Algeria revises its investment legal framework: Improvements but stumbling blocks remain in place

The New Investment Law provides for significant changes to the legal framework previously set out by the ordinance No. 01-03 of 20 August 2001 on investment - repealed by the entry into force of the New Investment Law subject to a few provisions on the National Investment Development Agency (ANDI) and the National Investment Council (CNI).

The New Investment Law intends to stimulate investments in Algeria in the production of goods and services by removing and reorganising contradictory and dissuasive rules for foreign investors.

Implementation provisions of the New Investment Law will be provided by regulations yet to come. In the meantime, implementation regulations of the ordinance No. 01-03 still apply. Advantages and rights benefiting to existing investors pursuant to previous legislations are maintained. The investments benefiting from advantages in accordance with the ordinance No. 01-03 and subsequent legislations remain subject to the previous legal framework until the expiry of the said advantages.

This article provides a high level summary of the adjustments made to the investment legal framework and provided for in the New Investment Law. It does not intend to cover in a detailed manner all changes made to the investment incentive system and the institutional architecture.

The New Investment Law had been in discussion for well over one year, with many changes contemplated, including amendments to some of the provisions which play an active role in the mixed reputation of Algeria as an investment destination, like the 51/49 rule (all investments must be held at least 51% by Algerian nationals) or the pre-emption right of the State over the sale of foreign investments. However, despite the difficult times encountered by Algeria with the fall in oil and gas prices, observers had for long given up the hope for a drastic upheaval of the investment framework, as the New Investment Law confirms.

The New Investment Law also only partly achieves the objective expected by investors to gather in one piece of legislation the key provisions distributed in many laws and regulations (investment law, finance laws, tax code, exchange control regulations) relevant to foreign investments.

Changes to the investment legal framework

A revised definition of investment

Investments are defined by the New Investment Law (articles 1 and 2) as:

• Acquisition of assets related to the creation of new activities, extension of production and/or rehabilitation of capacities, and
• Participation in the share capital of a company.

The New Investment Law does not mention (i) investments made in connection with the award of a concession or license, (ii) the acquisition of assets as part of restructuring or (iii) business takeovers pursuant to a partial or total privatisation, which were expressly referred to in the ordinance No.01-03. However, such transactions should still be caught by the new definition of investments.

A major change brought by the New investment Law is that in order to benefit from the advantages set out by the New Investment Law, a prior registration of the investment with ANDI is required. Under the previous legislation, only a prior declaration to ANDI was required.

A prior approval of CNI is required for investments amounting to or superior to DZD 5bn instead of DZD 2bn in order for them to enjoy the incentives set out below (article 14).

Several categories of incentives

Like ordinance No.01-03, the New Investment Law provides for several categories of benefits:

• Common incentives applicable to all eligible investments (article 12), including:
  • during the implementation phase, exemption from (i) custom duties for imported goods used for the implementation of the investment, (ii) VAT for goods or services acquired locally or imported for the implementation of the investment and (iii) property tax for all acquisitions of real estate assets made as part of the investment, and
  • during the exploitation phase, exemption for three years from (i) corporate tax and (ii) tax on professional activity.
• Additional incentives benefiting to privileged activities or activities creating jobs (article 15).
• Exceptional incentives for investments having a particular interest for the national economy are negotiated between the investor and the CNI under an agreement (article 17). Those incentives may in particular consist of an extension up to ten years of the duration of the benefit of the incentives of the exploitation phase.

The New Investment Law provides for the automatic benefit of the incentives provided under the New Investment Law in favour of registered investments except for “excluded” investments to be provided by implementation regulations.

Foreign investments

The removal of some investment constraints

The New Investment Law removes a number of investment restrictions:

• Foreign investors do no longer have the obligation to generate a foreign currency surplus throughout the lifetime of the project. This requirement was never really applied, and
• Other conditions such as the written commitment of an investor to give preference to products and services of Algerian origin in order to benefit from incentives.

The 49/51 rule pursuant to which foreign investments must be made through a partnership with national shareholders holding 51% of the share capital of the local company does not appear in the New Investment Law. However it was previously moved to the 2016 finance law and is still in force.

The requirement to use local financing for investments was also previously moved to the 2016 finance law and slightly softened.

Conditions applicable to foreign investments

Pursuant to the New Investment Law, in order to benefit from the guarantee of transfer of the capital invested and of the proceeds arising from it, foreign investments must be made by equity contributions in cash transferred in Algeria via the banking channel and their amount must be equal or superior to minimum thresholds set out under implementation regulations. They must be made in freely convertible foreign currencies assigned to the Bank of Algeria.

Reinvestments in equity of profits and dividends declared as transferable in accordance with the applicable legislation are also considered as contributions in cash.

The guarantee of transfer and the minimum thresholds referred to above apply to contributions in kind provided that such contributions have an external origin and that they are assessed in accordance with the rules and procedures governing the incorporation of companies.

Actual net profits resulting from the transfer and the liquidation of foreign investments are transferable even if their amount is greater than the initial capital invested (article 25).

The New Investment Law provides some clarification to an area which, combined with a very difficult exchange control, has caused many problems to foreign investors over years. Under the ordinance No. 01-03, despite quite obscure legal and regulatory provisions, the Algerian practice had moved towards restricting the right to the transfer of dividends and investment proceeds exclusively to foreign investments made by bank transfers of foreign currency assigned by the receiving Algerian bank to the Bank of Algeria. This excluded any other form of investment (contributions in kind, capitalization of shareholder or other loans etc). The New Investment Law does not bring much more flexibility to foreign investors but at least clarifies the requirements in terms of investments in cash and includes foreign investments in kind.

Share disposals

The Algerian State still has a pre-emptive right over transfers of shares by foreign shareholders or to them. The conditions of exercise of such right will be determined by implementation regulations (article 30).

The previous requirement to notify in advance the Algerian government (State Council for Participation) of the disposal abroad of shares of foreign companies holding shares in Algerian companies having benefited from incentives is now limited to the acquisition of up to 10% or more of the share capital (article 31). However, the State has the possibility to object to the disposal in which case it is given a pre-emption right in the Algerian entity equal to the shareholding of the foreign company transferred. How realistic such a requirement is regarding for example listed companies is still a question mark.

Foreign shareholders in Algerian companies do no longer need to communicate on an annual basis the list of their shareholders.