Armenia’s newly adopted amendments to the Law on Procurement introduce a legal definition of “grant”, partially addressing long-standing gap in the legislation. Until now, the term “grant” has been used inconsistently across the Tax Code, state grant procedures and CSO legislation, referring to different concepts and creating ambiguity around the tax treatment of grant funding, particularly in relation to VAT. While the amendments provide useful clarification and help distinguish grants from procurement contracts, further changes in the Tax Code are still needed to ensure that donor-funded CSO activities are not treated as economic activity solely because they involve project outputs, budgets or reporting obligations.
CSO Meter reports have highlighted long-standing uncertainty around taxation of grant funding
The inconsistent legal treatment of grant funding has been highlighted in CSO Meter reports as an issue affecting CSOs’ access to funding and financial sustainability. In particular, the CSO Meter 2025 Armenia Country Report notes that the term “grant” is not defined in the tax legislation and used inconsistently across the laws, allowing for diverse interpretations. Under the Tax Code, the goods, work and services, including those financed by grant funding, are subject to VAT, though exemptions may be granted by a relevant government decision. In previous discussions on the issue, tax authorities interpreted donor reporting, approved project proposals and budgets as indicators of service delivery, which may result in grant-funded activities being treated as economic activity. CSOs have raised concerns that VAT requirement may create risks for organisations whose income exceeds the VAT threshold (equal to 115 million AMD or around 277,000 EUR of annual turnover), particularly when their projects do not meet the criteria for seeking charitable status and are interpreted as service provision. These organisations are required to pay VAT on the turnover above the threshold in the current year and become mandatory VAT payers for all taxable income in the following year. To avoid these risks, some organisations refrain from attracting additional grant funding to stay below the threshold. Those exceeding the threshold may face discretionary checks and fines if their grant projects are classified as service provision under current legislation.
The adopted amendments clarify grants in procurement law
In November 2025, the Ministry of Finance published draft amendments to the Law on Procurement on the e-draft platform, which introduced a definition of “grant”. While the inclusion of a grant definition could have helped address existing inconsistencies in Armenian legislation, the initial wording risked creating further uncertainty. The draft mirrored the definition used in the state grant procedure, adding that a grant should not involve “acceptance of deliverable results by the customer”. This formulation was problematic, as the concept of deliverable results lies at the centre of existing disputes around the treatment of grant projects under the Tax Code.
The revised draft approved by the government and published on the parliament’s website no longer contained the reference to “acceptance of deliverable results by the customer”. Instead, it defined a grant as a funding allocation provided by a customer on a gratuitous and non-refundable basis to an individual or organisation, for promoting any branch of the economy or any type of activity for the purpose of carrying out statutory tasks, where the use of funds is directed towards implementation of a project and does not result in the transfer of ownership or other property rights to the customer. The amendments also prohibit qualifying or implementing transactions that meet the legal definition of procurement as grants.
The amendments were adopted by the parliament on 3 July 2026 and will enter in force starting 2027. The removal of the reference to deliverable results is a positive development, as it avoids embedding into the Law on Procurement a formulation that could have reinforced the problematic interpretation of grant-funded projects as service delivery.
Tax-related risks for CSOs remain unresolved
The adopted definition may have a positive clarifying effect as it underlines several key features of a grant: that it is provided gratuitously and on a non-refundable basis; is directed towards the implementation of a project linked to statutory tasks; and does not result in the transfer of ownership or other property rights to the customer. This wording may help distinguish grants from procurement contracts, which is important for CSOs, as grant funding should not be treated as service provision merely because a project includes objectives, activities, budgets and reporting requirements.
However, the broader uncertainty remains. The Tax Code still contains provisions that may allow grant-funded activities to be interpreted as work or services, and therefore as economic activity. As long as this ambiguity remains, CSOs may continue to face uncertainty over whether grant income is included in the calculation of turnover for VAT purposes, whether donor-funded projects require invoicing, and whether reporting to donors could be misinterpreted as evidence of service provision. This may affect access to funding, particularly for organisations implementing larger donor-funded projects, as well as their ability to plan budgets and comply with donor rules.
This issue is particularly significant because grant funding remains one of the main sources of income for Armenian CSOs. Unclear or inconsistent rules may discourage organisations from applying for larger grants, increase administrative burdens and weaken the financial sustainability of the sector.
Further reforms are needed to ensure consistent treatment of grants
The adoption of a grant definition in the Law on Procurement is a welcome step, but it should be followed by further legal adjustments. The government should ensure that the concept of grants is defined consistently across legislation and that grant-funded non-profit activities are clearly distinguished from entrepreneurial or service provision activities in the Tax Code and relevant by-law regulations.
CSOs are expected to continue monitoring how the new definition is applied in practice and to advocate for amendments to the Tax Code that would prevent grant funding from being treated as economic activity solely because it is based on an approved project, budget or reporting requirements. A consistent and proportionate legal framework for grants would help protect CSOs’ access to funding and strengthen the enabling environment for civil society in Armenia.