In an IFLR article published in 2009 we predicted that the Algerianisation measures adopted by the Algerian government, in particular the obligation for foreign investors to establish an entity with 51% Algerian resident shareholders for any investment project, would have to be modified in order for Algeria to continue to attract foreign investors (see http://www.iflr.com/Article/2366642/Channel/193438/Algeria-Algerianisation-will-be-modified.html). Statistics published by the National Agency for Investment Development (ANDI) reveal that the agency received only four foreign investment projects in 2009 compared to 102 projects in 2008. Wary investors have been reluctant to enter the country. The trend for 2010 is no better: only 10 investment projects have been submitted to ANDI, all by US investors.
The Supplementary Finance Law for 2010
The Algerian government has decided to pursue its Algerianisation measures at different levels in 2010. The Supplementary Finance Law for 2010 (SFL 2010), the new Ordinance on Money and Credit, and the new Presidential Decree on public tenders, all contain requirements to grant a greater share of the Algerian economy to Algerian resident nationals. At the same time, there are signs that the Algerian government is starting to tone down its Algerianisation policy in order to bring back foreign investors, thereby ensuring that Algerians contribute equally to the national economy.
Modification of commercial registry
While a number of the provisions of Ordinance No. 10-01 of August 26 2010, that set forth the SFL 2010, are aimed at further controlling foreign investment, Article 45 reassures foreign investors by clarifying the requirement that any modification to the commercial registry enrolment is subject to prior compliance with the 51% Algerian majority shareholding rules does not apply in the following circumstances:
- modification of the share capital which does not trigger a change of shareholders or the allocation of shares between shareholders;
- suppression of an activity or addition of an ancillary activity;
- modification of an activity as a result of the modification of the nomenclature of the activity;
- appointment of the Manager or officers of the company; and
- change of registered office.
Validity of commercial registry
According to Article 58, the validity of the commercial registry abstract can be limited for certain activities. This new measure is not fully spelled out in the SFL 2010 and will be clarified by the Ministry of Commerce. According to the Minister of Commerce, the purpose of this new measure, which sets the duration of validity of the commercial registry, granted for certain activities, at between one and three years, is to give more credibility to this document and to more efficiently control the activities of economic operators (including those which do not issue invoices, post official prices or file their annual corporate accounts).
Although not specifically directed at foreign investments, could the new measure also allow foreign companies to register a fully owned subsidiary for one to three years until a suitable Algerian partner is found and in time for the requirement to conform to the majority Algerian shareholding requirements? There is at this time no clear answer to this question.
Right of first refusal of the State
The SFL 2010 confirms and reinforces the exercise of the right of first refusal of the State on any transfer of participations of or for the benefit of foreign shareholders. In particular, Article 46 provides that any transfer of shares is subject to the presentation of a certificate of renunciation of the Algerian State to exercise its preemptive right delivered by the Ministry of Industry.
The notary, who is in charge of drafting the deed of transfer, presents the request and the certificate is delivered, in principle, to the notary within one month. The Algerian state is deemed to have renounced its preemptive right if it fails to respond. If the Algerian state decides to exercise its preemptive right, the price is determined on the basis of an appraisal. Even where the certificate has been delivered, the State retains the right to exercise its right of first refusal for one year, if the price is insufficient.
Transfer of shares of companies who benefited from investment incentives
Pursuant to Article 47, the total or partial transfer of shares of companies holding shares in Algerian companies that benefited from incentives at the time of their establishment is subject to prior consultation with the Algerian government. For reasons of national sovereignty, the Algerian State and public companies have the right to repurchase the shares of the company concerned by the direct or indirect transfer of shares.
Increased control for transfer of foreign currency abroad
The SFL 2010 also introduces new tax measures to reinforce the control of the tax administration on the transfer of foreign currency abroad. Pursuant to Article 20, a company can be requested to justify the transfer of foreign currency for the benefit of a company based outside of Algeria. When the tax administration suspects an indirect transfer of profits, its agents can request information and documentation evidencing the nature of the relationship between this company and one or more entities located outside of Algeria, the method of determination of the transfer price and the consideration paid for the transfer.
According to Article 29, and pursuant to the reciprocity principle, foreign companies in Algeria are subject to be assessed for the same amount as Algerian companies are assessed by the foreign country on. However, companies set up in partnership with foreign investors are exempted from this measure. This rule will be implemented by a Decree of the Ministry of Finance.
Tax on super profits
The super profits tax, which only applied to the hydrocarbon sector, is now generalised to all sectors of the Algerian economy. Article 22 of the SFL 2010 provides that super profits made in particular business conditions, other than in the hydrocarbon sector, may be subject to a specific tax. This tax is assessed on the exceptional margin at a rate which varies between 30% and 80%.
An order of the Ministry of Finance should clarify what is meant by particular business conditions, exceptional margins and the terms and conditions of computation of the tax and the applicable rate. While Article 22 does not distinguish between Algerian and foreign companies, this measure is directly aimed at the perceived large profits of foreign companies.
Public tender partnership
In accordance with its policy of national preference, and in order to guarantee the participation of Algerian companies in the new five-year public investment plan (estimated at $286 billion), Article 55 of the SFL 2010 requires that requests for proposals for an international tender include the commitment for foreign bidders to invest in a partnership, in the same field of activity, with an Algerian company, whose capital is held principally by Algerian residents.
The SLF 2010 provides that the conditions of application of this new rule will be adopted by a joint order of the Minister of Finances and the Minister of Trade. Additional details regarding the conditions of application are, however, already available in the new Code of Public Tenders.
The new Code of Public Tenders
The reformed Code of Public Tenders, which had been in the works since several months after major corruption scandals hit Algeria in the last few years, has now been published in the Official Journal. Presidential Decree 10-236 dated October 7 2010 introduces new control mechanisms to fight fraud and corruption and hopes to render the tender process more efficient. It also aims at increasing the participation and competitivity of Algerian companies in the public tender process.
The new text will govern the conclusion of any new
project, supply, design and service contracts for which a request for
proposal was issued or a consultation was launched prior to October 8 2010 and will regulate the performance of any contract which has not been
awarded to the contractor as of said date. The new Code of Public Tenders
contains, notably, the increase from 15% to 25% of the maximum preference
margin to the local enterprise with a capital held in majority by
Algerians or to the Algerian member of a group of enterprises and to
local products and services for public tender bids. It also includes the obligation to use exclusively a national tender when the national production or the local production tools can satisfy the needs of the customer
Moreover, Article 24 clarifies the obligation mentioned in the SFL 2010 to include a mandatory commitment of the foreign bidder to invest in a partnership with a local company, which shares are majority-owned by Algerians, together with the sanctions applicable in case of violation of the foregoing commitment. Specifically, the tender documents must contain a non limitative list of enterprises in the same field of activity susceptible of putting in concrete form a partnership arrangement with the foreign bidder. The commitment of the bidder to satisfy the partnership requirement must be included in its offer or else the offer will be rejected. The violation of the partnership requirement by the foreign contractor triggers the termination of the procurement contract if the partnership is not set up prior to the realization of the contract; if applicable, the application of monetary penalties of up to 20% of the contract and the recordation of the foreign enterprise on a list of companies which are forbidden to participate in public tenders.
Article 24 does not clarify whether the partners will be required to form an Algerian joint venture or will be able to act as a group of companies or a consortium to perform the contract, but the Presidential Decree clearly allows groups of companies acting jointly or solidarily and represented, unless an exception applies, by the majority member to respond to tender bids. It is also unclear whether the requirement of Article 24 will apply to all public tenders, including, for instance, those that follow the negotiated tender procedure (gré-à-gré).
In accordance with the new anti-corruption provisions contained in Ordinance No. 10-05 of August 26, 2010, which amends and completes Law No. 06-01 of February 20, 2006 regarding the Prevention and Fight against Corruption, the reformed Code of Public Tenders provides for the creation of a code of ethics and requires that any bidder to a public procurement contract provide a declaration of probity to certify that it will not commit or accept any act of corruption and clarifies that, in case of violation, the sanctions provided by the Anti-Corruption Law will apply. Violations will be investigated by the new Central Anti-Corruption Office, whose officers will, once the Office is set up, in principle, be empowered to conduct investigations across Algeria. Also, the mission of the Court of Accounts is broadened to include the fight against any type of fraud, illegal or illicit practice involving public money.
Algerianisation measures in the banking sector
Ordinance No 10-04 of August 26 2010, which modifies and completes Ordinance No. 03-11 on Money and Credit, lays out new Algerianisation measures for the capital of banks and financial establishments held by foreigners and, generally, reinforces the control of the Algerian State.
The 2010 Ordinance on Money and Credit confirms that foreign participations in Algerian banks are only authorised in the framework of a partnership with one or several Algerian partner(s) holding 51% of the capital. Any new bank or financial institution will need to comply with this measure.
Moreover, the management of the subsidiary of a foreign bank must be by Algerian residents. Furthermore, the transfer of private banking assets to third parties is subject to the prior authorisation of the Algerian State. The transfer must take place in Algeria and, as in other sectors of the economy, the State has a preemptive right on any such transfer.
Finally, in order to ensure representation in social organs, the Algerian State grants itself one specific share, without voting rights, in the capital of Algerian subsidiaries of foreign banks. But will this attempt to discourage foreign banks to transfer dividends to their parent company and encourage them to invest in the Algerian economy rather than to finance foreign trade and consumer credit be effective? Again, only time will tell.
Is the stock market the solution?
The Algerian press recently reported that the proposal by the think-tank of the Algerian Entrepreneurs Forum to put foreign investors on the Algerian stock market after three fiscal years is being examined by the Ministry of Finance (http://www.maghrebemergent.info/investissement/58-algerie/1243-algerie-la-bourse-pourrait-remplacer-le-51-49-pour-l es-investisseurs-etrangers.html). According to this scenario, the 51% of national shares would be distributed on the stock market by the foreign investor after three years of activity. An amendment to the 51%/49% requirement is unlikely to be ready for inclusion in the Law of Finances for 2011, but the government is apparently seriously working on the implementation of this proposal.
This may be part of the solution, but other easing measures to the systematic 51%/49% requirement will be required to bring back foreign investors to Algeria.
Recent legislative initiatives have contributed to the Algerianisation of the countrys economy. While the increase of Algerian participation in the Algerian economy is a laudable goal, the method and timing of government measures have scared off the vast majority of foreign investors at a time when the global economy is under financial stress.
However, in light of the absence of financially solid Algerian partners in a number of sectors, the Algerian government is slowly easing its initial plan to bring foreign investors back in the country. Algerianisation will, indeed, undergo changes.
||About the author
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 (J.D. degree magna cum laude) and Tulane Law School (JD degree; order of the Coif and Editor Tulane Law Review). Michael Coleman joined Baker & McKenzie as an associate in 1973 and was elected partner of Baker & McKenzie in 1980. Michael Coleman is currently 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, antitrust/competition, labour and tax issues. Michael Coleman has travelled extensively to Algeria counseling US and European-based clients in regard to large infrastructure projects.
Throughout the eighties and nineties, Coleman authored 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 Céline 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, two articles on the new Algerian Hydrocarbons Law of 2005 as amended in 2006, an article on the ins and outs of Algerian project finance in 2007, and the effect of the 2009 Supplementary Finance Law on foreign companies (2009).
Michael Coleman is fluent in French and English and has a working knowledge of Dutch.
Michael L. Coleman
Baker & McKenzie
||About the author
Céline van Zeebroeck, a Belgian licensed attorney, advises US corporations doing business in and with European jurisdictions on local corporate, distribution, labor and tax issues and EC competition matters. She also assists 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, antitrust/competition, public procurement, labour and tax issues.
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, the tax aspects of the 2005 Hydrocarbons Law as amended in 2006, the ins and outs of Algerian project finance (2007) and the effect of the 2009 Supplementary Finance Law on foreign companies (2009).
van Zeebroecks native language is French. In addition, she is fluent in English, Dutch and Spanish.
van Zeebroeck is a special legal consultant at Baker & McKenzie, Washington DC. She studied law at the Facultés Universitaires Notre-Dame de la Paix of 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.
Prior to joining the Chicago office of Baker & McKenzie, van Zeebroeck completed her attorney training in Belgium. She is admitted to the Brussels bar.
Céline van Zeebroeck
Baker & McKenzie