EY Law Alert: Introduction of Convertible Loan Agreements in the RA

Facts

Subject:

Approval of the Legal Framework Regulating Convertible Loan Agreements by the Armenian Parliament

Overview:

On 12 May 2025, the Armenian Parliament adopted a significant legislative package introducing the concept and regulation of convertible loan (C-note) agreements into Armenian law. The amendments affect the Civil Code, the Tax Code, and the laws governing Limited Liability Companies and Joint-Stock Companies. The goal of this legislative initiative is to enhance the investment environment in Armenia by legally enabling a widely used international financing instrument, which allows debt to be converted into equity under agreed conditions.

Implementation Details:

1. Scope and Definition: The new regulation applies to loan agreements where the borrower is a Limited Liability Company (LLC) or a Joint-Stock Company (JSC). A convertible loan agreement is legally recognized as a contract under which the borrower may, instead of repaying the loan amount or interest (in whole or in part), allocate or provide shares to the lender. The quantity, type, and class of shares, as well as the terms and procedures for conversion, must be clearly defined in the agreement. 

2. Foreign Currency Loans: If a loan is provided in a foreign currency, it will be converted into Armenian drams (AMD) at the official exchange rate of the Central Bank of Armenia on the date the conversion request (or application, in the case of an LLC) is received or deemed received by the borrower. On that same date, the loan is considered renewed and replaced by an AMD-denominated loan, ensuring alignment with currency regulations.

3. Legal Entry into Force: The law enters into force on the 10^th day following its official publication. It applies only to loan agreements concluded after its effective date.

4. Taxation: Tax Code amendments set out the timeline and terms of the taxation for the income from convertible notes.

Benefits:

• Flexible Investment Mechanism: Convertible loan agreements offer companies a non-traditional financing alternative that combines debt and potential equity, allowing startups and growth-stage businesses to attract capital without immediate ownership dilution.
• Balanced Risk for Both Parties: The mechanism enables investors and companies to align their interests — investors have the option to convert debt into shares if the company performs well, while companies retain control in the early stages by deferring equity participation.
• Favorable Terms for Borrowers: Companies can attract funding on more favorable terms (e.g., lower interest rates, extended maturity) by offering the future possibility of equity conversion, often appealing to early-stage or long-term investors.
• Predictable Legal Framework: The clear definition of convertible loan agreements and the legal procedure for conversion reduce legal ambiguity and support smoother execution and enforcement of investment agreements.
• Alignment with International Practice: By introducing a recognized investment instrument widely used in global markets, Armenia enhances its appeal to foreign investors, venture capital funds, and business angels.

Challenges:

• Legal Interpretation and Drafting Complexity: As this is a newly regulated area, companies and investors may face initial uncertainty in interpreting and applying the law. Drafting convertible loan agreements that comply with the new requirements may require legal expertise and careful structuring.
• Tax Implications: Although the law amends the Tax Code, the practical taxation of debt-to-equity conversions may present ambiguities, especially for foreign investors.
• Foreign Currency Conversion Risks: In cross-border deals, the conversion of foreign currency loans into AMD using the Central Bank rate at the time of the conversion request may expose parties to exchange rate volatility, creating financial and accounting implications.
• Corporate Governance Considerations: The introduction of new shareholders through debt conversion may raise concerns for existing company participants, particularly in voting rights, and control mechanisms.
• Awareness and Adoption: Many companies, particularly small and medium-sized enterprises, may lack familiarity with convertible instruments. This could delay adoption or lead to misapplication without proper legal or financial guidance.

Conclusion:

The formal introduction of convertible loan agreements represents a progressive shift in Armenia’s legal and investment landscape. This flexible financing tool is designed to support startup and SME growth, particularly in innovation-driven sectors like IT, while also offering value to more mature companies seeking alternative funding options. With greater legal clarity and regulatory predictability, the framework is expected to enhance investor confidence, stimulate entrepreneurial activity, and improve access to capital across the business spectrum.

How can EY help?

The formal introduction of convertible loan agreements represents a progressive shift in Armenia’s legal and investment landscape. This flexible financing tool is designed to support startup and SME growth, particularly in innovation-driven sectors like IT, while also offering value to more mature companies seeking alternative funding options. With greater legal clarity and regulatory predictability, the framework is expected to enhance investor confidence, stimulate entrepreneurial activity, and improve access to capital across the business spectrum.

EY Armenia offers integrated legal and tax support to help companies and investors navigate the new convertible loan agreement framework. Our multidisciplinary team, including EY Law and Tax professionals, is well-positioned to provide personalized guidance that ensures compliance, reduces risks, and supports both business and regulatory objectives.

Our services include:

• Legal review and drafting of convertible loan agreements tailored to the specific needs of borrowers and investors.
• Tax advisory on the implications of debt-to-equity conversions.
• Strategic guidance on investment structuring to align with both corporate governance goals and tax efficiency.
• Practical support in implementing the new requirements under the amended laws.

For more information or to discuss how EY Armenia can support your organization, please reach out to EY. Our integrated legal team is committed to helping you navigate this new regulatory environment with confidence.

Contacts

Inquiries may be directed to either of the following executives:

Alexey Markov | Partner | Head of Law Practice in Armenia
EY Armenia
Vazgen Sargsyan 2, Kamar Business Center, 0010, Yerevan, Armenia
Office: +374 (60) 50 7777
Alexey.Markov@am.ey.com

Kamo Karapetyan | Partner | Head of Tax Practice at EY in Armenia
EY Armenia
Vazgen Sargsyan 2, Kamar Business Center, 0010, Yerevan, Armenia
Office: +374 (60) 50 7777
Mobile: +374 (99) 88 67 00
Kamo.Karapetyan@am.ey.com

Grigor Grigoryan | Manager | Law Practice in Armenia
EY Armenia
Vazgen Sargsyan 2, Kamar Business Center, 0010, Yerevan, Armenia
Office: +374 (60) 50 7777
Mobile: +374 (77) 55 97 55
Grigor.Grigoryan@am.ey.com

Mikayel Arzumanyan | Manager | Tax & Law
EY Armenia
Vazgen Sargsyan 2, Kamar Business Center, 0010, Yerevan, Armenia
Office: +374 (60) 50 7777
Mobile: +374 (44) 80 80 05
Mikayel.Arzumanyan@am.ey.com