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Income Tax in Armenia



Income Tax of Individuals

Compliance for Residents

Employers are required to calculate income tax on a monthly basis from their employees’ salaries and transfer these amounts to the state budget, no later than the 20th day of the month following the month of calculation.

Taxpayers (namely who were engaged in business activities) have to file an Annual Income Calculation of business income and expenses by 15 April in the following year.

Taxpayers in business activities are required to make quarterly advance tax payments on/before 15 March, 15 June, 15 September, and 15 December. Any balance payments must be made by 1 May.

Income tax on other income received from legal entities is normally withheld at the source.
The individual receiving the income from other sources than Armenian legal entities shall declare it to the tax authorities and shall pay the tax him/herself.

Amounts withheld (imposed) by a tax agent shall be considered as the final amount of the income tax for foreign citizens and persons without citizenship in Armenia, with the exception of the cases when such person is a resident or he/she implements entrepreneurial activity in the Republic of Armenia. In the mentioned cases, foreign citizens and persons without citizenship must apply to the tax authorities of the location of their activity or domicile, in order to perform a recalculation and submit Annual Income Calculation.
The tax period ends on 31st December and the return are to be filed up 15th April.

Compliance for Non Residents

Income tax on income received by non-residents from tax agents is normally withheld at the source.

Amounts withheld (imposed) by a tax agent shall be considered as the final amount of the income tax for non-residents.

Non-residents will have an obligation to submit an Annual Income Calculation only in the event he/she receives an income from Armenian sources but not through tax agents.

According to the RA Law “On compensation for fallen or damaged servicemen during the defines of the Republic of Armenia” RA resident individuals who work on the RA territory or outside the RA territory and non RA residents who work on the RA territory shall pay to the state budget a stamp fee of AMD 1,000 for each month starting 1 January 2017. The stamp fee is withheld by employer/tax agent on a monthly basis from their employees’ salaries and transfer these amounts to the specified bank account.

Tax Rates

Residents

Income from royalties, interest (if not exempt), sale of property (if not exempt), and lease of property is subject to 10% tax. If paid by a tax agent (i.e. legal entity, individual entrepreneur), tax should be withheld at source.

Other income paid by a tax agent is subject to final withholding on a monthly basis. The taxable base is the gross income minus deductible income.

Monthly Taxable Income
Tax Rate
From AMD
To AMD
Percent
0
120,000
24.4
120,001
2,000,000
26
Above 2,000,000
36

The following special tax rates are provided by Law:

The tax agents, who signed a working agreement with residents of RA and according to the agreement employee worked exclusively outside the territory of the Republic of Armenia, within implementation of the program according to Article 33 part 1,2 of RA Law on "Profit Tax" calculates income tax from employees’ wages and equal payments at 13%.

The tax agent certified by RA law on "State support of information technology sector" during certified period calculates income tax on wages and equal payments at 10%.

Royalties, income from leasing (for sole entrepreneurs the annual income tax rates are applied), and interest received by Armenian citizens are subject to income tax at 10 percent. In case the annual income received from rent exceeds AMD 58.35 mln. the individuals are subject to additional 10 % income tax on amount exceeding the threshold without considering any deductions, including taxes paid by the tax agent.

Employers are required to calculate income tax on a monthly basis from their employees’ salaries and transfer these amounts to the state budget, no later than the 20th day of the month following the month of calculation.

Non Residents

The income tax on salaries and wages and the income deemed equal thereto shall be calculated and withheld (imposed) at the rates specified for residents.

The following types of income of foreign citizens or persons without citizenship are subject to income tax, which should be withheld (imposed) at the source through a tax agent, the rates for which are shown below:

Type of Income
Rate
Insurance reimbursements and income from transportation (freight)
5%
Royalties, interests, lease payment, increase in the value of property and other passive income, as well as other income received from Armenian sources
10%
Dividend received by foreign citizens and individuals with no citizenship
10%

Residency Rule

Individuals are tax resident in Armenia if:
· they are physically present for 183 days or more in any consecutive 12-month period commencing or ending in the tax year
· their centre of vital interests is in Armenia, or
· they are in the civil service of Armenia.

Individuals who do not meet any of these conditions are non-residents.

Taxable Income

As a general rule, all types of remuneration and benefits received by an employee for services rendered constitute taxable income. These include, but are not limited to, the following:

· wages and salaries
· interests
· dividends
· income from donations and assistance (unless specifically exempt)
· royalties
· income from any business or profession
· income from leasing
· benefits-in-kind.

Deductions

Employment expenses:

Deductions from gross income for employees may include the following:

· Paid benefits, except benefits defined by the Law of Armenia on Temporary Disability Benefits.

· All types of paid pension benefits, except pension benefits paid within the framework of participation to voluntary funded pension plans in accordance with the established procedure.

· Insurance benefits, except benefits (including pensions) to be received in accordance with the established procedure at the expense of voluntary funded pension insurance contributions made by a taxpayer on one’s own behalf and/or by a third person (including employer) for a taxpayer on conditions of voluntary funded pension insurance, in accordance with the procedure defined by the legislation of Armenia.

· Insurance premiums paid by employers for their hired employees’ health insurance, at a maximum of AMD 10,000 per month.

· Amounts of single-sum assistance in case of employee’s or family member’s death.

Business deductions:

An individual entrepreneur may deduct documented expenses that are incurred directly and exclusively for the purpose of generating business income.

Exempt Incomes
The following are several types of income that are exempted from the income tax:
Income from securities, such as:
·       Income from sale of stocks and other investment securities
o   interest or discount received from government bonds and other government securities as well as bonds issued by the Pan-Armenian Bank
o   income from trading in government securities and bonds issued by the Pan-Armenian Bank.
o   the property and monetary means which have been inherited or received as a gift, received from individuals

· money and food aid provided to individuals by non-profit organizations in the process of their ordinary activities

· property and cash provided by foreign as well as intergovernmental organizations without compensation

· insurance compensation

· scholarships and stipends.



Corporate Tax

Armenian-resident entities, and non-resident entities doing business in Armenia through a branch or a representative office, are liable for corporate income tax (CIT). Armenia taxes residents on their worldwide income; non-residents are subject to CIT only on their Armenian-source income.

The standard CIT rate is 20%.

Taxable income is defined to be the difference between a taxpayer’s gross income and deductible expenses:

· Gross income encompasses all revenues received by a taxpayer from all economic activities unless the revenues are expressly exempted under the law.

· Deductible expenses encompass all necessary and documented expenses that are directly related to conducting business or earning profit unless a specific provision in the law restricts the deduction.

Taxpayers engaged in agricultural production are exempt from CIT on that income.

Note that resident entities, branches and representative offices of foreign entities, and individual entrepreneurs are required to withhold income tax at source on payments to non-residents not having a permanent establishment (PE) in Armenia.

The tax base for investment funds (excluding pension funds and warranty funds), which are registered in the Republic of Armenia, and for securitisation foundations, which are established based on the Law on Asset Securitisation and Asset-backed Securities, is the sum of net assets.

The dividends paid to the shareholder of investment funds or other similar allocations provided in a different manner shall not be deducted from the net assets of the investment funds.

The CIT rate for investment funds (excluding pension funds and warranty funds) registered in the Republic of Armenia, as well as for securitisation foundations, is 0.01% of the tax base.
The turnover tax generally replaces the CIT and value-added tax (VAT) obligations for small and medium enterprises (SMEs). The tax rate is differentiated in accordance to the income type

Presumptive tax system

Taxpayers engaged in certain activities must use the presumptive tax system. Under this system, the taxpayer pays a fixed tax based on the location and area occupied by the business and will not be required to pay CIT or VAT. The rate of tax depends on the activity undertaken, as follows:

Type of Business
Base Data
Adjustment Ratio
Monthly presumptive tax payment (AMD)
Activity related to vehicles
For activities carried out by trucks:
The lading in terms of tons
Depends on region: 1.1 to 1.9
2,000 times the product of the base data and the adjustment ratio.
For activities carried out by buses:
The number of seats
Depends on region:
0.5 to 1.2
Lottery games organizers
Total value of lotteries sold during the year

25% of base data
Number of computers for totalisators

75,000 times the base data in case of totalisators
Number of websites provisioned for organizing internet totalisator

1 million times the base data if connected to the global internet network

Residency Rule

Resident entities are legal and business entities whose existence is established under Armenian law. Non-resident entities are those whose existence is established under foreign law (including subdivisions of foreign entities in Armenia).

Permanent establishment (PE)

The domestic definition for a PE essentially adopts the definition for PE found in the Organization for Economic Co-operation and Development (OECD) Model Tax Convention.

Income Computation

Taxable profits are defined as a positive difference between a taxpayer’s gross income and deductible expenses. Gross income encompasses all revenues received by a taxpayer from all economic activities, unless the revenues are expressly exempt from inclusion under the law. Deductible expenses encompass all necessary and documented expenses that are directly related to conducting business or earning profit, unless a specific provision in the law restricts the deduction.

Inventory valuation

Inventories are generally stated at the lower of cost and net realisable value. First in first out (FIFO) and average cost methods of valuation are generally used for tax purposes.

Capital gains

Capital gains are included in taxable income. Non-residents are taxable on the realised capital gains from the increase of the value of the assets (including shares) located in Armenia. Capital gains from the sale of shares will be taxed at a 0% rate from January 2018.

Dividend income

Dividends derived by an Armenian entity from another Armenian entity are exempt from tax. Dividends derived by non-residents from Armenian entities are subject to 10% withholding tax (WHT) unless relief is available under a relevant tax treaty.
Starting from January 2017, for non-resident shareholders, dividends should be deemed as income on the day of the decision made by the shareholders to distribute dividends from the profit, but no later than 30 June of the tax year following the reporting year.

Interest income

Interest income attracts normal CIT treatment.

Royalty income

Royalty income attracts normal CIT treatment.

Foreign income

Resident entities are liable to Armenian tax on their worldwide income. Foreign taxes should be available for credit against Armenian tax liabilities, up to the amount of Armenian tax payable on the foreign income.

There are no provisions in Armenian tax law allowing any tax deferral on income earned abroad.



Deductions

Expenses incurred in the furtherance of a taxpayer’s business activities generally are deductible, unless a specific provision in the Tax Code provides otherwise. Expenses that are not supported by relevant documentation are not deductible.

Depreciation

Fixed assets purchased (constructed) after 1 January 2014 should be pooled and depreciated with the following maximum rates:

Asset
Maximum Depreciation Rate Per Annum
Other industrial and commercial buildings, constructions, and transmission devices
7.5%
Hotels, resorts, rest houses, educational institutions
15%
Calculating devices and computers
100%
Robot equipment and assembly lines
50%
Other fixed assets
30%

The annual depreciation amount is calculated as the product of (i) the carrying value of the non-current asset group as of the end of the reporting date and (ii) the annual depreciation rates specified for the group (per the above rates).

The cost of non-current assets acquired/constructed/developed during the year is added to the carrying value of the given group of non-current assets, and the cost of the non-current assets alienated during the year (except those non-current assets that had been acquired during the year of alienation) is deducted from the carrying value of the given group of non-current assets.

Intangible assets may be amortised using the annual depreciation rate specified for the group by the taxpayer over the lesser of the asset's useful economic life or 20% per annum.
Land may not be depreciated.

Fixed assets purchased (constructed) prior to 1 January 2014 may be depreciated using the straight-line method. The maximum rates per annum (to be applied on the initial value) for depreciating fixed assets are:

Asset
Maximum Depreciation Rate Per Annum
Other industrial and commercial buildings, constructions, and transmission devices
5%
Hotels, resorts, rest houses, educational institutions
10%
Calculating devices and computers
100%
Robot equipment and assembly lines
33.3%
Other fixed assets
20%
Fixed Assets with value up to AMD 50,000
100%
Industrial and commercial buildings, constructions, and transmission devices located in a designated disaster area (currently Gyumri)
100%

Intangible assets created prior to 1 January 2014 may be amortised using the straight-line method over the lesser of the asset's useful economic life or ten years.

Goodwill

Payments with respect to goodwill and amortisation of goodwill are not deductible in Armenia.

Start-up expenses

Start-up expenses are fully deductible, provided they are properly documented.

Interest expenses

As a general rule, interest is deductible if the related debt is used to fund business activities of the taxpayer. However, the following items are not deductible from gross income:
· Part of interest on loan and credits (including interest amounts calculated within the framework of financial lease contracts) exceeding the amount of twice the settlement rate set by the Central Bank of Armenia on 31 December of the tax year. Currently, the deductible interest rate is capped at 24%.
· Part of yearly interest on loans attracted from non-bank and non-credit entities that, according to fiscal year results, is above:
o the two-fold positive amount of the equity of the taxpayer (excluding banks and credit organisations) on the last day of the fiscal year, and
o the nine-fold positive amount of the equity of the taxpayer, which is a bank or credit organisation, on the last day of the fiscal year.

Equity is the difference between assets and liabilities calculated for tax purposes.

In the event of a negative amount of equity on the last day of the fiscal year, interest on loans attracted from non-bank and non-credit organisations should not be deducted from the gross income.

The above provisions do not apply to interest on loans received from international development institutions included in the list specified by the Armenian government, as well as on interest on borrowing attracted from placement of debt securities through public offerings.

· Interest on loans received by non-bank and non-credit organisations if the amounts of these loans are provided to other taxpayers on an interest-free basis. 

· The part of interest on loans received by non-bank and non-credit organisations that is above interest received on sub-lending of those loans to other taxpayers.

Lease payments

Lease payments are generally deductible, except for the following cases:

· Lease payments on fixed assets and/or intangible assets leased by the taxpayer are not deductible if they are provided to other taxpayers for free use.

· The part of lease payments on fixed assets and/or intangible assets leased by the taxpayer that is above lease payments received on sub-lease on those assets to other taxpayers.

Bad debt

A taxpayer is entitled to deduct bad debts if the taxpayer creates a reserve and allocates the amount of bad debt in the following proportions:

· Up to 90 days from the due date: 0%.
· From 91 to 180 days from the due date: 25%.
· From 181 to 270 days from the due date: 50%.
· From 271 to 365 days from the due date: 75%.

Beyond 365 days, bad debts of less than AMD 100,000 may be deducted. For larger debts, the company would need to have pursued the debt through the courts before a deduction may be taken.

Charitable contributions

Expenses on aid, food organisation for individuals, as well as organisation of social-cultural events for them, are deductible in amounts of up to 0.25% of gross income.
Cost of assets, works, and services provided to non-commercial organisations, libraries, museums, public schools, boarding-houses, nursing homes, orphanages, and hospitals are deductible in amounts of up to 0.25% of gross income.

Fines and penalties

Commercial fines and penalty expenses are deductible for CIT purposes. Fines and penalties paid to the state or municipal budgets are not deductible.

Taxes

Non-refundable (non-credited) taxes (e.g. property tax, land tax, expensed VAT), duties, and other obligatory payments are deductible for CIT purposes.

Other significant items

The deductibility of the following common items is limited for CIT purposes:
· Expenses for business trips outside Armenia are limited to 5% of the gross income of the reporting year. However, up to 80% of sales turnover for execution of works and/or delivery of services indicated in the contract signed with the customer or provided separately in the settlement document endorsed by the customer can be deducted in the event of execution of works and/or delivery of services outside the territory of Armenia.

· Representative expenses are limited to the lesser of 0.5% of the gross income of the reporting year or AMD 5 million.

· Expenses on management services are limited to 2% of the gross income of the reporting year, except for the cases envisaged by the Tax Code.

· Funded contributions made within the framework of the voluntary funded pension scheme are limited to 7.5% of the salary of the employee.

Net operating losses

Companies are entitled to carry forward losses to the five subsequent income years. Armenian law does not allow the carryback of losses.

Payments to foreign affiliates

Payments to foreign affiliates are deductible if they meet the normal tests for deductibility.


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Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.



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This blog is Created by CA Anil Kumar Jain.