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Investment in Armenia Introduction for foreign companies considering doing business in Armenia

KPMG in Armenia


Preface

This publication has been prepared by KPMG Armenia to assist foreign investors who consider starting a business in Armenia. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. KPMG Armenia would be pleased to assist you in evaluating and implementing your investment plans. For details of the services which we provide, and on how to contact KPMG Armenia, please refer to Chapter 7. KPMG Armenia cjsc Yerevan, August 2009

Note: For your reference, USD equivalent of amounts indicated in AMD may be calculated using the official exchange rate established by the RA Central Bank. At the time of issuing this publication the rate established by the RA Central Bank was: USD 1 = AMD 370.83 (as at 11 August 2009).


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Contents

CHAPTER 1

ARMENIA: A BRIEF SUMMARY

CHAPTER 2

BUSINESS ENVIRONMENT

11

CHAPTER 3

BUSINESS ENTITIES

25

Geography Climate Historical overview Population and language Currency and payments International time Weights and measures Government Entry visas/residency status Work permit Office and living accommodation Business hours Hotels and accommodation Transportation and communication Armenian Diaspora

The Government’s approach towards foreign investment Foreign investment incentives Types of foreign investments Foreign investments in Armenia Workforce Economy Key Macroeconomic Indicators Government economic policy Foreign trade and free trade agreements Import regulations Export regulations Membership of international organizations International finance assistance Monetary policy and the banking sector Insurance system Credit Bureaus Privatization Natural resources Government Securities market

Entrepreneurs/Sole proprietors Business partnerships Limited liability companies Supplementary liability companies Joint-stock companies

3

3 3 3 4 4 4 4 4 5 6 6 6 6 8 9

11 12 13 14 15 15 16 16 16 17 17 17 18 18 20 21 21 22 22

25 25 26 26 26


Investment in Armenia

Cooperatives Representative offices and branches of legal entities Establishment (registration) of legal entities, branches and representative offices

CHAPTER 4

2 26 26 27

ACCOUNTING REQUIREMENTS

25

CHAPTER 5

LEGAL ENVIRONMENT

30

CHAPTER 6

TAXATION OVERVIEW

38

CHAPTER 6

LABOUR LEGISLATION

38

CHAPTER 8

KPMG'S OFFICE IN ARMENIA

54

AN INTERNATIONAL OVERVIEW

55

KPMG IN RUSSIA AND CIS

56

APPENDIX 1

PROCEDURE FOR REGISTRATION OF A REPRESENTATIVE OFFICE/BRANCH OF A BUSINESS ENTITY

57

APPENDIX 2

LIST OF ABBREVIATIONS AND ACRONYMS USED IN THE TEXT 58

Regulation of accounting and reporting Recent changes in the RA Law “On Accounting” Financial statements Auditors and audit requirements Auditing standards Audit companies

Foreign Investment Law Banking and related legislation The judicial system of the Republic of Armenia Law firms

The Law on Taxes Value Added Tax (VAT) Profit Tax Personal Income Tax Mandatory Social Security Payments Excise Tax Customs Duties Property Tax Land Tax Presumptive Fee Double Taxation Treaties Other Mandatory Payments

Tax Inspections Labour relationship Labour contracts Documents required for employment Types of labour contracts Terms and conditions of labour contracts Termination of labour contract

28 28 29 29 29 29

31 32 36 37

38 38 40 43 45 45 47 48 48 49 49 49

50 51 51 51 51 52 52


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Chapter 1

Armenia - A brief summary

Geography Modern Armenia is a small, strategically important country located at the crossroads of Europe and Asia. The Republic of Armenia (the RA) occupies an area of 29,800sq. km. Armenia borders Turkey to the west, Georgia to the north, Azerbaijan to the east, with Nakhichevan (part of Azerbaijan) to the south-west and Iran to the south. Land boundaries total 1,254km. The terrain is defined by the high Armenian Plateau with mountains (mount Aragats being the highest peak at 4,090 meters), fast flowing rivers, some forest land and fertile soil by the Arax river. Armenia is rich in certain natural resources, among them, deposits of copper, molybdenum, zinc, aluminium and gold. Substantial deposits of pumice, marble, tuffa, limestone, basalt and salt also exist. Mineral springs supply bottled-water industry. The capital of Armenia is Yerevan. Climate The climate is highland continental with hot, dry summers and cold winters. The coldest month is January, with the average daily temperature ranging between -13°C and 1°C. The hottest months are July and August with the average daily temperature ranging between 30°C and 35°C. Average annual rainfall varies between 22 and 90 cm. The wettest months are from May and June and the driest month is January. Historical overview Situated between Asia and Europe, the territory of today’s Armenia has seen many migrations, political states and conquerors. Armenians are an ancient race, who has preserved its traditions and spirit through difficult historical periods, each of which had its own influence and impact on the development of the Armenian history and culture. Armenia was the first nation to adopt Christianity as a State religion. In 2001, Armenia celebrated the 1700th anniversary of the declaration of Christianity as it has been a State religion since 301 AD. The country is adorned with over one hundred ancient churches and monasteries of great architectural merit, dating back to the VI century AD. Some of these monasteries were famous centers of education and culture. There is also a large Diaspora of Armenians (about six million people) living outside the country in various parts of the world, whose ancestors left Armenia due to regional conflicts which took place in the early part of the 20th century. The Armenian nation soon recovered from these conflicts and on 28 May 1918 declared itself independent, creating the first Armenian Republic, with Yerevan as the capital.


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After two years of independence, on 2 December 1920 Armenia joined the Soviet Union. During the Soviet period of seventy-one years, Armenia developed dramatically as a country in education, industry and infrastructure. In 1991, along with other nations of the former USSR, the Armenians voted overwhelmingly for independence. Population and language The population of Armenia numbered 3,236,700 people as at the end of 2008. Only about two percent of the population is non-Armenians. There are an estimated six million ethnic Armenians living outside the Republic, spread over Russia, North and South Americas, the Near and Middle East, and Western Europe (a total of 66 countries). The population is highly educated and well-trained, particularly in engineering and technology. Close to one hundred percent of the adult Armenian population is literate. Of special significance are the teams of qualified scientists who have conducted research in many areas of science and technology. The State language is Armenian, which forms a separate branch of the IndoEuropean language family. Armenian has its own unique alphabet, invented between 401-406 AD by St. Mesrop Mashtots (361-440 AD). Despite the homogeneity of the population, many Armenians are fluent in foreign languages. The majority of them speak Russian and an increasing number are becoming fluent in English, French and German as a consequence of Armenia’s deeper integration in the world economy. Currency and payments Armenia’s national currency is the Dram (known by ISO standards as AMD) with each Dram being divided into 100 Lumas. It was introduced on 22 November 1993 by the Central Bank of the Republic of Armenia (the CBA). The CBA has exclusive right to issue currency; it also organizes and controls the monetary circulation in the economy. The CBA runs a liberal monetary policy allowing floating exchange rates and free transfer of currency. The key objective of the monetary policy is to ensure stability of prices. However, the Armenian Dram is not an internationally recognized freely convertible currency. Both residents and non-residents may import and export currency and securities to and from Armenia without any restrictions. There is a cash export limit for individuals, amounting to USD 10,000 (or equivalent in other currencies). Amounts above this limit should be transferred through bank accounts. The most popular foreign currency is the US dollar. A number of banks have started to encash travelers cheques. Almost all of the Armenian commercial banks operate automated teller machines, which accept MasterCard, Visa, ArCa, eDram and other plastic cards. International time The time in Armenia is four hours ahead of Greenwich Mean Time (GMT+4). Weights and measures The commonly accepted standard for measurement in Armenia is the metric system. Government Armenia is a republic. A new post-Soviet constitution was adopted by public Referendum on 5 July 1995. The Constitution is based largely on that of the French, favouring the semi - presidential model. The Armenian authorities implemented a constitutional reform aiming to strengthen the separation of


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powers and to continue making progress towards compliance with the commitments to the Council of Europe. On 27 November 2005 the amendments to the Constitution of Armenia were adopted in the Constitutional Referendum. In accordance with the Constitution, the President of Armenia is elected for a period of five years by popular vote. The President appoints the Prime Minister and members of Government who are nominated by the Prime Minister. The Armenian Parliament (the National Assembly) is unicameral (with one legislative chamber) and currently has six standing committees, which, along with the Ministries, are actively involved in the legislative reform process. Members of the National Assembly are elected through general election once every five years. The territory of the Republic of Armenia is divided into ten regions (Marzes). The capital city of Yerevan has the status of a community since the constitutional amendments from 27 November 2005. The regions are divided into communities. The communities are legal entities with local self-government, which is implemented by the local authorities: by the Heads of the communities and by the Councils of the Elders of the communities, both elected directly by the population of the respective community. The communities have their own budgets and manage their property independently. In the regions (on Marz level) the State Government is represented by the Governors (Marzpets), who are appointed by the Government. Entry visas/residency status Foreign citizens (except for those from some countries of the Commonwealth of Independent States (CIS), traveling to Armenia must obtain an entry visa. Entry visas are provided by Armenian embassies abroad, or at the points of crossing the RA State Border, or on the territory of Armenia – by the Passport and Visas Department of the RA Police and by the RA Ministry of Foreign Affairs. Foreign citizens may also apply to the RA Ministry of Foreign Affairs to obtain electronic visa via Internet. (www.armeniaforeignministry.am/eVisa). The entry Visas are provided for the period of stay of up to 120 days, with the possible extension for the maximum of 60 days. The currently available types of visas are shown in the table below: Type of Visa Diplomatic Official Visitor Transit

Fee (in AMD 000’) None None 3-40 18/10

Number of entries multiple/single multiple/single multiple/single multiple/single

Visa validity period Up to 3 years Up to 3 years Up to 1 year Up to 1 year

For residing on the territory of Armenia foreign citizens may apply to receive a Status of Stay in the RA. The authority dealing with provision of the Status of Stay is the Passport and Visas Department of the RA Police. The statuses currently available are shown in the table below:

Temporary Stay

Fee (in AMD 000’) 105

Permanent Stay

140

Special Stay

150

Status

Period of validity Up to 1 year (may be extended by 1 year at a time) 5 year (may be extended by 5 years at a time) 10 years (may be provided multiple times)


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Work permit The RA employers have the right to sign a labor contract with foreign employees and use their labor, on the basis of the work permit issued by the relevant authority to the foreign citizen. There are exemptions specified by law, where a foreign citizen is allowed to work in Armenia without having a work permit. In particular, the following categories of foreign citizens are allowed to work in Armenia without a work permit: ƒ

Foreign citizens having a Permanent Stay or a Special Stay status,

ƒ

An RA citizen’s or a legally residing in the RA foreign citizen’s spouse, who has a Temporary Stay status in Armenia,

ƒ

A close family member (having a Temporary Stay status in Armenia) of an RA citizen or of a foreign citizen having a Permanent Stay status in the RA.

ƒ

The founders, directors or authorized representatives of commercial organizations with foreign capital,

ƒ

The employees of foreign commercial organizations who work at the representative offices of those organizations located in Armenia.

Office and living accommodation The approximate office rental rates in the center of Yerevan currently vary between USD 25 and USD 40 per square meter per month (including 20% VAT). Outside the city center rental values are considerably lower. Several real estate agents specialize in finding apartments for rent for expatriates. As with office rental, prices for apartments vary significantly, depending on location, living area and level of refurbishment. Business hours Most businesses operate five days a week. Usual business hours for financial institutions, commercial and industrial organizations are from 9.00am to 6.00pm, with a lunch break from 1.00pm. to 2.00pm. Business hours for retail stores vary depending on their size and location. Most retail outlets are open from 8.00am. to 9.00pm. There are also 24hour stores. Hotels and accommodation During the past three to four years, the hotel industry has been continually developing and improving. Along with the renovation of old hotels, several new hotels have been built in Armenia. Below is a list of some of the hotels which provide services comparable with international standards. Hotels in Yerevan: Hotel Ani Plaza, 19 Sayat-Nova Ave, Yerevan 0001, Tel: (+37410) 589 500, (+37410) 589 700 Hotel Ararat, 71 Grigor Lusavorchi Street, Yerevan 0015, Tel: (+37410) 510 000, (+37410) 510 001 Hotel Arma, 275 Norki Ayginer, Yerevan 0025, Tel: (+37410) 581 843, Armenia Marriott Hotel,1 Amiryan Street, Yerevan 0010, Tel: (+37410) 599 000 Hotel Avan Villa Yerevan, 16, 13th Street of Nork Marash, Tel: (+37410) 655 877, (+37410) 652 707 Hotel Aviatrans, 4 Abovian Street, Yerevan 0010, Tel: (+37410) 567 228, Hotel Bass, 3/1 Aygedzor Street, Yerevan 0019, Tel: (+37410) 221 353, Hotel Best Western Congress, 1 Italian Street, Yerevan 0010, Tel: (+37410) 580 095, (+37410) 591 199 Hotel Erebuni Plaza, 26/1 V. Sargsyan Street, Yerevan 0010, Tel: (+37410) 510 453, (+37410) 510 451 Hotel Europe, 38 Hanrapetutian Street , Yerevan 0010, Tel: (+37410) 546 060, Hotel Golden Palace, 2/2 Azatutyan Ave, Yerevan 0037,


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Tel: (+37410) 219 999 Hotel Golden Tulip Yerevan, 14 Abovyan Street, Yerevan 0010, Tel: (+37410) 591 600 Hotel Hrazdan, 72 Dzorapi Street, Yerevan, 0015, Tel:(+37410) 535 332 Bass Hotel Complex, 3/1 Aygedzor Street, Yerevan, 0019, Tel: (+37410) 221 353 Hotel Hy Business Suites, 8 Hanrapetutian Street, Yerevan 0010, Tel: (+37410) 567 567 Hotel Latar, 58, 4th street Silikyan District, Yerevan 0029, Tel: (+37410) 380 711, (+37410) 380 721 Hotel Metropol, 2/2 Mashtots avenue, Yerevan, 0015 Tel: (+37410) 543 701 Hotel Olympia, 56 Barbusse Street, Yerevan 0028, Tel: (+37410) 271 850 Hotel Regineh, 235/1 Norki Ayginer, Yerevan 0047, Tel: (+37410) 654 020, (+37410) 651 619 Hotel Shirak, 13a Movses Khorenatsi Street, Yerevan 0010, Tel: (+37410) 529 915 Hotel Terjan, 5th Street, Silikyan district, Yerevan 0029, Tel.: (+37410) 390 388, (+374 10) 399 699 Hotel Tufenkian Hospitality, 16, 13th Street, Nork, Yerevan 0047, Tel: (+37410) 655 877 Hotel Valencia, 40 Myasnikyan Ave., Yerevan 0025, Tel: (+37410) 543 572, (+37410) 543 573 Hotels in the Marzes: Gegharqunik Avan Marak Tsapatagh Hotel, 21/1 Tumanyan Street, Sevan, Gegharkunik Marz, Tel: (+37410) 547 888, (+374 10) 542 707 Bohemyan Resort Hotel Complex, 29 Sayat Nova Ave, Sevan, Gegharkunik Marz, Tel: (+37410) 561 776, (+374-261)258 85 Harsnaqar Hotel Complex, Tsamakaberd, Sevan, Gegharkunik Marz, Tel: (+37410) 286 272 Kotayq “Arthur’s Aghveran Resort” Holiday Home, Aghveran Recreation Area, Arzakan Kotayk Marz Tel: (+374-226) 616 10 “Jupiter” Tsakghkadzor Hotel Complex, Tsaghkadzor, Kotayk Marz, Tel: (+374-223) 606 16, (+374-223) 606 17 Hotel Kecharis, 15 Orbeli Yeghbayrner Street, Tsaghkadzor, Kotayk Marz Tel: (+374-223) 604 09, (+374-223) 605 09 Multi Rest House Hotel Complex, Tsaghkadzor, Kotayk Marz Tel: (+37410) 287 450 Lori Hotel Argishti, 1 Batumi Street, Vanadzor, Lori Marz, Tel: (+374-322) 425 56, (+374-322) 425 57 Avan Dzoraget Hotel, Dzoraget, Lori Region, Tel: (+37410) 235 076 Hotel Gugarq, 20 Tigran Mets Ave, Vanadzor, Lori Marz, Tel: (+374-322) 415 19, (+374-322) 415 10 Odzun Holiday Home, Odzun, Lori Marz, Tel: (+374-253) 235 22 Shirak Araks Hotel Complex, 25 Gorki Street, Gyumri, Shirak Marz, Tel: (+374-312) 511 99, (+374-312) 534 93 Hotel Berlin, 25 Haghtanaki Street, Gyumri, Shirak Marz, Tel: (+374-312) 576 59, (+374-312) 531 48 Hotel Isuz, 1/5 Garegin Nzhdehi Street, Gyumri, Shirak Marz, Tel: (+374-312) 251 51, (+374-312) 333 99


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Syunik Hotel Lalaner, 29 Sisakan Street, Sisian, Syunik Marz, Tel: (+374-2830) 66 00, (+374-2830) 45 00 Hotel Mirhav, 100 Mashtots Street, Goris, Syunik Marz Tel: (+374 284) 24 612, (+374 284) 24 632 or Mobile: (+374 91) 209 083 Tavush Haghartsin Hotel Complex, 121 Kamoi Street, Golovino District, Dilijan, Tavush Marz Tel: (+374-268) 277 70 Hotel Mosh, 3 Yerevanyan Street, Ijevan, Tavush Marz Tel: (+374 263) 356 11 Vayots Dzor Hotel Anush, 5 Vardanyan Street, Jermuk, Vayots Dzor Marz Tel: (+374 287) 224 41 Hotel EvMary, 3 Shahumyan Street, Jermuk, Vayots Dzor Marz Tel: (+374 287) 218 14 Nagorno Karabakh Hotel Armenia, 4 Petrvari Qsani Street, Stepanakert, Nagorno Kharabakh, Tel: (+374-47) 948 802 Hotel Lotus, 81 Vagharshyan Street, Stepanakert, Nagorno Karabakh, Tel: (+374 47) 945 273 Hotel Nairi, 14a Hekimyan Street, Stepanakert, Nagorno Karabakh, Tel: (+374-47) 971 503, (+374-47) 971 502 Hotel Shushi, 3 Amiyan Street, Shushi, Nagorno Karabakh, Tel: (+374-477) 313 57 Currently, hotel prices vary from USD 40 to USD 250 per night for a single room. Business centres, conference rooms and other facilities are available in most of the hotels. Transportation and communication Yerevan has a relatively developed public transportation system, which includes buses, trolley buses, Metro, taxi services and vans or so-called ‘route taxis’. Similar means of transportation are available in the other major Armenian towns, except for electrical transport (Metro and trolleybuses). Road and railroad communication exists between all the major regions of Armenia. Taxis are available in the capital and in all major towns and are relatively inexpensive. Three international airports are in operation: Zvartnots International Airport and Erebuni (both in Yerevan) and Shirak (in Gyumri). There are also nine local airports in Armenia. In June 2002, Zvartnots Airport was given under concession to a foreign operator for 30 years. The renovation and expansion works of the Airport began in 2004, and a new international terminal (18,000 sq. m.) was opened on 1 June 2007. Yet, another terminal is being built to house passenger check-in counters and customs control for departing passengers, which are currently located in the old, Soviet-era built terminal of the Airport. It is planned to open in 2011-2012. In 2008 the airport handled a total of 1,360,596 passengers. Several local and international airlines (such as Armavia (national carrier), Aeroflot, Air France, BMI, Czech Airlines and Lufthansa) provide a number of flights to the largest cities in the CIS, Europe, and Asia. Scheduled flights operate to Amsterdam, Athens, Aleppo, Beirut, Dubai, Istanbul, Frankfurt, Kiev, London, Moscow, Munich, Paris, Prague, Tehran, Tbilisi, Vienna, and other major cities in the world. There are 840 km of railways, excluding industrial lines. Of the three international railroad connections via Georgia, Azerbaijan and Turkey, only the connection through Georgia to the Black Sea ports (mainly Poti and Batumi) is


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in use at present. Railroad communication with Russia has been resumed from April 2005 owing to a bi-weekly train-ferry service between the Georgian port of Poti and the Russian port of Kavkaz, and has significantly reduced transport costs between Armenia and Russia. The recent developments of political relations between Turkey and Armenia increase the probability of reopening the Armenian-Turkish border. This would result in lower cargo transportation costs for European and Middle East destinations, associated with the reopening of the currently non-operating Kars-Gyumri railroad that connects the two countries. The Governments of Armenia and Iran plan to construct a railroad connecting Armenia with Iran. The proposed link would require around 80 kilometers of new railroad construction in northwestern Iran, from the Armenian border on the Araks River to the Iranian city of Marand, where the track would be connected to the Tabriz-Julfa line. It is anticipated to launch construction of Armenia-Iran railway in late 2009, as soon as the project’s feasibility study is finalized. Currently, for cargo transportation with Iran the Iranian seaport of Bandarabas is used. Highways within Armenia total 11,300 km and there are connections with all neighboring States. The Armenian telecommunications network is currently operated by two mobile operators, ArmenTel (operating under the trade mark Beeline), which is fully owned by Russia's VimpelCom, and K-Telecom (operating under the trademark VivaCell MTS), a subsidiary of Russia's MTS. On 19 November 2008, the RA Public Services Regulatory Commission issued a 10 year license to the company France Telecom (Orange brand) as a third mobile operator in Armenia. Orange plans to launch its operations in Armenia in autumn 2009. It will put the emphasis on the so-called thirdgeneration (3G) services: such as video calls and broadband Internet connection. Russian-based Comstar's Armenian subsidiary Cornet-AM has built the first WiMAX network in Armenia. Another WiMax operator, iCon Communications, has entered the Armenian telecommunication market. The company plans to offer high-speed wireless broadband Internet, Virtual Private Network (VPN) and Voice over IP (VoIP) services. Armenian Data Communication company (ADC), another significant market player, has developed large optical fiber network covering almost entire territory of the capital city Yerevan.

Armenian Diaspora Taking into account that about two-thirds of Armenians live abroad, the Diaspora has important influence on Armenia’s development and greatly contributes to Armenia’s socio-economic, educational and cultural processes. Starting from 2008 the Ministry of Diaspora has been established in the structure of the Government of Armenia. The main activities of the Ministry are aimed at widening the context of Armenia-Diaspora partnership and facilitation a broader Diaspora engagement into Armenia’s development agenda. The main strategic directions undertaken by the Ministry can be described as: Preservation of the Armenian identity in the Diaspora Identification of the potential of Armenians spread worldwide and their involvement in the development of Republic of Armenia Promotion of programs aimed at nation’s unification


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Through setting up pan-Armenian professional associations, creating national networks, conducting tailored conferences, forums, presentations and establishing direct ties between the Homeland and the Diaspora, the Ministry facilitates the development of the institutional and incentive framework to mobilize and support Diaspora investments and knowledge transfer to Armenia. The relations between Armenia and Diaspora are also carried out through various associations, non-profit organizations, which deal with the issues of social, economic, cultural and educational nature that help to preserve the core of the Armenian identity, as well as provide technical assistance and contribute to the development of respective sectors. Some of the Diaspora organizations are: The Armenian General Benevolent Union (AGBU) was founded on April 15, 1906, in Cairo, Egypt. and is aimed to preserve and promote the Armenian identity and heritage through educational, cultural and humanitarian programs. The Armenian Assembly of America (United States) is a nationwide nonprofit organization established in 1972, Headquartered in Washington, DC. is a nationwide non-profit organization established in 1972. The Assembly promotes public awareness of Armenian issues, encourages greater Armenian-American participation in the American democratic process, and assists in humanitarian and development programs in Armenia. The Association of Armenians of Russia (Russia) is a non-profit organization founded in 2000. The objective of the organization is to preserve the national identity of the Armenian Diaspora in Russia, to engage the entrepreneurs from Russia in business development in Armenia, to initiate and support the implementation of investment projects in Armenia. The World Armenian Congress (Russia) was founded in 2004, in Russia, as an international association of Armenian non-governmental organizations. The objective of the Congress is to unite, consolidate and gather the strengths, capabilities and experience of all the Armenians, individuals and organizations, to contribute to the growth of the Republic of Armenia. Particularly, the Congress organizes various conferences, business forums, which result in establishment of direct contacts and business relations between Armenian businessmen all around the world.


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Chapter 2

Business environment

The Government’s approach towards foreign investment There is a positive and open attitude towards foreign investments in Armenia. The objective of the Government policy in this respect is to provide incentives for the foreign investments aiming to increase the country’s exports and stimulate employment. The reforms related to economy and infrastructure, macroeconomic stabilization and economic growth have contributed to the development and implementation of the country’s foreign investment policy. This policy is reflected in the RA Law “On Foreign investments”. The main principles of the investment policy may be summarized as follows: a liberal attitude towards foreign investments an “Open door” investment principle protection of investors’ rights provision of equal conditions for foreign and domestic investors. According to the assessment made by the American Bar Association, the current Law of the Republic of Armenia “On Foreign Investments” is viewed as being one of the most liberal and successful among other emerging economies. Armenia’s cumulative rating according to the Heritage Foundation “Index of Economic Freedom”, is 69.9, “Moderately Free”, making its economy the 31st freest in the 2009 Index. Its overall score remains unchanged from last year. Armenia is ranked 18th freest among the 43 countries in the Europe region, and its score puts it above the world average. In July 2008 another world known rating agency, Fitch Rating gave Armenia long-term “BB” , with Stable Outlook, for issuer default ratings both in foreign and national currency. The Country Ceiling is “BB+”. Taking into account the global and regional economic shock the Fitch Rating has reviewed this rating in early 2009 for adjustment purposes; however the rating of the Armenian economy remained unchanged. The following organizations in Armenia aim to support foreign investors and provide all necessary advice: The Ministry of Economy of the RA. This Ministry is responsible for implementing foreign investment policy and preparing attractive investment packages, etc. (http://www.mineconomy.am/) The Business Support Council of the RA, which consists of a panel of well-known local business representatives and members of Government. The Business Support Council is active in organizing discussions covering the whole range of business issues, and giving solutions to these issues, where needed.


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The Armenian Development Agency. This Agency was formed in 1998 to act as the adviser and presenter of Armenian economic opportunities to foreign investors, as well as to assist Armenian companies in exporting their products and services abroad. (www.businessarmenia.com) There are virtually no restrictions concerning the sectors in which a foreign investor may invest, except in certain national defense-related areas. A prior approval for making an investment is generally not required, except for investments made in regulated establishments, such as banks, investment companies and certain public utilities. Armenia has signed bilateral treaties on investments and investor protection with 37 countries, 36 of which have been already ratified. Armenia is a signatory of the CIS multilateral convention on the protection of investor rights. Some Armenian business associations actively seek overseas partners to invest in Armenian companies. Given the relatively small domestic market in Armenia, export opportunities and international business connections are very important to Armenian businesses. These business associations are generally supportive of the Government’s policy with regard to expanding business and improving standards. Some of the business associations, actively involved in enabling a better business environment in Armenia, are: UMB(E)A - The Union of Manufacturers and Businessmen (Employers) of Armenia The Union of Manufacturers and Businessmen (Employers) of Armenia (UMB(E)A) was founded in 1996. The main activities of UMB(E)A are aimed at legal protection of the interests of businessmen and improvement of economic legislation, development of international relations and promotion of export, advocacy of the domestic manufacturers, development of small and medium businesses. AmCham - The American Chamber of Commerce in Armenia The American Chamber of Commerce in Armenia (AmCham) has been operating in Armenia since 2000. Providing active support at such areas as tax legislation and customs administration, AmCham represents the business interests of its members' from all business segments in Armenia to the Armenian government, international organizations, and to the wider business community. EIF - Enterprise Incubator Foundation Enterprise Incubator Foundation (EIF) was founded in 2002 with a joint effort of the Government of Armenia and the World Bank and mainly focuses on improving innovation and entrepreneurship policy and regulation, promoting Armenian enterprises and increasing the competitiveness of the local Information Technology sector in the global market place by providing a comprehensive package of business, training, and facility services. Foreign investment incentives Armenia’s investment and trade policy is considered to be one of the most open in the CIS. With an economy that largely depends on foreign trade, Armenia’s Government is making significant efforts to attract foreign investments. Foreign companies are encouraged to invest and are entitled to the same treatment as local companies. The following incentives for foreign investors are available in Armenia. Ownership: 100% ownership permitted. Admission: No screening and no specific approval/ authorization for making an investment.


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Ownership of land: Foreign citizens are not allowed to own land in Armenia, however they may hold long-term leases. Foreign citizens are permitted to own the freehold of buildings and apartments, and a company registered by a foreigner in Armenia has the right to buy land. Import duty: No duty on raw materials. Export duty: None. VAT on export: Refunds are provided; zero rating in Armenia applies to goods and services exported under “Free Turnover” and “Reexportation” customs regimes. Losses: Losses incurred by businesses may be carried forward up to a maximum of five years. Exchange control: Free operation of foreign currency accounts. Remittance: No restrictions on remittances. Staff recruitment: No restrictions. Location: No sectoral or geographical restrictions on investments. Investment guarantees: Five-year Grandfather Clause1, 37 bilateral treaties, and membership of MIGA. Dispute resolution: ICSID Signatory. Full member of WTO since the end of 2002. In addition to the specific investment incentives described above, the following factors make Armenia attractive for Foreign Direct Investment (FDI): Rapidly growing economy. Relatively inexpensive, well educated and skilled workforce. Relatively stable banking system. Worldwide Diaspora. Continuous support by the international donor community in implementing reforms. Access to the CIS and Middle East markets. Substantial Government involvement in economic and structural reforms. Types of foreign investments Foreign investors may make the following types of investments: Establishment of a fully foreign-owned company (including representations, affiliates and branches), or the purchase of an existing company. Establishment of a new joint venture company with the participation of Armenian companies or citizens, or the purchase of the portion of the shares in an existing company. Purchase of different types of securities. Procurement of permit to use the land, or a concession agreement for the use of Armenian natural resources with participation of Armenian companies or citizens. Procurement of other property rights. Other forms of investments.

1

See the Chapter on Legal Environment – “Foreign Investment Law”.


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Foreign investments in Armenia Over the past ten years the Armenian economy experienced an increasing amount of investments, with Armenia recording some of the highest FDI per capita figures amongst non-oil producing CIS States. According to the National Statistical Service (NSS), gross inward FDI stock in Armenia during the post-Soviet period as of the end of December 2007 totaled at USD 3,422 million. Gross inflow of FDI as of the end of 2008 was USD 935.5 million. During the past decade Armenia has attracted foreign investments mainly in the following sectors (see also Chart 1): telecommunication and transportation power and Utilities mining and metallurgy light and food industry trade (wholesale and retail) transport, etc.

Foreign Direct Investment by Sectors (as of the end of 2008 17.0%

Mining & Metallurgy

11.0% 6.0%

Food processing industry Power and Utilities

4.2%

Telecommunication 8.5%

Wholesale and retail trade (including hotels and restaurants)

4.5%

30.8%

Transport Real estate activities

18.0%

Other

Source: National Statistics Service

Several multinational companies have operations in Armenia including Air France, British Airways, British American Tobacco, Bulvinos Chemicals, Caritas, Castel, Coca-Cola, Corporaci贸n America, Cronimet, France Telecom, GlaxoSmithKline, Huntsman, MTS, Marriott International, Pernod Ricard, Philip Morris, Renco, RusAl, RAO UES, Vimpelcom, Gazprom and Siemens. In recent years a number of IT companies have set up branches in Armenia and are progressing successfully, for example HPLA, EPG Labs, Synopsis, Virage Logic, iCon Communications, etc. The banking sector is strengthened by the entrance of new foreign banks. These include several banks with Russian participation (VTB, Troika Dialog, GazpromBank, etc.), Credit-Agricole, Procredit bank (with German capital), Lebanese Byblos Bank and Credit Bank, as well as Postbank (with Dutch capital). It is worth mentioning, that European Bank of Reconstruction and Development (EBRD) is actively involved in the shareholding structures of the Armenian banks. As of the end of February 2009, the bank had shares in 4 commercial banks: Byblos Bank Armenia (25%), ArmEconomBank cjsc (25%), Ararat Bank cjsc (25%) and ProCredit Bank cjsc (16.67%).


Investment in Armenia

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Workforce A significant portion of the Armenian labor force has higher education. The most well-known institutions with highly educated and experienced faculties (professors and academics), offering comprehensive studies in their respective fields are as follows: Yerevan State University Armenian State University of Economics State Engineering University of Armenia Yerevan State University of Architecture and Construction Yerevan State Medical University Armenian State Agrarian University American University of Armenia Armenian-Russian (Slavonic) State University French University in Armenia Foundation. Many Armenian graduates seek employment abroad and then return with invaluable work experience which enables them to assume leading positions in local and international businesses. Costs in Armenia for both the skilled and unskilled workforce are very competitive in comparison with the USA and the EU. Economy Armenia is in the midst of a transition from a centrally controlled economy to a free market economy. Under the old system, Armenia developed a highly sophisticated industrial sector, supplying the USSR and foreign markets with machinery, construction equipment, defence electronics, textiles, chemicals and other manufactured goods, in exchange for raw materials and energy resources. Between 1989 and 1994 the economy declined owing to such key factors as the 1988 earthquake and the disintegration of the USSR. Many industrial enterprises have since either closed down or are operating at significantly reduced levels of capacity. Since 1994 the GDP growth in Armenia was and continues to be one of the highest among CIS countries in recent years. With assistance from international organizations and through its own efforts, the Government and the Central Bank have been successful in dealing with inflation and achieving macroeconomic stability. The Armenian economy is taking significant strides forward, and as such, the investment climate in the country is promising. The table below shows that GDP was USD 11,929.4 million in 2008, USD 9,204.5 million in 2007, and USD 6,384.51 million in 2006. The real annual GDP growth rate (in AMD terms) was 6.8%, 13.8% and 13.2% for 2008, 2007 and 2006 financial years respectively.


16

Investment in Armenia

Key Macroeconomic Indicators Name of the indicator

2001

2002

2003

2004

2005

2006

2007

2008

2,118.4

2,376.3

2,807.1

3,576.6

4,900.4

6,384.5

9,204.5

11,929.4

9.6

13.2

14

10.1

13.9

13.2

13.8

6.8

Gross Investments/GDP (%)

19.8

21.7

24.3

24.9

30.5

35.9

37.8

40.9

Direct foreign investments (million USD)

69.9

110.7

120.5

245.6

232.7

450.1

701.0

925.2

Export of goods F.O.B. (million USD)

341.8

505.2

685.6

722.9

973.9

985.1

1,152.3

1,069.1

Import of goods F.O.B. (million USD)

877.4

987.2

1,279.5

1,350.7

1,801.7

2,191.6

3,267.8

4,411.6

GDP Deflator in % with respect to the previous year.

104.1

100.7

104.6

106.3

103.2

104.6

104.1

108.5

Volume of Industrial Output (million USD)

557.2

594.9

736.1

1,003.4

1,424.4

1,550.0

2,094.7

2,455.3

Volume of agricultural output (million USD)

632.4

658.6

708.6

945.0

1,077.2

1,336.2

1,853.1

2,082.9

Volume of construction (million USD)

198.9

290.6

411.0

518.1

950.7

1,547.5

1,961.6

2,753.1

338

340.7

437.2

591.1

792.7

1,198.1

1,752.3

2,391.3

890.5

997.9

1,189.6

1,479.0

1,865.6

1,972.9

2,731.5

3,463.0

5,744.8

5,518.8

5,500.9

6,030.0

6,316.5

5,941.3

5,897.6

6,114.3

Current account (million USD)

-199.6

-147.9

-189.4

-19.6

-51.7

-117.1

-589.3

-1.381.8

Armenian Dram/ USD (Nominal exchange rate: Period average)

555.1

573.4

578.8

533.5

457.7

416.0

342.1

306.0

Gross Domestic Product by production (million USD) Real annual growth of GDP (%)

Volume of services rendered to population (million USD) Retail trade turnover (million USD) Generated electrical power (million KWH)

Source: NSS

Government economic policy As a main precondition for economic development, the Government of Armenia aims to achieve a sustained average annual growth in GDP of 8.5% between 2009 and 2011. To this extent, the Government intends to continue structural reforms within the economy. In the long term the Government anticipates that the nominal value of GDP will increase 4.2 times between 2007 and 2021. The Government places a major emphasis on further improving economic and political conditions in order to attract a higher level of direct foreign investments and to enhance the volume of domestic savings. In order to stabilize Armenia’s negative trade balance, the Government is committed to further development of the banking sector, liberalizing trade regulations, upgrading energy and transport infrastructure, finding additional supplies of fuel and energy and developing business-related legislation in conformity to international standards. Armenia’s external debt remains sustainable, given that most of it is owed to multilateral institutions. The Government will aim to reduce the current account and budget deficits. The tightening of the rules on using cash registers in business was another step towards improvement of tax collection. So was introduction of a Social Security card system, which was also aimed at improvement of tax collection and ensuring more efficient distribution of social benefits. Foreign trade and free trade agreements The Government of Armenia has adopted a policy of free international trade. Armenia has entered into a number of international trade agreements that include: full membership status in the World Trade Organization since December 2002 free-trade agreements with most of the CIS countries.


Investment in Armenia

17

Bilateral free trade agreements of the Republic of Armenia have been ratified and are legally binding with the Russian Federation (1993), Tajikistan (1994), Kyrgyzstan (1995), Moldova (1995), Ukraine (1996), Turkmenistan (1996), Georgia (1998), Kazakhstan (2002) and Belarus (2003). Import regulations Armenia uses the Harmonized system of tariffs classification. Tariffs are in ad valorem and levied on C.I.F. values. The Customs Duty tariff schedule is rated either 0 or 10 percent. For the period 2009-2011 the European Commission has selected Armenia to be one of the 16 beneficiary countries that have qualified to receive the additional preferences offered under the GSP+2 incentive arrangement. While most imports are free of prohibitions, quotas, or licensing requirements, there are restrictions for health, security or environmental reasons. These restrictions include requiring authorization for weapons, components used in the production of weapons, explosives, nuclear materials, poison, drugs, strong psychotropic substances, devices for use in opium smoking, and pornographic materials. The import of medicines must be authorized by the Ministry of Health and import of agricultural chemicalsby the Ministry of Agriculture. Armenia is a member of the World Customs Organization and uses the transaction value method of customs valuation, based on the provisions of the 1994 GATT Agreement on the implementation of Article VII. A customs declaration form must be presented along with a pro forma of the goods being imported. Tobacco and spirits require certificates of quality issued by the national certification body, Armexpertiza. Export regulations Armenia has no export licensing; however for some products exporters need to obtain prior State permission for export operations. Today, Armenian enterprises are successfully exporting their goods and services to the international market. Some examples include processed diamonds, jewelry, molybdenum, gold, copper, silver, synthetic rubber, cables, electricity, alcohol products, cigarettes, canned food, natural juices, mineral water and software products. As of the end of 2008 the major trading partners of Armenia were Russia, Germany, China, Ukraine, USA, Turkey, Iran, Belgium and Italy. The European Union is the major origin of Armenian imports and most favored export destination, followed by the CIS. Membership of international organizations Armenia is a member of many international organizations including: IMF World Bank, IDA, EBRD BSEC WTO UN, UNCTAD, UNESCO, UNIDO CIS WIPO INTERPOL IAEA CCC

2

WHO ECE ESCAP WCO ICAO IFAD ILO INTELSAT IOC ITU ISO MIGA

The GSP is a scheme of generalized tariff preferences that offers preferential access to imports into the EU market from developing countries. GSP+ provides additional preferences for vulnerable countries which ratify and implement international standards in the fields of human rights, core labor standards, sustainable development and good governance.


Investment in Armenia

18

In January 2001, Armenia was admitted into the Council of Europe as a full member. International finance assistance During the post-Soviet period foreign official transfers (grants) and concessions played a remarkable role in the process of restructuring and revival of the Armenian economy. During 1994-1996, official transfers (grants) were mainly directed to covering demand towards consumption; however, thereafter they became mostly linked with reforms implemented in specific areas: e.g. Health care and education, public utilities and infrastructure, institutional reforms, etc. The major multilateral sources of assistance are the World Bank Group (WB), International Monetary Fund (IMF), the European Bank for Reconstruction and Development (EBRD), International Fund for Agricultural Development (IFAD) and MCC (Millennium Challenge Corporation). Among bilateral donors the USA remains by far the largest provider of aid to Armenia. Other bilateral donors included the governments of Germany, France, Japan, the Netherlands, Switzerland, UK, Italy and other countries. The International financial assistance projects in Armenia may be conditionally divided into the following three groups: Foreign official transfers – for the past years main providers were the USA (USAID), USA (MCA), EU (EU TACIS), Japan (JICA), etc. The US based charitable Lincy foundation (financed by US billionairephilanthropist of Armenian origin Kirk Kerkorian) also played a significant role in financing infrastructure development, urban development, cultural and educational projects. Concessions loans – main multilateral donors are the WB Group, IMF, EBRD and IFAD. Main bilateral donors are the USA and Germany. Public and private investment projects (providing both equity and loan financing) – major multilateral organizations providing such financing in Armenia are IFC and EBRD. Bilateral organizations are US (OPIC), German (KfW), Japanese (JICA), etc. Monetary policy and the banking sector The main objective of the monetary policy for 2008 - 2010 will be to keep the annual rate of inflation at 8% (±1.5%). Financial sector reforms are set to continue and are in line with the progress in the establishment of a stable institutional and legal environment. The banking sector is dominated by few relatively large banks that are actively improving their operations and services to match international standards. The number of services provided by these banks has increased significantly over the past few years. In addition, the financial sector is developing with the establishment of nonbanking financial institutions such as insurance companies, investment funds and brokerage companies, which constitute an additional driving force towards aiding foreign investments. On 7 January 2008 the Swedish exchange operator OMX AB became the owner of 100% of the shares of the Armenian Stock Exchange (Armex) and the Central Depository of Armenia (CDA). Also new Supervisory Boards of Armex and CDA, each consisting of 5 members, were formed. As of the end of February 2009, 19 banks applied for the membership of NASDAQ OMX Armenia. Membership of NASDAQ OMX enables banks to carry out exchange transactions in all corporate securities listed on NASDAQ OMX Armenia, as well as in Government bonds, REPO and foreign currency.


Investment in Armenia

19

Another important step was taken by the RA Government toward improvement of the regulatory environment of the Armenian banking sector when amendments were made to the banking law for the establishment of the Financial Ombudsperson’s Institute in Armenia to protect consumers’ rights and overhaul financial services. The Financial Ombudsperson’s Office launched its activities on 24 January 2009. Its purpose is to protect the rights of borrowers and improve financial intermediation in Armenia. The capital of the Armenian commercial banks significantly increased in recent years. In addition, the CBA set the minimum statutory capital requirement for banks at AMD 5 billion effective from 1 January 2009. As of the end of June 2009, the following banks were operating in the Republic of Armenia: ACBA-Credit-Agricole Bank cjsc

BTA Investbank cjsc

Ameria Bank cjsc

Byblos Bank cjsc

Anelik Bank cjsc

Cascade Bank cjsc

ArmBusinessBank cjsc

Converse Bank Corporation cjsc

ArmEconomBank ojsc

HSBC Bank Armenia cjsc

ArmSwissBank cjsc

InecoBank cjsc

AreximBank cjsc

Mellat Bank S/B cjsc

ArdshinvestBank cjsc

ProCredit Bank cjsc

Ararat Bank cjsc

Prometey Bank ltd

ArtsakhBank cjsc

UniBank cjsc

Armenian Development Bank ojsc

VTB Armenia cjsc

As listed above, 22 private commercial banks were operating as of the end of June 2009, amongst which ACBA-Credit-Agricole Bank, which is the largest, with assets of about USD 398 million (28 percent owned by the CreditAgricole SA Group - one of the largest banking groups in the world). As of the end of July 2009, no bank out of the 22 was under special supervision (interim administration). As of 31 December 2008 the banking system’s total assets to GDP was 28.4% and outstanding loans to GDP – 17.2%. Compared with the year 2007, banks total assets and loans to GDP increased by 3.5 and 3.9 percentage points respectively. The total assets of the 22 banks as at 31 December 2008 amounted to AMD 1,036.3 billion showing 32.4% growth compared to AMD 782.7 billion at 31 December 2007. The total capital of the above banks amounted to approximately AMD 238.4 billion as at the end December 2008 showing 37.5% growth as compared to approximately AMD 173.4 billion at 31 December 2007. Significant changes took place in the Armenian commercial banks’ shareholding structures during the past few years. Also, new banks applied to the CBA for banking licenses. In April 2004 one of the leading Russian banks, Vneshtorgbank, became the shareholder of over 70% of former Armsavingbank’s shares. In June 2006 Armsavingsbank was renamed to VTB Bank (Armenia) cjsc. In July 2007 VTB acquired the remaining 30% of the shares and became the sole shareholder. In August 2007 the main shareholding (96%) of former ArmImpExBank cjsc was obtained by TDA Holdings Limited, an investment company affiliated to the leading Russian investment bank “Troika Dialog”. Following this acquisition, Armimpexbank launched a new brand - 'AMERIABANK' and operates under this brand since summer 2008.


Investment in Armenia

20

In September 2007, one of the major Lebanese banks, Byblos Bank S.A.L., announced its acquisition of a 100% stake in International Trade Bank. After this acquisition the bank started to operate as an independent subsidiary of the Byblos Bank Group under the name Byblos Bank Armenia cjsc. On 6 December 2007 the CBA issued a banking license to ProCreditBank. The shareholders of the bank are German “Procredit Holding AG” (with 67.49%), EBRD (16.67%) and German “KfW” (15.84%). ProCredit Bank Armenia is member of ProCredit Group. ProCredit Group consists of 22 banks operating in Eastern Europe, Africa and Latin America, which are led and supervised by ProCredit Holding AG, based in Frankfurt am Main, Germany. Another major change in Armenia’s banking sector’s shareholding structure took place in September 2008: Russian Gazprombank became the sole owner of Areximbank cjsc. Gazprombank OJSC is among Russia’s three largest banks and ranks the third among the largest banks of the Central and Eastern Europe. By the end of December 2008 the RA National Assembly has adopted the RA Law “On All-Armenian Bank” which regulates the procedure of establishment and operation of the Bank. The All Armenian bank with an authorized capital of USD 100 million is expected to start functioning in 2009. The main mission of the bank is to consolidate Armenian communities worldwide and use their capacity for strengthening national competitiveness on the world market. The All Armenian bank will be an open joint-stock company. It is expected to be co-founded by the RA Government (20%) and the world’s leading financial institutions and private investors. On 20 February 2009 Anelik Bank cjsc announced about acquisition of 51% of its shares by Credit Bank, a Lebanese bank. It is worth mentioning that all Armenian banks are audited every year by an authorized independent auditing company with international exposure. Anyone may legally open foreign currency accounts in commercial banks. Foreign currency deposits may be made in these accounts, without any restrictions to withdraw. Companies may convert currency without any limitation. They can open foreign currency accounts in Armenian or foreign banks. There are no limits on the transfer of funds through banks. Individuals leaving the country have the right to export up to the equivalent of USD 10,000 in cash without any supporting documentation. Insurance system The Armenian economy is experiencing rapid growth and development of the insurance system. The existence of a developed insurance market is an important factor for making the Armenian economy more attractive to the foreign investors. They provide investors with protection against various risks arising from force-majeure circumstances, business interruptions, losses, third party liabilities etc. Investors may obtain insurance policies for commercial and household property, art, business process, professional indemnity, motor vehicles, cargo, life, death, medical, travel, jewellery, etc. As of the end of December 2008 there were 11 insurance companies and five intermediaries (insurance brokerage firms) in Armenia with total equity of AMD 7.5 billion and total assets of AMD 11.7 billion. They obtain reinsurance coverage from the world’s largest and well-known reinsurance companies, such as Lloyds of London, Hanover, Merion, Munich Re, etc. As of the end of June 2009, the following insurance companies and intermediaries are operating in the Republic of Armenia:


Investment in Armenia

Insurance companies

21

Intermediaries

Alfa Insurance cjsc

ACBA Brok llc

Cascade Insurance cjsc

Leader Insurance Brokers llc

Garant Limens cjss

Mitra Brokers llc

Griar-Insurance cjsc

Prime Insurance Co. ltd

Ingo Armenia cjsc

Resolution Consultants llc

ISG Insurance llc London Yerevan Co llc Nairi Insurance llc Rasco cjsc Rosgosstrakh-Armenia cjsc Sil Insurance cjsc All insurance companies are regulated by the Central Bank of RA. Credit Bureaus Until recently the CBA was the only institution operating in Armenia which accumulated information about credit history of individuals and private companies. The system provided by CBA is called “Credit Registry”. Credit Registry is a system, which contains information on credibility of customers of banks/credit institutions. Credit Registry accumulates, processes and provides users with information on, and loans extended to, borrowers. Information collected by Credit Registry constitutes a loan history for each borrower. The system operates until now, but the policy of CBA is to pass all the functions of “Credit Registry” to private credit bureaus. As at August 2009 there was only one private credit bureau operating in Armenia - “ACRA Credit Reporting” cjsc which was founded in January 2004. ACRA provides information (credit report/credit history), on commercial basis, on individuals’ or companies' past borrowing and repaying, including information about late payments. Privatization Following independence in 1992, the Government of Armenia launched an ambitious program of privatization aiming to promote the creation of a viable private sector. The process of State property privatization in Armenia actually started in 1994. This process is currently coordinated by the Department of State Property Management. In accordance with Article 5.2 of the RA Law “On the Privatization of State Property”, both foreign and Armenian individuals and/or legal entities are entitled to equal opportunities for investment. Enterprises may be offered for privatization either through auction, open share subscription, direct sale or tender. According to the Department of State Property Management report, as of 01 January 2009 about 2,018 medium and large enterprises, 7,306 “small objects” and 101 unfinished constructions were privatized in Armenia. There is also a range of unfinished construction objects and attractive properties around the country in various stages of completion available for sale and final exploitation. Currently, the private sector accounts for about 80% of the Armenian GDP. Examples of major privatizations by international tender are: ArmenTel in December 1997; the Yerevan Brandy Factory in April 1998; the Armenia and Ani Hotels in 1999; Armenian Savings Bank in 2001; the Electric Networks of


Investment in Armenia

22

Armenia (Electricity Distribution Company) in 2002; the Zangezour Copper Molybdenum combine (Armenia’s largest mining asset) in December 2004. In 2002 the Government of Armenia signed a 30-year concession agreement for operating Zvartnots International Airport. Natural resources Armenia has significant deposits of gold, copper, molybdenum as well as smaller deposits of zinc, lead, iron and silver. There are deposits of nepheline for use as raw materials in the refinement of aluminum and manganese deposits. Nonferrous and precious metals: Armenia has a strong mineral resource base of copper molybdenum ores. Deposits of the world renowned Kadjaran copper molybdenum ores are estimated as a potential source for the next 100 years. Zangezour Copper Molybdenum combine in Kadjaran town is the largest enterprise in the mining industry. There are a number of smaller mines currently operating in Armenia. Iron Ores: There are two deposits of iron ore that are of great industrial importance in Abovyan and Hrazdan. In addition to being the main constituent of iron, they contain valuable rare earth elements of germanium, gallium, tallium, niobium, and tantalum. The Hrazdan deposit also contains zirconium. Lead and zinc: Lead and zinc ores are the second most common in Armenia, after copper molybdenum and copper. Gold and silver: The deposits of nonferrous metal ores are characterized by their considerable precious metal content, making the deposits industrially important. There are gold deposits in Zod, Meghradzor and Terterasar. Armenia has become a significant gold producing region in the CIS. The Armenian volcanic and sedimentary rocks are useful building materials. Particularly exceptional is the white, pink, orange, or black tufa, all of which are light, durable, and easily processed. They serve as the main construction and decoration materials. The country has abundant deposits of marble, granite, high quality travertine and limestone, and small deposits of clay gypsum. There are also deposits of rich mineral sorbents such as bentonite, perlite, zeolite and diatomite. Armenia is rich in semi-precious and ornamental stones such as the jewelry agates, jasper, amethyst, serdoliks, turquoise, and different types of marble onyx. Common salt deposits were found near Yerevan with estimated reserves of 150 to 200 billion tones. Armenia has an abundant resource of mineral water, distinguished by its variety of physical and chemical compositions, temperatures and medicinal characteristics. Among the well-known springs are the springs of Jermuk, Arzni, Dilijan, Bjni, Hankavan and Sevan. Government Securities market The Government securities market has undergone major changes during recent years. Currently internal public debt of Armenia is comprised of the following four debt instruments: Government Treasury Bills (short term); Government Treasury Notes (coupon notes), (mid-term) Government Treasury Notes (serial repayment coupon notes), (mid-term) Government Treasury Bonds (long term) Government Savings Coupon Bonds (long term).


Investment in Armenia

23

Government treasury securities are issued and allocated in accordance with the Government Decree “On approval of the procedures of issue, allocation, circulation and retirement of Government Securities” No.103- N dated 3 June 2004. Government Treasury Bills are discount securities with a maturity varying from one to 52 weeks and were first issued in 1995. Volume, maturity and yield figures of T-bills for the period of 30 December 2001 to 30 December 2008 are as follows:

30.12.2001

Volume in nominal value (million AMD) 21,196.01

157

18.70%

30.12.2002

23,300.00

169

14.79%

30.12.2003

22,300.00

183

11.43%

30.12.2004

9,200.00

129

5.64%

30.12.2005

6,500.00

191

3.80%

30.12.2006

7,699.60

74

5.22%

30.12.2007

7,000.00

158

6.01%

30.12.2008

30,133.50

117

8.50%

Issue date

Maturity (years)

Average yield

Government Treasury Notes (serial repayment coupon notes) with a maturity varying between 1.25 to 5 years were introduced on May 7, 2000, Government Treasury Notes (coupon notes) were issued in September 2004. Volume, maturity and yield figures of T-notes for the period of 30 December 2001 to 30 December 2008 are as follows:

Issue date

Volume in nominal value (million AMD)

Maturity (years)

Average yield

30.12.2001

10,830.80

310

22.68%

30.12.2002

16,012.56

410

18.84%

30.12.2003

20,573.34

538

16.16%

30.12.2004

34,506.08

746

9.88%

30.12.2005

36,487.49

722

7.72%

30.12.2006

38.087.80

766

6.96%

30.12.2007

47,421.15

878

6.87%

30.12.2008

36,873.63

799

7.27%

Government Treasury Bonds were first introduced on September 23, 2004 with maturity of seven years. Volume, maturity and yield figures of T-bonds for the period of 23 September 2004 – 30 December 2008 are as follows:

Maturity (years)

Average yield

23.09.2004

Volume in nominal value (million AMD) 1.500.00

7

9.25%

14.12.2004

1.200.00

10

9.27%

30.12.2005

8,360.00

10

8.29%

30.12.2006

12,175.40

10.9

8.62%

30.12.2007

11,710.62

10

8.34%

30.12.2008

24,985.83

11.9

9.78%

Issue date


Investment in Armenia

24

Government Savings Coupon Bonds were first introduced on January 16, 2007 with maturity of seven years. Volume, maturity and yield figures of Tbonds for the period of 16 January 2007 – 30 December 2008 are as follows: Issue date

Volume in nominal value (million AMD)

Maturity (years)

Average yield

30.12.2007

171.43

231

7.44%

30.12.2008

311.84

243

8.43%

Treasury bills are offered in weekly auctions. To participate in the weekly auction, an application should be submitted through an Armenian commercial bank or directly to the Central Bank of Armenia. Treasury securities market of Armenia has the following structure: Issuer - Ministry of Finance and Economy Underwriter – the Central Bank of Armenia Dealers and brokers - resident banks Internal public debt manager - State treasury system Principal Depositary - Central Bank of Armenia Clearing and payment system - Central Bank of Armenia Investors- no restrictions. There is Profit Tax payable by companies on the interest earned from Treasury Bonds and other State securities.

Chapter 3

Business entities


Investment in Armenia

25

Chapter 3

Business entities

There are certain options for a person to perform business (commercial) activities in the Republic of Armenia. In particular, a person can either register as an entrepreneur or establish a commercial (profit-making) organization. Another option is for legal entities (including foreign legal entities) to establish a separated subdivision (a representative office or a branch). Citizens can exercise entrepreneurial activities without state registration if they are considered a payer of permission fees (for certain types of activities established by law) or signed a contract for joint activity for the purpose of production of agricultural products. The Civil Code dated 5 May 1998 (and effective as of 1 January 1999), establishes the following legal forms of business: entrepreneurs/Sole proprietors business partnerships (full partnerships and trust partnerships) limited liability companies supplementary liability companies joint-stock companies (open and closed) cooperatives representative offices and branches. Entrepreneurs/Sole proprietors This form allows individuals to perform commercial activities. Although this form is distinct from legal entities, the provisions applicable for commercial organizations also regulate the activities of entrepreneurs in general. An entrepreneur is allowed to have his/her own seal, a bank account and employees. However, it should be noted that an entrepreneur has unlimited liability for all debts incurred. Business partnerships Partnerships are a specific type of commercial organizations along with business companies. Partnerships have certain peculiarities, which allow distinguishing them from companies. Partnerships can be established in Armenia in the form of full partnerships or trust (special) partnerships, whilst business companies may choose other forms, in particular a jointstock company, a limited liability company, a supplementary liability company or a cooperative. As an association of partners, a partnership cannot be established by one person. The partners personally participate in the management of a partnership. Therefore, it is not permitted to be a partner in more than one partnership. The partners are personally liable (jointly and severally) for the debts of the partnership. The trust partnerships also have silent partners (called “depositors�) who are uninvolved in the activities (management) of the partnership and have a share in the profits and losses of the business.


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Limited liability companies A limited liability company (llc or ltd) is a type of business entity, which can be established by one or more persons (called “members�), each member having a share in the capital. The members have limited liability for the debts of the company and are only liable to the extent of their share in the charter capital. There is no minimum charter capital requirement established for the limited liability companies, except for the limited liability companies acting in specific fields (for example, banks). The members of a limited liability company also have a preemptive right to purchase the share of other members. It should be taken into consideration that it is prohibited by law for companies with only one founder or shareholder to establish limited liability companies in Armenia. Additionally, it should be mentioned that the overwhelming majority of business companies (more than 55%) in the Republic of Armenia are operating under the legal status of a limited liability company. Supplementary liability companies This form of business entities is rather similar to limited liability companies. The main difference is that the members of a supplementary liability company bear secondary liability for the debts of the company, which bears the primary responsibility. The liability of the members is limited to a multiple of their share in the capital. In the event of the bankruptcy of a participant, his portion of liability is transferred proportionally to the remaining participants, unless otherwise prescribed by the charter of the company. Joint-stock companies A joint-stock company is a business company, the charter capital of which is divided into shares. Joint-stock companies have the exclusive right to issue special type of securities - shares. Joint-stock companies can be established as an open joint-stock company (ojsc) or a closed joint-stock company (cjsc). The shares of open joint-stock companies can be purchased in the open market and can be listed in stock exchanges. There are auditing and information publication requirements for open joint-stock companies. This information is publicly available. The number of shareholders in closed joint-stock companies is limited by law (not to exceed 49 shareholders) and a right of preemptive purchase of shares is provided for the shareholders. There is no minimum charter capital requirement established for joint stock companies, except for the joint stock companies operating in specific fields (for example, banks). Cooperatives Cooperatives are a specific type of legal entity, being associations of persons joined together for material and other benefits. Cooperatives are formed on the basis of contributions of their members. Certain types of cooperatives (for instance, consumers’ cooperatives, condominiums) are non-profit organizations and therefore, are not allowed to perform business activities. Representative offices and branches of legal entities Another option available for performance of activities in the Republic of Armenia is by way of establishing a representative office or a branch. These establishments do not obtain the status of a legal entity. The scope of activities of a representative office is limited to representation and protection of the interests related to the head office. The scope of activities of a branch is larger since the branch is allowed to perform all the functions of the head office or part of them, which means that the branch can perform business activities. Both representative offices and branches operate on behalf of the head office, which provides property thereto. Representative offices and branches have a simpler structure and the management is performed by a director, who is appointed by the head office and acts on the basis of a power of attorney. Representative offices


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and branches operate on the basis of their charters, which should be approved by the head office. Establishment (registration) of legal entities, branches and representative offices Legal entities are subject to State registration in the Republic of Armenia and they are considered established in the Republic of Armenia as of the moment of their State registration. Performance of business activities without State registration can result in administrative or criminal liability. Representative offices and branches of legal entities are not registered in the Republic of Armenia but enlisted with the State registration authorities instead. The State registration of legal entities, enlistment of representative offices and branches is carried out by the State Register of Legal Entities3. In order to be registered or enlisted with the State Register, the company has to submit the required documents. Legal entities, representative office and branches are normally registered within five working days following the submission of the required documents.

3

Unless otherwise prescribed by law (for example banks and branches of foreign banks are registered in the Central Bank of Armenia)


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Chapter 4

Accounting requirements Regulation of accounting and reporting In accordance with the RA Law “On Accounting”, all legal entities registered in Armenia, as well as branches and representative offices of foreign legal entities must carry out financial accounting and prepare general purpose financial statements in accordance with the following accounting regulatory Acts issued by the RA Ministry of Finance: Accounting Standards of the Republic of Armenia (ASRA), which have been adopted by the RA Ministry of Finance and are based on International Accounting Standards effective as of the end of 2000 with minor changes; Currently effective International Financial Reporting Standards (IFRS) for banks and other organizations, which voluntarily made transition to International Standards (The changes made to the RA Law “On Accounting” see below); Mandatory Chart of Accounts – currently there are 3 Charts of Accounts in application: for banks, insurance companies and other organizations; Recommended forms of financial statements. Currently all organizations, with minor exceptions, are required to submit their annual financial statements to the State Revenues Committee. Banks, insurance companies and other financial institutions; listed and natural monopolies are also required to submit regulatory reports to the appropriate regulatory bodies. In addition, banks, insurance companies, other financial institutions, listed companies, not listed open joint-stock companies, large companies (the company is considered large if at least one of the following two criteria is met: 1) the revenue from the activity of the previous year exceeds AMD 500 million; 2) the book value of the assets as at the end of the previous year exceeds AMD 500 million) and several other organizations (e.g. lotteries, casinos, etc.) are required to publish their financial statements. The Chief Accountants of such organizations are obliged to possess a professional qualification from the Ministry of Finance or the Central Bank (for banks and other financial institutions). Recent changes in the RA Law “On Accounting” On 26 December 2008 the RA Law “On Accounting” was amended mainly changing the reporting requirements in the RA. In accordance with these amendments, International Financial Reporting Standards, the principles of preparation and submission of financial statements, Guidance on application of the Standards and other documents mandatory for implementation, published by the International Accounting Standards Board, shall apply on the territory of the Republic of Armenia.


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According to the transitional provisions, reporting in compliance with IFRS is applied: to banks and other organizations which have voluntarily made transition to International Standards – starting from 1 January 2009 to financial institutions other than banks (such as credit, settlement organizations, reporting issuers at the Securities Market, investment companies, the regulatory market operator, Central Depository, insurance and reinsurance companies and insurance brokers) – starting from 1 January 2010 for organizations, whose revenue during the previous calendar year exceeded AMD 100 million – from 1 January following the year after the expiry of the six-month period following the publication of the International Financial Reporting Standards, Guidance to International Standards, their amendments, starting from 1 January 2011 (the publication is preliminarily estimated in late 2009 - first half 2010). The companies with lower revenue (less than AMD 100 million) may apply a special Regulation of tax accounting different from International Accounting Standards and Guidance to Standards. The authorized State body establishes different sample forms of financial statements and instructions for completion of these statements. Financial statements The presentation and preparation of financial statements should be performed in accordance with the RA Law “On Accounting”. The full package of financial statements includes: the statement of financial position the statement of comprehensive income the statement of changes in equity the statement of cash flow; and notes to the financial statements. Where the company has a subsidiary, it should prepare consolidated financial statements for the Group. The Directors of the companies are responsible for maintaining appropriate accounting practices in accordance with the accounting regulating Acts issued by the Ministry of Finance; preparing and submitting the financial statements. Financial statements have to be signed by the directors and the chief accountants of the companies. Auditors and audit requirements Audit of the annual financial statements carried out by an independent audit company is mandatory for certain companies, such as open jointstock companies, banks and similar financial institutions, stock exchange participants, listed and other large companies (as defined above). Audit companies are licensed by the Ministry of Finance. In order to receive a license the audit firm should have at least two qualified auditors, who obtain a professional qualification from the Ministry of Finance. Auditing standards Audits are performed in accordance with the auditing standards of the RA, approved by the Ministry of Finance. These are the normative legal acts regulating the methods and procedures of carrying out audit, as well as audit related services in compliance with the International Standards on Auditing (ISA). The RA Law “On Audit” regulates this field. Audit companies Currently4 in Armenia there are 22 audit companies, including KPMG (established in 1997), (PWC established in 2008) and Ernst&Young (established in 2008).

4

As at 31 July 2009


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Chapter 5

Legal environment

Below is a list of laws that may be of importance to potential investors: The Civil Code is the main Legal Act providing the regulatory basis for the legal status of business entities in Armenia, commercial and business relations, the right to property ownership and related rights, conclusion and execution of transactions, representation in civil law, calculation of time periods, limitation (prescription) periods, performance of obligations, contractual relations, tort, intellectual property, inheritance etc. The Labour Code is the main Legal Act regulating employment relations in the Republic of Armenia. The Code sets forth the main provisions related to employment agreements, collective agreements, length of a working day, rest time, duration of vacations, calculation of salaries and other payments to employees, termination of employment relations, duration and payment for special leave, such as maternity leave, study leave, restrictions and notification for termination etc. Although the current Labour Code has entered into effect from 21 June 2005 its provisions have retrospective force and apply to existing employment relations as well. The Law on State Registration of Legal Entities stipulates the procedure for registration of legal entities and entrepreneurs, registration of reorganization of legal entities, registration of amendments in charters and registration of liquidation of the entities. The Law “On Privatization” sets the framework for the transfer of Stateowned enterprises to private ownership. The law stipulates the forms of privatization of State-owned property, to be determined by the Government of the Republic of Armenia in each case. The Law “On inventions, utility models and industrial designs” regulates the property and personal, non-property rights with regard to creation, legal protection and application of inventions, industrial designs and utility models. It provides patent protection for inventions (20 years), utility models (10 years) and industrial designs (5 years with right of prolongation for total up to 25 years). Armenia has also ratified several international conventions in this area, such as the Patent Cooperation Treaty, Paris Convention for the Protection of Industrial Property, Strasbourg Agreement Concerning the International Patent Classification, etc. The Law “On trademarks, service marks and designation of origin” establishes the procedure related to the registration and protection of trademarks, service marks and geographical indications. Pursuant to this law, a trademark or a service mark is subject to legal protection in the Republic of Armenia by virtue of international treaties or acknowledgement of its renown or after its State registration, which is carried out by the Intellectual Property Agency (at the Ministry of Economy). Designations of origin are also subject to legal protection by virtue of international treaties or after their State registration. Armenia is a signatory of such international treaties, as the Madrid Agreement for the Repression of False or Deceptive Indications of Source on Goods, the


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Vienna Agreement Establishing an International Classification of the Figurative Elements of Marks, the Nice Agreement Concerning the International Classification of Goods and Services for the Purposes of the Registration of Marks. The Law “On copyright and related rights” provides for the legal protection of literary works, musical works, paintings, films, software, and other intellectual property rights as well as the legal protection of the rights of performers, producers of sound recordings and broadcasting organizations. Among the legal instruments for the protection of copyright and related rights are international conventions, which Armenia has ratified, in particular the Berne Convention for the Protection of Literary and Artistic Works, the Rome Convention for the Protection of Performers, Producers of Phonograms and Broadcasting Organizations, WIPO Copyright Treaty, WIPO Performances and Phonograms Treaty, etc. The Law “On bankruptcy” provides the grounds for recognizing the legal entities insolvent, the procedure for financial rehabilitation or liquidation of insolvent entities. Pursuant to this law, a liquidator is appointed to administer the liquidation process. The liquidator analyzes the financial position of the company, verifies the validity of third party claims, opens a special bank account, convenes the creditors’ meeting etc. The duties of the liquidator can be terminated by court in the event of non-performance or improper performance of the liquidator. Similar issues for banks, credit organizations, investment companies and insurance companies are regulated by the RA Law “On Bankruptcy of banks, credit organizations, investment companies and insurance companies”. The Law “On auditing” provides the definition of audit activities, establishes the general framework for the audit activities, including audit documentation, qualification of auditors, requirements for the licensing of audit companies, rights and obligations of auditors and audit companies. The Law specifies that audit in Armenia is carried out in accordance with the Armenian Standards of Auditing, which correspond to International Standards on Auditing. The Law “On the protection of economic competition”. The aim of this law is to protect and promote competition, to prevent unfair competition and abuse of monopoly, to create an environment for fair competition, to help the development of entrepreneurship, and to protect consumer rights in the Republic of Armenia. Environmental and Natural Resources Laws. Exploitation of natural resources and environmental protection is regulated by a number of Codes and Laws in the Republic of Armenia. In particular, the National Assembly has adopted the Land Code, the Water Code, the Code on Entrails of the Earth, the Law on Concession of Entrails for extraction and research purposes, the Law on Waste Products, the Law on Payments for Environmental Protection and Use of Natural Resources, the Law on the Assessment of Environmental Impact, etc. Foreign Investment Law The Law “On foreign investments” sets forth the rights, guarantees and privileges for foreign investors, who can make their investment in various forms, such as a joint venture or the establishment of a wholly-owned subsidiary. The Law “On Foreign Investments” contains a grandfather clause, which allows foreign investors to refer to the investment legislation, effective for a five-year period from the moment of making the investment. Investments made by foreigners shall not be nationalised or confiscated. Seizure of property can be applied as an exclusive measure if authorized by a court and where a state of emergency has been declared by the Government. Seizure of property is subject to full compensation. Foreign investors are also entitled to compensation of damages and losses (including lost profit) resulting


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from unlawful acts of State authorities or State officials or improper performance of their duties. Goods, which are imported by foreign investors with the purpose of paying up shares or the charter capital, are exempt from customs duties. However, if these goods are disposed within 3 years after their import, the customs duties shall be paid. Foreign citizens are not allowed to own land in the Republic of Armenia - they can only acquire the right of land use on the basis of a lease or free use agreement. Activities related to natural resources can be performed on the basis of concession agreements to be signed with the relevant State authority. Foreign investors are also obliged to pay taxes in accordance with the tax legislation of the Republic of Armenia, which provides privileges for investors in certain cases. Banking and related legislation The basic laws regulating banking activity are the Law “On the Central Bank of the Republic of Armenia”, the Law “on Banks and Banking Activity”, the Law “On Bankruptcy of Banks and Credit Organizations”, the Law “On Bank Secrecy”, the Law “On Credit Organizations”, the Law “On insurance and insurance activities”, The Law “On Securities market”, The Law “On combating money-laundering and financing of terrorism”, the Law “On guaranteeing the compensation of bank deposits of individuals”, the Law “On currency regulation and currency control” and the Law “On payment and settlement systems and payment and settlement organizations”. As of August 2009, the authority regulating this area – the Central Bank of Armenia - has adopted a number of regulations governing the establishment of banks, their operation and other issues related to banking. In particular, the following regulations are currently effective: Regulation 1: Registration and licensing of banks, branches of foreign banks, registration of branches and representative offices, qualification and registration of management of banks and branches of foreign banks. Regulation 2: Regulation of the banking activities, prudential standards for banking. Regulation 3: Bank statements; reporting and publication. Regulation 3/01: Licensing of insurance activities and insurance intermediary activities; obtaining the preliminary consent to qualifying holding in statutory capital of insurance company; insurance company's business plan submission, procedure and date; testing of qualification of candidates for officials and responsible persons of insurance company and insurance intermediary; themes of qualification test for officials of insurance company and responsible persons of insurance intermediary. Regulation 3/02: Prudential standards for insurance activities, procedure of formation and calculation of prudential standards Regulation 3/03: Types of technical reserves and procedure of their formation. Regulation 3/04: Forms of statements of insurance companies, the information included in them, terms and procedure of their submission. Regulation 3/05: Criteria authorized and reliable.

for

considering

reinsurance

companies

Regulation 3/06: Information publications on insurance broker organizations and their authorities, its content, forms and periodicity. Regulation 3/07: Outsourcing operations under insurance operations outsourcing agreement, documents and information to be submitted to the Central Bank of Armenia to obtain prior authorization to outsource insurance operations, their content, filing procedures and forms, rules and


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conditions for obtaining prior authorization to outsource insurance operations Regulation 3/08: Scoring method of insurance company activities rating (CARAMELS) operating in the Republic of Armenia. Regulation 3/09: The procedure of classification of assets and formation and use of the reserves of possible losses of insurance companies. Regulation 4/01: Registration and licensing of investment companies, registration of branches and representative offices of investment companies and foreign investment companies , procedure of obtaining preliminary consent for having significant participation in the charter capital of investment companies, procedure, form and terms of presenting a business plan by them. Regulation 4/02: Prudential standards of investment companies, their limits, the procedure of their calculation, the structure of the elements involved in the calculation, the extent of violations of the established prudential standards. Regulation 4/03: Reports submitted to the Central Bank by persons providing investment services, procedure, form and periods on their submission. Regulation 4/04: Prospectus and statements of reporting issuers. Regulation 4/05: The qualification of the persons providing investment services, the operator, the heads of Central Depository and individuals providing investment services, their professional compliance criteria and the list of the topics for testing their professional qualification Regulation 4/06: Criteria for certifying investors as qualified investors and procedure on registration of qualified investors. Regulation 4/07: Requirements providing investment services.

on

activities

of

persons

Regulation 4/08: Procedure on making available to the public reports, references, explanatory notes and other such documents submitted to the Central Bank for off-site supervision and exceptions from the requirement of making these documents available to the public. The procedure of publication of information by investment companies regarding themselves. The Regulation on the minimal requirements stipulated for the financial institutions in the field of combating money laundering and terrorism financing. Regulation 5/01: Registration and Licensing of Regulated Market Operator; Procedure for Obtaining Preliminary Consent for Qualifying Holding in Statutory Capital of Regulated Market Operator ; Procedure, Mode and Timeframe for Presentation of Business Plan Regulation 5/02: Registration and licensing of the Central Depository, the procedure of obtaining preliminary consent for having significant participation in the Charter capital of the Central depository, the procedure, form and time limits for submitting a business plan. Regulation 5/05: Regulated Market Operator's reporting of violations committed by regulated market participants and reporting issuers to the Central Bank Regulation 7: The procedure and time period for the formation of temporary administration of insolvent banks and credit organizations; reporting by the head of temporary administration; Regulation 9: Cash operations in the banks operating on the territory of Armenia. Regulation 10: Licensing and regulation of FX purchase and sale operations.


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Regulation 11: Licensing, regulation and control of FX public sale in Armenia. Regulation 12: Licensing and regulation of FX dealer trading. Regulation 13: Procedures on registration and licensing of credit organizations, registration and licensing of credit organizations' branches and representative offices, approval of acquisition of significant participation in the statutory fund of credit organizations, procedure on qualification award and registration of the managers of credit organizations, business regulations of credit organizations, requirements on credit organizations' facilities and the availability of equipment. Regulation 14: Regulation of activities of credit organizations; prudential standards for activities of credit organizations. Regulation 15: Statements of credit organizations, reporting and publications. Regulation 16: Licensing of money transferring organizations, registration of their branches and representative offices, regulation of activities, qualification of managers. Regulation 17: Licensing of processing and clearing organizations, registration of their branches and representative offices, qualification of managers. Regulation 18: Issuance of permits for the creation and operation of Armenian payment and settlement system. Regulation 19: Issuance of permits for the participation in foreign payment and settlement systems. Regulation 21: Cash operations in the credit organizations operating on the territory of Armenia. Regulation 22: Statements of payment and settlement organizations, reporting and publication. Regulation 33: Custodian activities of securities. Procedure of licensing of pawnshop activity in the Republic of Armenia. Regulation on selection of independent audit companies by commercial banks operating in the Republic of Armenia. Regulation 40: Declaration on registration of securities, and reporting issuers’ reports Regulation 01/01: On registration of All Armenian Bank Regulation 5/06 The scope and procedure of publication of data subject to publication by the operator of the regulated market on its web page Regulation on the minimal requirements established for financial institutions in the sphere of combating money laundering and terrorism financing The Law of the Republic of Armenia “On the Central Bank of the Republic of Armenia”, defines the sphere of activities of the Central Bank, its authorities, objectives, status, principles of carrying out the monetary policy, financial transactions and governance of the Central Bank, principles of relationship between the State authorities and commercial banks and the principles of currency regulation and supervision. The Law of the Republic of Armenia “On banks and banking activity” defines the basic principles of banking activities, including the procedures and provisions for regulation, licensing and supervision of banking activity, the structure of the banking system, the specifications of organizational-legal structure of banks, bank liquidation and reorganization. The Law of the Republic of Armenia “On the bankruptcy of banks and credit organizations” establishes the procedure for the bankruptcy of banks and credit organization, which may lead either to the financial rehabilitation or


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the liquidation of the bank or credit organization. This Law also specifies the criteria of insolvency. The Law of the Republic of Armenia “On bank secrecy” defines the rules and regulatory basis for the publication and provision of information related to bank secrecy, as well as responsibility for illegal disclosure of confidential information. The Law of the Republic of Armenia “On credit organizations” regulates the procedure and terms for licensing, regulation and supervision of the activities of those organizations, including credit unions, savings unions, leasing and factoring organizations and other credit organizations. The relationship between banks and their clients is basically regulated by the Civil Code. The Civil Code provides the main legal framework for loans, collateral security, deposits, bank accounts, leasing, factoring, cash collateral, guarantees, etc.. The Civil Code also covers internationally accepted practice for transactions covering the signing of agreements, norms in business relations and freedom of agreement. The Civil Code also provides for compensation of losses and set-off procedures, the basic rights, liabilities and responsibilities of parties to an agreement and the concept of force majeure, etc. The Law of the Republic of Armenia “On insurance and insurance activities” regulates the relations arising out of undertaking and implementing of insurance, reinsurance and insurance intermediation activities; establishment, licensing, operation and termination of operation of insurance companies, reinsurance companies and insurance intermediaries; public oversight of insurance, reinsurance, insurance intermediation activities; and other relations associated with insurance in the Republic of Armenia. The Law of the Republic of Armenia “On combating money laundering and terrorism financing” regulates the relationships pertaining to combating money laundering and terrorism financing, define the system of bodies engaged in combating money laundering and terrorism financing, the procedures and conditions for cooperation between these bodies, as well as the issues related to the supervision and to the imposition of sanctions in the field of combat against money laundering and terrorism financing. The Law of the Republic of Armenia “On guaranteeing the compensation of bank deposits of individuals” regulates the relationship with regard to the guaranteeing the compensation of bank deposits of individuals. Particularly, the Law provides the definition of the bank deposit, establishes the amount of the bank deposits compensation of which is guaranteed as well as establishes exceptional cases when the compensation of the bank deposit is not guaranteed. The guarantor of the deposits is a Fund of guaranteeing compensation of deposits The Law of the Republic of Armenia “On currency regulation and currency control” determines procedure and terms of currency transactions; cases of ownership, holding and use of currency values, procedure and terms, and regulates other relations linked to currency regulation and currency control in the Republic of Armenia. Particularly it establishes that money pricing for sale of goods (property), rendering of services, salary and salary equivalent payments, assessment, execution of work and use of property shall be made in the drams of the Republic of Armenia The Law of the Republic of Armenia “On payment and settlement systems and payment and settlement organizations” regulates and administers: activities of payment and settlement systems and payment and settlement organizations, licensing of payment and settlement systems and payment and settlement organizations, procedure and terms of oversight of payment and settlement systems and payment and settlement organizations, determines infringement of laws and other normative regulations by payment and settlement systems and payment and settlement organizations, sanction


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applied to payment and settlement systems and payment and settlement organizations and rules for settlement finality. The Law of the Republic of Armenia “On Securities Market” regulates the relations that occur in connection with the activities of the securities market of the Republic of Armenia and defines: the procedure for public offering and public trading of securities, the procedure for providing investment services in the securities market and organizing public trading of securities, the procedure for custody, clearing and settlement systems of securities, as well as activities of the Central Depository; the authorities and obligations of the Central Bank of Armenia with regard to regulation and supervision of the securities market, the responsibility for violation of requirements of the Law, the regulations adopted on its basis and other legal acts. The securities market of the Republic of Armenia includes persons who issue securities and invest in securities within the territory of the Republic of Armenia, the regulated markets of securities and the field of non-regulated trade, the Central Depository, and persons engaged in activities that are subject to licensing as stipulated by the Law. According to the Law, the Central Depository is a joint stock company, which performs the functions of a centralized custodian, centralized registry and settlement system operator of securities. Currently the shareholder of the Central Depository is NASDAQ OMX. The judicial system of the Republic of Armenia A three-tier judicial system currently exists in the Republic of Armenia: The First Instance Courts; a) courts of general jurisdiction; b) specialized court – Administrative Court The Courts of Appeal; a) Civil Court of Appeal; b) Criminal Court of Appeal The Cassation Court. The relations regarding organization and functioning of the judicial power in Armenia are regulated by the Judicial Code of RA. In the field of constitutional justice the highest judicial power is Constitutional Court of the Republic of Armenia. The relations regarding its organization and functioning are regulated by the Law “On Constitutional Court” Courts of general jurisdiction hear all civil and criminal cases as a first instance court. Sixteen Courts of general jurisdiction operate in the Republic of Armenia: nine courts in the regions (marzes) of Armenia and seven courts in Yerevan. As a general rule (with some exceptions in criminal procedure) in the courts of general jurisdiction cases are heard by one judge. The civil procedure in Armenia is regulated by the Civil Procedure Code and the criminal procedure - by the Criminal Procedure Code. Administrative court hears administrative cases provided in the Administrative Procedure Code. The decisions of the Administrative court can be appealed to Cassation Court of RA. The Central seat of the Administrative court is in Yerevan. It has other seats in the regions of Armenia.


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The Courts of Appeal revise the judicial acts of the courts of general jurisdiction. Both Courts are located in Yerevan and their decision may be appealed in the Cassation Court. In the Courts of Appeal appeals against judicial acts solving the case in essence are heard by a panel of three judges, other appeals (on interim judicial acts) – by one judge. The Cassation Court is the highest judicial instance, its main function is to ensure uniformity in the implementation of the law Cassation Court within the limits of its authorities revises the judicial acts of the subordinate courts solving the cases in essence and the decisions of the Court of Appeal made in the result of revising the interim judicial acts. It has two chambers: one chamber hears civil and administrative cases and the other one - criminal cases. The Cassation Court is located in Yerevan. In Armenia the judicial precedence institute is partially established. In accordance with the current legislation the substantiations of the judicial act of the Cassation Court or the European Court of Human Rights (including the interpretations of the law) with respect to a case with certain factual circumstances are mandatory for the court in the course of considering a case with similar factual circumstances, with the exception of the case when the court substantiates with solid arguments that they are not applicable towards those factual circumstances. Law firms Below is a partial list of law firms operating in Armenia, and assistance in restoration of Legal Entities and individuals’ infringed rights as well as provide legal consulting and litigation services. Arlex International, Inc. , Armenia, 0010, 9 Tpagrichneri Street, Yerevan Tel/Fax: (374 10) 58-02-13 "HARUTIUNIAN & ASSOCIATES LAW OFFICE" Limited Liability Company, Armenia, 0025, Yerevan, Khanjyan St., Building 50, 4th Floor (in Tekeyan Center building) Tel: (37410) 559 501, 559502 Fax: (37410) 559 503 INTERNATIONAL LEGAL CONSULTING" ("ILC") Limited Liability Company, Armenia, 0009, Yerevan, Abovyan St., Building 34, Apt. 7 Tel: (37410) 569 698 Fax:(37410) 566 735 "KARAKHANYAN & PARTNERS LAW OFFICE" Limited Liability Company, Armenia, 0010, Yerevan, Vardanants St., Bld. 18/1, 2nd Floor Tel: (37410) 500 354, 500 355 Fax: (37410) 500 354 LEV GROUP LAW-ECONOMIC UNION" Closed Joint-Stock Company Armenia, 0015, Yerevan, Argishtii St., Building 7, Room 203 (in the building of Moscow House) Tel: (37410) 568 080, 510295 Fax: (37410) 568 080 LISAM Legal Services Armenia, 89/3 Teryan street, 2nd floor Tel: (37410) 541064 Fax: (37410) 541 064 TER-TACHATYAN Legal Consulting 13 Mashtots Ave., 0002, Yerevan, Armenia Tel: (37410) 534 399, 534 591 Fax: (37410) 534 591


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Chapter 6

Taxation overview5

The Law on Taxes This Law defines the concept and types of taxes, the procedures for solving tax disputes in the Republic of Armenia, liability for breaches in the tax law of the Republic of Armenia, other legal Acts regulating tax relations, as well as the principles on which the tax legislation of the Republic of Armenia and other Acts regulating tax relations are based. Specifically, the Law states that contradictory or ambiguous provisions contained in the tax legislation are to be interpreted and applied in favor of the taxpayer. Also, the Law specifies the penalties and fines for breach of requirements of tax legislation. In particular, penalties are imposed for non-disclosure of tax amounts or their wrong declaration in the range of 50-100 percent of the undisclosed and/or wrong declared amount. A fine at the daily rate of 0.15 percent is calculated on the amount of tax not paid by the due date, limited to a maximum of 365 days.

Value Added Tax (VAT) In Armenia taxable turnover subject to VAT includes the following: revenue received from the sale of goods and services value of goods and services provided free-of-charge to third parties value of goods imported to Armenia by “Import for Free Turnover� customs regime, with the exception of cases defined by law. The basis for VAT is the price stated in the invoice. For goods imported to Armenia VAT is calculated on the sum of the customs value of the goods, any customs duty and/or Excise Tax. VAT on goods imported to Armenia is collected by the Customs Administration, except for the goods included in the list established by the law with respect to imports of organizations and individual entrepreneurs, for which the 0 percent of customs duty is established, and which are not subject to Excise Tax. The current VAT rate is 20 percent on the taxable turnover of goods and services. The amount of VAT payable to the State Budget is calculated by subtracting (offsetting) VAT paid to suppliers and to Customs Administration from VAT receivable from sale of goods and services.

5

Based on legislation effective on 1 August 2009.


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The offset is possible if the following conditions are fulfilled: Acquisition of goods and receipt of services (performed for production and commercial purposes) are authenticated by a tax invoice (in some cases – by a cash register receipt or a brief invoice) issued by the supplier, which includes all requisites specified by the legislation; Payment for goods and services received is made through a bank or post on the bank account of the supplier – in case a tax invoice was received; or if the payment is made in cash – in case the amount in documents (including VAT) has not exceeded AMD 300,000 for each separate transaction, and AMD 3 million for all these types of transactions carried out during the month. Information on major tax invoices (those with the taxable turnover of over AMD 100,000) received from the suppliers of goods acquired and/or services received was submitted to the tax authority for the reporting period. The time period specified for payment of VAT and for submission of VAT statements is before the 20th day (inclusively) of the month following the reporting period (quarter or month). There is generally no requirement to make advance payments of VAT. Privileges: The law defines cases where the entity is not considered as VAT payer, as well as the cases when zero rate of VAT applies and transactions which are VAT exempt. The difference between zero rating and exemption is that in the case of exemption the VAT paid to the supplier is not compensated. If during the previous calendar year the taxable turnover of transactions on supply of goods, provision of services and realization without compensation (or with partial compensation) have not exceeded AMD 58.35 million the person will not be considered as a VAT payer6. The above provision does not apply to the following: persons producing or importing goods subject to Excise Tax, or persons implementing activity subject to licensing or possessing a license, for whose activity the annual state duty for the license is established in the amount of AMD 100 thousand or more, or ”related parties” – if a share of 20 percent or more exists, as well as in the cases when 80 percent of the amount of purchases (except importation) or sales (except the transactions of rent and free-of-charge use of property, disposal of intangible assets and receipt of interest) relates to a single person. Irrespective of the mentioned threshold, persons may become considered as VAT payers on the “voluntary” basis. The following transactions are VAT exempt. Insurance, most banking and financial activities, which are carried out by banks, credit organizations, the specialized persons who are operating in stock market, or settlement organizations. Foreign currency and securities trading. Research activities, irrespective of the source of financing. The sale of assets inherited by the Government, treasures, goods with no owners and leasing transactions of leasehold enterprises established on the basis of State enterprises.

6 During a particular calendar year they will be considered as VAT payers from the moment when their taxable turnover exceeds AMD 58.35 million - for the part exceeding the mentioned amount.


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Procurement and supply of goods and the provision of services arising from loans and grants made by international financial organizations (the World Bank, USAID, etc.) for the realization of programs in Armenia. Sales of newspapers and magazines. Sales of precious and semiprecious stones indicated in the list established by the RA Government. Sales of semi-manufactured products produced from precious metals and for jewelry purpose. Tourist services rendered to foreign entities/persons, as well as the agency services rendered by tourism agencies, are exempted from VAT, if the trips, tours and excursions take place on the territory of RA. A few other types of transactions. VAT zero rating in Armenia applies to goods exported under “Free Turnover” customs regime and services, including official purchases by foreign embassies and consulates. Internationally traded goods in transit through Armenia are zero rated. VAT zero rating also applies in the case of exportation of goods under the “Re-exportation” customs regime if those goods were imported under the “Temporary importation for processing” customs regime, as well as on the taxable turnover of services provided with respect to processing or assembling of products, repairing, modernizing of moveable assets on the territory of Armenia and other similar services exported in conformity and within the terms established by the customs legislation of the RA. Besides the above privileges, the VAT Law prescribes deferral of VAT payment on importation of certain categories of goods to Armenia for up to three years, as well as deferral for three years in the cases where any categories of goods are imported to Armenia within the scope of investment projects, and the customs value of those goods exceeds AMD 300 million. Profit Tax Profit Tax in Armenia is payable both by residents (organizations established in the Republic of Armenia) and non-residents (organizations created outside the Republic of Armenia). Profit Tax is calculated on the basis of the taxable profit representing the positive difference between the total income from the sale of goods, services, assets and other property, less deductions allowed by law. The rate of Profit Tax for residents and registered non-residents is 20 percent of the taxable profit. For taxpayers not considered as VAT payers during all the year 2009 – the profit tax payable for 2009, calculated in accordance with the procedure established by law, shall be no less than 2 percent or no more than 10 percent of the gross income calculated for the year. The amounts paid in accordance with the above shall be considered as the final amounts of Profit Tax for that year. Taxpayers have to submit their Profit Tax return as well as the Balance Sheet and the Income Statement to their local tax authority by 15 April of 7 the year following the reporting year . The amount of Profit Tax should be transferred to the State Budget no later than 25 April of the year following the reporting year. The reporting year end is 31 December for all companies. In order to determine the taxable profit, gross income is reduced by expenses supported with documents and necessary for generating the

7

Organizations not considered as VAT payers submit only simplified profit tax calculation in a format approved by the Tax Authorities.


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income. The accounting for income and expenses for tax purposes is performed on an accruals basis, with some specifics provided by the Law. In determining the taxable profit, the current year’s profit may be reduced by the amount of any losses carried forward from previous years (not applicable to non-residents). The loss may be carried forward for the following five years. The types of deductible expenses include fixed assets depreciation, for which the following minimum periods are established. For industrial and commercial buildings, constructions and transmission devices, except for those listed below - 20 years. For hotels, resorts, rest houses, educational institutions - 10 years. For assembly lines, robot equipment - 3 years. For calculating devices and computers, as well as for fixed assets with the value up to AMD 50,000 - 1 year. For other fixed assets, including perennial plants and investments made for improvement of land - 5 years. Deduction of the following types of expenditure is restricted (limited): Advertisement outside Armenia (maximum of 3 percent of gross income of the reporting year or 20 percent of the value of services/goods exported from Armenia). Training of staff outside Armenia (not more than 4 percent of the gross income of the reporting year, but limited to a maximum of AMD 3 million per employee). Expenses for foreign trips, including per diems, lodging, transportation (no more than 5 percent of the gross income of the reported year). Client entertainment (no more than 0.5 percent of the gross income of the reporting year, but limited to a maximum of AMD 5 million). Marketing expenses incurred outside Armenia ( limited to 2 percent of the gross income of the reporting year, or 15 percent of the value of goods and services exported by the taxpayer during the reporting year, or 5 percent of the value of goods and services imported by the taxpayer during the reporting year, whichever is higher). The portion of interest payable on credits and borrowings, in excess of twice the bank interest rate specified by the RA Central Bank. The above mentioned restrictions do not apply to organizations not considered as VAT payers, and the above mentioned expenses are deducted by those taxpayers in full, with the exception of per diems, which are deducted in accordance with the generally established procedure. Tax Holidays, other privileges All taxpayers involved in agricultural production are exempted from Profit Tax on profit received from selling their products, as well as on revenue derived from other activities, so long as the revenue received from other activities does not exceed 10 percent of gross revenue. The amount of the Profit Tax for a resident entity - the organizer of a free commercial zone (as defined by the Custom legislation) is reduced by 100 percent for the reporting year. The amount of Profit Tax of a resident entity – user of a free commercial zone (as defined by the Custom legislation) for the reporting year is reduced by 100 percent when, in the reporting year, at least 90 percent of the gross income of the user of the free commercial zone, consists of the income for goods exported or services provided out of the RA from the territory of the zone.


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Advance payments Resident taxpayers are obliged to make “Profit Tax Advance Payments” on a monthly basis throughout the year, in the amount of 1/16 of the previous year’s Profit Tax, no later than the 25th day of each month. The taxpayers whose previous year Profit Tax amount did not exceed AMD 500,000, newly established organizations, as well as the taxpayers, that were not considered as VAT payers in the previous year, may make no Profit Tax Advance Payments. The Law also makes provision for “Minimum Profit Tax”, which is applied in parallel with “Profit Tax Advance Payments”. The “Minimum Profit Tax” is 1 percent of the difference between the preceding month’s income received from sale of goods and services, and the depreciation allowances calculated on fixed assets, providing that depreciation allowances do not exceed 50 percent of the income received for the same period8 . Each month the amount of “Minimum Profit Tax” is compared to the calculated amount of “Profit Tax Advance Payment” and the higher of the two amounts is paid. The “Minimum Profit Tax” for taxpayers using Profit Tax privileges9 shall be reduced proportionally to the size of the privilege, during the periods when the privilege is applicable. Non-resident taxpayers are obliged to make “Profit Tax Advance Payments” if the actual Profit Tax for the previous year exceeded AMD 2 million. The payments are made every six months of the current reporting year in the amount of one quarter of the previous year’s Profit Tax. The concept of “Minimum Profit Tax” does not apply to non-residents. Withholding Tax Taxation of income derived from Armenian sources by non-resident entities not registered in Armenia, should be carried out at the source by a tax agent. Profit Tax should be withheld (imposed) by the tax agent from the total income received by the non-resident, at the following rates: Type of income Insurance compensation, reinsurance payments and income received from freight Dividends10, interest, royalties, income from leases, capital gains on property, as well as other income received from Armenian sources

Rate 5 percent 10 percent

In case it is not possible to withhold (collect) the tax at the source of the income payment (i.e. in the absence of a tax agent) the non-resident receiving income from Armenian sources bears the liability of payment of Profit Tax, based on the above rates.

8

The taxpayers not considered as VAT payers calculate “Minimum Profit Tax” without deducting the depreciation allowance. Taxpayers producing agricultural products, residents which are organizers or users of free commercial zones according to the RA customs legislation. Dividends received from Armenian sources are subject to tax at 0 percent rate if the following conditions are met at the simultaneously: If dividends received by the non-resident are not subject to tax in his country of residence; If the participation (share) of the non-resident in the Share capital of a resident company paying the dividends comprise no less than 25 percent of the share capital for the period of no shorter than two calendar years; Participation (share) from which dividends are paid, belonged to the non-resident for no less than two calendar years; Non-resident who was paid dividends is the actual owner The organization distributing dividends is presented a certificate issued by tax authority stating that the non-resident gaining incomes meets the first and the fourth requirements specified above. The 0 percent rate mentioned above is not applicable in the instances when dividends are paid to the residents of offshore zones (countries with privileged regimes or territories forming a part thereof). Dividends received from the All-Armenian Bank are subject to the 0 percent rate irrespective of the above mentioned conditions.

9

10


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Personal Income Tax The Law “On Income Tax provides for tax on worldwide income, which applies to residents of the Republic of Armenia, whereas non-residents are subject to taxation only on income derived from Armenian sources. Persons who have spent 183 days or more in a tax year in Armenia, or whose main interests (home, family, property and business) are located in the Republic of Armenia, are considered to be residents irrespective of the citizenship. Income earned by residents from overseas activities may be adjusted to reflect taxes already incurred in overseas countries. Types of income which are subject to Income Tax include: wages and salaries, interest, income from donations and assistance (unless specifically exempt), royalties, income from any business or profession, income from leasing and benefits in kind, etc. The current personal allowance deductible from the taxable income is AMD 30,000 per month (this is not applicable to income received by foreign citizens and persons without citizenship). Income Tax on wages and salaries of Armenian citizens, foreign citizens and persons without citizenship are shown in Table A. Table A Monthly taxable income

Tax rate

Up to AMD 80,000

10 percent of taxable income

AMD 80,000 or over

AMD 8,000 plus 20 percent on the taxable income exceeding AMD 80,000

Employers are required to withhold Income Tax at source on a monthly basis from their employees’ salaries and transfer these amounts to the State Budget, no later than 20th day of the month, following the month when income was calculated. Royalties, income from leasing and interest received by Armenian citizens are subject to Income Tax at 10 percent, without the AMD 30,000 allowance. The tax on that incomes are payable to the State Budget no later that 20th day of the month following the month of payment of the income. Individuals, who are not registered as individual entrepreneurs, are obliged to pay Income Tax at 10 percent of gross income in cases when no Income Tax is withheld at source of payment of such income. Exemptions: Several types of income are exempted from Income Tax as follows: Income from securities such as: dividends interest or discount received from Government bonds, and other Government securities as well as bonds issued by the AllArmenian Bank. Income from trading in Government securities and bonds issued by the All-Armenian Bank. Property and financial means which have been inherited or received as a gift from individuals. Money and food aid provided to individuals by non-profit organizations in the process of their ordinary activities. Property and financial means provided by foreign as well as intergovernmental organizations, without compensation. Insurance compensation, etc.


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Annual Income Calculation and Income Tax Payments Republic of Armenia residents, have an obligation to submitting the Annual Income Calculation which is an appendix of the Annual Declaration of Property and Income of individuals. Exemptions: In the following cases the individual is not obliged to submit the Annual Income Calculation: when income received is taxed by tax agents when the gross income from which the tax agent has not withheld the Income Tax, did not exceed AMD 300,000 when income received by the individual, consisted exclusively of the non-taxable types of income (deductible income). The individuals who have property or income subject to declaration according to the respective Law should file also the Annual Declaration of Property and Income. Individuals have to file the Annual Declaration of Property and Income and Annual Income Calculation by 15 April of the year, following the reporting year. Individuals who receive income from entrepreneurial activities are required to make quarterly advance payments in the amount of 1/6th of the previous year Income Tax by 15 March, 15 June, 15 September and 15 December. Any remaining balance must be paid by 1 May of the following year. The Individual entrepreneur, who had a loss in the previous year, or whose Income Tax for the previous year did not exceed AMD 500 thousand, or who was not considered as a VAT payer in the previous year, may make no Advance Payments after submitting the Annual Income Calculation. The Law also makes provision for “Minimum Income Tax”, which is applied in parallel with “Income Tax Advance Payments”. The “Minimum Income Tax” is 1 percent of the difference between the preceding quarter income received from sale of goods and services, and the depreciation allowances calculated on fixed assets, providing that depreciation allowances do not exceed 50 percent of the income received for the same period (taxpayers not considered as VAT payer do not deduct the depreciation allowance). Each quarter the amount of “Minimum Income Tax” is compared to the calculated amount of “Income Tax Advance Payment” and the higher of the two amounts is paid. Taxation of foreign citizens The following types of income of foreign citizens or persons without citizenship are subject to tax, which should be withheld at source through a tax agent, the rates for which are shown in Table B:


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Table B Type of Income

Rate

Insurance compensation and income from transportation (freight) Royalties, interests, lease payments, increase in the value of property and other passive income, as well as other income received from Armenian sources

5 percent 10 percent

Mandatory Social Security Payments Employers, employees and individual entrepreneurs are liable to mandatory social security payments, at the following rates, on income for work performed: Paid by employer: Gross Salary (AMD per month)

Mandatory Social Security Payments

Up to 20,000

AMD 7,000 flat

20,000 - 100, 000 Over 100,000

AMD 7,000 + 15 percent of the amount exceeding AMD 20,000 AMD 19,000 + 5 percent of the amount exceeding AMD 100,000

Paid by employee: Gross salary (AMD per month)

Mandatory Social Security Payments

Any amount

3 percent

Paid by individual entrepreneurs: Basis for calculation (AMD per year) Up to 1,200,000 Over 1,200,000

Mandatory Social Security Payments 15 percent but not less than AMD 60,000 AMD 180,000 + 5 percent of the amount exceeding AMD 1,200,000

Individual entrepreneurs have the obligation to pay a minimum social payment each month, in the amount of AMD 5,000, by the 15th of the following month. Foreign citizens and persons without citizenship conducting entrepreneurial and other activities (employment) in Armenia, as well as their employers are not subject to any social security payments. Excise Tax Excise Taxes are payable on both domestically produced and imported goods. The basis for Excise Tax is the quantity of goods subject to Excise Tax, applying the following excise rates:


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Article Beer

Tax base unit For domestic production - 1 litre For imported goods - 1 litre Realization price (without VAT and Excise Tax)

Grape and other wines For imported goods- the custom price Vermouth and other grape wines that contains vegetarian and aromatic extracts Fermented drinks

Spirits /ethyl alcohol/

Alcoholic drinks

Excise Tax Rate AMD 70 AMD 105 10 percent but no less than AMD 100 for one litre 10 percent but no less than AMD 150 for one litre

For domestic production - 1 litre

AMD 500

For imported goods - 1 litre

AMD 600

For domestic production - 1 litre For imported goods - 1 litre For domestic production - 1 litre (equivalent to 100 percent alcohol) For imported goods -1 litre (equivalent to 100 percent alcohol) Realization price (without VAT and Excise Tax)

AMD 180 AMD 200

For imported goods - the custom price

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AMD 600 AMD 700 30 percent but no less than AMD 380 for one litre 30 percent but no less than AMD 600 for one litre

Tobacco substitutes

1 kg

AMD 1,500

Crude oil

1 ton

AMD 27,000

Gases/types of gas derived from oils and other hydrocarbons (with the exception of natural gas)

1 ton

AMD 1,000

The control over the payments on local excisable production is performed by the Tax Authorities. However, Excise Taxes on imports are collected by the Customs Administration. A special flat fee is applied to tobacco, diesel fuel and petrol by separate laws and governmental decrees. That fee substitutes Profit Tax, Excise Tax and VAT for diesel fuel and petrol imported and sold in Armenia. Another flat fee substitutes Excise Tax, VAT and Customs Duty for imported tobacco products, as well as Excise Tax and VAT for domestically manufactured tobacco products. Irrespective of the type of business activity, taxpayers should calculate and pay the fee for tobacco products, using the following rates:


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The code of product per the list of external economic activity 2402 10 000 11 2402 90 000 11 2402 10 000 12 2402 90 000 12 2402 20 900 11 2402 20 100 11 2402 90 000 13 2402 20 900 12 2402 20 100 12 2402 90 000 14

Name of product Cigars containing tobacco Cigars other Cigarellas containing tobacco Cigarellas other Filtered cigarettes containing tobacco Filtered cigarettes containing clove Filtered cigarettes, other Unfiltered cigarettes containing tobacco Unfiltered cigarettes containing clove Unfiltered cigarettes, other

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Size of Presumptive Tax (in AMD per 1,000 units) For For imported domestic goods production 500,000

300,000

15,000

11,000

6,500

4,750

3,250

1,950

Irrespective of the type of the taxpayers’ business activities and the customs value of the imported fuel, AMD 112,000 fee is payable per ton of imported petrol and AMD 32,500 per ton of diesel fuel. The monthly amount of Presumptive Tax on petrol and diesel fuel sold in Armenia is established as follows:

For diesel fuel

For petrol

In the amount of 1 percent of revenue derived from sales of diesel fuel during the given month, but no less than AMD 1,500 for each sold ton. In the amount of 1 percent of revenue derived from sales of petrol during the given month, but no less than AMD 2,500 for each sold ton.

The Excise Tax is not applicable to: Sale of goods exported from Armenia and subject to Excise Tax, if the document specified by the Law is available. Goods subject to the Excise Tax imported into and exported from the customs territory of the RA under customs regimes established by the customs legislation that differ from "Import for free turnover" regime. in case of importation and realization of goods which are subject to Excise Tax but were confiscated in accordance with legislation, recognized as having no owners and transferred to the State. Goods imported to the RA by individuals which are subject to Excise Tax and do not exceed the customs value or the quantity established by the customs legislation.

Customs Duties Import Duty Import duties are established either at zero or at 10 percent rate ad valorem (invoice value excluding VAT). The basis for the duty comprises of the value of goods, transportation, commissions and related expenses. Exemptions from import duties apply to goods in transit and imports for humanitarian aid purposes. Imports from free trade zones may either be tax exempt, or subject to reduced tax rates. It is prohibited to import items that could pose a threat to health, the environment or national security.


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Export Duty In accordance with the Customs Code, zero rate applies to all types of exports.

Property Tax Property tax is payable by both individuals and legal entities on privately owned property as follows: dwellings, public and industrial buildings; motor transport; water transport; motor cycles. The tax basis is the value of the property and/or physical characteristics of the taxable object, based on which the relevant rate of property tax is applied. The tax base for buildings is determined by the original valuation and by subsequent revaluation, carried out every three years by the relevant State authority. The tax rate on public and industrial buildings is 0.3 percent per annum on the property value. For vehicles, water transport and motor cycles flat rates apply, depending on horsepower. From the fourth year after the production of a vehicle and onwards, a discount between the rates of 10 percent and 50 percent is provided. No Property Tax is calculated and paid for trucks after the 20th year after production. Property Tax reports are to be submitted on a quarterly basis for legal entities and on a yearly basis for individuals. Exemptions: Tax exemptions apply to the following property types: linear engineer-transport construction, if there is no fee for utilization; reservoirs; taxable property treated as historical or/and cultural value. The exemptions are also established for the following taxpayers: the national operator of mail service For some taxpayers, property tax exemptions shall be established by the municipal authorities (not exceeding 10 percent of income reflected in the community budget). Land Tax Land Tax is payable by private landowners and permanent or temporary users of State-owned land. The tax on land under lease is payable by the lessor. A flat fee payable annually is set by the Government per unit of surface. Land Tax on agricultural land is payable annually at the rate of 15 percent of the net revenue estimated on the basis of cadastral valuation, which is established by the government. The government may grant special exemptions from payment of Land Taxes during periods of unusually harsh agricultural conditions. For non-agricultural land, the Land Tax rate is specified as follows:


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1 percent of the cadastre value on land in urban area and 0.5 percent on land outside urban areas used for purposes of industry, transportation, communications, defense, gas pipelines; 1 percent of the average cadastral value on forests and 1 percent of the cadastral value on other non-agricultural lands. The Government maintains a list of agricultural and forestry research organizations which are granted 50 percent reduction on Land Taxes.

Presumptive Fee Presumptive Fee replaces Profit Tax and VAT for taxpayers implementing some types of activities. Presumptive Fee is obligatory for taxpayers performing the following activities: shops with small turnover, catering facilities, hairdressing salons, car repair service, public baths and showers, activities on gas refilling stations of motor vehicles, industrial fishing, organizing computer games, billiards games, etc. Casinos are also subject to Presumptive Fee. Starting from 1 January 2010, those who implement the following types of activity shall cease to be treated as payers of Presumptive Fees: trade activity through shops, kiosks (pavilions); trade activity in commercial sites; activity of organizing a commercial site. Starting from 1 May 2010, persons carrying out the activity of gas-filling shall cease to be treated as payers of Presumptive Fees. The activity of some hospitality service units will be considered to be a type of activity taxable by Presumptive Fees starting from 1 July 2009 (per the criteria established by the RA Government). Presumptive Fee is calculated on a number of different bases, depending on the type of activity. The bases include size of trading space occupied, the number of employees, the actual number of working days in a month, number of gambling tables and/or machines, etc. The rates are flat and the Fees payable monthly. Double Taxation Treaties The countries with which Armenia currently has signed, ratified and officially effective Treaties for the avoidance of double taxation are: Austria Belarus Belgium Bulgaria Canada China Estonia France Finland Georgia

Greece India Iran Italy Latvia Lebanon Lithuania Netherlands Moldova Poland

Qatar Romania Russia Switzerland Syria Thailand Turkmenistan Ukraine United Arab Emirates

Other Mandatory Payments Nature Protection and Nature Utilization Fees The Nature Protection Fee is paid with the purpose to accumulate funds required for nature protection activities. The Nature Utilization Fee is paid with respect to the utilization of the resources with purpose of creating conditions for effective, comprehensive usage of the State-owned natural resources, as well as for creating equal conditions for users of nature resources.


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Road Fee The Road Fee is the mandatory payment collected with the purpose of generating necessary financial resources for construction, repair and maintenance of State automobile routes of general use. Owners of transportation means are considered to be Road Fee payers. Road Fee is paid: When automobile roads are used by vehicles registered in other countries, When automobile roads are used by freight transportation means registered in other countries, When automobile roads are used by vehicles of large dimensions, For placing advertisement on automobile roads, When automobile roads are used by freight transportation means registered in Armenia.

Tax Inspections Taxes are subject to review and investigation by tax authorities, which have the authority to impose fines and penalties. In some cases specified by the legislation the tax liabilities of taxpayers shall be calculated by tax Authorities (so called “indirect method� of tax calculations). No tax liability (taxes, fines and penalties) may be imposed by tax authorities if three years have elapsed from the date of a violation being committed. One and the same State body has the right to perform an inspection in the economic entity no more than once per calendar year, except for certain cases for which repeated tax audits are authorized by Law. According to the tax administration strategy for 2008-2011 adopted by the Government, the tax inspections should be based on risk criteria, which assumes that, in average, the frequency of tax inspections in economic entities should reduce.


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Chapter 7

Labour legislation

Labour relationship Labour relations in the Republic of Armenia, the grounds for their origination, modification and termination, the rights and obligations of parties to labour relationship, as well as conditions of employees’ security and health are regulated by the RA Labour Code. Labour contracts In the Republic of Armenia labour contracts are signed in writing by means of executing a single document bearing the signature of the parties, in two copies, one copy for each party. A copy is provided to the employee, another copy is retained by the employer. On the same day the labour contract is registered in Labour Contracts Register of the employer. The form, procedure of keeping and maintaining this register is stipulated by the RA Government. Documents required for employment Employers will require the following documents in order to sign a labour contract. personal identification document employment record book (with the exception of the first-time employment, or combined employment) and a Social card a certificate of education or relevant qualification a statement evidencing the health condition, if the labour contract is signed for work requiring initial and regular medical inspections, as well as with employees of up to 18 years old a written consent of one of the parents, or adopters in case of hiring an under-age citizen, of 14 – 16 years old when hiring an RA citizen (male) of military age, who have not passed the term military service - a relevant statement authorizing the person’s relief from the term military service. Types of labour contracts A labour contract is signed: for an indefinite period, if the period of the contract is not specified in the labour contract, and for a definite period if the period of the contract is specified in the labour contract.


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Terms and conditions of labour contracts In the labour contract the sequential number of the contract, name, surname of the employee should be indicated, and it should contain the following terms and conditions: place of work, the structural subdivision the year, month, date of commencing the work the job title, profession, with description of job functions rights and obligations of the employee rights and obligations of the employer terms of employee remuneration and the amount of salary description of the labour conditions, privileges and compensation, including privileges for employees working under hazardous or difficult work conditions period of validity of the labour contract the year, month and date of signing the labour contract. Termination of labour contract By the employer’s initiative For the reason of expiry of the period of validity of the labour contract signed for a specific period, the employer may terminate the labour contract, having notified the employee of it ten days in advance. If, after the expiry of the period of validity of the labour contract signed for a specific period, the contract is not terminated per the procedure described above and the labour relationship continue, the contract is considered to be signed for an indefinite period. The employer has the right to terminate the labour contract in the following cases in particular: when the organization is liquidated when the employer has been declared bankrupt in case of decrease of the number of employees resulting from changes in volumes of production, in economic conditions or conditions of work organization. In the above cases a two-month prior written notice is required. When terminating the contract the employee is paid a severance pay in the amount of one-month average salary. when the employee does not match the position occupied or the work performed. In this case a 14-day prior written notice is required. When terminating the contract the employee is paid a severance pay in the amount of two week’s average salary. when the employee fails to successfully pass the probation period. in case of non-performance by the employee of his duties – in case when at least twice within one year disciplinary liability has been imposed on the employee. in case of employee’s long-term incapacity to work (for over 120 consecutive days).The employee is paid a severance pay in the amount of two week’s average salary. when the employee reaches a retirement age. In this case a 14-day prior written notice is required. other cases envisaged by law. In the notification of termination of the labour contract the grounds and reasons for dismissal from work, as well as the year, month and date of dismissal are indicated. During the notice period the employer should provide a free time to the employee which cannot be less than 10 percent of work time. The employee’s average salary is preserved for that period.


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Normally, the labour contract may not be terminated with pregnant women during the entire period of the pregnancy, the maternity leave and the month following the latter. By the employer’s initiative The labour contract may be terminated by the employee’s initiative by notifying the employer at least 14 days in advance.


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Chapter 8

KPMG’s office in Armenia

KPMG has been working in Armenia for more than 11 years, and our essential principle has always been to use the firm’s global intellectual potential, combined with the practical experience of our professionals, to help leading companies to achieve their goals. We provide Audit, Tax and Advisory services to major Armenian, regional and global companies and to a broad range of non-governmental organizations and financial institutions. KPMG's reputation is based on our values and our code of conduct, which have taken shape over more than 150 years, during which time KPMG has become a major international company. KPMG has operated a full service office in Armenia since 1997. It was the first of the “Big Four” international auditing and accounting firms licensed by the Government of Armenia. Our staff in Armenia is now in excess of 90, with the majority of them represented by Armenian professionals who are assisted by foreign specialists, including 11 ACCA/ACA qualified staff. Our goal is to offer a wide range of services, which meet the specific needs of each client. By listening to our clients and analyzing challenges they face, we continue the enhancement of our existing offerings and develop new types of services - both on the international level and for Armenia. Our services include: AUDIT

TAX

ADVISORY

Financial Statement Audit

Advisory support

Internal audit, Risk and Compliance Services

Statutory Audit Audit Services

Related

Ongoing accounting and tax outsourcing

Business Performance Services

Operational reviews

Accounting Advisory Services

Tax optimization

Corporate Finance

International Executive Services

Financial Risk Management Forensic Restructuring Transaction Services IT Advisory Services


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An international overview

KPMG provides Audit, Tax and Advisory services through its worldwide network of professional services firms with over 137,000 people in 144 countries. Our purpose and aspiration is to turn knowledge into value for the benefit of our clients, our people, and the capital markets. KPMG member firm combined revenues increased to US$22.69 billion for the fiscal year ending 30 September 2008, versus US$19.81 billion for the prior fiscal year, reflecting double-digit growth across all of KPMG’s service lines. KPMG’s combined revenues for fiscal year 2008 represent growth of 14.5 percent in U.S. dollars and growth of 8.4 percent in local currency terms. The last few years have seen rapid change, with an intense focus by the business community and the regulatory authorities on auditor independence, a new rigor in corporate accounting, and a renewed commitment to business integrity and accountability. KPMG is at the forefront of these changes, taking an active role in reshaping our profession to help ensure a vibrant future and contribute to the integrity of the capital markets. KPMG is committed to three key imperatives: quality of services, insight into the problems of our clients, and integrity in our business. It is these principles that drive our firms' professionals to provide Audit, Tax, and Advisory services that reflect global consistency and unwavering integrity.


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KPMG in Russia and CIS

For the last few years KPMG in Russia and the CIS has been one of the fastest growing KPMG practice worldwide with growth in 2008 of 62 percent. It numbers amongst its Audit, Tax and Advisory clients most major Russian businesses. KPMG has had a permanent representation in Moscow since 1990 and has operated through a Russian legal entity, ZAO KPMG, since 1992. In the CIS, KPMG now has offices in Moscow, Saint Petersburg, Ekaterinburg, Nizhny Novgorod, Novosibirsk, Rostov-on-Don, Almaty, Astana, Bishkek, Donetsk, Kiev, Tbilisi and Yerevan, employing together about 3,100 people. For the EMA (Europe, Middle East and Africa) region, combined KPMG member firm revenues increased 16.3 percent to US$ 12.41 billion.


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Appendix 1

Procedure for registration of a representative office/branch of a business entity In order to establish a Representative Office/Branch of a business entity, the founder should first of all adopt a decision on establishment of a Representative Office/Branch and approve its Charter. An organization is established in the Republic of Armenia from the moment of its State registration which is performed by the State Register of Legal Entities (hereinafter – the State Register). The following documents are submitted to the State Register. An application signed by the authorized representative of the founder. State duty payment receipt. The State duty for the registration of a subdivision is AMD 12,000. Passport copy of the director of the subdivision. Copy of the founder’s charter. If the founder is a foreign entity, this document should be certified by a notary and apostiled. Registration certificate of the founder (or an excerpt from the trade register or similar document) If the founder is a foreign entity, this document should be certified by notary and apostiled. Resolution of the founder on the establishment of a Representative Office/Branch and approval of its Charter. Also, the director of the subdivision is appointed at this stage. Charter of the Representative Office/Branch. The registration certificate should be issued within 5 working days after submission of the documents and making a relevant note in the registry of receipt. Alternatively, the application for enlistment shall be rejected within the same time period. The rejection of registration may be appealed in court. Within one month after State registration the Representative Office/Branch should apply for enlistment with the Tax authorities. An application signed by the authorized representative and a copy of the registration certificate should be submitted for enlistment with the Tax authorities. There are no charges for registration with the tax authorities. Normally, the organizations are enlisted within 1 working day and a Taxpayers Identification Number (TIN) is assigned. After the above steps are completed, the Representative Office/Branch applies for obtaining a seal. The following documents are submitted to obtain a seal: application signed by the authorized representative copy of the registration certificate TIN copy of the charter of the Representative Office/Branch design of the seal (it is made by a specialized company which prepares a seal) passport of the director/authorized representative. A seal will be prepared by specialized company on the same day or within 1 day and the fee is accordingly AMD 15,000 or 12,000.


Investment in Armenia

Appendix 2

List of abbreviations and acronyms used in the text Abbreviation AAAA AD ADC AMD ASRA BSEC C.I.F. CBA CCC CDA CIS EBRD ECE ESCAP EU F.O.B. FDI FX GATT GDP GMT GSM GSP IAEA ICAO ICSID IDA IFAD IFRS ILO IMF INTELSAT INTERPOL IOC ISA ISO ITU JICA KWH MCC MIGA NSS OPIC OTE RA REPO UN UNCTAD UNESCO UNIDO

Full text Association of Accountants and Auditors of Armenia Anno Domini Armenian Data Communication company Armenian Dram Accounting Standards of the Republic of Armenia Black Sea Economic Cooperation Cost, insurance, freight The Central Bank of Armenia Customs Cooperation Council Central Depository of Armenia Commonwealth of Independent States European Bank for Reconstruction and Development Economic Commission for Europe Economic and Social Commission for Asia and the Pacific European Union Free on Board Foreign Direct Investment Foreign Exchange General Agreement on Tariffs and Trade Gross Domestic Product Greenwich Mean Time Global System for Mobile communications Generalized System of Preferences International Atomic Energy Agency International Civil Aviation Organization International Centre for Settlement of Investments Disputes International Development Association International Fund for Agricultural Development International Financial Reporting Standards International Labour Organization International Monetary Fund International Telecommunications Satellite Organization International Criminal Police Organization International Olympic Committee International Standards on Auditing International Organization for Standardization International Telecommunications Union Japan International Cooperation Agency Kilowatt/hour Millennium Challenge Corporation Multilateral Investments Guarantee Agency RA National Statistics Service Overseas Private Investment Corporation Hellenic Telecommunications Organization Republic of Armenia Repurchase agreement United Nations United Nations Conference on Trade and Development United Nations Educational, Scientific and Cultural Organization United Nations Industrial Development Organization

58


Investment in Armenia

Abbreviation USA USD USSR VAT VPN WCO WHO WIPO WTO

Full text United States of America United States Dollar Union of Soviet Socialist Republics Value Added Tax Virtual Private Network World Customs Organization World Health Organization World Intellectual Property Organization World Trade Organization

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Investment in Armenia

60

KPMG Armenia can be contacted through: Andrew Coxshall, Managing Partner for Southern Caucasus

8th floor, Erebuni Plaza Business Center, 26/1 V. Sargsyan Street, Yerevan, 0010 Republic of Armenia Tel/fax: (+374 10) 566 762 general@kpmg.co.am E-mail:

Also through: Andrew Cranston, Senior Partner

KPMG 18, C, Krasnopresnenskaya nab., Moscow, 123317, Russia tel.: + 7 495937 4477 ext. 15541 fax: + 7 495 937 4400/99 kpmgmoscow@kpmg.ru For more information on our services, please visit our Website at: www.kpmg.am (KPMG Armenia) or www.kpmg.ru (KPMG in Russia) For information about KPMG International, please visit the following Website: http://www.kpmg.com

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. Š 2009 KPMG Armenia cjsc, a company incorporated under the Laws of the Republic of Armenia and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Armenia KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.


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