A look at tax regulations for investors in Algeria
Posted by Serrai Invest Capital Ltd ( Media Team)
Although 2015 will be recalled as a sensitive year for the Algerian economy, given the ongoing impact that the global drop in oil prices has had on the state budget, no significant increase in taxes has occurred and the Algerian tax system remains oriented around incentives for boosting manufacturing activity.
Primary Tax Codes
Structured around five key tax codes, the Algerian tax system is governed through the following:
- 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, governs the relationship between the tax department and taxpayers, including their respective rights and obligations, the determination of the tax base, tax collection processes and litigation rules.
Direct taxes – mainly corporate income tax and turnover tax (taxe sur l’activité professionelle, TAP) – have been subject to significant amendments during this fiscal year, by reference to the Supplementary Finance Law published in July 2015.
Taxes on sales, such as VAT, have not been subject to significant changes in 2015, but it is said that some may take place in 2016, with some products moving from a reduced rate to the standard rate, and with an extension of the internal consumption tax.
Except for foreign companies performing services and those based in a country with which Algeria holds a specific tax treaty, all other corporate entities are subject to the general taxation regime, which is frequently referred to as the common law regime.
The general regime applies to local entities and to those foreign companies conducting business in Algeria under the status of a permanent establishment, even when they are from a tax treaty country.
Different Types Of Presence
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, bearing in mind that these activities do not qualify as investments from a foreign direct investment perspective. Various forms of companies are available, such as the:
- Joint-stock company, with a minimum share capital of AD1m (€9200);
- Limited liability company, with a minimum share capital of AD100,000 (€920). It has been announced that the Algerian commercial law will be soon amended to enable an AD1 (€0.0092) share capital company;
- Sole-partner limited liability company, with a minimum share capital of AD100,000 (€920); and
- Limited partnership, with a minimum share capital of AD1m (€9200). Capital contributions can take place in cash or in kind for all types of company.
Apart from taking a stake in an Algerian company, foreign companies may also 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 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.
Registered branches, addressed as Succursale d’Entreprise Etrangère, are no longer allowed, except in the upstream oil industry and in banking. This has been true since 2009 when Algerian legislation imposed the requirement of an Algerian-majority stake at a minimum of 51% in manufacturing and services, as well as in trading activities.
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.
Investigations were carried out on existing representative offices in 2015 by the Ministry of Commerce, which is becoming increasingly selective in delivering agreements to foreign applicants.
The agreements delivered by the Ministry of Commerce are valid for two years, and can be renewed upon term. These will only be provided to companies involved in manufacturing, excluding those dealing in consulting and in pure trading.
A representative office is only a taxpayer in its capacity as an employer and is consequently liable for payroll taxes withheld at source.
The Supplementary Finance Law of 2015 has significantly increased the registration duty required upon a new registration or upon a renewal of agreement, from AD100,000 (€920) to AD1.5m (€13,800).
General Tax Regime
The general regime governs the taxation of individuals, residents of Algeria and resident corporate entities, regardless of whether these entities are owned by Algerian nationals or by foreign direct investors.
It also applies to permanent establishments of foreign companies, which are present in Algeria by the performance of a contract or otherwise, and those foreign companies that have chosen to be governed by this regime instead of the withholding regime. The general regime may also apply to registered branches that were established before 2009. The general regime, which is also applicable to foreign companies incorporated outside of Algeria but with a standalone permanent establishment or as members of consortia in Algeria, includes two main taxes:
- The TAP; and
- The corporate income tax. Some foreign companies with a permanent establishment may also end up paying a branch tax.
The TAP ends as 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 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 based on the total collections.
TAP shall be paid at the district where the work or service is performed. However, since 2013, tax payers 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 of the DGE.
Algerian companies, with or without foreign capital, enjoying tax incentives as granted by the investment law, may take benefit of a tax holiday for TAP. This tax relief requires a commitment to reinvest 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. The Supplementary Finance Law 2015 has redesigned the rates, particularly for manufacturing activities, which now enjoy a reduced rate of 1% without the benefit of any further reduction. A reduction of 25% was also granted for construction activities and civil and hydraulics works.
Construction activities and civil and hydraulic work are those registered as such at the companies’ register and which lead to the payment of specific social security contributions.
Corporate Income Tax
For corporate bodies, the filing of corporate income tax 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 in reference to the prior year’s profits.
Three instalments at 30% of the prior year’s profit shall be paid, respectively due by March 20, June 2 and November 20. For their part, 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 inclusive of VAT.
The single corporate tax rate of 23% introduced by the Finance Act 2015 was amended in July 2015 by the Supplementary Finance Law in July 2015, which re-introduced the 19% tax rate for manufacturing activities. The rate for corporate income tax has now been fixed at:
- 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 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% for construction activities and civil and hydraulics works, companies 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 (€9200) in reference to the purchase price;
- 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. The Algerian tax regulation does not permit, for the purpose 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 taxes. 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 take benefit of a tax holiday for corporate income tax. Enjoying this tax relief leads to committing to reinvest the equivalent of the saved taxes within four years.
Since 2009, the Algerian tax law includes 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 that 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 at 15% if the dividend is paid in favour of a foreign partner, unless stated differently in a tax treaty.
Transfer Pricing Rules
The year 2015 has seen a greater focus on the transfer pricing documentation submitted by taxpayers. It will likely continue to be an area of interest for the 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. This extension has been brought through an amendment of the fiscal procedures code under the Finance Act of 2014.
In order to determine the perimeter of these transactions, related parties are those defined under the Algerian Accounting Law and furthermore under Article 141 of the Code of Direct Taxes. Under the wording of these regulations, companies are considered as related parties in the following situations:
- When one company based in Algeria, or outside of Algeria, is directly or indirectly involved in the management, in the control or in 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, in the control or in the share capital of a company operated in Algeria or outside of Algeria.
Standard documentation should include a global information document about the activities of the company, including its organisational structure and details on the kind of transactions 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;
- Copies of contracts between related companies;
- A description of the operations performed with the related entities including the kind of flows 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, such as licenses, trademarks, trade names and know-how;
- Financial data, and information about overhead administration, 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 annual turnover of AD100m (€920,000), by the 30th of April following the relevant fiscal year, which is the deadline for submitting the annual tax return. Failing to produce documentation within 30 days following a notification from the tax department may lead to a fine of AD500,000 (€4600) with the re-instatement of the transferred benefits, increased by 25%.
Withholding Tax Regime
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 services 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.
In cases where the withholding tax system does apply, 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 a 20% withholding tax.
The tax withheld is inclusive of all taxes and therefore clears corporate income tax, the TAP and the VAT with a full discharge of any further taxation. The foreign company has to provide a return every year-end summarising the revenues and the related withholdings, together with a summary of payments to third parties (total of payments by vendor).
Under Algerian domestic tax law, VAT is assessed at a standard rate of 17% or at a reduced rate of 7%, according to the specific 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 activities and 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. 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 in Algeria are subject to the same VAT rules as Algerian residents. A reverse charge mechanism is applied, 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.
Other Significant Finance Aspects
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 to the 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 (€184).
Income Tax On Salaries
Any employer in Algeria has to comply with the filing and the payment of personal income tax for employees.
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 somewhere outside Algeria, they are taxed in Algeria for their revenue earned from an Algerian source.
Individuals are considered to be a 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 activities; and
- Individuals performing a professional activity (either in full employment or freelance). For employees, 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 involved with the work permits and the province administration is involved with the residency.
Salaries are subject to 35% social security contributions. 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%.
Except for those who are making contributions 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 overseas contribution 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 required 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 employed in the economy, but not subject to social security, to voluntarily join the social security regime and enjoy medical cover for sickness and maternity, subject to a monthly payment of 12% calculated on the minimum national guaranteed wage.
The Supplementary Finance Law 2015 has also introduced additional threat against the lack of declaring employees to social security.
Any employer who fails to declare his employees to social security, within the period prescribed by the legislation in force (ten days from first day of employment), is punishable with a fine of AD100,000 (€920) and AD200,000 (€1840) per worker not declared, and a term of imprisonment of two to six months, or one of the two penalties.
In the case of recidivism, the employer is liable to a fine of AD200, 000 (€1840) to AD500,000 (€4600) per worker not declared, and a term of imprisonment lasting between two and 24 months.
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.
This reduction can be carried out 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 thus has the authority to provide the attestation related to a reduction of these two taxes.