The key message for manufacturing companies that are still encouraged by incentives is that the 2016 Finance Act has not significantly changed the Direct Taxes Code or the Code of Taxes on Sales despite the continuing fall of oil prices.
The Supplementary Finance Law of 2015, published in July of that year, had already granted reduced rates of corporate income tax for manufacturing activities, after serious lobbying by the leaders of the Forum of Enterprises and the construction sector.
Stable tax rates, together with an ongoing simplified system for local companies with a turnover not exceeding AD30m (€248,000), seems to be the trend that Algerian authorities will maintain.
The 2017 Finance Act recently adopted by Parliament confirms this trend for direct taxes, with one exception being value-added tax (VAT), which will be increased from 17% to 19%.
The tax regime differs from the window used to enter the Algerian market. This tax contribution addresses the main taxes in place in conjunction with the different kinds of presence in Algeria.
Representative offices are allowed for foreign companies that are willing to maintain a presence in the Algerian market, liaising with potential and existing clients, but with no right to perform any kind of business.
After being deeply scrutinised in 2015, representative offices have been provided with new licences in 2016. In reference to the last Order from the Ministry of Commerce, dated November 9, 2015, a more selective process has been put in place, whereby the agreement delivered by the Ministry of Commerce is still provided for two years after the company has paid a registration duty of AD1.5m (€12,400) and agrees to maintain a bond of AD30,000 (€248)for the duration of the representative office’s existence.
In the absence of business revenue due to the restrictions imposed on such entities, representative offices do not pay taxes directly related to business, with VAT ending as a cost, but may be liable for payroll taxes to be withheld from salaries at source, should the representative office be an employer.
This kind of entity can only be set up if a contract is signed by an entity established in Algeria and a foreign company.
Foreign companies may set up a permanent establishment when they perform a construction contract or when they fall under the provisions of a tax treaty, concluded to avoid double taxation and which extend the same tax system applicable to local companies. Most of the time a permanent establishment can enjoy a business presence in Algeria as long as the foreign company has a valid and ongoing contract with a client established in Algeria.
The existence of a permanent establishment enables the foreign contractor to contract with third parties, hire employees and open bank accounts. FOREIGN FIRMS WITH NO PERMANENT PROFESSIONAL PRESENCE: This kind of presence is limited to service contracts performed by foreign companies which do not have a permanent professional presence in Algeria, where the applicable tax regime consists of a withholding tax of 24%, or 20% for management contracts.
This withholding tax is an all-inclusive tax, withheld at source, and covers both corporate income tax, turnover tax and VAT, unless a tax treaty states different tax rates or excludes the foreign company from Algerian direct taxes.
When the withholding tax system applies, the tax regulation does not impose the setting up of a formal entity. The client paying the fee is responsible for withholding the tax and for remitting it to the tax collector.
The tax law in Algeria still allows foreign companies which have no professional establishment to elect for the general taxation regime, commonly known as the common law regime.
Algerian Corporate Entities
Resident corporate entities are companies incorporated in Algeria, with or without foreign shareholders.
Local companies which are incorporated in Algeria may be formed between Algerian partners and foreign partners, provided that the national majority stake rule is met.
The majority rule applies to both manufacturing activities and trading activities, and requires that an Algerian national, resident in Algeria, shall hold a minimum stake of 51%, bearing in mind that pure trading activities do not qualify as investment.
Registered branches, addressed as succursale d’ upstream oil industry and banking, since legislation introduced in 2009 imposed the Algerian-majority stake requirement, set at a minimum of 51% in manufacturing and services, as well as in trading activities. Various forms of companies are available, such as:
• Joint stock companies (Société par actions), with a minimum share capital of AD1m (€8270), requiring a minimum of seven shareholders and managed through a board of directors or through a supervisory board aside a directorate;
• Limited liability company (société à responsabilité limitée), with no minimum share capital to be agreed between the partners, with the possibility to consider industry intake, and with no share in capital but agreed shares in profits;
• Sole partner limited liability company (entreprise unipersonnelle à responsabilité limitée), with no minimum share capital;
• Limited partnership (société en commandite par actions), with a minimum share capital of AD1m (€8270). Contributions can be made in cash for all kinds of companies.
The general tax regime, which includes the key direct taxes, applies to local entities and foreign companies conducting business in Algeria under the status of a permanent establishment.
The General Tax 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 foreign direct investors. It also applies to permanent establishments of foreign companies, present in Algeria for the performance of a contract, or those foreign companies electing for this regime instead of the withholding regime.
The general regime, which is also applicable to foreign companies incorporated outside Algeria, with a standalone permanent establishment or as members of consortia in Algeria, 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 turnover tax (taxe sur l’ the taxpayer. Unlike VAT, the TAP is a direct tax and is paid by the individual or the company performing the business, and 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.
TAP shall be paid at the district where the work or service is performed. However, since 2013 taxpayers of the Division for Large Enterprises (Direction des Grandes Entreprises, DGE) can pay this tax together with all other taxes at the collector’s desk at the DGE.
Algerian companies, with or without foreign capital, which enjoy tax incentives as granted by the investment law, may benefit from a tax holiday for TAP. This tax relief leads to a commitment to reinvest 30% of the taxes saved within four years of the fiscal year in which the incentive was used; the same applies for corporate income tax.
Manufacturing activities enjoy a reduced rate of 1%, without the benefit of any further reduction, while a reduction of 25% is granted for construction activities, and civil and hydraulics works.
Construction activities, and civil and hydraulics works, are those which are registered as such in the company’s register and which lead to the payment of specific social security contributions.
The Corporate Income Tax
The filing of corporate income tax for corporate bodies takes place at the headquarters’ location in Algeria or at the location of the main establishment.
The annual tax return is due by April 30 of the following year, inclusive of the payment of the balance after the instalments have been paid during the relevant fiscal year.
For Algerian companies, instalments are based on the profits of the previous year. Three instalments, at 30% of the prior year’s profit shall be paid, respectively due by March 20, June 20 and November 20. By exception, foreign companies subject to the general regime pay the instalments at 0.5% on every payment received – including advance payments – in reference to the total value of the contract, which is meant to be VAT inclusive. Corporate income tax rates apply as follows:
• 19% for manufacturing activities;
• 23% for construction activities, and civil and hydraulics works, as well as for tourism and thermal activities, excluding travel agencies;
• 26% for the other activities. In the case of joint activities, it is required to keep separate bookkeeping; in the absence of separate accounting, the 26% rate applies by default.
It should be noted that for the purposes of enjoying the rate of 23%, construction companies, and civil and hydraulics works must meet the requirement of contributing to social security funds.
For the purpose of calculating the taxable profit, expenses incurred for the direct interest of the business are allowed for deduction, provided that they should be effective and properly documented. A few restrictions are stated by the tax law, which limits:
• The deduction of cars’ depreciation, to AD1m (€8270) in reference to the purchase price;
• The deduction of overheads limited 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. The Algerian tax regulation disallows, for the purposes of corporate income tax calculation, the deduction of fines and penalties charged for non-compliance with laws and regulations, rent charges that are not related to premises used for the operations, and both apprenticeship and training tax, while losses can be carried forward for four years.
Algerian companies, with or without foreign capital and enjoying tax incentives as granted by the investment law, may benefit from a tax holiday for corporate income tax. Enjoying this tax relief includes a commitment to a reinvestment of 30% 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 when they are from a non-tax treaty country.
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, provided that the company which pays the dividend has 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 at a rate 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
The year 2016 continued to be a year of core focus on transfer pricing documentation submitted by taxpayers. The 2017 Finance Act will quadruple the penalty for the default of such documentation, up to AD2m (€16,500), which is to say that this matter is a key issue for Algerian tax authorities.
The documentation, which was originally required for the transfer pricing policy applied to any kind of transactions performed between related entities, may be extended to any entity based overseas in situations where it is presumed that there is an indirect transfer of profit and when tax officers require such extension of documentation.
Entities Are Meant To Be
Undefined • When one company based in Algeria or outside of Algeria is directly or indirectly involved in the management, the control of or the share capital of an entity 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 in the management, the control of or the share capital of a company operated in Algeria or outside of Algeria.
Standard documentation should include a global information document which includes information about the activities of the company, its organisational structure and the kind of transactions that take place between the related entities, together with a description of the group transfer pricing policy. Specific documentation related to the fiscal year is also required, including:
• A description of the company, of 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 flows and the amounts and any payments of royalties. These elements can be reported by global flow and by the type of transaction;
• Copies of annual audit reports, together with the audited financial statements related to the reported fiscal year;
• The list of key owned intangible assets, such as licences, trademarks, trade names and know-how;
• Copies of the contracts between related companies;
• Financial information about overheads and admin costs, and research and development costs;
• A presentation of the transfer pricing method applied during the fiscal year, 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 (€827,200) 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 (€4140), with the reinstatement of the transferred benefits, increased by 25%.
In 2016 VAT continued to be 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.
The reduced rate of 7% applies to a few items and transactions relating to construction activity and some goods which the state aims to deliver to the market at affordable prices.
The 2017 Finance Act will enforce an increase of the standard rate up to 19% and the reduced rate up to 9%.
The taxable amount varies depending on the type of transaction liable to VAT. In broad terms, 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 engaged in taxable transactions on 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 of Algeria on the payer of those services.
Reimbursement of input VAT is only admitted in some given cases (for example, in those cases where the excess derives from the difference in VAT rates applicable to the acquisition of raw materials or in the case of closing an activity). Companies delivering goods or services to a client whose operations are exempt from VAT have to get a certificate of exemption from their client for every invoice issued and paid.
The vendor on its 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.
Personal Income Tax
Any employer in Algeria, no matter whether the employees are expatriates or Algerian nationals, has to comply with the filing and payment of income tax for employees.
According to Algerian tax regulations, individuals who have their fiscal domicile in Algeria are subject to personal income tax for all their revenue. For those whose fiscal domicile is defined as being outside of Algeria, they are taxed in Algeria for their revenue earned from an Algerian source. Individuals are considered to be tax resident in Algeria when:
• They have their usual home there, based on an ownership of a house or based on a rental for a minimum of one year;
• Individuals for whom Algeria is the main place of residency or the main place of their interests or activities;
• Individuals performing a professional activity (either in employment or freelance). For employees, the revenue is defined as all wages, salaries and pensions.
The following items do not attract taxation:
• Allowances for business expenses;
• Hardship allowances for work performed in isolated regions; and
• All social contributions (employee’s share to the social security). The employment of expatriates in Algeria requires work permits and residency. Labour authorities are responsible for work permits and the administration of each province is responsible for residency.
Salaries are subject to 35% social security contributions. All employers are liable to pay 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%.
Except for those contributing to a social security scheme in a country which 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 the pension.
Companies performing an activity related to the construction sector or to civil and hydraulic works are also required to contribute to a special fund to cover paid vacation for employees.
Employers contribute to this fund at the rate of 12.21% for the paid vacation of their employees, with an additional contribution at the rate of 0.75% shared halfway between the employee and the employer, to cover the paid days for interruption of works in the event of adverse weather conditions.
The Supplementary Finance Law of 2015 has brought a new provision to enable any active person occupied, not subject to social security, to voluntarily join the social security regime and enjoy medical cover for sickness and maternity, subject to a monthly 12% payment calculated on the minimum national guaranteed wage.
The Supplementary Finance Law of 2015 has also introduced an additional threat for those who do not declare employees to social security. Any employer who fails to declare his employees to social security, within the period prescribed by the legislation in force, (10 days from the first day of employment), is punishable by a fine of AD100,000 (€827) and an additional AD200,000 (€1650) per worker not declared, and a term of imprisonment of between two and six months, or one of the two penalties.
In the case of recidivism, the employer is liable to a fine of between AD200,000 (€1650) and AD500,000 (€4140) per worker not declared, and a term of imprisonment of between two and 24 months.
Other Taxes Related To Employment
Employers are also liable to an apprenticeship tax of 1% of the total wage cost. The apprenticeship tax may be reduced when a fixed headcount of apprentices is met.
Another 1% tax on total wage cost takes place in companies employing more than 20 employees as a professional training tax. However, the amount of this tax can be reduced based on the assessment of the training efforts 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 has the authority to provide the attestation related to a reduction of these two taxes.
Other Significant Aspects Of Finance
Algerian companies are subject to the Algerian exchange regulation, which on one hand requires that all revenue should be made in local currency, and on the other hand enables these companies to have access to the conversion of their cash for paying 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 No. 13-320 dated September 26, 2013.
This order allows shareholders loans into partners’ current accounts in corporations created under a foreign direct investment or in 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 under the General Regime or under the withholding tax regime, are entitled to collect payments in foreign currency in their home country, but would frequently receive a partial payment in local currency, which ends as a non-convertible portion and restricted to the scope and duration of the contract.
The transfer of funds for any kind of payment other than for 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 paying offshore services, where a duty of 3% on the amount subject to the transfer shall be paid. For the import of goods or equipment the duty is paid at the rate of 0.3% on the amount of the import value, with the duty not being less than AD20,000 (€165).