The Impact of Tax Treaties on Cross-border Transactions in Armenia

INTRODUCTION

As globalization continues to shape the modern business landscape, cross-border transactions have become increasingly common. Understanding the impact of tax treaties on these transactions is crucial for businesses operating in Armenia. Tax treaties, also known as Double Taxation Agreements (DTAs), are designed to prevent the double taxation of income earned in one country by a resident of another. This client note explores the key aspects of Armenia’s tax treaties and their implications for cross-border transactions.

KEY PROVISIONS IN ARMENIAN TAX TREATIES 

Armenia's tax treaties delineate which country has the right to tax specific types of income, such as business profits, dividends, interest, and royalties. Generally, business profits are taxable only in the country where the enterprise has a permanent establishment, ensuring that businesses are not taxed on their worldwide income in multiple jurisdictions.

Many tax treaties also reduce or eliminate withholding taxes on dividends, interest, and royalties paid to residents of treaty countries. For instance, a typical tax treaty might reduce the dividend withholding tax rate from 20% to 5%, significantly lowering the tax burden on cross-border payments and making international operations more cost-effective.

Furthermore, tax treaties often include a non-discrimination clause, ensuring that nationals of a treaty partner are not subjected to more burdensome taxation than nationals of the host country under similar circumstances. This clause promotes fairness and equality in treating taxpayers, fostering a more favorable business environment.

Provisions for the exchange of information between tax authorities of treaty countries also help combat tax evasion and improve tax compliance. These provisions enable tax authorities to share information about taxpayers' income and financial transactions, enhancing transparency and reducing opportunities for tax avoidance.

ELIMINATING DOUBLE TAXATION

Tax treaties provide mechanisms to eliminate double taxation, ensuring that income is not taxed by both countries. The most common methods include the exemption method and the credit method.

Under the exemption method, income earned in one country and taxed there is exempt from tax in the taxpayer’s country of residence. This method is often used for specific types of income, such as business profits and pensions.

The credit method allows taxpayers to credit the tax paid in the source country against their tax liability in their country of residence. Armenia frequently employs this method in its tax treaties. For example, suppose an Armenian resident pays tax on foreign income in a treaty country. In that case, they can credit the foreign tax paid against their Armenian tax liability, reducing their overall tax burden.

PRACTICAL EXAMPLES

Suppose an Armenian company receives dividends from a subsidiary in a treaty partner country. Under the relevant tax treaty, the withholding tax rate on dividends may be reduced from 20% to 5%, significantly reducing the Armenian company's tax liability. This reduction makes it more attractive for Armenian businesses to invest in foreign subsidiaries and repatriate profits.

If an Armenian business pays interest to a lender in a treaty country, the applicable tax treaty may reduce or eliminate the withholding tax on the interest payments. For example, instead of a 10% withholding tax, the rate might be reduced to 0%, making cross-border financing more cost-effective and encouraging international borrowing.

An Armenian firm paying royalties for intellectual property use to a treaty country resident may benefit from reduced withholding tax rates. For instance, the withholding tax rate on royalties might be reduced from 10% to 5%, lowering the overall cost of acquiring such rights and encouraging the use of foreign technology and intellectual property.

CHALLENGES AND COMPLIANCE

While tax treaties offer numerous benefits, businesses must navigate compliance challenges to fully leverage these advantages. Proper documentation, such as certificates of residency and tax returns, is essential to substantiate treaty benefits and prove eligibility for reduced tax rates and exemptions under the relevant tax treaty.

Thorough knowledge of relevant treaty provisions is crucial to applying them correctly and avoiding potential disputes with tax authorities. Businesses should seek legal and tax advice to ensure they understand the specific provisions of each treaty and how they apply to their transactions. 

PRACTICAL TIPS FOR BUSINESSES

Businesses operating in Armenia can optimize their tax planning strategies by leveraging the benefits offered under tax treaties. Here are some practical tips to consider:

• Ensure all necessary documentation, such as certificates of residency and tax identification numbers, is accurately prepared and maintained to substantiate eligibility for treaty benefits.
• Conduct thorough reviews of Armenia's tax treaties to identify opportunities for minimizing tax liabilities on cross-border transactions. Consider restructuring operations to maximize benefits under applicable tax treaties.
• Consult with tax advisors or legal experts who specialize in taxation.

HOW WE CAN HELP?

Our experienced lawyers in the field of tax consulting are eager to assist you in maximizing the benefits of Armenia's tax treaties and ensuring compliance with international tax obligations.

NOTE: This material is for general information only and is not intended to provide legal advice