Legal Risks for IT Companies Operating in Armenia

Armenia has become an attractive hub for the IT and high-technology sectors thanks to favorable tax incentives, a growing pool of skilled professionals, and strong government support for the industry. As of 2026, special tax regimes allow qualifying IT companies to benefit from a reduced turnover tax rate of 1% for businesses whose annual turnover does not exceed 115 million AMD. If turnover exceeds this threshold, the company is required to transition to the general taxation regime.

However, operating in this dynamic environment also involves significant legal risks. Failure to properly comply with legislative requirements may result in fines, retroactive tax payments, reputational damage, operational restrictions, or even criminal liability in cases of serious violations.

This article outlines the main legal risks faced by IT companies operating in Armenia, based on current legislation, regulatory trends, and common challenges observed within the sector.

1. Compliance with Data Protection and Privacy Requirements

In Armenia, the primary legal act regulating personal data is the Law on Personal Data Protection (adopted in 2015 and influenced by European standards such as the GDPR). The Personal Data Protection Agency (PDPA) oversees the enforcement of this law.

For IT companies—especially those operating in software development, SaaS, fintech, or platforms that process user data—legal risks are significant if these requirements are not properly met.

Key obligations include:

• Obtaining informed consent or ensuring another lawful basis for processing personal data.
• Implementing security measures (such as encryption) to protect data.
• Although the 2015 law does not strictly mandate breach notification within 72 hours, regulatory reforms introduced in 2025–2026, aligned more closely with EU standards, indicate that timely reporting is becoming an important compliance indicator.
• Limiting data collection to what is necessary and ensuring the rights of data subjects (access, correction, deletion).

Risks

• Local administrative fines under the Administrative Offenses Code for violations of data protection rules.
• Criminal liability under the Criminal Code in cases involving breaches of personal data, confidentiality of communications, or digital crimes.
• Reputational damage and loss of customer trust, especially for companies providing services in international markets where GDPR-level standards are expected.

There is also a risk of unlawful or careless data transfers, particularly as cross-border data flows increase, which may attract regulatory scrutiny. IT companies are required, where necessary, to register their data processing activities with the Personal Data Protection Agency (PDPA) and to conduct regular audits.

2. Intellectual Property (IP) Challenges

Armenia provides strong intellectual property protection in line with international standards, and in 2021 it became one of the few countries (second only to the United States) to explicitly allow the patenting of software. Software is automatically protected by copyright, while patents, trademarks, and trade secrets provide additional layers of protection.

However, many startups and IT companies overlook several important legal considerations.

Common risks include:

• Lack of intellectual property assignment agreements — Under Armenian law, copyright initially belongs to the author. Therefore, without clear work-for-hire provisions and signed acceptance–handover acts, the company does not legally acquire ownership of the software.
• Public disclosure before obtaining legal protection — Publishing information at an early stage (for example, on websites or during events) may eliminate the novelty requirement necessary for patent protection.
• Difficulties in enforcing rights — Although registration is possible through the Intellectual Property Agency (AIPA), proving infringement or applying legal remedies is often time-consuming and costly due to limitations in the efficiency of the judicial system.
• Widespread use of unlicensed software in the market, which increases the risk of audits or claims by rights holders (such as Microsoft). The latter has repeatedly highlighted the high level of unlicensed software usage.

Mitigation: Conduct annual IP audits, ensure written IP assignment documents from all contributors, register key assets (trademarks, domains, and patents where necessary), and implement non-disclosure (NDA) and confidentiality agreements.

3. Tax Compliance and Classification Risks

The Tax Code of the Republic of Armenia provides significant incentives for IT and high-technology activities (for example, the ability for qualifying companies to apply a 1% turnover tax regime from 2025 to 2031, a reduced corporate income tax rate for software exports, as well as payroll-related tax benefits).

However, mistakes in application or compliance can create serious tax risks.

Risks include:

• 1% turnover tax regime — applicable only to companies whose annual turnover does not exceed 115 million AMD. If the threshold is exceeded, the company loses the right to benefit from the turnover tax regime in the following tax year (a mandatory “cooling-off year”).
• Changes to income tax reimbursement (2026) — the 60% income tax reimbursement intended for foreign specialists is now paid directly to employees. Companies must revise their financial models, as this is no longer considered a corporate subsidy.
• 200% tax deduction — under the general taxation regime, companies may deduct 200% of R&D-related salaries from taxable income. However, this deduction is capped at a maximum of 50% of total taxable income.

IT companies must maintain accurate accounting records and work closely with tax advisors to ensure lawful eligibility for these incentives.

4. Labor and Employment Law Challenges

Mandatory digital registration through the State Revenue Committee’s (SRC) electronic platform applies to all new employment contracts signed from January 1, 2026, while existing paper-based contracts must be digitized by January 1, 2027.

Risks include:

• Misclassification of employees (for example, treating software developers as independent contractors when they effectively perform employee functions), which may lead to retroactive payments and fines.
• Failure to comply with the new digital contract system or with requirements related to salaries and social benefits.
• In extreme cases, restrictions on business activity or even the risk of criminal liability for company executives.

5. Cybersecurity and Emerging Regulations

New cybersecurity legislative regulations introduced in 2025–2026 apply to critical infrastructure and government information systems, establishing specific obligations for their operators.

IT companies that process sensitive data or operate in sectors of vital importance face compliance risks, including mandatory reporting requirements and adherence to security standards. Data security breaches may result in administrative or criminal liability.

6. Corruption and Judicial Risks

Although Armenia has made some progress in recent years in combating corruption, the business environment still faces significant risks within the judicial system, where bribery or other unlawful interference may affect the outcome of cases.

This is particularly relevant to the enforcement of contracts, intellectual property disputes, and proceedings involving regulatory authorities.

How LSA Law Firm Can Help IT Companies Reduce Legal Risks in Armenia

LSA Law Firm (Law and Strategy Advisors), based in Yerevan, is an established firm with more than 10 years of experience, specializing in providing high-quality legal and accounting services throughout Armenia. The firm has positioned itself as a trusted partner for businesses, including companies operating in the rapidly growing IT and high-technology sectors, offering tailored support to ensure compliance, prevent disputes, and resolve issues effectively.

IT companies operating in Armenia benefit from attractive state incentives under the Law “On State Support for the High-Tech Sector” (in force since 2025), including tax privileges and employment-related benefits. However, as outlined in the previous article, these advantages are accompanied by increased regulatory scrutiny in areas such as data protection, intellectual property rights, tax classification, labor law, and other compliance-related fields.

LSA helps companies proactively manage these risks, allowing them to focus on growth and development rather than overcoming legal obstacles.

Key Forms of Support Provided by LSA to IT Companies

1. Intellectual Property Protection and Ownership Clarification: Many IT companies face uncertainty regarding the ownership of source code, algorithms, or software products created by employees, freelancers, or contractors. LSA drafts and reviews intellectual property assignment agreements, non-disclosure agreements (NDAs), work-for-hire provisions, and licensing agreements to ensure that the company is the lawful owner of its core assets. In addition, the firm supports trademark registration, patent filings (where applicable under Armenia’s software-friendly legislation), and the enforcement of rights in disputes—reducing the risk of IP loss during scaling or company exit (sale) stages.
2. Employment Relations and Contractor Compliance: Given the mandatory transition to digital employment contracts (from 2026) and the high risk of misclassifying freelancers as independent contractors—especially within the widely used 1% turnover tax model in the IT sector—LSA provides expert legal guidance. Services include drafting and reviewing employment agreements, advising on the correct classification of employees and contractors to avoid retroactive tax and social contribution liabilities, and handling labor disputes. This is particularly important for companies that rely on Armenia’s highly skilled workforce while maintaining full legal compliance.
3. Tax and Incentive Optimization: LSA supports IT companies in meeting and maintaining eligibility for incentives available under the high-tech regime (such as reduced turnover or corporate income tax rates and payroll-related reimbursements). The firm assists with registration in the state high-tech registry, prepares compliance documentation (for example, demonstrating that 90% or more of revenue is derived from high-tech activities), and represents clients during tax inspections or disputes. This reduces reclassification risks and ensures maximum use of the incentives available for the 2025–2031 period.
4. Data Protection, Privacy, and Cybersecurity: Aligning business practices with GDPR-inspired standards and Armenia’s emerging cybersecurity legislation, LSA advises companies on lawful data processing, consent mechanisms, breach notification obligations, and the implementation of security measures. The firm also supports the registration of data processing activities with the Personal Data Protection Agency, the development of privacy policies, and the management of cross-border data transfers—especially important for SaaS, fintech, or export-oriented IT companies serving international clients.
5. Corporate Structuring and Ongoing Support: For startups and IT companies with foreign founders, LSA provides company formation services (LLC, JSC, etc.), contract drafting (supplier, customer, partnership agreements), negotiation support, and post-registration steps, including obtaining tax identification numbers and arranging banking services. The firm offers long-term legal service packages at discounted rates for recurring clients, ensuring continuous support in a changing regulatory environment (such as new high-tech laws or digital service regulations).
6. Dispute Resolution and Representation: When legal issues arise—whether administrative proceedings, tax or customs disputes, labor claims, or intellectual property infringements—LSA represents clients’ interests in courts, before government authorities, or during negotiations. The firm’s multilingual team (English, Russian, Armenian, and French) is a significant advantage for international IT businesses operating in Armenia.