The new legal framework for foreign investment in Algeria: Progress to be confirmed?

24 February 2017

By Brahim Benabdeslem, vice-chairman of the Algerian Business Leaders Forum (FCE) ; Sophie Pignon, Public Law Partner and co-head of the Africa Desk at Bird&Bird Paris; and Ali Hojeij, Attorney at law within the same department and member of the Africa Desk.

This article was published in the Algerian paper La Tribune de l’Economie on September 19th 2016. Since then, the Minister of Public Works and Transport, Boudjemaa Talaï, has announced the preparation of a bill on financing infrastructures projects through public-private partnership.

Notwithstanding the extent of the foreign exchange reserves which the Algerian Republic continues to enjoy, the collapse in the prices of raw materials has had a considerable impact on its trade balance in recent years. Algeria derives a considerable share of its budgetary revenues from oil and gas. However, in an economy where public investment continues to play a leading economic role, the adoption of dynamic measures to facilitate investment, in particular foreign investment, appears highly imperative. This is one of the ambitions set out in Law No. 16-09 on the promotion of investment, published in the Official Journal on 3 August 2016, which repeals most of the provisions of Ordinance No. 01-03 of August 20, 2001, as amended and supplemented, relating to the development of investment (hereinafter the "Ordinance").

What types of investments does Law No. 16-09 cover?

Solicitous to concentrate on investment law stricto sensu, Law No. 16-09 continues to apply, as in the 2001 Ordinance, to "domestic and foreign investment in economic activities for the production of Goods and services ", but no longer governs "investments made in the context of the granting of concessions and/or licenses" which were previously envisaged in the Ordinance. The latter are, in fact, a logic of administrative authorization, of unilateral essence, which ultimately has little in common with the contractual and partnership logic of international investments. It is rational in this spirit that the two aspects have been distinguished. Within the meaning of Law No. 16-09, and provided that the activities and/or goods concerned are not excluded from the advantages provided for under the law, they constitute investments eligible for the advantages provided for, those relating to:

  • Creative investments, traditionally (1) understood in the economic sense of the term, which does not, for example, cover the case of a simple change in the social form of an economic operator;
  • Investments extending production capacity. These include the acquisition of capital or sustainable assets for the purpose of expanding the production capacity of the same tax subject;
  • Rehabilitation investments. This may include, for example, the purchase of equipment to achieve productivity gains, the replacement of the equivalent of used or technologically obsolete equipment;
  • Goods, including "renovated goods, constituting external contributions in kind which are part of relocation of activities from abroad";
  • Goods "subject to the exercise of an option to purchase by the lessee creditor in the framework of international leasing provided that such goods are brought into the national territory in new condition" , in a manner to be specified by a regulation. Operations falling within the scope of the law may, if they fulfil certain conditions, benefit from various legal and economic advantages.

What are these advantages?

Although this list is not exhaustive, Law No. 16-09 provides for three levels of advantages:

  • the advantages common to all so-called "eligible" investments, i.e. which concerns activities not prohibited under the regulatory text to be adopted in application of Law No. 16-09. The text distinguishes the advantages depending on which phase it applies (i) realisation (exemption from customs duties, exemption from VAT, etc.) and (ii) exploitation of the project subject to the investment (Income tax exemption  for example). In addition, certain tax and/or financial advantages are added to the eligible investments which would be made in certain localities "whose development requires a special contribution from the State”;
  • the so-called "additional" advantages are reserved for "privileged and/or job-creating activities", for example for tourist, industrial and agricultural activities.
  • the so-called "exceptional" advantages, reserved for investments "of particular interest to the national economy" (2). They are established by negotiated agreement between the investor and the State.

There is no possibility of cumulating advantages of the same nature: the investor "benefits from the most advantageous incentive" among those provided for by positive law, including Law No. 16-09. In any event, we understand that certain activities are legally sanctioned, by so-called "negative" lists, any investment in another activity likely to be eligible for the above-mentioned advantages. Thus, for the latter, rather than recovering from the casuistic subtleties, the investor can benefit from the advantages that Law No. 16-09 provides by simple declaration, which must be welcomed.

The pre-emptive right of the State extended to indirect transfers

The explanatory memorandum to the draft law specified that the pre-emptive right of the State, as it had been known, had "lost the role of a control instrument of the access of foreigners to the national economy since the abolition of the preliminary examination procedure by the National Investment Board (CNI)". However, in the text ultimately adopted, in addition to "all transfers of shares or shares realized by or for the benefit of foreigners", the pre-emptive right of the State is extended to the events known as "indirect transfers".

For the purposes of Law No. 16-09, an indirect transfer is an "up to 10% or more" sale of shares in foreign companies holding interests in a company governed by Algerian law.

It gives rise "to the information of the Shareholdings State Council", enabling the State to exercise its pre-emptive right in this type of event.

The terms of the pre-emptive right must still be determined by executive regulations.

The 51/49% rule symbolically weakened

According to this rule, the exercise of activities for the production of goods, services and imports by foreigners "is subject to the constitution of a company whose capital is held at least 51% by the national shareholding resident ".

Understand: the foreign investor cannot own more than 49% of such company. This is the commonly called "51/49%" rule, which imposes on foreign companies investing in Algeria to create a national company majority-owned by local shareholders.

Originally provided for in the Ordinance, this rule is absent from Law No. 16-09. It can nevertheless be found in the Finance Law for 2016 at Article 66. The obligations arising from the "51/49%" rule appear, in many respects, difficult to reconcile with the increasingly marked globalization of international investment and, on the other hand, the objective assigned to the law to make international investments in Algeria easier.

The constraint is real. An evolution, no doubt progressively, of the rule, therefore appears desirable.


Towards a law on PPP?

Law No. 16-09 refers twenty-nine times (!) to clarifications to happen "by regulation", underlining the subordination of the implementation of the text to a series of subsequent texts. Given the magnitude of the task stemming from the drafting of the implementing texts, it is advisable to remain cautious about the effectiveness, in the short or medium term, of the aforementioned advantages.

Nevertheless, this law is a positive signal sent to foreign investors.

This positive signal is also reflected in the possibility for the government to authorize "on a case-by-case basis" the use of external financing for projects "essential to the realization of strategic investments by companies governed by Algerian law" (Article 55 , Paragraph 2 of the Finance Law for 2016). To the advantages legally specified by Law No. 16-09, may be added other advantages that the nature of the project would make possible.

Let us bet that the national economic situation calls for an audacious pursuit of these efforts, in particular with a view to adopting a genuine normative and institutional framework for public-private partnerships (PPPs), for the purposes of operations designed to develop a competitive and diversified economy. Is this not one of the main objectives of the five-year development plan 2015-2019?

(1) For the quoted examples, we suggest to you an investor's tax guide prepared by the Directorate General of Taxes of the Ministry of Finance, which will likely be updated in light of the new texts governing investments in Algeria.

(2) These benefits must be negotiated by the investor and Andi. The national investment council will have to agree that Andi can conclude the agreement fixing the additional advantages negotiated.

For more information on these developments, please do not hesitate to contact Sophie Pignon.

Authors