Paying dues: An overview of local tax regulations

The Algerian tax system has been stable for 20 years under the current structure, which was designed in 1992. Both direct and indirect taxes have been simplified with appropriate regulations and a specific code of fiscal procedures, with a significant decrease of rates for income tax. The new rules implemented in 2009 for foreign direct investment (FDI) have slightly changed some tax codes with the objective of establishing a more level playing field between local and foreign firms. The following presents the different ways of doing business in Algeria and the main taxes applicable.

LOCAL COMPANY INCORPORATED IN ALGERIA: Provided that national majority stake rules are met, a local company formed by Algerian partners or with foreign partners can be the right vehicle for implementing a business in Algeria, or for gaining a better scoring in public tendering. This range of companies includes:

• Joint stock companies (Société par actions) with a minimum share capital of AD1m (€9600);

• Limited liability company (Société à responsabilité limitée) with a minimum share capital of AD100,000 (€960);

• Sole partner limited liability company (Entreprise unipersonnelle à responsabilité limitée) with a minimum share capital of AD100,000 (€960);

• Limited partnership (Société en commandite par actions), with minimum share capital of AD1m (€9600). Algerian companies are subject to exchange regulations that require all revenue be made in local currency, but also allows these companies to have access to the conversion of their cash for paying for imports. Currently, letters of credit are the only way to pay for import of goods and equipment. For further financing, local companies can only contract loans with local banks. Affiliates of foreign companies are no longer allowed to contract shareholders loans, the overall objective being to reduce external debt. Algerian companies with or without foreign capital may enjoy incentives as granted by the investment law.

REGISTERED BRANCH: Algerian legislation requires firms to have local partners with a minimum 51% stake in manufacturing and services or 30% in trading. The National Commercial Registration Centre no longer allows the registration of foreign company branches for the sake of pushing FDI towards local partnerships. The registration of foreign company branches is only allowed in the oil and gas industry under the law for exploration and production in hydrocarbons.

REPRESENTATIVE OFFICES: A holdover from the time when the state held a monopoly on foreign trading, foreign companies can still set up representative offices (bureaux de liaison) under Algerian regulation. A representative office has no right to perform any kind of business or commercial transaction, and therefore cannot have any revenue apart from funding provided by the mother company. Its role is only to represent the mother company that has established a presence to promote its products and services.

The foreign company willing to set up a representative office has to apply for an agreement delivered by the Ministry of Commerce valid for two years, which can be renewed upon term. Since the Representative Office cannot perform any kind of business, it becomes a taxpayer only when employing personnel and being accordingly liable for payroll taxes, withheld at source. FOREIGN FIRMS UNDERTAKING BUSINESS ON A CONTRACTUAL BASIS WITH A PERMANENT ESTABLISHMENT: A permanent establishment (PE) is neither a local firm nor a branch. It results from international taxation rules as a tax concept, recognised by force of the tax law. It justifies a business’ presence in Algeria as long as the foreign firm has a valid contract.

A PE mainly enshrines a firm’s rights linked to the performance of contracts, such as the opening of bank accounts and the contracting capacity to recruit employees and suppliers. Obligations are mainly about the compliance with the labour, social security and tax laws.

IN JOINT EFFORTS, CONSORTIA: Consortia can result from a simple contract or a more formal procedure with a registered entity. They generally form to undertake contracts for clients established in Algeria.

The client generally recognises the consortium as the contracting party with a leading contractor for the purpose of coordinating with all co-contractors.

Among the various technical aspects of any given contract, the coordination is crucial upon invoicing, as most of the clients (very often state-owned companies or state agencies) prefer to deal with one single entity – the consortium – and accordingly receive one single invoice from the consortium. In practice, copies of the invoices from the members of the consortium are appended to that consolidated invoice.

Provided that the contract establishes a clear allocation of work and revenue for each co-contractor, each member of the consortium is responsible for its own taxes. Algerian firms consolidate the activity of their share in their local accounts while foreign contractors account their share under the accounts of the existing PE or under the PE deriving from the contract.

Should an Algerian entity become a member of a consortium, it is common that the agreement turns into a registered venture (groupement), which is governed by Algerian commercial law. Otherwise, the consortium can be formed through an agreement when the parties are foreign companies.

DIRECT TAX SYSTEM: The direct tax system relies on a general regime, which governs the taxation of individual residents of Algeria and resident entities, while a specific withholding regime is applicable to foreign professionals and foreign entities that do not have a permanent professional presence in Algeria.

Companies that are resident entities incorporated in Algeria, with or without foreign investors in the share capital, and those incorporated outside of Algeria with a PE in Algeria are liable for corporate income tax and turnover tax under the general regime.

A PE usually avoids double taxation by working within the framework of tax treaties Algeria has with other countries or by performing a construction contract.

CORPORATE INCOME TAX: Corporate bodies file corporate income taxes at the headquarters’ location in Algeria or at the location of the main establishment. The annual tax return is due by April 30th of the following year, which is inclusive of the payment of the balance due after the instalments have been paid during the relevant fiscal year.

Instalments for Algerian companies are determined in reference to the prior year’s profits and shall be paid through three instalments of 30% each, respectively due by March 20th, June 20th and November 20th.

By exception, foreign companies subject to the general regime and accordingly having a PE in Algeria pay the instalments at 0.5% on every payment received, including advance payments, in reference to the total value of the contract.

The corporate income tax rate is 19% for manufacturing and construction activities, and 25% for trading activities and services or within combined activities, when trading activities and services account for more than 50% of the total turnover.

In calculating taxable profit, expenses incurred in the direct interest of business are allowed to be deducted, provided that they are effective and properly documented. The tax law stipulates some restrictions:

• The deduction of passenger cars’ depreciation to AD1m (€9600) in reference to the purchase price;

• The deduction of overheads to 1% of the annual turnover, bearing in mind that these costs shall be supported in full with appropriate evidence.

The Algerian tax regulation disallows, for the purpose of corporate income tax computation, the deduction of fines and penalties charged for non-compliance with laws and regulations, rent charges that are not related to premises used for operations, and both apprenticeship and training tax. However, losses can be carried forward for four years.

Algerian firms, with or without foreign capital and enjoying tax incentives as granted by the investment law, may enjoy a tax holiday for corporate income tax. Taking advantage of this tax relief requires a commitment to reinvest the equivalent of the taxes saved.

TURNOVER TAX: The turnover tax, also known as the Professional Activity Tax (Taxes sur l’Activité Professionnelle, TAP ) is supported as an expense by the taxpayer and is considered within the pricing of any good or service. The TAP is a direct tax paid by the individual or the company performing the business and shall not be collected from the clients as an indirect tax. Although the business community claims this tax is heavy, it remains in the Algerian tax scheme as it contributes to the financing of local authorities. For this reason, TAP is paid in the district where the work or service is performed.

The Finance Act 2012 amended the TAP payment provision by extending the monthly filing and effective payment of the tax upon collection, as previously granted to the construction sector where the payment is considered as a key component of the operating cycle.

Algerian companies, with or without foreign capital and enjoying tax incentives as granted by the investment law, may enjoy a tax holiday for TAP. Like with the corporate income tax, this tax relief entails a commitment to reinvest the equivalent of those taxes saved.

TAXATION OF DIVIDENDS: Dividends paid to Algerian corporate bodies are exempt from taxation as long as the company that pays the dividend has paid its own corporate income tax. Otherwise, dividends are taxed by withholding when the dividend payer remits the net dividend to an individual shareholder, with 10% withheld in the transfer of dividends in favour of a foreign partner after withholding 15%, unless stated differently in a tax treaty.

BRANCH TAX: In 2009 Algerian tax law was amended to tax the net profit reported by foreign companies present in Algeria through branches or PEs. To this end, both branches and a fiscal professional presence are recognised as taxable subjects, distinguished in this case from their headquarters, with net profits deemed as transferred and taxed at 15%. Companies from countries with certain tax treaties are exempt from this tax. THE WITHHOLDING TAX REGIME – AN “ALL IN ONE TAX”: Withholding tax applies only to revenues made by foreign firms on services or management contracts. Withholding tax is 24% for service contracts, and management contracts are subject to 20% withholding.

Under the withholding system, tax regulations do not require setting up a formal entity, with the client paying the fee being responsible for withholding the tax and remitting it to the tax collector.

The tax withheld is inclusive of all taxes according to corporate income tax, the TAP and value-added tax (VAT) with a full discharge of any further taxation.

The foreign firm must provide a return at each year-end summarising revenues and related withholdings together with a summary of payments to third parties.

Foreign services providers may elect to follow the common law regime (the general regime). In this case, the foreign services providers become responsible for their taxes and have to meet the same compliance requirements as PEs of foreign companies.

VALUE ADDED TAX: VAT is assessed at a standard rate of 17% or at a reduced rate of 7%, depending on the goods or services in question. This applies to certain taxable transactions performed in Algeria by persons or entities that carry on, either regularly or casually, commercial and industrial activities. The reduced rate of 7% applies to certain transactions relating to construction activity and some goods that the state aims to deliver to the market at affordable prices.

The taxable amount varies with the type of transaction liable for VAT. Broadly, the sale price of the good sold or service rendered is the tax base of VAT due.

Legal entities with no place of business in Algeria but engaged in taxable transactions in the country are subject to the same VAT rules as residents. Algerian tax law now has a reverse charge mechanism placing 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 certain cases, such as where the excess derives from the difference in VAT rates applicable to the acquisition of raw materials or in case of cessation of activity.

A list disclosing the name, address and registration number of each supplier must also be filed with the Algerian tax authorities, together with the VAT returns. Should this list fail to be provided, VAT deductions or refund requests may be hindered.

Companies delivering goods or services to a client whose operations are exempt from VAT must receive a certificate of exemption from the client for every invoice issued and paid. The vendor must 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 ON SALARIES: Any employer in Algeria, whether its employees are expatriates or Algerian nationals, must file and pay income tax for employees. For employees, revenue is defined as all wages, salaries and pensions. Employment of expatriates in Algeria requires work permits and residency. Labour authorities issue work permits and the provincial administrations issue residency authorisation.

According to Algerian tax regulation, individuals who have their fiscal domicile in Algeria are subject to personal income tax for all revenues. Those whose fiscal domicile is outside Algeria are taxed in Algeria for their revenue earned from an Algerian source.

Tax residency is determined by:

• Having a home in Algeria, either via ownership of a house or a rental agreement of at least one year;

• If Algeria is the main place of residence or the main place of an individual’s interests (activity);

• If an individual performs a professional activity (by employment or as freelancer) in Algeria. The following items are not taxed:

• Allowances for business expenses

• Hardship allowances

• Social contributions (an employee’s share to social security) SOCIAL SECURITY: Salaries are subject to 35% social security contributions. All employers are responsible for social security regulations by remitting employees’ contribution withheld at source at the rate of 9% together with the employers’ contribution at the rate of 26%.

Except those contributing to social security schemes in states with a social security treaty with Algeria, paying contributions abroad does not exempt individuals or employers from paying social security in Algeria.

The social security contribution covers risk injuries, medical expenses, family allowances and the pension.

OBG would like to thank Mazars for their contribution to THE REPORT Algeria 2012