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from the restrictions placed upon foreign investments by the “49%-51% rule” implemented in 2009, Algeria has finally repealed this rule and put in place several incentive measures in the 2020 Additional Finance Act published a few days ago (the “2020 AFA”), aiming at boosting foreign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.
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:
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.
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.
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].
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:
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.
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.