Penalties Begin for Those Not Paying Taxes on Rental Income: Fines Are Not Insignificant

Taxing income from real estate rental has long been provided for by Armenian legislation. However, this provision has only been operational in cases where rental contracts are formalized, as it is nearly impossible to detect informal agreements between individuals. Ori Alaverdyan, head of the Revenue Policy and Administration Methodology Department at the Armenian Ministry of Finance, discussed this issue with Sputnik Armenia, commenting on the legislative tightening implemented by the Armenian government to uncover hidden revenues.

“Enforcement regarding rental income is a challenging task, almost impossible in practice. It is quite complex around the world, not only in Armenia. Tax authorities in all countries face issues collecting taxes on this type of income because it is difficult to monitor,” said the official.

As of today, certain amendments to the Armenian Tax Code concerning real estate rental have come into effect. These changes aim to impose penalties on property owners who do not have rental agreements and do not pay taxes on income received from renting out their properties. The penalties are substantial, set at 5% of the cadastral value approximating the market value of the property, but not exceeding 500,000 AMD. In the case of repeated violations within one year, the fine will be doubled, but will not exceed 1 million AMD.

According to Alaverdyan, the intent behind these changes is to bring illegal income into the tax domain. Starting from December 1, income derived from renting out real estate will be treated as illegal entrepreneurship, subjecting individuals to fines for concealment.

“If there is evidence that individuals have rented out their apartments or other real estate and have not paid income tax on the received rent, or have not informed the tax authorities about renting their property without registering the rental contract in the Real Estate Cadastre, it may qualify as illegal entrepreneurial activity,” noted the spokesperson.

He added that besides revealing shadow transactions, the state also faces a serious challenge in identifying the actual amount of rental income.

To avoid issues and encourage voluntary transaction registration, Alaverdyan mentioned that, in addition to the strict methods defined by legislative changes, the government plans to introduce incentive mechanisms in the near future. The already implemented income declaration system for individuals in Armenia will also be considered, whereby citizens can declare their incomes and start paying taxes on them. In return, the state will provide some compensation through refunds of the taxes paid. It is possible that, alongside the further development of the system, the amount of tax refunds or the types of social expenditures granted to taxpayers will also increase.

“Otherwise, simply uncovering these phenomena through force methods will not be effective, as it is impossible to ensure a comprehensive application of such tools. We cannot allocate the entire potential of the tax authority solely for revealing the rental income of individuals,” Alaverdyan stated.

Despite the significant prevalence of apartment rentals in Armenia in recent years, with demand remaining high and prices continuing to rise, an analysis of the Real Estate Cadastre revealed that from January to October 2023, rental transactions made up only 4.8% of real estate transactions. Moreover, most of these were related to public significance structures. Out of 3,104 registered transactions, 1,591 concerned public significance structures, 239 involved production facilities, 841 were land lease agreements, 303 pertained to apartments, 87 to residential houses, and 43 to garages.

It is worth noting that in 2023, public officials are set to join the groups already included in the income declaration system, with all registered employees in Armenia expected to follow suit in 2024.