading activities. According to the Ministry of Finance and Economy, FDI in 1997 was $34-36 million (IMF figure was $30 million). Ministry officials think that almost half of investment does not get registered (shadow economy factor), and that the real figure may approach $60-70 million. It is expected that by the end of 1998, FDI will grow to $100-120 million. From the government's point of view, foreign investment is unacceptably low and does not approach the full potential of available opportunities. In 1993-1996, the government organized several international conferences (including one in Los Angeles in June 1996) targeting potential investors. These events produced very modest results. However, certain economic improvements observed in Armenia in 1995-1997, and the lasting cease fire on the border with Azerbaijan have resulted in a noticeable positive change in the U.S. business interest in Armenia. After a long period of hesitation (1990-1994), in which only two to four U.S. firms were registered annually in Armenia, more than 15 U.S. firms settled here in 1995 only. The interest grew further in 1996-1998. To boost interest among U.S. businesses, and the Diaspora in particular, the government is planning to organize investors' conferences on Armenia in the US in 1998-1999.

U.S. firms in Armenia have formed joint ventures and subsidiaries, thus bringing the total number of U.S.- owned firms to about 120. While such exporters as Procter & Gamble, Mars, Xerox, Dell, IBM, and many others have begun filling Armenia's markets with their products, a few challenging investment project are also underway. A telecommunications joint venture started in 1995 by Trans World Telecom (and recently sold to OTE, Greece) has become the main provider of Armenia's long distance, cellular and paging services, and has engaged in an ambitious project to modernize the country's entire telecom network. Armenian programmers at HPL, Hailink, Boomerang Software, Yeretron, and Credence in Yerevan are engineering complex software applications. Coca-Cola's bottling plant began production in 1996; a $12 million gold re-processing plant was commissioned by Global Gold and First Dynasty Mines (U.S.) in January 1998, future investment could reach $200 million; American Armenian Exploration company spent over $20 million on continuing oil and gas exploration; ARARAT-NOVA joint venture is in the process of upgrading its wine and cognac production at Yerevan's famous Ararat Winery, and Dika Light purchased a large perlite mining and processing plant. A number of projects in the production of electronic components, machine-made rugs, fruit juice processing and packaging, and construction of hydro-power plants are in various stages of negotiation.

7.19 MAJOR FOREIGN INVESTORS

According to the Ministry of Industry and Trade, major investors in Armenia are:
- First Dynasty Mines (see previous paragraph),
- Greek OTE telecoms company which is part of a consortium that acquired the Armenian Telephone Company Armentel in 1997 for $142 million,
- French Pernod Ricard which purchased the Yerevan Brandy Winery in 1998 for $30 million,
- French Castel Group which invested in production of mineral water plant and a brewery in Armenia,
- Midland Bank, member of the HSBC group, which opened the first major western bank in Yerevan, Midland Armenia Bank, in 1996 with a chartered capital of $10 million,
- Canadian Grand Tobacco, which plans to invest $5 million in its Yerevan tobacco joint venture.

This report is provided courtesy of the Business Information Service for the Newly Independent States (BISNIS)