After a decade of drastic decline in FDIs resulting from the restrictions placed upon foreign investments by the “49%-51% rule” implemented in 2009, Algeria has finally repealed this rule and put in place several incentive measures in the 2020 Additional Finance Act published a few days ago (the “2020 AFA”), aiming at boosting foreign investments in the country.
1. The end of the 49%-51% rule, except for strategic sectors
For more than ten years, foreign investors in Algeria were constrained by the “49%-51% rule” in all sectors of activity: they were obliged to set up an Algerian company with a share capital held at least at 51% by one or more Algerian nationals residing in Algeria (thus limiting foreign investment in an Algerian entity to 49% of its share capital).
The rule which was initially driven by the Government’s wish to oversee the running of foreign investments, eventually proved detrimental to the Algerian market, making it less attractive to foreign investors. The Algerian Government itself acknowledged the weakness of the mechanism in the explanatory statements of the bill of the 2020 AFA, with a fall of 81% in the number of new investment projects between 2007-2008 and 2010-2011. It also admitted that the expected transfer of technology did not happen because of the generalization of sleeping partners. The removal of the mandatory partnering with Algerian residents should also do away with many abuses which had been induced by the 49%-51% rule, such as blackmailing and influence peddling.
The 2020 Finance Act published on 30 December 2019[i] lifted the restriction, stating that the 49%-51% rule shall only apply to “strategic sectors” and that foreign investment will be unlimited in all non-strategic sectors. Unfortunately, since “strategic sectors”, had not been defined, the end of the 49-51% could not be implemented and the status quo continued in practice for six months, until the publication of the 2020 AFA a few days ago. Foreign investors are now free to set up a 100% foreign owned company in Algeria if they wish, except in “purchase and resale activities” and five defined “strategic sectors”, where the 49%-51% rule will continue to apply. The drafting of the 2020 AFA raises a few questions though (see below).
The 49%-51% rule shall now only apply to:
- purchase and resale activities – The 2020 AFA does not provide a detailed description of these activities, which could therefore encompass a large range of commercial activities, such as retail selling, wholesale, import of products for resale in the same condition, etc. It is not clear, for example, whether distribution activities will also fall within the 49%-51% rule. In particular, the legal status of franchising has still not been clarified under Algerian law. Besides, the purpose of limiting foreign investments in this kind of activity raises questions: the repatriation of dividends in these activities was already limited[ii]. This measure may have been motivated by the Government’s wish to limit intragroup over invoicing; and
- five strategic sectors, being:
- the exploitation of the national mining domain as well as all underground or surface resources relating to an extractive activity, with the exception of quarries of non-mineral products – There is no definition of what are considered as non-mineral products and whether, for example, this would cover cement and aggregates. Moreover, the Algerian Mining Law of 2014[iii] provides that a list of mineral and fossil products which are considered as strategic for the national economy shall be determined by regulation, which has not been published yet;
- the upstream energy sector and any other activities governed by the hydrocarbons law (which includes downstream activities), as well as operating the distribution network and transportation of electrical energy by cable, and transportation of hydrocarbons (gas and liquids) by overhead or underground pipelines – It is not clear what the “upstream energy sector” covers exactly in addition to the activities that are covered under the Algerian hydrocarbons law. Besides, the relevance of duplicating the 49%-51% rule for the hydrocarbons sector in the 2020 AFA could be questioned. Any potential change in this respect would entail amending two sets of laws;
- the military industry and related activities under the authority of the Ministry of National Defense;
- railways, ports and airports – It is not clear whether this covers the ownership of these transportation infrastructures and/or their exploitation; and
- the pharmaceutical industry, except for investments related to the manufacturing of “essential innovative, high value-added products, requiring complex and protected technology”, intended for the domestic market and export – It is not clear what these products cover precisely and which governmental body will have authority to decide whether a product is an “essential innovative and high value-added product”. The same laboratory producing a product falling within the above-mentioned criteria and other standard pharmaceutical products would then be constrained to set up two separate entities in Algeria? What if a new similar product enters the market and renders the initial innovative product obsolete? Moreover, foreign investors will still face the issues of the local content preferential rights in the application process for being granted a marketing authorization (autorisation de mise sur le marché, in French).
Certain specific regulated sectors such as bank or manufacturing of tobacco products, which are not listed amongst the strategic sectors under the 2020 AFA, are governed by separate sets of laws and regulations expressly setting out a 49%-51% rule. This rule could be considered as having been implicitly repealed by the 2020 AFA. However, one cannot exclude that the local authorities will take the position that each specific legal framework will have to be amended first, before being able to set up a 100% foreign investment vehicle to operate in these sectors.
When the 49%-51% rule was implemented with respect to Algerian companies, the setting up of local branches by foreign investors was also blocked, because it was seen by the Algerian authorities as a way to circumvent the 49%-51% rule. Therefore, foreign investors have not been allowed to set up branches in Algeria for the past 10 years. Now that the restriction on foreign ownership in non-strategic sectors is lifted, one may logically expect that this will also apply to the setting up of branches. However, the 2020 AFA does not expressly refer to branches. It is hoped that this will be clarified soon by the Algerian authorities.
2. The end of the State’s pre-emption right
The State’s pre-emption right, which was applicable to any direct or indirect (at least 10%) transfer of shares in an Algerian company by or to foreign investors, is now lifted[iv] and replaced, in strategic sectors only, by a prior governmental authorisation for any transfer of shares by foreign parties to other foreign parties of the share capital of an Algerian law entity operating in one of the strategic sectors.
The 2020 AFA provides that an implementing regulation shall be issued in this respect. It will be interesting to see which governmental body will have authority to grant such an authorization, and the options and remedies available in case such authorization is rejected.
3. The withdrawal of the mandatory recourse to local financing
Foreign companies investing in Algeria will now be able to finance their investments through loans provided by foreign banks[v]. However, other practical issues relating to the funding of investments would need to be clarified, such as the rules governing shareholders’ loans granted by foreign parent companies, which are currently only allowed to finance capital expenditures, but not working capital[vi].
4. Additional incentives for industrial investments
The Algerian investment law[vii] provides for several incentive schemes, aiming at encouraging foreign investments. In addition to these, the 2020 AFA has set forth the following additional incentive measures:
- a 2-year exemption from customs duties and VAT on the importation or local purchase of components and raw materials by subcontractors producing assemblies and sub-assemblies to be integrated into equipment in the mechanical, electronics and electric industries, as well as for companies operating in equipment maintenance and the production of spare parts in all sectors[viii]. The 2-year exemption can be renewed – The explanatory statements of the bill of the 2020 AFA state that the aim of this provision is to promote the resurgence of industrial activities such as machining, milling, turning. The 2020 AFA provides that an implementing regulation will be issued in this respect;
- the authorization of the importation of refurbished production chains for release to consumption (which until now, was subject to a prior authorization from the Ministry of Industry), except equipment relating to the transportation of persons and goods – The practicalities are intended to be detailed in an implementing regulation. According to the explanatory statement of the bill of the 2020 AFA, the aim of this provision is driven by the current global economic circumstances where companies may be facing difficulties, thus offering the opportunity to import refurbished production chains into Algeria at affordable prices;
- vehicle distributors are no longer required to initiate an industrial or semi-industrial project to be granted their operating license; and
- an exemption of customs duties and VAT for the raw materials imported or acquired locally, as well as components acquired from local sub-contractors, included in the manufacturing process in the mechanical, electronics and electric sectors, subject to approval by the Ministry of Industry. A 5% customs duties and 19% VAT on importation or acquisition of KD kits by manufacturers having reached the integration rate set forth in the specifications issued by the Ministry of Industry is also foreseen. The two regimes are cumulative and supersede the existing SKD/CKD regime – The specifications expected to be issued in a forthcoming regulation will be critical for the implementation of these incentive regimes.
5. New tax measures
The 2020 AFA contains several new tax provisions, one of which is the increase from 24% to 30% of the withholding tax on the remuneration perceived by foreign companies which do not have a permanent establishment in Algeria and are only performing a temporary service contract. The aim behind this increase is certainly to encourage these companies to opt for the regular tax regime (corporate tax, VAT and TAP) and set up an Algerian law subsidiary.
6. Promotion of start-up companies
The 2020 AFA has inserted several tax exemptions for the benefit of start-ups. Furthermore, it now allows private equity firms to hold more than 49% of the share capital in start-ups (whereas they are still bound by the 49% limit in all other types of companies). It also allows crowdfunding, to facilitate fund raising for the benefit of very small companies and start-ups.
Algeria is quite a virgin market, which will offer investment opportunities in a wide range of sectors, such as infrastructure, including digital, 4G, optic fibre, unbundling local loop, hospitality, education, services, agriculture, automobile and automobile parts manufacturing.
Nevertheless, the success of the new rules set out under the 2020 AFA will lie primarily in the Government’s ability to deal with and limit the overbearing Algerian bureaucracy, which is currently the most likely initial hurdle to investment in Algeria. Another practical issue is that, over the years, the Algerian Government has issued several legal amendments having an impact on foreign investments in the country, through different sets of laws and regulations, which makes it difficult for foreign investors to have easy access to a comprehensive presentation of the legal investment framework.
A detailed analysis of the Algerian legal incentive investment regime can be provided upon request.
[i] Law No. 19-14 of 11 December 2019 establishing the finance act for 2020, published in the Algerian Official Gazette No. 81 of 30 December 2019.
[ii] Article 6 of the Algerian Central Bank’s instruction No. 01-09 of 15 February 2009 forbids the repatriation of dividends pertaining to companies carrying out resale activities in the same conditions.
[iii] Cf. article 10 of law No. 14-05 of 24 February 2014, published in the Algerian official gazette No. 18 of 30 March 2014.
[iv] Article 53 of the 2020 AFA has repealed articles 30 and 31 of the investment law No. 16-09 of 3 August 2016.
[v] Article 54 of the 2020 AFA has repealed Article 55 of the 2016 Finance Act imposing the recourse to local financing.
[vi] Executive Decree No. 13-320 of 26 September 2013.
[vii] Law No. 16-09 of 3 August 2016, published in the Algerian Official Gazette No. 46 of 3 August 2016.
[viii] Article 55 of the 2020 AFA.