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“Silicon Mountain”, as Armenia’s tech industry has been dubbed, has been instrumental to the country’s historic economic growth, which has recorded a double-digit increase in GDP for the last five years. A rare combination of strategic planning and cooperative policymaking of the Armenian Government and the tech sector has borne fruit in the average annual growth rate of 20% in the sector. However, with the much-vaunted tax break for tech startups set to expire in December, the health and potential for sustainable growth of the indigenous tech industry in an increasingly competitive global environment remain unclear.
The bill, formally known as the “Armenian law on state assistance to the IT sector”, was first adopted in 2015. Designed to support a burgeoning tech startup ecosystem, the Law provided generous tax incentives to help transform small local tech companies into global players. Tech companies, within the first three months since registration in Armenia, employing fewer than thirty people, and with no apparent links to foreign companies, would be eligible for a 0% tax rate for five years. Additionally, a 10% personal income tax would apply to employees. After five years, tax rates would revert to the standard 20% corporate income and 23% personal income brackets respectively.
The result has been a significant growth in the creation of startups in the country, as well as an increase in the number of startups benefiting from the incentives outlined in the bill. In 2016, around 100 startups and individual entrepreneurs received state incentives, with this number rising to 281 in 2017. The incentives program has since seen significant growth, with 4,133 recipients to date. In 2022 alone, 1,230 benefited, and this number increased to 1,633 in 2023. This data demonstrates exponential growth in the number of startups in the country since the program’s inception.
Since the government announced the development of a homegrown tech industry as a key objective in its economic growth strategy, the startup sector in particular has seen record-breaking investment figures and growth rates. In 2023 alone, Armenia-based startups raised a combined $27 million in seed funding, according to 3N, a firm that tracks these figures. That number balloons to $216 million when including global startups with Armenian founders. In total, Armenia is estimated to have attracted $122 million in venture investments in 2023, representing ninety percent of all venture funding for the entire South Caucasus and Central Asia region for that year.
Beyond the specific startup tax break law, other legislative changes have also helped enhance Armenia’s appeal as a tech-friendly country. In 2021, Armenia passed a tech startup patent law, becoming the second country after the United States to patent computer software. The Ministry of Economy states that the law is designed to provide reliable protection to computer software and, “generate favorable conditions in Armenia for startups and innovators to create intellectual values and patent them in Armenia.”
By most accounts, these regulatory adjustments have been welcomed by the industry, and the timing couldn’t be better. Following Moscow’s February 2022 invasion of Ukraine, western tech companies with a footprint in Russia and looking to avoid sanctions have turned to Armenia, drawn by the competitive tax incentives and legally enshrined IP protection. Despite being ineligible for the tax break law, big names in the tech industry, including NVIDIA and Yandex, have also sought refuge in Yerevan.
However, quantifying the impact of the tax incentive on the tech sector’s growth is challenging. Although the increasing venture rounds and proliferating Yerevan-based unicorn companies suggest a positive trend, it’s unclear how many––if any––of these successful startup companies attribute their achievements to the tax break. According to Raffi Kassarjian, a former president of the Union of Advanced Technology Enterprises (UATE), a business association representing many of the country’s major high-tech companies, and current head of the tech advisory firm Sensyan, the most significant outcome is that it incentivises so many smaller firms, predominantly those involved in outsourcing, to “come out of the shadows” and register as legal entities. This trend is corroborated by the industry’s transformation from largely supporting traditional subcontracting business models to seeing a boom in cutting-edge technology startups pushing the boundaries of machine learning, quantum computing, decentralized technologies, and biotech since the 2015 law came into force.
The National Assembly has extended the tax law several times, and even though it is set to expire in December of this year, various proposals are being floated to improve its reach, aiming to address concerns about continuing brain drain caused by the rising cost of living.
While the current law has been widely applauded for its innovative approach to spurring a home-grown industry with tangible positive outcomes, its framing is seen as being ineffective. Yerevan-based tech entrepreneur Vache Asatryan argues that the law is too restrictive in its definition of tech workers to effectively stimulate a wider ecosystem of innovation. Asatryan suggests that it should be expanded to benefit all knowledge workers, “rather than confining the beneficiaries of this law only to roles specifically associated with technology development, such as engineers or developers.” He reasons that technology is just one facet of a modern information-driven economy.
Accessibility is another issue. Other countries with similar tech-centered growth strategies have incorporated tax benefits for startups within more comprehensive, and accessible digital platforms. Estonia, for instance, provides seamless access to all business-related information and accounting through its blockchain-based digital platform.
While Armenia offers similar services, user experiences suggest that there is much to be desired. Moreover, these systems are often not correctly integrated with one another.
This is especially relevant given Armenia’s strategic imperative to develop multidisciplinary research and development capabilities for a variety of sectors, from high-tech to defense. As the legislative environment currently stands, large foreign companies are still deterred from investing in R&D facilities in Armenia. In response, a draft proposal aims to overhaul the existing legislation once it expires at the end of the year and address some of these shortcomings.
Experience from other tech-driven small countries suggests that government incentives go a long way in developing the sector. These initiatives go beyond mere tax exemption schemes and have been successful in both retaining and attracting new tech talent. This influx of talent bolsters rapidly expanding, globally competitive advanced economies –– both goals that Armenia should achieve. Singapore’s Productivity and Innovation Credit (PIC) scheme, for example, has caused ripple effects across multiple strategic sectors of the island-nation’s economy, including financial services and logistics. As a result, the tech sector has turned into one of the country’s largest employers, with over 200,000 workers contributing to almost 5% of the total GDP.
That number is closer to 12% in Ireland, which has attracted over a thousand major global tech companies since passing a controversial tax-haven scheme. Estonia, known for its innovative e-residency program, has issued over 91,000 e-Residencies for talent from more than 170 countries since its inception in 2014. Now, it boasts the highest startup density in Europe with over 1,000 startups for its 1.3 million population. Meanwhile, Israel’s Ministry of Economy estimates that every job created in the tech sector creates an additional 2.5 jobs in supporting sectors.
Back in Armenia, a proposed draft law is currently being developed by the High Tech and Economy Ministries. This law intends to cast a wider net to include Armenia-based contract workers, as well as knowledge workers from Russia, Ukraine and Belarus who have relocated to Armenia, taking advantage of the country’s membership in the Eurasian Union. The goal is to retain as much talent in Armenia as possible, all while repatriating Armenia’s diaspora potential. However, the bill is still being passed back and forth between the two ministries as they attempt to streamline the intended processes.
Sargis Karapetyan, the current CEO of UATE, says he has yet to see the final draft of this law, which the ministries have not made available at the time of writing. Karapetyan remarks, “The rumor is that a new law will fully replace the current one by the end of the year, but based on last year’s experience, I’m not holding my breath.” The law’s effectiveness can only be speculated upon when, or if, it comes into force before its predecessor’s expiration.
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