A number of legal and tax considerations come into play when bidding on Algerian turnkey projects awarded by an Algerian government entity. This article responds to questions frequently asked by foreign contractors who want to understand the Algerian legal framework before entering the Algerian market. For instance, is the contract price revisable? What are non-transferable dinars? Can English be the language of the contract? How can we mitigate tax exposure in Algeria? Will the Algerian customer accept a letter of credit? What are our warranty obligations after completion of the project? Does Algerian law need to be the governing law of the contract?
The negotiation process
The practice of Algerian government customers is to educate themselves about the best terms of supply and state-of-the-art technology through the bidding process. To acquire this knowledge, the Algerian customer negotiates the contractual terms of a particular project, usually on a staggered basis, with several foreign firms – each of which might be unaware that its competitors are vying for the same project award. Obviously, this approach lengthens the negotiation process considerably and triggers the need for the foreign contractor to recalibrate its pricing.
The negotiating team
We recommend that the foreign supplier organize its negotiating team in two sections: one to deal with the technical, marketing and financing aspects of the project, the other to concentrate on the legal aspects of the project. Moreover, the foreign supplier should make sure to include on the legal team a person who can write and speak French and English effectively. It is difficult for one person to serve as translator, negotiator and drafter at the same time, and it does make sense to divide these functions among different persons (provided, of course, that they work closely together).
Translation of the agreement
The French version of the contract will be the governing version, binding the foreign supplier to the Algerian customer, so it is important that the English translation be as accurate as possible to avoid costly misunderstandings during the implementation phase. Ordinarily, a contract covering any type of Algerian project consists of two sections: the first deals with the legal rights and obligations of the parties; the second deals with the technical aspects of the project. Someone perfectly versed in the English as well as the French terminology of contract law should translate the first section of the contract.
Labour and sourcing supplies
It is possible that the contract will include requirements to use a certain percentage of local workers and local products. The contract will also require, in principle, that the foreign supplier provide training and technical assistance within the framework of the project.
Prices for local labour and materials (whether raw, semi-processed or processed) have increased in the last couple of years and should not be underestimated in the bid. Also, the scope of the local hiring, training and technical assistance to be provided by the foreign supplier should be carefully defined, as this will have an impact on pricing and timeframe for performance.
The foreign supplier should reserve the right, if unable to source services or goods (including raw materials) in Algeria in a timely and cost-effective manner, to secure them from other sources in Algeria or, if unavailable there, from suppliers outside Algeria. The effect on the contractual price of this right should be carefully addressed in the contract. If the Algerian customer does not agree to the foreign supplier reserving the right to select the source of the products and services outside Algeria, the foreign supplier should insist on inserting language regarding the automatic extension of the performance milestones stipulated in the contract and/or the optional right of the foreign supplier to terminate the contract for cause after a set time.
The length of the administrative process for bringing in expatriate staff will also impact the timeframe for performance of the contract.
The foreign supplier must make sure that the contract expressly stipulates that the Algerian customer will assist the company in procuring any necessary work permits for the performance of services in Algeria by its expatriate personnel.
Pricing and payment issues
The currency denomination of the contract price concerning the hardware sourced or services rendered outside Algeria should be clarified with the Algerian customer before submitting the bid. Arguably, if the hardware is sourced in the US as opposed to the EU and/or a US firm is used for the construction work, the monetary unit should be the US dollar and not the Euro. If the Algerian customer requires that the offshore hardware or services in the contract be denominated in euros, the foreign supplier should make sure that this amount is hedged at some point in time.
Price actualization and revision
A recent surge of construction prices in the region, due mainly to the quasi-monopoly held by foreign construction contractors and an increase in demand for qualified local labour and raw materials (because of new oil and gas funds made available for construction projects), requires that the foreign supplier be extremely careful when estimating its costs.
The price for the contract will generally be set up as a variation of a fixed price, which may not be revised unless certain conditions are met. However, the Code of Public Tenders provides that the price may be updated (actualisé). For instance, price updating (actualization) may be granted in the form of a lump sum as agreed mutually by the foreign supplier and the Algerian customer if the term between the deadline for the submission of the bid and the order to begin work (which usually coincides with the date of notification of the contract by the Algerian customer) is greater than the term of validity of the offer, and if economic circumstances so require. If the contract is concluded according to the direct negotiating procedure, the Algerian customer may, in principle, at the expiration of the period of validity of the prices provided in the bid by the foreign supplier, update the prices as of the date of notification of the commencement of the work. In that case, the base indices to be taken into consideration to calculate the new prices are those in effect in the month the validity of the price ended. The effectiveness of this revision is not guaranteed. If performance of the contract is delayed, and if the delay is not attributable to the foreign supplier, fixed price contracts that are not subject to price revisions may be updated.
In certain exceptional circumstances, the Algerian Civil Code allows for a revision of the contract price or even cancellation of the contract. But this would generally require the intervention of the judge or arbitrator. Specifically, the Civil Code provides that, when a contract is concluded as a lump-sum contract according to a plan agreed with the customer, the contractor may not claim any price increase despite modifications or additions to the plan, unless these modifications or additions are due to a fault of the customer or they have been authorized by the customer and their price was agreed in writing with the contractor. The Civil Code expressly refers to the cancellation of the contract as a way to remove its burdensome character: "when as a result of exceptional events of a general character and which were unforeseeable at the time the contract was concluded, the economic equilibrium between the respective obligations of the client and the contractor breaks down and the basis on which the financial estimates of the contract of enterprise where computed has consequently disappeared, the judge may grant an increase of the price or pronounce the cancellation of the contract" (Article 561(3).
The contract should provide for a clear revision mechanism that would kick in automatically if certain stated events occurred (including delay or an increase of the price of certain raw materials). The contract should at least clarify that the price may be updated in accordance with the provisions of the Code of Public Tenders and the Civil Code.
Non-transferable and transferable dinars
If the contract involves the performance of services and the purchase of goods partly in Algeria and partly abroad, the Algerian customer will insist upon paying for these services or goods in non-transferable and transferable dinars (dinars that may be converted into hard currency), respectively. So the foreign supplier should make sure to allocate sufficient funds out of the total contract price to services and goods to be sourced outside Algeria. During the negotiating process, there is likely to be constant pressure from the Algerian customer to increase the non-transferable Algerian dinar portion and to decrease the transferable Algerian dinar or foreign currency portion of the total contractual price allocated by the foreign supplier in its original bid. If services or goods that were originally intended to be bought in Algeria must instead be purchased outside of Algeria because of unavailability, poor workmanship or bad quality of the products sourced in Algeria, the foreign supplier might not be able to use up completely the non-transferable Algerian dinar portion of the project. In principle, the Algerian authorities will not authorize the foreign company to set off this unused credit against the cost overrun incurred outside Algeria. Accordingly, the foreign supplier will need to use its own dollars to purchase the services or goods and could lose the unused non-transferable dinar portion. A sufficient hard currency cushion to absorb these cost overruns at the time that the bid is tendered can usually be built up without losing the edge over competitors.
Scope of the work
The Algerian customer may ask the foreign supplier to allow for a certain percentage of deviation (sometimes as high as 25%) from the agreed contract scope without additional compensation if the agreed milestone dates are not exceeded. If this right is included in the contract, the foreign supplier should press for the inclusion of adequate safeguards, allowing it to curb any abusive exercise of the unilateral right by the Algerian customer to expand or otherwise vary the scope of the agreed work.
If the location of the construction site is not known at the time of the bid, the foreign supplier should budget for the cost of the earthworks and related works, which is frequently underestimated by foreign bidders in Algeria.
Algerian subsidiaries, branches of foreign companies and foreign entities that, although not formally incorporated or registered in Algeria, are deemed to have a permanent establishment (PE) in Algeria, are taxed as follows:
- Algerian corporate income tax (CIT) assessed at the rate of 25% on net profits (that is, gross income minus expenses). The net profit margin must be determined for each category of activities in Algeria (the margin should be reasonable to avoid challenge by the Algerian tax administration).
- The tax on professional activities (TPA) assessed at the rate of 2% on the gross revenues excluding value-added tax (VAT) generated in Algeria. In effect, the TPA is a gross receipts tax. For imports of equipment and materials, a reduced rate of 1.4% for wholesale sales rather than the standard rate of 2% would apply, provided that the Algerian entity is the entity formally importing the equipment and other materials for Algerian customs and VAT purposes and that the equipment and materials are invoiced separately from the other tasks to be performed under the contract by the foreign entity performing the offshore services. So the foreign entity should refrain from importing and clearing equipment/hardware through Algerian customs. The reduced TPA rate applies only to sales and, in principle, should not apply to transactions whose purpose is the delivery of real estate work. To avoid the tax administration questioning the applicability of the reduced TPA, it is recommended to provide for two separate contracts: one for the sale of equipment, the other one for civil works (that is, the real estate work) and related services. These separate contracts should, preferably be concluded between the Algerian entity and two distinct entities.
VAT on goods and services purchased in Algeria
VAT would also be assessable (unless exempted) at the ordinary rate of 17% for real estate (brick and mortar) work and related activities.
Inside Algeria, Algerian VAT will, in principle, be due on services rendered, and equipment or materials delivered by third-party subcontractors.
Depending on the nature of the contract, it is possible that the Algerian government would grant a VAT exemption. Any exemption should be noted in the contract with the Algerian customer.
A reduced rate of VAT of 7% applies to certain goods and services that matter to the Algerian economy, such as radars, turbo-reactors, and equipment for the conversion to LNG or natural gas.
One important issue will be the ability of the Algerian entity to recover, through the ordinary debit/credit or the refund rules, as promptly as possible all VAT that is paid by it to its subcontractors for the real estate work and the transportation, as well as any other services that do not come under the 24% tax (which is inclusive of VAT as further explained below). For this purpose, the foreign supplier should appoint a small accounting firm or other professional service organization in Algeria that can act as an authorized VAT representative for both its permanent establishment in Algeria (that is, brick and mortar work) as well as for the legal entities that will provide services that do not fall under the 24% tax regime.
The 24% tax regime
Any service or intellectual property right (fee, royalty or other compensation) that, although performed or sourced outside Algeria by a foreign entity that does not have a PE in Algeria, is paid for or ultimately used by an Algerian resident is subject, in principle, to the 24% withholding tax regime under the Algerian Code of Direct Taxes. The 24% tax, which is assessed on the gross amount of the fees, is payable at source by the Algerian customer. This tax is deemed to include the CIT, the TPA and the VAT (subject to any applicable tax treaty).
The services rendered outside of Algeria by the head offices of the foreign entity to their PE in Algeria are, according to the position usually adopted by the Algerian tax administration, not subject to the 24% tax. However, as a trade-off, the same tax administration usually requires that those services be debited at cost so that the entire profit of the contract is released in Algeria. Accordingly, one must consider the risk of the possible applicability of the 24% tax or the (more likely) rejection of the deductibility of all or part of the concerned amounts.
The foreign contracting company is, under the regime of the 24% tax, not required to maintain any books and records for purpose of the determination of net profits/losses and the taxable basis because, by definition, the 24% tax is analogous to a gross receipt tax.
CIT instead of the 24% tax
Foreign companies that perform civil engineering work in Algeria will, ordinarily, be deemed to have a PE in Algeria. The 25% corporate income tax rate, the 2% TPA, VAT (unless exempted) and ordinary rules of corporate taxation applicable to Algerian companies will apply.
If the foreign contracting party has no PE in Algeria (that is, services are rendered by an entity other than the entity that engages or supervises/subcontracts the real estate work), the gross fees paid by the Algerian customer to the foreign contracting party that are allocable to services performed outside as well as inside Algeria are subject to the 24% tax (Article 156 bis of the Algerian Code of Direct Taxes, as interpreted by the Algerian tax administration.)
However, under the same Article of the Algerian Code of Direct Taxes, it is possible for the foreign company to opt for taxation on a net profit/loss basis. This option has to be affirmatively exercised. Subject to the approval of the tax administration, the foreign company can, if it exercises the option, apply the 24% tax to the fees allocable to the services (including licensing of technology) sourced outside Algeria and the regime of corporate taxation at the ordinary rate of 25% on an actual profit/loss basis to the services rendered in Algeria. Although the foreign contractor is not supposed to have any fixed installation in Algeria for the application of the 24% tax, a derogatory interpretation by the tax administration allows the foreign company to be taxed concerning its Algerian-sourced services as if the foreign company had a PE in Algeria.
Customs duties, importation VAT and custom clearance
Customs duties (unless exonerated under the contract or by law) generally range between 5% for certain construction parts and 15% for construction materials.
Algerian customer contracts might provide that export duties and foreign taxes are borne by the supplier, while import taxes and duties are borne by the customer. However, on its face, this language does not exempt the foreign supplier/contractor from Algerian corporate and individual income taxes.
The foreign supplier should clarify with the Algerian customer whether they would allow the import of the goods free of customs duties and importation VAT before submitting the bid, to estimate accurately the contract price. If there is a customs duties and VAT exemption, the foreign supplier should inquire whether the exemption would apply to all goods supplied by the foreign supplier to the Algerian customer.
As mentioned above, the foreign entity should refrain from itself importing and clearing through Algerian customs the equipment/hardware. The place of delivery should be before Algerian customs clearance (Incoterms 2000 FOB/FCA, CIF or even, if necessary, DDU) and the Algerian entity (preferably the Algerian customer) should be in charge of the customs clearance process. However, the parties may agree that the foreign entity remains in charge of the safekeeping, transport and assembly of the equipment and materials.
The project might, in certain circumstances, benefit from the investment incentives legislation. The project needs to be reviewed on a case-by-case basis to provide guidance to the foreign supplier in this respect.
The guarantee of good performance provided in the Code of Public Tenders generally applies to construction and supply contracts.
Ordinarily, bank guarantees, rather than confirmed letters of credit, are the favoured means of security for Algerian government purchasers. The reason for this preference is that, in the mind of the Algerian purchaser, the use of a letter of credit is costly, and the seller then directly or indirectly charges that cost to the purchaser. Accordingly, although a letter of credit issued by an acceptable foreign bank might be an acceptable guarantee, the preferred medium in the Algerian mindset is a bank guarantee. A corporate guarantee might also be an acceptable form of security, but only as an umbrella guarantee. As set out in the Code of Public Tenders, the type of guarantee offered plays an important role in the choice of the foreign contractor and a company corporate guarantee might not be enough to convince the Algerian customer to select the foreign supplier as its contract partner (unless, for instance, the foreign supplier is to subcontract an important part of the work locally).
However, the foreign supplier's ability to obtain a contractual guarantee from a bank could be an issue. Historically, US banking laws have prohibited the issuance of bonds for this purpose. So a US bank could not be used for this purpose, although it might be possible to use a non-US branch of a US bank. Non-US banks are also a possibility. The solution to this issue would seem to be the use of letters of credit in lieu of the bonds. However, this might not be feasible with the Algerian customer.
As a general principle, the wording of the bonds or guarantees should seek to minimize references to the contract terms and should operate independently of the contract in its final form. This is desirable for all parties. There should be an ascertainable monetary limit to the bonds/guarantees, clearly defined expiration dates and conditions upon which any guarantee is called.
Another important issue is the choice of governing law, which, according to Algerian law and practice, is necessarily Algeria. Most banks outside Algeria would take issue with this point. A solution might be to leverage this point in the negotiations to obtain a guarantee from an Algerian bank.
The Algerian customer will usually request guarantees not only with respect to the construction/installation of the structure and related equipment but also with respect to its operation over a specified period.
The Algerian customer will want to look to the foreign supplier as its sole contractual party. However, particularly in a turnkey project, the Algerian customer will not oppose itself to the selection of specific sub-contractors. Because the Algerian customer will not assume responsibility for contracting with one or more subcontractors, it is the responsibility of the foreign contractor to make sure that any subcontractor complies with the terms of the main contract.
Articles 95 and 96 of the Code of Public Tenders provide that "the contracting party is solely responsible vis-à-vis the Algerian customer for the performance of the subcontracted portion of the contract" and that "the use of subcontractors is possible under the following conditions:
• the primary working area of the subcontractor must be provided in the contract;
• the choice of the subcontractor must be approved in advance by the Algerian customer;
• when the work to be performed by the subcontractor is provided in the contract, said subcontractor may be paid directly by the Algerian customer."
The Algerian Civil Code adopts the same solution. The contractor may entrust the work, in whole or in part, to a subcontractor, provided that it is not prohibited to do so by a clause of the contract or if the nature of the work does not require its personal skills. In this case, the contractor (that is, the foreign supplier) remains liable vis-à-vis the customer for the actions of the subcontractors.
Right of direct action
Under Article 565 of the Civil Code, the subcontractors and the workers (that is, employees) who work for the account of the contractor to perform the work have a direct right of action against the customer up to the sums that are due by the customer to the contractor at the time the legal proceedings are filed. The employees of the subcontractors have also, under Algerian law, a direct right of action against the contractor and the customer. Their claims are treated as preferential under Algerian insolvency law.
Warranty of architects and contractors
It is possible, using negotiation leverage, to effectively place a cap on the liability exposure of the foreign contractor, but the scope of the negotiation on this point is limited by mandatory provisions of the Civil Code concerning the 10-year warranty of architects and contractors. This statutory warranty period starts running from the date of final acceptance of the work.
The Civil Code provides in relevant part that:
- "The architect and the contractor are jointly and severally liable, during ten years, for the total or partial destruction of the real estate work or other permanent work, even though the destruction would have been caused by defects in the ground.
The warranty set forth in the preceding subparagraph extends to the defects which exist in constructions and works and which threaten the solidity and safety of the work. The ten-year period starts from the date of the final acceptance of the work.
This article does not apply to the recourse, which the contractor could exert against the subcontractors" (Article 554).
- "The architect who only prepares the plans of the work without assuming the monitoring of the performance of the work answers only of the defects arising from his plans" (Article 555).
- "Any clause excluding or limiting the warranty applicable to the architect and the contractor is null" (Article 556).
- "The preceding action in warranty is tolled three years after the date of occurrence of the destruction or the discovery of the defect in the work (Article 557).
- "As soon as the contractor has completed the work and has placed it at the disposal of the customer, the latter must proceed, as soon as possible, to its acceptance, in accordance with business practices. If notwithstanding the legal summon received by the customer, the latter does not accept the work without just cause, the work is deemed accepted" (Article 558).
The standard business practice is that acceptance should occur within 20 days from the notification of the completion of the work by the contractor and an acceptance report (involving both parties) should be prepared to this effect.
Acceptance occurs in two phases.
At the end of the works, and after the procedure described above, the customer accepts the works with or without reservation. From this moment begins the performance warranty period. During this period, which is stipulated in the contract, the contractor remains liable for all defects notified by the customer.
Final acceptance will not occur until the end of the performance warranty, if the contractor has answered all reservations. If the customer does not declare the final acceptance of the work, the work is deemed accepted after the expiration of the above-mentioned period. The 10-year warranty starts from the moment of final acceptance of the work.
The 10-year warranty period may not be suspended or interrupted. The contractual parties may agree to increase its duration but may not exclude or limit it.
Also, the customer does not need to prove the fault of the contractor because the 10-year warranty constitutes an obligation of result (that is, the work must conform with the agreed specifications for 10 years from the final acceptance of the work). The destruction or loss event is enough to trigger the contractors' (and the architects') responsibility, unless they can prove the existence of a force majeure event, the fault of the customer (that the contractor and the architect, as professionals, were unable to foresee or avoid) or the (unforeseeable and unavoidable) fault of a third party unrelated to the construction.
The foreign supplier would be the signatory of the contract with the Algerian customer, so it would also be deemed the main contractor and the architect of the works by the Algerian customer. Legal authors consider that the 10-year warranty is derived from the contract between the main contractor and the customer and cannot be used against subcontractors. Accordingly, any risks related to construction work performed by a third-party subcontractor who will be in charge of the brick and mortar work cannot be shifted to that subcontractor in the contract with the Algerian customer.
Limitation of risk
Some of the risk could be shifted to the subcontractor by entering into an agreement between the foreign supplier and the subcontractor, whereby the subcontractor would agree to compensate the foreign supplier for any claim of the customer or any of the subcontractors or workers of the subcontractor. However, if the subcontractor files for bankruptcy or judicial receivership, the foreign supplier, as a general principle, would not have a preferential claim under Algerian law.
Ordinance 95.07 of January 25 1995 regarding insurance in matters of construction provides that any architect, contractor, technical controller or other intervening person whose professional civil liability may be engaged with respect to construction works must be covered by an insurance policy. Specifically, architects, contractors and technical controllers must cover their 10-year warranty set out in the Civil Code with an insurance contract from the time of the final acceptance of the works.
The foreign supplier may obtain this insurance locally or abroad. The foreign supplier should check the price of the insurance premiums for inclusion in the bid price.
Liability in case of termination
Algerian contract law provides that the parties may agree on the amount of compensation due in case of non-performance of their respective contractual obligations. The parties may also agree to release the debtor from the contractual obligation of its liability in case of non-performance except in case of fraud or grave fault of its employees.
Under Algerian law, if the amount of compensation due by the breaching party is not set out (or at least quantifiable) in the contract with the Algerian customer, it will be determined by the judge designated by the contract. In the absence of fraud or grave fault, damages are limited to what was foreseeable by the parties when concluding the contract. The judge may also reduce the amount of the compensation agreed by the parties if the breaching party can show that the amount is unreasonable or that the obligation has been performed in part. Generally, however, the creditor of the obligation may not claim a higher amount of damages than the amount provided in the contract with the Algerian customer, unless it can prove fraud or grave fault of the breaching party and a direct causation between that fraud or grave fault and the harm suffered.
The invitation to tender likely will provide that the Administrative Chamber of the Court of Algiers has jurisdiction in case of disputes and that Algerian law will be the governing law of the contract.
It would clearly be preferable for the foreign supplier to bring any dispute regarding the performance of the contract before an international arbitral tribunal, which offers greater assurances of independence regarding the parties.
From a legal standpoint, arbitration of any dispute is permissible even with the public sector, if the contract from which the dispute arises has an international commercial nature.
Governing law and forum
It is unlikely that the Algerian customer will accept the inclusion of an international arbitration clause (such as ICC or Uncitral), particularly if the arbitral tribunal sits outside Algeria. In principle, even if the Algerian customer accepts such a clause, Algerian law will be the governing law. However, in some cases government entities have accepted the jurisdiction of an international arbitral tribunal (such as ICC with an arbitration tribunal in Switzerland). These were instances where the Algerian customer was in urgent need of the foreign hardware and expertise.
Celine van Zeebroeck
Baker & McKenzie
Celine van Zeebroeck is an associate at Baker & McKenzie, Chicago. She studied law at the Facultés Notre-Dame de la Paix in Namur (Belgium), the Universidad Complutense of Madrid (Spain) and the Catholic University of Leuven (Belgium), where she received her JD. She also obtained an LLM from The University of Chicago. She is admitted to the Brussels Bar.
Since 1999, she has conentrated on advising US and foreign corporations doing business in and with Algeria, Morocco and Tunisia, and other developing nations in French-speaking Africa, with an emphasis on local corporate, labour and tax issues. Celine van Zeebroeck has co-authored, with Michael Coleman, several articles on Algeria concerning the Algerian Code of Public Tenders of 2002, the repeal of the statutory ban on the retention of intermediaries and the tax aspects of the 2005 Hydrocarbons Law as amended in 2006.
Celine van Zeebroeck is fluent in French, English and Dutch and has a good knowledge of Spanish.
Michael L Coleman
Baker & McKenzie
Michael L Coleman was born and raised in Belgium. He is a graduate of the University of Toronto (BA degree with honours), the School of Law of the University of Brussels (JD degree, magna cum laude) and Tulane Law School (JD degree; order of the Coif and editor, Tulane Law Review). Mr Coleman joined the international law firm of Baker & McKenzie as an associate in 1973 and was elected partner of Baker & McKenzie in 1980. Mr Coleman is resident in the Chicago office of Baker & McKenzie. Since 1973, one of his areas of concentration has consisted in advising US corporations doing business in and with Algeria, Morocco and Tunisia, and other developing nations in French-speaking Africa, with an emphasis on local corporate, labour and tax issues. He has travelled extensively to Algeria, counselling US and European-based clients in regard to large infrastructure projects.
Michael Coleman authored during the eighties and nineties numerous articles on the legal and tax treatment of expatriates assigned to Algeria for turnkey projects and on the negotiation of industrial joint venture agreements in Algeria. More recently, he co-authored, with Celine van Zeebroeck, an associate of Baker & McKenzie, two articles on the Algerian Code of Public Tenders of 2002 and the repeal of the statutory ban on the retention of intermediaries, and two articles on the new Algerian Hydrocarborns Law of 2005 as amended in 2006.
Coleman is fluent in French and English and has a working knowledge of Dutch.