What Taxes You Should Pay From 2021 If You Are a Registered Employee

Starting this year, registered employees in Armenia will be taxed at a lower income tax rate, but at the same time, mandatory accumulated pension contributions and funds directed to the Military Insurance Fund are increasing.

The tax rates are enshrined in the "Tax Code of the Republic of Armenia." The income tax for everyone will decrease from 23% to 22%.

Since 2020, Armenia operates a flat income tax system. This means that all registered employees pay income tax at the same rate. Previously, a progressive system was in place, and citizens were taxed based on their income level (the higher the income, the higher the income tax rate). However, since 2020, everyone has paid a 23% income tax.

According to amendments adopted in 2019, the income tax will be gradually reduced until 2023, reaching 20%. This year, it will be 22%. Thus:

• From January 1, 2020, the income tax rate was set at 23%.
• From January 1, 2021, it will be 22%.
• From January 1, 2022, it will be 21%.
• From January 1, 2023, it will be 20%.

For the accumulated pension system, 3.5% of the salary will be allocated instead of the previous 2.5%.

Alongside the reduction in income tax rates, social contributions are increasing. Registered employees in Armenia are mandatory participants in the accumulated pension system if they were born in 1974 and later. Older individuals can join the system voluntarily.

The logic of the mandatory accumulated pension system is that 10% of an employee’s salary should be accrued as a future pension. A part of this 10% is paid by the employee, and the other part is covered by the state. In tax terms, this amount is called a social contribution. Currently, the state's participation is more substantial. However, tax reforms have been drafted so that from 2023, the state's and employees' contributions to this 10% become equal, each being 5%.

In 2020, as a social contribution, 2.5% of the employee's salary was collected, with the state adding 7.5% of the employee's salary. From 2021, the state's contribution decreases by one percentage point to 6.5%, while the employee's contribution increases by the same amount to 3.5%.

Thus, the rates for mandatory pension contributions, or social contributions, are as follows:

• From January 1, 2020: 2.5%
• From January 1, 2021: 3.5%
• From January 1, 2022: 4.5%
• From January 1, 2023: 5%

At the same time, there are certain nuances in calculating the social contribution. The system is designed so that the amount accrued by the state for one participant does not exceed 32,500 drams. If the salary is between 500,000 and 1,020,000 drams, the state pays 32,500 drams, and the participant pays from 10% of their salary minus 32,500 drams. If the salary exceeds 1,020,000 drams, a fixed amount is paid: 32,500 drams from the state and 69,500 drams from the individual.

The stamp duty contributions to the Military Insurance Fund are also increasing. Until 2021, 1,000 drams was deducted monthly from the salaries of registered employees in Armenia for the Military Insurance Fund. This was considered a stamp duty.

After amendments adopted at the end of last year, it will cease to be a "1,000 dram fund"; the stamp duties have been set on a progressive scale, becoming 1,500 to 15,000 drams. The higher the salary, the larger the amount the employee will allocate to the fund.

Currently, the stamp duty contributions to the Military Insurance Fund will be collected on the following scale:

• 1,500 drams for a calculation base of up to 100,000 drams
• 3,000 drams for a calculation base of 100,001 to 200,000 drams
• 5,500 drams for a calculation base of 200,001 to 500,000 drams
• 8,500 drams for a calculation base of 500,001 to 1,000,000 drams
• 15,000 drams for a calculation base of over 1,000,001 drams

According to the latest data published by the Statistical Committee, the average nominal monthly salary in Armenia from January to November 2020 was 186,167 drams. This refers to the "gross" salary. If this salary is taxed according to the tax thresholds mentioned above, the net salary would be 135,694 drams, assuming the worker is a mandatory participant in the pension scheme. Their income tax would amount to 40,957 drams, social contribution would be 6,516 drams, and stamp duty would be 3,000 drams.

Another simpler example. Let’s calculate based on net salary, as is often agreed upon between the employer and employee in Armenia. If they agree on a net salary of 150,000 drams, then the registered "gross" salary of the employee should be 208,725 drams, of which 150,000 drams will be their net salary, 45,920 drams will be the income tax, 7,305 drams will be the social contribution, and 5,500 drams will be the stamp duty.