Armenia is preparing a major reform of the tax system for small and medium-sized businesses. Deputy Finance Minister Arman Poghosyan announced proposed amendments to the Tax Code during a parliamentary session on December 3, explaining that current preferential tax regimes have become a tool for tax evasion, with large businesses deliberately fragmenting themselves to qualify for lower tax rates.
Currently, preferential tax regimes apply to small and medium-sized enterprises (SMEs), sole proprietors, and notaries with annual turnovers of up to $295,000. Instead of paying VAT and corporate income tax, they pay a single turnover tax: 5% for commercial activities and 3.5% for manufacturing.
According to the ministry, this system creates significant imbalances. In manufacturing, the overall tax burden is twice as high as under the simplified regime; in construction, 2.4 times higher; in trade, 2.6 times higher; and in legal and accounting services, the disparity reaches 3.2 times.
Moreover, the current system encourages tax evasion. Employees paying a 20% income tax frequently register as sole proprietors to pay only 5% on turnover or avoid taxes entirely under micro-entrepreneurship exemptions.
As a first step to address these issues, starting January 2025, legal and accounting professionals will transition to the general taxation system, including VAT. For other activities, turnover tax rates will be doubled, but businesses will be allowed to reduce their taxable base by deducting documented expenses.
The draft law also proposes removing several sectors from the preferential tax regime. These include head office activities, construction, real estate operations, architectural and engineering activities, technical testing, advertising, marketing and scientific research, healthcare, and temporary staffing services. Additionally, companies operating under the general taxation system will no longer be able to reduce their taxable base using expenses for services provided by businesses in these excluded sectors.