VII. INVESTMENT CLIMATE Openness To Foreign Investment Armenia's economy is open to foreign investments. No restrictions exist in this area. Conversion And Transfer Policies Armenian Drams can be converted to hard currency in Armenian banks and numerous exchanges. Limitations in these area are connected strictly with the banks' and exchanges' own capabilities. Foreign companies doing business in Armenia are allowed to freely transfer their profits out of the country. Expropriation And Compensation Expropriation and compensation issues as related to U.S. companies and joint ventures in Armenia are fully regulated by the Armenian law "On Property" and by the Bilateral Investment Treaty (BIT). Dispute Settlement Dispute settlement between the U.S. company and the government of Armenia is to be conducted in accordance with the Bilateral Investment Treaty. Disputes between the Armenian and U.S. businesses can be settled through the Armenian Arbitrage Courts, state courts, are any other appropriate International, Armenian, or U.S. body stated in a contract. Political Violence No political violence is observed or anticipated in Armenia Performance Requirements/Incentives Most enterprises established after January 1, 1992, do not have to pay taxes for the first two years after becoming profitable. Some types of enterprises do not benefit from this privilege. There are also a number of deductions from taxable profit which provide additional incentives for doing business. For instance, an enterprise's profit is tax-free if more than 50 % of its employees are handicapped. All construction related enterprises working in the area damaged by the 1988 earthquake can reduce their tax payments by 50% for 1994-96. A joint venture between a foreign and a local Armenian entity is entitled to two year tax holiday. From the third year until the tenth year of operation, JVs can deduct 50% of their tax amount if the foreign share is more than 50%. They can deduct 30% if the foreign share is 30%-50%. Foreign owned companies have the same privileges as joint ventures if more than 50 percent is owned by a foreigner. Foreign-owned companies can be exempt from full payment of taxes to the Armenian government if the corresponding government provides the same privileges to Armenian-owned companies doing business in that country. A double taxation agreement with the United States is currently being drafted. Inquiries on more information on these and other incentives and privileges should be directed to the State Tax Administration (see Appendix B) Protection of Property Rights Property rights of U.S. businesses in Armenia are protected by the Armenian law "On Property", by the Trade Agreement, and the Bilateral Investment Treaty. An "Agreement on Trade Relations Between Armenia and the U.S.A.", signed in 1992, states that the parties shall ensure that domestic legislation provides for protection and implementation of internal property rights, including copyright on literary, scientific and artistic works including computer programs and data bases, patents and other rights on inventions and industrial design, know-how, trade secrets, trade marks and service marks, and protection against unfair competition. In August 1993, the Armenian parliament adopted a Law on Patents and the government established a Patent Administration. Patents are granted for a period of 20 years. Appropriate laws on trademarks and copyright are being considered by the Parliament. Regulatory System: Laws And Procedures Below are the key laws and regulations forming business environment in Armenia: 1. The Law on Property 2. The Law on Enterprise and Entrepreneurial Activity 3. The Law on Taxes 4. The Law on Privatization of State Enterprises 5. The Law on State Register 6. The Law on the Central Bank 7. The 1994 Privatization Program Bilateral Investment Agreements 1. Agreement on Trade Relations Between the Republic of Armenia and the United States of America 2. Treaty Between the Republic of Armenia and the United States of America Concerning the Reciprocal Encouragement and Protection of Investment (BIT). This Treaty has not been ratified by the Armenian Parliament. OPIC And Other Investment Insurance Programs At present, OPIC represents the only reliable organization providing investment insurance programs for American businessmen doing business in Armenia. The "Investment Incentive Agreement between the Government of the Republic of Armenia and the Government of the United States of America" was signed in 1992. By 1994, OPIC registered 7 potential projects in Armenia for insurance, representing a USD 400,000,000 investment. Labor The 1992 Law on Employment guarantees employees the right to form or join unions of their own choosing without previous authorization. At the same time, many large enterprises, factories, and organizations remain under state control and voluntary, direct negotiations between unions and employers without the participation of the government can not take place. The 1992 Law on Employment guarantees the right to organize and bargain collectively. Armenia's high unemployment rate makes it difficult to gauge to what extent this right is exercised in practice. The 1992 Law on Employment prohibits forced labor. The statutory minimum age for employment is 16. The minimum wage is set by governmental decree and was increased periodically during 1993. Employees paid the minimum wage cannot support either themselves or their families. The vast number of enterprises are either idle or operating at only a fraction of their capacity. Those still on the payroll of idle enterprises often receive two-thirds or less of their base salary. The overwhelming majority of Armenians are thought to live below the officially recognized poverty level. Foreign Trade Zones/Free Ports None. Capital Outflow Policy Persons who leave the country are permitted to export a sum that exceeds 500 USD (or an equivalent sum in other hard currency) only upon presentation of a document proving that the money was legally obtained (earned, exchanged, etc.). Foreign citizens engaged in economic activity in Armenia can freely transfer their profits from Armenia. Export payments must be made only on the contractual basis through banks which, along with customs departments, verify the legality of actual exports transactions. All government and non-government economic entities operating in Armenia must inform the Central Bank, State Tax Inspectorate, and the Administration for Statistics, State Register and Analysis about their business accounts, joint ventures, subsidiaries, affiliates, and representations established outside of Armenia. At the same time, starting in 1993, Armenian citizens can open non- business accounts in foreign banks through services of Armenian commercial banks. However, all applications for money transfers exceeding USD 500 to these accounts should be accompanied by a document proving that the money was legally obtained (earned, exchanged, etc.). Major Foreign Investors 1. In 1990-91, John Huntsman built a prestressed slabs manufacturing plant in Yerevan - a unique high-tech production formed as a 50/50 joint venture (Huntsman-Armenia Corporation) with the Ministry of Construction of Armenia. The American side provided all equipment and financing. At present, Huntsman does not operate the plant for a personal profit - his 50 percent is reinvested in the plant or in other projects in Armenia. 2. In 1991, Levon Travel, an American Air Travel Agency, opened its office in Yerevan (Joint Venture with 95 percent U.S. assets). 3. In 1988, a joint venture was formed between Bennetton (Italy) and Garun Knitted Goods Factory (Yerevan). The JV produced BENNETTON men's and ladies' wear for export. 4. The "Sport" shoe manufacturing company has been manufacturing 250 pairs of licensed Adidas (Germany) sports shoes since 1987.