What Is a Grandfather Clause?

A grandfather clause, or legacy clause, is an exemption that allows persons or entities to continue with activities or operations that were approved before the implementation of new rules, regulations, or laws. Such allowances can be permanent, temporary, or instituted with limits.

  • A legacy clause is a provision that allows people or entities to follow old rules that once governed their activity instead of newly implemented ones, often for a limited time.

  • The "grandfather clause" term originated during the U.S. Civil War era and referred to statutes enacted in the South to suppress African American voting.
    Legacy clauses can be permanent, temporary, or instituted with limits.

  • Legacy clauses often apply to zoning laws when the purpose of a development changes.

An Example of a Grandfather Clause in Armenia.

The Law of Armenia on Foreign Investments. Article 7. “In the event of amendments to the foreign investment legislation of the Republic of Armenia, the legislation that was effective at the moment of implementation of investments shall be applied, upon the request of a foreign investor, during a five years period from that moment.”

Annulment of ICSID Award in Edmond Khudyan and Arin Capital & Investment Corp. v. Republic of Armenia Case

On April 13, 2022, the Secretary-General of ICSID registered an application for partial annulment of the award filed by Mr. Edmond Khudyan (Claimant) and notifies the parties of the provisional stay of enforcement of the award in ICSID Case.

According to the Claimant, there is no legal source that affirmatively supports the notion that Mr. Khudyan ever became a citizen of the Republic of Armenia. The Tribunal derived its sole support for that premise from its own inaccurate paraphrasing of Article 15 of Soviet Law on the Procedure of Exiting the USSR, the effect of which would be to make every person who had ever lived in the Armenian SSR and emigrated abroad automatically a citizen of the Republic of Armenia in contradiction to the express terms of Republic’s own Citizenship Law. The Tribunal’s decision that it does not have jurisdiction over Mr. Khudyan because he is a citizen of the Republic of Armenia is not tenable, its flaws are clear on the face of the Award, and it does not stand up to even minor scrutiny when compared with the relevant legal sources that were brought to the Tribunal’s attention. It therefore constitutes a manifest excess of powers under Article 52(1)(b) of the Convention.

Therefore, Mr. Khudyan respectfully requests pursuant to the ICSID Convention the Award rendered on 15 December 2021 in ICSID Case No. ARB/17/36 be annulled.

This case concerns a dispute filed with the International Centre for Settlement of Investment Disputes ("ICSID") pursuant to Armenia - USA BIT.

The Claimants are Mr. Edmond Khudyan, a national of the United States of America ("US"), and Arin Capital & Investment Corp., a corporation established under the laws of the State of California in the US (collectively, the "Claimants").

The Claimants are represented in these proceedings by Dr. Gevorg Tumanov of Redbridge and Mr. James H. Boykin, and Mr. Alexander Bedrosyan of Hughes Hubbard & Reed.

New Tax Incentives for Startups in Armenia

The Armenian government has introduced new incentives for IT companies. Legal entities and individual entrepreneurs that will employ more than 50 employees previously not employed in Armenia will receive 50% reimbursement of the income tax paid.

The initiative intends to develop IT, as well as the creation of a suitable competitive environment in Armenia.

It aims to encourage the recruitment of highly qualified employees. The idea was to draw a significant number of freelancers out of the shadows.

State support is provided to commercial organizations and individual entrepreneurs, which meet the following conditions:

  • 90 percent or more of income from activities (sales turnover) are from software development, IT consulting and other related activities;

  • In the absence of revenue (sales turnover), 90 percent or more of the entire number of employees should be IT professionals;

  • The number of employees should increase by at least 50;

  • Newly hired employees from September 2021 to March 2022 shall not be registered employees (including service provisions under the service contract) in Armenia;

  • Beneficiaries should not have tax obligations exceeding 100,000 AMD.

Tax Incentives for IT Startups in Armenia

Armenia has made the IT sector a priority industry since the year 2000. Several initiatives have been adopted over the years to encourage the development of the IT industry, such as tax incentives for IT startups.

The system of granting tax incentives to IT startups first came into force in 2015 based on the law "On State Assistance to the Information Technology Sector". It is designed to provide IT startups with tax breaks for the first years of their activity. Low rates set under the law are intended to provide motivated behavior for investment and reduce the risk of tax evasion.

In April 2019, the Armenian parliament adopted a set of amendments and additions to the law "On State Assistance to the Information Technology Sector", which extends the term of the above-mentioned tax breaks. As a result, the deadline for applying for and obtaining a certificate for tax breaks has been extended to 1 December 2022.

IT startups operating in the following fields can benefit from state support:

  • Software development,

  • Consulting activities in the field of computer technology,

  • Computer system management activities,

  • Data processing, network distribution, and related activities,

  • Activities related to web-portal development,

  • Implementation of educational or research programs in the field of information technologies,

  • Electronic systems design, testing and production, computer animation and modeling, as well as design and testing of integrated circuits.

Tax break certificates are granted on a case-by-case basis by the Special Commission established by the Government.

The tax breaks granted to Armenia-based IT startups exempt them from paying corporate tax of 20% (a zero rate applies under this Law), as well as providing a reduced income tax flat rate of 10% (instead of generally 20-21%) for employees.

Companies applying for a certificate must meet certain requirements, particularly:

  • They must be trade organizations or Private Entrepreneurs registered in the Republic of Armenia. The certificate cannot be applied to subsidiaries, economic associations, branch offices, or representatives of foreign legal entities.

  • The number of employees should not exceed 30

  • They shall not sell their fixed assets                            

  • At least 70% of turnover must derive from the types of activities defined above, etc.

Armenia is a welcoming country, and among the mentioned, there are multiple reasons to choose Armenia as a business location.


International Sanctions on Russia and its impact on Armenia

Many countries have imposed a slew of financial restrictions, including freezing the assets of Russia's Central Bank, limiting its ability to access its dollar reserves. The US, EU, UK, Canada and Australia have also banned people and businesses from dealing with Russia's Central Bank, Finance Ministry and the Wealth Fund.

Russian Banks Otkritie, Bank Rossiya, Novikombank, Promsvyazbank, Sovcombank, VEB and VTB have been already removed from the Swift messaging system, which enables the transfer of money across borders. However, the ban stopped short of including those banks handling energy payments. Credit cards issued by Russian banks using the Visa and Mastercard payment systems have stopped functioning overseas after March 9.
Russia has officially become the most sanctioned country in the world. Could it have drastic repercussions for business and what should be noted?

In recent years, Russia has accelerated using its own payment cards, like MIR, and its own version of Swift, SPFS․ MIR system was introduced in Kazakhstan, Kyrgyzstan and Armenia in 2018, and in 2019 in Turkey, and Uzbekistan. In October 2021, MIR was launched in the UAE, Bulgaria and Thailand.

The Central Bank of Russia announced that the Russian banks plan to issue cards using UnionPay (China), enabled in 180 countries. While several Russian banks already use UnionPay, others including Sberbank and Tinkoff, could start issuing cards co-badging Russia's domestic MIR payments system with UnionPay.

The Ministry of Economy of Armenia has published a guide for Russian, Belarusian and Ukrainian businesses seeking to move to Armenia, suggesting how to register a business, renting an apartment, even how to bring pets across the border. It also has created a working group to answer queries from businesses interested in moving.

Today, many Ukrainian, Belarusian and Russian companies, especially IT companies are considering Armenia as a potential new home. Favorable investment environment, developed banking and legal system, and tax incentives make Armenia an attractive direction.

Parallel import, or grey market goods.

The concept of parallel importation is a constantly growing phenomenon in the current globalized world. Parallel importation refers to a situation where the owner of the trademark has not given its consent to import its goods to a certain area.

A closely correlated concept with parallel import is the principle of trademark exhaustion. The approach to parallel imports will greatly depend on how a country deals the concept of trademark exhaustion.

There are at least three concepts existing in the global practice:
a. National,

b. Regional, and

c. International

EU has adopted the approach of regional trademark exhaustion, the Community-wide exhaustion. Parallel imports coming from outside the Community are not approved without the consent of the trademark proprietor, while the USA applies the basic approach of national trademark exhaustion. However, as the practice demonstrates, this is not the whole truth since certain exceptions apply.

Armenia, as a rule, adheres to the international principle of exhaustion of trademark rights with some exceptions. It should also be noted that Armenia is a member of the EAEU (Eurasian Economic Union) consequently, the regional concept regulations of the EAEU shall prevail over domestic regulations in relations with the member states of the Union․

The concepts of trademark exhaustion and parallel imports are rather debatable, and a unanimous approach to these concepts is not as obvious. The presumption that parallel import is beneficial for consumers for the reasons of offering cheaper prices and greater selection is a strong argument, although there are both supporting and opposing arguments whether the unauthorized parallel imports are truly beneficial for the market as a whole. Consumers would be more than happy to freely access parallel imports without any restrictions, and worldwide international trademark exhaustion would support this kind of approach. However, the rights of the consumers are not the only rights to be protected, and the rights of the trademark’s owner should be protected as well.

Brand owners may not totally avoid parallel import, but they are strongly encouraged to develop and implement a coherent strategy to redress the problems created by them. Aside from trademark law, they can also look into other areas of law to build up their brand protection plan.



The Protection of Intellectual Property Rights under International Investment Law in Armenia

Intellectual property rights are the rights given to persons over the creations of their minds. They usually give the creator an exclusive right over the use of his/her creation for a certain period of time.

Protection of trademarks, patents, copyrights, industrial designs, and other types of IP mainly are covered by TRIPS rules. TRIPS also set minimum standards of protection, which constitutes a floor and not a ceiling as to adequate IPR protection. TRIPS thus provides members with the right to adopt higher and more extensive levels of protection if they willingly do so.

Beyond the trade context, IPRs as a form of investment also fall under the scope of application of BITs and investment provisions of RTAs (including FTAs and Economic Partnership Agreements). The qualification of IPRs as covered investments under most international investment agreements is far from being a novelty. Bilateral and multilateral investment treaties and investment chapters of RTAs usually do not set specific substantial standards on intellectual property, but they protect the rights of investors who use intellectual property as a mode of investment.

Case law also recognizes intellectual property rights as an "investment." In the Case Shell Brands International AG and Shell Nicaragua S.A. v. the Republic of Nicaragua (ICSID Case No. ARB/06/14) two companies connected to the petrochemical giant Shell Group, filed a claim against the Government of Nicaragua for breach of the Netherlands-Nicaragua bilateral investment treaty in response to an alleged expropriation of their logo and brand name. According to Shell, Nicaragua seized Shell’s trademarks in an effort to enforce a 489 Million US Dollar judgment handed down in 2002 by a Nicaraguan Court.

In some treaties, the term “property” was simply extended to such intangible rights, while in others explicit reference was made to patents, copyrights, and trademarks.  In some cases, the reference to IPRs appears in the preamble of BITs.

For example, the 1999 US-Armenia BIT recognizes intellectual property as an investment, which includes, inter alia, rights relating to literary and artistic works, including sound recordings; inventions in all fields of human endeavor; industrial designs; semiconductor mask works; trade secrets, know-how, and confidential business information; and trademarks, service marks, and trade names.

A detailed illustrative list of covered IPRs is provided for under the 2018 Armenia - Japan BIT. For the purposes of the Treaty: the term “investment” means every kind of asset owned or controlled, directly or indirectly, by an investor, including:
“… intellectual property rights, including copyrights and related rights, patent rights and rights relating to utility models, trademarks, industrial designs, layout designs of integrated circuits, new varieties of plants, trade names, indications of source or geographical indications, and undisclosed information.”

Armenia is a member of more than 30 BIT and the vast majority of them recognize IP rights as an “investment” precisely. At the same time, There are four mechanisms provided by Armenia to protect investors:

      1. investment legislation;

      2. investment contracts;

      3. bilateral investment treaties; and

      4. multilateral investment treaties.

For many years investment contracts between investors and host states (or state entities) often involve substantial investment of capital. Investors seek reassurance that the contractual protections on the basis of which they have invested will remain in place for the life of their investment. In order to achieve this, investment contracts often contain stabilization clauses (freezing clauses, intangibility clauses, economic equilibrium clauses, allocation of burden clauses, and hybrid clauses).

There are hundreds BITs and MIT's in force, in total, where one contracting party is Armenia. Although there is no standard form for BITs, many contain broadly similar protections.

BITs and MITs generally contain similar investor protections. The most common protections found in these instruments are:

      • protection from expropriation without compensation

      • MFN provisions

      • NTP

      • fair and equitable treatment;

      • full protection and security; and

      • free transfer of investment and returns.