As Algeria is dealing with revenue shortfalls, two important legislative texts were published at the end of 2015: (a) Ministerial Order dated November 25, 2015 on Liaison Offices and (b) the 2016 Finance Law.
- Liaison Offices
- The Ministerial Order of November 9, 2015, published on November 25, 2015 in the Algerian official journal, formalizes “the terms and conditions of opening and operation of non commercial liaison offices” (the “2015 Order”) that were sparsely contained in the Joint Ministerial Instruction dated July 30, 1986, the Registration Code, ad hoc administrative, including measures adopted in October 2014, and the Supplementary Finance Law of July 2015.
- In the absence of a statutory text that expressly prohibited the performance of commercial activities, the number of liaison offices had surged, in particular in the pharmaceutical, energy and public works sector, in anticipation and following the adoption of the 51/49% ownership rule in 2009 and then, in 2013, for importation activities (the 51/49% rule provides that at least 51% of the shares of Algerian companies must be owned by Algerian nationals who are residents of Algeria or by companies which are wholly-owned by Algerian resident shareholders). With the 2015 Order, the Ministry of Commerce provides a clearer statutory framework for the opening and operation of liaison offices and indicates that it will no longer allow the operation of liaison office that engages in commercial activities.
- While the 2015 Order mainly confirms existing rules and obligations, it also clarifies the scope of activities of liaison offices in Algeria. Pursuant to Article 3 of the 2015 Order, liaison offices are entrusted with prospecting the market, making contacts, gathering information, promoting products and performing administrative formalities for the benefit of foreign commercial companies. Although, the permissible scope of activity of liaison offices may appear rather broad, the 2015 Order makes clear that:
- Liaison offices do not have legal personality and cannot engage in economic activities. Their interventions are performed on behalf of the company they represent and they act in that capacity, by delegation from the latter (Article 4).
- The performance of any commercial activities by the liaison office, in the name and for the account of the foreign commercial company, is strictly prohibited (Article 9).
- A written commitment certifying that the foreign commercial entity will comply with the applicable laws and regulations of Algeria, and, in particular the obligation to not perform direct or indirect commercial activities, is now required (Article 7.6).
- Carrying out a commercial activity triggers the withdrawal of the two (2) year renewable authorization delivered by the Ministry of Commerce, in addition to applicable sanctions (Article 9).
- Article 11 of the 2015 Order further provides that “no other authorization may be delivered to the liaison office”. This new restriction lacks clarity and only time will tell what the Ministry of Commerce has in mind. Does it relate to the Ministry of Commerce’s reluctance to authorize more than one liaison office for companies of the same group? Is it a prohibition to apply for a renewal after an initial authorization has lapsed? Or will the Ministry of Commerce prevent liaison offices from performing activities which are subject to other authorization/licensing requirements, including the Ministry of Health authorization to provide scientific and medical information for liaison offices of pharmaceutical companies? In the latter case, will pharmaceutical companies still be allowed to open a liaison office if, for instance, they are not involved in providing scientific and medical information?
- According to a statement of the Head of regulation and legal affairs at the Ministry of Commerce, the Ministry of Commerce will launch an investigation into all of 335 authorizations granted to liaison offices which currently operate in Algeria in order to verify their compliance with the new provisions. It is unclear whether the Ministry of Commerce will also require that all requests for the opening of a liaison office filed prior to the publication of the 2015 Order be revised to comply with the new rules. From a practical standpoint, it is also unclear whether the Ministry of Commerce has the human resources to perform the foregoing audits.
- The 2016 Finance Law
Law No. 15-18 dated December 30, 2015, published inthe Official Journal No. 72 dated December 31, 2015, sets forth the Finance Law for 2016 (“2016 FL”). The content of the 2016 FL is influenced by the sharp drop in oil prices. Based on US$ 37 a barrel as the oil reference price and an exchange rate of 98 dinars to the U.S. dollar, the 2016 FL expects non-hydrocarbon economic growth to reach 4.6% and inflation to be 4%. State expenditures have been reduced by 9% but the fall in oil revenues is far larger. Set forth below are some of the key measures of the 2016 FL which was adopted by the upper house of Parliament after fierce debates regarding, in particular, the measures suggested by the Algerian Government to boost foreign investment.
- Oil and Gas
The VAT rate is increased from 7% to 17% on a number of products and services, including the sale of gasoil (which is imported), as well as the consumption of natural gas and electricity above certain thresholds. The tax on petroleum or related products (TPP) which are imported or obtained in Algeria has also been revised upwards and can be subsequently increased to take into account financial and economic situations.
These measures intend to limit the waste of gasoil, an imported fuel, reduce the growing differential between the cost of fuel and the subsidized consumer price, and, ultimately, end smuggling.
The flaring tax has been increased to encourage operators to invest in equipment that will allow to recover the gases.
Finally, the 2016 FL introduces an exemption from Customs duties for gasoline and diesel which are reimported in the framework of the processing operations of Algerian crude oil abroad, under the customs regime of temporary exportation for outward processing. This measure is expected to materially reduce Sonatrach’s expenses.
The revised Article 182 of the Customs Code facilitates the temporary admission of imported goods for inward processing. Companies that carry out regular inward processing transactions may be granted a global authorization.
Specific equipment is exempted from Customs duties when acquired by or on behalf of an expanded number of government agencies mentioned in Article 66 of the 1992 Supplementary Finance law, namely the services of the Prime Minister, the general directorates of national security, the civil protection, national transmissions, the coordination of homeland security, Customs, the communal guard, and the penitentiary and reinsertion administration.
While the draft 2016 FL provided for the removal of the obligation to reinvest the tax incentives granted in the framework of an investment set forth in Article 142 of the Direct Taxes Code due to implementation issues and the desire to encourage investment, said Article was eventually revised to reduce to 30% the share of the profits that must be reinvested within four (4) years of the granting of said incentives.
Article 171 of the Direct Tax Code is modified to provide that a joint Ministerial Order will define the research and development activities which may be deducted from the taxable basis. 10% of research and development expenses up to 100 million Algerian dinars may be deducted provided that this amount is reinvested in research and development.
Since 2009, there was an obligation to finance foreign investment (whether directly or in partnership), with the exception of the share capital, through local sources of financing. Article 55 of the 2016 FL confirms the rule but allows, subject to government approval on a case by case basis, external financing when it is indispensable for Algerian companies to carry on strategic investment.
The 2016 FL, rather than the upcoming revised Investment Code, deals with the modifications to the Commercial Registry which do not trigger the obligation to comply with the 51/49% rule. Article 66 of the 2016 FL reaffirms the rules laid out in Article 4bis of the current Investment Code, namely:
“The performance of activities of production of goods, services and import by foreigners are subject to the establishment of a company where the resident national shareholding is at least equal to 51% of the share capital.
Any change of registration in the Commercial Registry triggers a prior obligation for the company to comply with above-referenced rules of allocation of the share capital.
However, the latter requirement does not apply to amendments concerning:
• the change in the share capital (increase or decrease) that does not involve a change in the proportions of the allocation of the share capital defined above;
• the transfer or exchange, between old and new directors, of qualifying shares under Article 619 of the Commercial Code, provided that the value of such shares does not exceed 1% of the share capital of the company;
• the removal of an activity or the addition of a related activity;
• the modification of the activity due to the change in the classification of economic activities;
• the appointment of the management of the company;
• the change of registered office address.”
Foreign investors had certainly hoped for more radical changes to the investment framework which led to the increase of liaison offices around 2009. While a number of companies will need to reorganize their presence in Algeria, existing 51/49 joint-ventures and partnerships may be able to get financing abroad. Moreover, companies which benefited from tax and other incentives will be able to use their profits more freely. It remains to be seen whether the upcoming revised Investment Code will provide genuine incentives for foreign investors.