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). Investment in Armenia 1 Contents CHAPTER 1 ARMENIA: A BRIEF SUMMARY 3 Geography 3 Climate 3 Historical overview 3 Population and language 4 Currency and payments 4 International time 4 Weights and measures 4 Government 4 Entry visas/residency status 5 Work permit 6 Office and living accommodation 6 Business hours 6 Hotels and accommodation 6 Transportation and communication 8 Armenian Diaspora 9 CHAPTER 2 BUSINESS ENVIRONMENT 11 The Government’s approach towards foreign investment 11 Foreign investment incentives 12 Types of foreign investments 13 Foreign investments in Armenia 14 Workforce 15 Economy 15 Key Macroeconomic Indicators 16 Government economic policy 16 Foreign trade and free trade agreements 16 Import regulations 17 Export regulations 17 Membership of international organizations 17 International finance assistance 18 Monetary policy and the banking sector 18 Insurance system 20 Credit Bureaus 21 Privatization 21 Natural resources 22 Government Securities market 22 CHAPTER 3 BUSINESS ENTITIES 25 Entrepreneurs/Sole proprietors 25 Business partnerships 25 Limited liability companies 26 Supplementary liability companies 26 Joint-stock companies 26 Investment in Armenia 2 Cooperatives 26 Representative offices and branches of legal entities 26 Establishment (registration) of legal entities, branches and representative offices 27 CHAPTER 4 ACCOUNTING REQUIREMENTS 25 Regulation of accounting and reporting 28 Recent changes in the RA Law “On Accounting” 28 Financial statements 29 Auditors and audit requirements 29 Auditing standards 29 Audit companies 29 CHAPTER 5 LEGAL ENVIRONMENT 30 Foreign Investment Law 31 Banking and related legislation 32 The judicial system of the Republic of Armenia 36 Law firms 37 CHAPTER 6 TAXATION OVERVIEW 38 The Law on Taxes 38 Value Added Tax (VAT) 38 Profit Tax 40 Personal Income Tax 43 Mandatory Social Security Payments 45 Excise Tax 45 Customs Duties 47 Property Tax 48 Land Tax 48 Presumptive Fee 49 Double Taxation Treaties 49 Other Mandatory Payments 49 CHAPTER 6 LABOUR LEGISLATION 38 Tax Inspections 50 Labour relationship 51 Labour contracts 51 Documents required for employment 51 Types of labour contracts 51 Terms and conditions of labour contracts 52 Termination of labour contract 52 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 Investment in Armenia 3 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. Investment in Armenia 4 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 Indo- European 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 Investment in Armenia 5 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: Fee Number of Visa validity Type of Visa (in AMD 000’) entries period Diplomatic None multiple/single Up to 3 years Official None multiple/single Up to 3 years Visitor 3-40 multiple/single Up to 1 year Transit 18/10 multiple/single 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: Fee Status Period of validity (in AMD 000’) Temporary Stay 105 Up to 1 year (may be extended by 1 year at a time) Permanent Stay 140 5 year (may be extended by 5 years at a time) Special Stay 150 10 years (may be provided multiple times) Investment in Armenia 6 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: (cid:131) Foreign citizens having a Permanent Stay or a Special Stay status, (cid:131) An RA citizen’s or a legally residing in the RA foreign citizen’s spouse, who has a Temporary Stay status in Armenia, (cid:131) 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. (cid:131) The founders, directors or authorized representatives of commercial organizations with foreign capital, (cid:131) 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 24- hour 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, Investment in Armenia 7 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 Investment in Armenia 8 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