Tax Breaks Fuel IT Startup Growth In Armenia

YEREVAN — The Armenian government reported on Tuesday a sharp rise in the number of new information technology (IT) firms that have qualified for tax breaks introduced three years ago to boost Armenia’s rapidly growing IT sector.

Under a government bill passed by the Armenian parliament in late 2014, such firms employing up to 30 people can be fully exempt from profit tax. They are also eligible for a preferential income tax rate for their employees, equivalent to 10 percent of their gross wages.

Nearly 430 IT startups have been granted the tax breaks, valid for five years, by a special government commission since then. According to the Armenian Ministry of Transport, Communications and Information Technology, 281 of them received such exemptions last year, up from around 100 in 2016.

The ministry touted the privileged tax regime on Tuesday in a statement and a video report attached to it. The footage featured interviews with the founders of three Armenian tech firms set up in the last few years.

One of them, Himnark, specializes in accounting software development. “We provided services to one foreign company and our resulting profit wasn’t taxed,” said its young owner, Ruben Osipian. “We invested it in developing new software. Had it not been for the tax exemption, we would have obviously invested less.”

“Our income tax is lower and that allows us to pay higher [real] wages,” said Vahram Bleyan, one of the two founders of another startup, Mamble. The company claims to mainly sell software to a large corporate client in the United States.

IT is the fastest-growing sector of the Armenian economy, having expanded by over 20 percent annually in the past decade. The sector employing more than 15,000 people grew by almost 30 percent last year, according to government data.

Deputy Transport Minister Amalya Yeghoyan predicted last week that this rapid growth will continue unabated this year. “I am sure that the number of jobs will increase,” she said, according to the Armenpress news agency.

The government-funded Enterprise Incubator Foundation (EIF) estimates that the combined turnover of at least 650 IT firms currently operating in Armenia reached $765 million in 2017. The figure, which includes Internet service provision, was equivalent to over 6.5 percent of the country’s Gross Domestic Product.

The sector’s largest companies include the Armenian branches of U.S. tech giants like as Synopsys, National Instruments, Mentor Graphics and VMware. Its steady expansion is also increasingly driven by homegrown Armenian companies.

“Local firms are now in better shape than they were five years ago,” the EIF said in a recent report. “They have more employees, attract venture investment, and demonstrate an improvement in technical expertise and knowledge of the market. In addition, they are implementing more complex and value-added projects.”

A lack of skilled personnel is widely seen as the main challenge facing the sector. Local IT executives have long complained about the inadequate professional level of many graduates of IT departments of Armenia universities. The latter often need to undergo on-the-job training after graduation.

“This is a problem,” said Yeghoyan. In her words, there are now at least 2,000 job vacancies in the sector.