The Algerian tax system is structured through several different tax codes, as follows:
• The Code of Direct Taxes and Related Taxes;
• The Code of Taxes on Sales, which is mainly dedicated to value-added tax (VAT);
• The Code of Indirect Taxes;
• The Code of Registration Duties; and
• The Code of Stamp Duties. Another code, the Fiscal Procedures Code, regulates the relation between the tax department and taxpayers, with their respective rights and obligations, in terms of the determination of the taxable bases, tax collection and litigation rules.
Direct taxes, mainly corporate income tax, the turnover tax (taxe sur l’activité professionnelle, TAP) and taxes on sales (mainly VAT), are the most frequent taxes met by businesses.
Algerian tax rules apply to both Algerian companies and foreign companies with a registered branch or permanent establishment in Algeria.
This contribution to The Report: Algeria 2014 will outline and explain the main taxes in place as well as the different kinds of tax presence in Algeria.
The General Regime
The general regime governs the taxation of individuals, residents of Algeria and resident corporate entities, no matter whether these entities are owned by Algerian nationals or by foreign direct investors.
It also applies to the permanent establishments of foreign companies that are present in Algeria owing to their performance of a contract, or to those foreign companies electing for such a regime in lieu of the withholding regime. Resident corporate entities are companies incorporated in Algeria, with or without foreign shareholders.
Local companies incorporated in Algeria are those formed between Algerian partners or with foreign partners, provided that the national majority stake rule is met. On this matter the majority rule has been extended to 51% for Algerian nationals resident in Algeria for trading activities. Various forms of companies are available such as the:
• Joint stock company, with a minimum share capital of AD1m (€9300);
• Limited liability company with a minimum share capital of AD100,000 (€930);
• Sole partner limited liability company with a min imum share capital of AD100,000 (€930); and
• Limited partnership, with a minimum share capital of AD1m (€9300).
The general regime may also apply to registered branches that had been in existence prior to 2009. Registered branches, which are known locally as “succursale d’entreprise etrangère”, are no longer permitted.
This is because Algerian legislation requires an Algerian-majority stake at a minimum proportion of 51% in manufacturing and services, and a minimum of 30% for trading activities.
Rules Relating To A Valid Contract
The general regime is applicable to foreign companies that are incorporated outside of Algeria, with a permanent establishment or as members of consortiums in Algeria. A permanent establishment derives from the performance of construction contracts or the provisions of tax treaties that Algeria has signed with other countries to avoid double taxation.
A permanent establishment is able to enjoy a business presence in Algeria as long as the foreign company has a valid contract.
The rights deriving from the existence of a permanent establishment are mainly linked to the performance of the contracts, such as the opening of bank accounts with the contracting capacity to recruit employees and suppliers.
The general regime includes two main taxes:
• The turnover tax; and
• The corporate income tax, while some foreign companies with a permanent establishment may end paying a branch tax.
The Turnover Tax
The TAP is an expense for the taxpayer. Unlike the VAT, the TAP is a direct tax and is paid by the individual or the company performing the business. As a result, it shall not be collected from the clients as an indirect tax.
Therefore, the TAP shall be included in the pricing of any good or service. The taxable basis is the amount of the invoiced monthly sales for trading activities, while the taxable basis for the activities in services and construction is made of collections.
The TAP will be paid in the district where the work or service is performed. Ever since 2013 taxpayers that qualify under the Division for Large Enterprises (Direction des Grandes Entreprises, DGE) are able to pay this tax together with all other taxes at the collector’s desk of the DGE. Algerian companies, with or without foreign capital, that are enjoying tax incentives as granted by the investment law may take benefit of a tax holiday from TAP.
This tax relief leads to committing for reinvesting the equivalent of the saved taxes within four years after the fiscal year that has enjoyed the incentive. The same applies for corporate income tax.
Corporate Income Tax
The filing of corporate income tax for corporate bodies takes place at its headquarters in Algeria or at a location of the main establishment. The annual tax return is due by April 30th of the following year. This includes the payment of the balance after instalments have been paid during the relevant fiscal year.
For Algerian companies, instalments are based in reference to the prior year’s profits. Three instalments at 30% of prior-year profit shall be paid, due by March 20th, June 20th and November 20th. Foreign companies that are subject to the general regime in Algeria are required to pay the instalments at 0.5% of every payment received, including advance payments. These instalments have been calculated in reference to the total value of the contract, which is meant to be inclusive of VAT.
The two corporate income tax rates of 19% for manufacturing and construction activities, and 25% for trading activities and services are said to move to one single rate of 23% effective from 2015. All companies subject to corporate income tax will have to pay their 2014 tax as collected in 2015 at this new rate. To calculate the taxable profit, expenses incurred for the direct interest of the business are allowed for deduction, provided they are effective and properly documented. The tax law limits:
• Deduction of passenger cars’ depreciation, to AD1m (€9300) in reference to the purchase price; and
• The deduction of overheads to 1% of the annual turnover (unless a tax treaty states differently), bearing in mind that these costs shall be supported in full with appropriate evidence. Algerian tax regulations do not currently permit, for the purpose of corporate income tax calculation, the deduction of fines and penalties that are charged for non-compliance with laws and regulations, rent charges that are not related to the premises used for any operations, as well as both apprenticeship and training tax. At the same time, it is possible to carry forward losses for a period of up to four years.
Algerian companies, with or without foreign capital and enjoying tax incentives as granted by the investment law, may take the benefit of a tax holiday for corporate income tax. Enjoying this tax relief leads to committing to reinvesting the equivalent of the saved taxes within four years.
The Branch Tax
Since 2009, the Algerian tax law includes a further taxation of the net profit reported by foreign companies present in Algeria through branches or permanent establishments of countries that are not signatories to tax treaties.
For this purpose both branches and permanent establishments of foreign companies are considered as distinctive fiscal professional installations from their mother companies and are consequently taxed on their net profits at the rate of 15%.
Taxation Of Dividends
Dividends paid to Algerian corporate bodies are exempt from taxation as long as the company that pays the dividend has also paid its own corporate income tax.
Otherwise, the taxation of dividends takes place by way of withholding when the dividend is paid to an individual holder of shares, after a withholding of 10% or upon the transfer of dividends in favour of a foreign partner after withholding 15%, unless stated differently in a tax treaty.
Transfer Pricing Rules
Taxpayers are required to maintain documentation on transfer pricing. The documentation, which is originally required about the transfer pricing policy applied among any kind of transactions that are performed between related entities, may be extended to any entity that is based overseas, in situations of presumption of indirect transfer of profit, when tax officers require such extension of documentation. This extension has been brought through an amendment of the fiscal procedures code under the finance act for 2014.
In order to determine the perimeter of these transactions, related parties are those defined under Algerian accounting regulations as well as under Article 141 of the direct tax code.
Companies are considered as related parties in the following situations:
• When one company based inside or outside Algeria is directly or indirectly involved in the management, control or share capital of an entity that is operated in Algeria or outside of Algeria.
• If in a company operated in Algeria or outside of Algeria, the same persons participate directly or indirectly to the management, to the control or to the share capital of a company operated in Algeria or outside of Algeria. Standard documentation should include global information about the activity of the company, its organisational structure as well as the various kinds of transactions between related entities, alongside a description of the group transfer pricing policy. Specific documentation related to the fiscal year should include:
• A description of the company, its activities and the kind of transactions performed, including changes incurred during the fiscal year;
• A description of the operations performed with the related entities including the kind of cashflows and the amounts, including any payments of royalties. These elements can be reported by global flow and by kind of transactions;
• Copies of annual audit reports together with the audited financial statements related to the reported fiscal year;
• The list of key owned intangible assets, including licences, trademarks and trade name;
• Copies of contracts between related companies;
• Financial information, information about over head and administration costs, and costs relating to research and development; and
• A presentation of the transfer pricing method applied during the fiscal year, as well as justifying this method in comparison with the principle of full competition to enable a comparability analysis (analysis of the market, functional analyses, and economic situation contractual provisions). The required documentation is expected with the annual tax return for every fiscal year, from foreign companies and from any corporate entity exceeding an annual turnover of AD100m (€930,000), by April 30 following the relevant fiscal year, which is the deadline for submitting the annual tax return.
Failing to produce this documentation within 30 days following a notification from the tax department may lead to a fine of AD500,000 (€4650) with the reinstatement of the transferred benefits, increased by 25%.
Withholding Tax Regime
The income of foreign companies with no permanent professional installation in Algeria is taxed by way of withholding, mainly when performing a service contract and not falling under the status of a permanent establishment. Foreign service providers may exercise the option to elect for the common law regime. In this case, foreign services providers become responsible for their own taxes and have to meet the same compliance required under the general regime.
When the withholding tax system applies, the tax regulation does not impose the establishment of a formal entity. The client paying the fee is responsible for withholding the tax and for remitting it to the tax collector. In practice, the withholding tax applies only to revenues made by foreign companies for services or management contracts.
Under service contracts, the withholding tax is 24%, while management contracts are subject to 20% withholding. The tax withheld is inclusive of all taxes and clears accordingly corporate income tax, the TAP and VAT with a full discharge of any further taxation. The foreign company is required to provide a return of the revenues and the related withholdings at the end of each year, together with a summary of payments to third parties (representing the total of payments by vendor).
A representative office is only a taxpayer in its capacity of being an employer and consequently is liable for payroll taxes.
According to Algerian regulations, a representative office (bureau de liaison) does not possess the right to perform any kind of business or commercial transaction. It cannot have any kind of revenue, apart from the funding provided by the mother company. Its role is only to represent the mother company that has applied for such an installation, in order to promote its products and services.
A foreign company wishing to set up a representative office has to apply for an agreement delivered by the Ministry of Commerce. The agreement is valid for two years and can be renewed upon term.
Under Algerian domestic tax law, VAT is assessed at a standard rate of 17% or at a reduced rate of 7%, according to the goods or services in question, with respect to certain taxable transactions performed in Algeria by persons or entities which carry on, either regularly or on a casual basis, commercial and industrial activities.
This reduced rate of 7% only applies to a few items and transactions relating to construction activity as well as some goods that the state aims to deliver to the market at affordable prices.
The taxable amount varies depending on the type of transaction liable to VAT. Broadly speaking, the sale price of the good sold or service rendered should be the tax base of the VAT due.
Legal entities with no place of business in Algeria but that are engaged in taxable transactions in Algerian territory are subject to the same VAT rules as Algerian residents. Algerian tax law applies a reverse charge mechanism, putting the liability of the foreign entity providing services outside Algeria on the payer of those services.
The reimbursement of input VAT is only admitted in some given cases (for instance, where the excess derives from the difference in VAT rates applicable to the acquisition of raw materials or in case of closing an activity). Companies delivering goods or services to a client whose operations are exempt from VAT have to get from their client a certificate of exemption for every invoice issued and paid.
The vendor on his side has to apply for an annual budget of VAT exemption to enjoy the exemption of the purchase of goods and services that will be directly related to the scope of the contract.
Domestic Exchange Regulations
Algerian companies are currently subject to domestic exchange regulations. These require that all revenues should be made in local currency, but also enable these companies to access the conversion of their cash so as to pay for their imports.
Local companies can only contract loans from local banks, while affiliates of foreign companies are not allowed to contract shareholders’ loans other than those allowed by Executive Order Nos. 13 to 320 dated September 26, 2013.
This order allows shareholders loans into partners’ current accounts in corporations created in a partnership, provided that it is free of interest and that repayment should not go beyond three years from the date of receipt of funds.
Foreign companies performing contracts, whether they are under the general regime or under the withholding tax regime, are entitled to collect their payments in foreign currency in their home country. However, they often receive a partial payment in local currency, which is a non-convertible portion and restricted to the scope and to the duration of the contract. The transfer of funds for any kind of payment other than the import of goods, to non-residents of Algeria, shall be declared to the tax authorities prior to the effective transfer.
Banks are required to proceed with the transfer only once the attestation of transfer has been made available by the tax department after considering that the beneficiary has cleared any tax liability in Algeria or that he is exempt from taxes.
Such attestation of transfer is applied for transfer of services, where a duty of 3% on the amount subject to the transfer shall be paid.
Personal Income Tax
Any employer in Algeria, whether its employees are expatriates or Algerian nationals, has to comply with the filing and the payment of income tax for employees. According to Algerian tax regulations, individuals whose fiscal domicile is in Algeria are subject to personal income tax for all their revenues. Those whose fiscal domicile is outside Algeria are taxed in Algeria for any revenue earned from an Algerian source.
Individuals are considered tax residents when:
• They have their usual home there, based on an ownership of a house or based on a rental of a minimum period of one year;
• Individuals for whom Algeria is their main location of residence or main location of their activity; and
• Individuals performing a professional activity, for example through freelance employment. For employees, revenue is defined as all wages, salaries and pensions.
The following items are not eligible for taxation:
• Allowances for business expenses;
• Hardship allowances; and
• All social contributions (the employee’s share to social security). The employment of expatriates in Algeria requires work permits and residency. Labour authorities are involved with the work permits and the provincial administration is involved with the residency.
Salaries are subject to social security contributions at 35%. All employers are liable to social security by remitting the employees’ contribution withheld at source at the rate of 9%, together with the employers’ contribution at the rate of 26%. With the exception of those contributing to a social security scheme in a country that has a social security treaty with Algeria, under a secondment scheme, the payment of contributions outside of Algeria does not exempt an employer from paying social security in Algeria. The contribution covers risk injuries, medical expenses, family allowances and pensions. Companies performing an activity related to the construction sector, civil works and hydraulic works are also required to contribute to a special fund to cover paid vacation time.
Employers contribute to this fund at the rate of 12.21% for paid vacation time, with an additional contribution at the rate of 0.75% shared halfway between the employee and the employer, to cover paid days when work is interrupted due to bad weather.
Employers are also liable to an apprenticeship tax amounting to 1% of the total wage cost. The apprenticeship tax may be reduced when a fixed headcount of apprentices has been met.
Another tax of 1% on the total wage cost applies to companies employing more than 20 employees as a professional training tax. This amount can be reduced based on an assessment of the training effort made by the employer, provided that the continuing education has been performed through a public training institution or by an approved trainer. The head of professional training of the relevant province possesses the authority to provide an attestation related to a reduction of these two taxes.
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