IT Sector tax systems in Armenia and Georgia: Comparative review

The growth of the IT sector has become a key driver of economic development in many countries, and the South Caucasus region is no exception. Armenia and Georgia, two neighboring nations, have rapidly expanding IT industries that have attracted global attention. To foster this growth, both countries have implemented tax incentives to support the sector.

In a conversation with NEWS.am Tech, David Grigoryan, General Manager of Devsoft Armenia revealed the details of the tax systems of the two countries, comparing their approaches and examining the implications for the IT sector.

Armenia: An Emerging Hub for Tech Innovators

Armenia's government has recognized the importance of the IT industry for the country's economic growth and has implemented various tax incentives to attract local and foreign investments. Some key aspects of the Armenian tax system include:

• Tax Exemptions for Startups: In an effort to encourage innovation, the Armenian government offers startups tax exemptions for the first three years of operation. This allows fledgling companies to reinvest their earnings into their businesses, driving expansion and job creation.
• Reduced Corporate Income Tax: IT companies registered in Armenia are subject to a reduced corporate income tax rate of 10%, compared to the standard 20% rate for other industries. This reduction enables IT firms to retain more of their profits, promoting growth and investment in the sector.
• Value-Added Tax (VAT) Refunds: To support research and development (R&D) activities, Armenia provides VAT refunds on imported equipment and materials for IT companies engaged in R&D. This policy reduces costs for firms developing new technologies and products, further incentivizing innovation.

Georgia: A Tax-Friendly Environment for IT Growth

In a recent development, significant changes have been made to the taxation system affecting both personal and corporate income. Personal income tax for employees has witnessed a considerable reduction, dropping from a previous rate of 20% to a mere 5%. Similarly, corporate income tax rates have also been adjusted, now set at 5% as opposed to the previous 15%. 

The above-mentioned changes have been applied for “International Company Status” holders in the IT & Maritime sectors. 

Furthermore, "International companies" operating in Georgia can now take advantage of certain expense deductions. These deductions are applicable if specific types of expenses are incurred within the country. By meeting these conditions, international companies have the opportunity to decrease their distributed taxable profits.

The list of eligible expenses for such deductions includes salary expenses paid to Georgian residents by an international company. Additionally, costs associated with scientific research, design, and trial-construction in permitted fields of activity for the international company can also be deducted from taxable profits.

In a move to further incentivize business growth, international companies have also been granted exemption from property taxes, excluding land taxes. This tax relief provides a significant financial benefit for these businesses.

Lastly, dividends paid out by international companies are no longer subject to taxation at the source. This change ensures that shareholders can enjoy their returns without the burden of additional tax deductions.

These taxation amendments aim to create a more favorable business environment, encouraging both local and international investment, and fostering economic growth within the country.

As Grigoryan noted, the tax systems of Armenia and Georgia demonstrate a commitment to fostering growth in the IT sector. Each country offers unique advantages that cater to different aspects of the industry. It is essential for entrepreneurs and investors to carefully weigh these factors when considering their investment and operational decisions in these countries.