Fewer companies, more major taxpayers: The IT sector in Armenia
Armenia’s IT sector
Recently, there have been some unusual developments in Armenia’s information technology sector. An analysis of statistical data reveals a downward trend in the number of registered companies and employees. At the same time, the number of IT companies among the country’s major taxpayers has been growing in recent years.
What explains these changes in a sector declared a priority for economic development, and what can we expect in the future?
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The number of companies and employees has decreased
By the end of 2023, Armenia had 10,674 taxpayers in the IT sector, the highest figure in the last five years. However, in the first half of this year, the number of taxpayers fell by 1,320, or 12.4 percent.
At the same time, the number of employees also declined. In 2023, the sector employed 36,773 people, while in 2024, this number dropped to 34,814. This represents a decrease of 1,960 people, or 5.4 percent, compared to the previous year.
This decline is due to several factors, according to economist Agasi Tavadyan:
“The first reason is currency fluctuations. Since 2021, the Armenian dram has significantly strengthened, which has hindered the growth of exports, including IT services. If in 2021 an IT specialist earned around $1,000, which equaled 520,000 drams, today it’s only 385,000 drams—while prices for goods and housing rents have increased simultaneously.”
Tavadyan also pointed to changes in the government’s approach to tax collection and the reduction of tax incentives:
“As the government sees tax collection as the key measure of efficiency, new taxes are introduced each year. In this situation, the tax benefits granted to the IT sector are gradually being eroded. While Armenia is reducing tax incentives, neighboring countries are increasing theirs. Additionally, since 2022, following the influx of Russian relocators, Armenia, and particularly Yerevan, has become the most expensive country and city in the region.”
The fourth key factor, according to Tavadyan, is that Armenia failed to fully capitalize on the influx of Russian IT specialists: “We couldn’t offer them enough incentives to keep them in Armenia.”
This view is shared by Sargis Karapetyan, co-founder of Embry Tech and director of the Union of Advanced Technology Companies. He adds another reason for the decrease in IT companies and employees:
“Due to global economic challenges, foreign orders have significantly declined. In some areas, this drop has reached 60-70 percent.”
Companies founded by foreigners
To understand the impact of Russian relocators leaving Armenia on the reduction in IT companies and employees, we requested data from the State Revenue Committee on companies founded or co-owned by foreign nationals.
According to the provided data, the number of LLCs and individual enterprises created by foreigners has increased in recent years, with 8,180 registered in the first half of 2024. However, the number of employees has decreased from 6,301 to 6,033.
Sargis Karapetyan believes that the actual number of foreign IT workers who have left the country is much higher:
“The State Revenue Committee’s data may not present the full picture for several reasons. For example, a significant proportion of relocators were dual citizens or ethnic Armenians who arrived from Russia and were registered in Armenia with Armenian passports. This could lead to certain inaccuracies in the data.”
Armenia’s IT sector
IT Sector’s share in GDP
According to Armenia’s Statistical Committee, the share of IT in the country’s GDP has grown in recent years, reaching 3.2 percent by the end of 2022. The data for 2023 has yet to be finalized.
“Given that IT is a strategic sector for the country, 3.2 percent is an extremely low figure. I believe the IT sector’s contribution to GDP should be much higher,” says Sargis Karapetyan, head of Embry Tech.
Economist Agasi Tavadian, however, claims that his research shows the share of IT in the GDP significantly declined further in 2023.
IT Companies among Armenia’s top 1,000 taxpayers
Despite the reduction in the number of companies and employees, IT firms continue to dominate the list of Armenia’s largest taxpayers.
In 2019, only 32 IT companies were on this list. As of the first half of 2024, that number has risen to 85. The amount of taxes they pay has also increased.
“When the economy faces tough times, weaker players are forced out, or larger ones absorb them,” explains economist Agasi Tavadian, commenting on the rise in the number of IT companies among major taxpayers.
Are government support programs effective?
In response to our inquiry, the Ministry of High-Tech Industry provided information on government support programs implemented in recent years. Among the steps taken to boost the sector were tax incentives, state support, and facilitating participation in international industry exhibitions. However, there was no detailed breakdown of the results for each initiative.
Former Minister of High-Tech Industry and current Deputy Speaker of Parliament Hakob Arshakyan spoke about the outcomes of these programs and the apparent setbacks.
He expressed dissatisfaction with the reduced funding for industry programs, backing his arguments with annual data and participant numbers:
“In 2021, the ‘From Idea to Business’ program granted 562 million drams [around $1.5 million] to about 50 startups. In 2022, 27 companies received 350 million drams [around $909,000], and in 2023, almost the same amount was granted to 26 companies.
The ‘Virtual Bridge’ project was launched in 2020, but after the COVID-19 pandemic and the 44-day war, it was entirely removed from the state budget. Meanwhile, around 1 billion drams [approximately $2.6 million] had been planned for it. The program aimed to provide entrepreneurs with international training opportunities, including in Silicon Valley.
The ‘University-Business Cooperation for Specialist Training’ program was intended for mass employee retraining. In 2020, 5,225 people completed the courses; in 2021, 2,896; in 2022, 791; and in 2023, only 500 people. The funding for this program has also decreased. In 2020, it was 390 million drams [just over $1 million], and by 2023, it had dropped to 100 million drams [around $260,000].”
Hakob Arshakyan believes that the number of participants in these programs should have grown, not decreased. In his view, the government should also encourage education in the field of computer technology.
“Until recently, there was no real state policy regarding IT. The only exceptions were tax exemptions for startups and a 10 percent income tax reduction,” says Sargis Karapetyan, director of the Union of Advanced Technology Companies.
However, he emphasizes that in recent years, there have been open and active discussions with the government about all these issues:
“Although we haven’t yet reached a mutually beneficial optimal solution, we have made some proposals that were not accepted. Now, we are waiting for proposals from the government. Despite these discussions, there is still no clear state strategy for the sector that would help retain top specialists in Armenia.
Today, Georgia, Kazakhstan, Uzbekistan, and the UAE are aggressively recruiting talented specialists from Armenia. We are experiencing a significant outflow. I believe that for the sustainable development of the sector, we urgently need to pass the proposed legislative package.”
Armenia’s IT sector
What legislative changes are expected?
Active discussions on amending industry legislation in Armenia’s government and parliament began at the end of last year. However, the proposed law has not yet been opened for public consultation. Recently, Minister of High-Tech Industry Mkhitar Hayrapetyan stated that a new law supporting the IT sector is being developed and will be in effect for at least seven years. He assured that the legislative package is in its final stages of revision.
Hayrapetyan revealed some of the positive changes from the draft law:
- A 100% income tax refund for new employees at companies with up to 30 people.
- A 50% income tax refund for new employees at companies with more than 30 people.
The minister also addressed the issue of specialists leaving the country:
“When we see many companies relocating to Portugal, Serbia, and other countries, there are two sides to this. First, there’s no guarantee they wouldn’t have left regardless of what the Armenian government did because they initially saw Armenia as a stepping stone. Second, it’s not certain we could have retained even 20% of them. There is fierce global competition for specialists in the high-tech field, and I want Armenia to keep up with these trends and sometimes even set them.”
Sargis Karapetyan believes that the chance of Armenia becoming a country that sets the pace is realistic:
“But this chance is shrinking by the day, by the hour. How we use this opportunity depends on the development policies we ultimately implement. While we’ve been discussing for two years which areas to focus on in Armenia and what incentives to offer, we continue to miss out on major opportunities.”
Armenia’s IT sector
What do experts propose?
Economist Agasi Tavadian emphasizes the need to continue providing tax benefits, but suggests implementing them in a targeted way:
“It’s necessary to offer more favorable conditions to specialists working outside Yerevan, in the regions. Taxes should increase in line with real economic growth. If the economy doesn’t grow or contracts, raising taxes in such conditions could have a negative impact, as it may drive businesses back into the shadow economy.”
Sargis Karapetyan, Director of the Union of Advanced Technology Enterprises, highlights the importance of a clear, focused strategy:
“I believe everything should stem from a well-defined strategy. We first need to determine which sectors of the economy we want to develop technologies in. After that, we should adopt a highly liberalized approach to companies working in those sectors, encouraging others to shift towards priority industries.
A differentiated approach should be applied to companies, taking into account their business models and needs. The most important thing is to avoid approaches that could severely harm one sector while overly benefiting another. When implementing an industry strategy, it’s crucial to consider not only the domestic context but also the competitive landscape in other countries.”
Armenia’s IT sector
