In Armenia, entrepreneurs can choose between two taxation systems: the General Tax System (GTS) and the Simplified Tax System (STS). The choice depends on the nature of the business, income level, expense structure, and tax law requirements. The general system involves a higher tax burden but allows for expense deductions, whereas the simplified system aims to reduce administrative complexity and optimize taxation for small businesses. Switching to the STS is often a beneficial option for IEs and must be done within 20 days.
This article provides a detailed overview of the features of both systems, the procedure for switching to the STS, and important taxation nuances for IEs in Armenia, including the issue of double taxation for Russian residents.
General Tax System (GTS) for IEs
This system is applied by default to anyone who does not declare a switch to the STS. The main taxes under the GTS are:
- Income tax: 20% of net profit
- VAT: 20% (if annual turnover exceeds AMD 115 million)
- Fixed social contributions: 5% of profit, but not less than the statutory minimum
This regime may be beneficial for entrepreneurs with significant expenses, as the taxable base can be reduced through deductions. However, the high tax burden and complex reporting often make the GTS less attractive for small businesses.
Simplified Tax System (STS) for IEs
The simplified tax system is designed for entrepreneurs with relatively low turnover and simple business structures. Key advantages of the STS include:
- Low tax rates: 1% for IT businesses, 10% for all other sectors (based on gross turnover)
- No VAT obligation
- Simplified accounting: reports are submitted quarterly
- Fixed social contributions: based on the minimum wage
The STS is especially beneficial for entrepreneurs with high-margin income and low operating costs.
Restrictions on Using the STS
Not all entrepreneurs are eligible for the simplified tax system. Key limitations include:
- Annual turnover must not exceed AMD 115 million (exceeding this results in automatic transition to the GTS)
- No transactions with affiliated parties
- Certain business sectors are excluded from the STS (e.g., finance, insurance, and others)
- Small businesses may also qualify for microbusiness status
Microbusiness in Armenia is a special tax regime for small businesses offering significant benefits, including full exemption from income tax and VAT for those with an annual turnover of up to AMD 24 million.
How to Switch to the Simplified Tax System (STS): Step-by-Step Guide
The process involves completing a series of procedures and submitting documents to the Armenian tax authorities. It differs for newly registered and existing individual entrepreneurs (IEs).
For New Individual Entrepreneurs
If the entrepreneur is just registering, they must submit an application to switch to the STS within 20 working days after registration with the Armenian Tax Service.
For Existing Individual Entrepreneurs
If the IE is already operating under the General Tax System (GTS), they can switch to the STS at the beginning of the calendar year by submitting the appropriate application by February 20 of the current year.
Switching Procedure
- Verify eligibility (annual turnover, type of business activity, etc.)
- Submit the application to the tax office
- Receive confirmation from the tax authority
- Begin operating under the STS from the date the application is approved
Double Taxation: What to Pay in Russia?
If an individual entrepreneur is a resident of Russia but conducts business in Armenia, the issue of double taxation may arise. There is a Double Taxation Avoidance Agreement (DTAA) between Russia and Armenia dated December 28, 1996. This agreement allows entrepreneurs to avoid paying taxes twice through a system of tax credits.
However, it’s not that straightforward: the agreement applies only to the general taxation regime and does not cover the simplified tax system (STS). This is because the STS replaces multiple taxes at once, including profit tax and VAT, which are taxed separately under the standard regime.
Therefore, entrepreneurs using the simplified system cannot apply tax credits as provided by the agreement. In particular, tax paid in Armenia under the STS cannot be credited against tax obligations in Russia.
Conclusion
Switching to the STS in Armenia is a beneficial decision for individual entrepreneurs working in services, trade, or IT. Contact us if you’d like to open an IE in Armenia remotely, switch to the STS, and get help with tax reporting.
Important considerations:
- STS eligibility criteria
- Application deadlines
- Possible tax consequences in Russia
Before switching to the simplified tax system, it is recommended to consult with an accountant to ensure the chosen tax regime is the most advantageous for your specific situation.