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LFC project

14/05/2020

The Council of Ministers has approved, during its meeting held on Sunday, May 10, 2020, by videoconference, the draft of Supplementary Finance Law for 2020 (the “LFC 2020”).
This draft aim, on one hand, to make certain adjustments to the provisions applicable to foreign investments provided for by the Finance Law for 2020 (the “LF 2020”) and, on the other hand, to introduce new measures, both with a view to the economic recovery of Algeria.

1. Adjustments to the applicable foreign investment provisions provided for by the LF 2020

Or the record, one of the main reforms made in the LF 2020, and not the least, consisted in the repeal of the legal limitation of foreign shareholdings up to 49% of the share capital of an Algerian company (known as the 51/49 rule) for sectors that would not be considered as “of particular interest” or “strategic”.

The draft of LFC 2020 reiterates, in its Article 50, the principle according to which, any activity of production of goods and services is opened to foreign investment without obligation of partnership with a local partner “excluding activities of purchase for resale as such (i.e. distribution activities) and those of a strategic nature, which remain subject to a partnership with a national resident shareholding, up to 51%.”
It should be emphasized that, after many speculations, Article 51 of the draft of LFC 2020 defines the following sectors as strategic:

  • “the exploitation of the national mining domain, as well as any underground or surface resource relating to an extractive activity on the surface or underground, excluding quarries of non-mineral products;
  • upstream of the energy sector and any other activity governed by the hydrocarbons law, as well as the exploitation of the distribution network of electrical energy and gaseous or liquid hydrocarbons;
  • industries initiated or related to military industries under the authority of the Ministry of Defense;
  • railways, ports and airports;
  • pharmaceutical industries, with the exception of investments linked to the manufacturing of innovative essential products, with high added-value, requiring complex and protected technology, intended for the local market and for export. The procedures for applying this measure should be specified, as necessary, by regulation.”

The procedures for applying this measure should be specified, as necessary, by regulation to be adopted.
The explanatory notes accompanying the draft of LFC 2020 states that “the recent development of the national economy, especially in the global context, dictates the review of [our] investment policy, and, particularly, with respect to foreign investment in Algeria, which is experiencing a significant drop in FDI, compared to other countries that recorded an encouraging increase in diversified FDI in 2019, according to the UNCTAD report on world investment in 2019”.
These explanatory notes also point out the weakness of the 51/49 rule, which could not, in practice, ensure the expected transfer of technology and know-how, due in particular to various contractual mechanisms which foreign investors use with their local partners.

It is specified “that a total participation of a FDI results in a transparency in the share capital ownership, implying a real commitment of the foreign investor to enable him to take strategic decision for the company notably in terms of real transfer of technology and competitiveness on national and international markets.”

2. Introduction of new measures in the ​​foreign investment framework: removal of the State's pre-emption right

 

Articles 53 and 53 bis of the draft of LFC 2020 has withdrew the State’s pre-emption right, provided in Articles 30 and 32 of Law No. 16-09 of August 3, 2016, relating to the promotion of investment, that were applicable to any sale made by or to the benefit of foreign investors, as well as, any so-called “indirect” sale of the Algerian company, that has benefited from advantages or facilities at its establishment.
Henceforth, “any transfer of shares by foreign parties to other foreign parties, of share capital of an Algerian legal entity, involved in one of the strategic activities, as defined in article 51 of this law, is subject to authorization.”
This draft of LFC 2020 specifies, moreover, that “any transfer of assets from a non-resident foreign party to a resident national party, is assimilated to an import of goods or services and, therefore, is governed by foreign exchange control regulation applicable to transfer of proceeds resulting from the share transfer transaction.”

After recalling the genesis of this pre-emption right and its evolution but, especially, the practical difficulties resulting, in particular, from the absence of the expected regulatory texts, the explanatory notes point out that the State pre-emption right, as provided, allowed “neither its application, nor the liberation of foreign investments encumbered by these legal provisions inapplicable in fact. This is not likely to reassure multinationals or listed companies about the future of their investments in Algeria, and even less investment funds.”

These explanatory notes also add that the State pre-emption right, established in the ​​foreign investment framework, “has hindered the emergence of a stock market in Algeria by the limit made to the free negotiability of securities and actions. Because it is up to the parties to define the rights and obligations including the use of the pre-emption right of each shareholder in a shareholders’ agreement defining the terms of their partnership, depending on their strategy.”
Therefore, facing the fact that capital exporters see the State pre-emption right as a discriminatory measure, contrary to the spirit of free enterprise and free movement of capital and, hence, as a discouraging measure when considering setting-up in Algeria, the Algerian government indicates that the State should no longer “claim to be the exclusive purchaser of everything that is sold in terms of property value, since applicable law and tax legislation guarantee the protection of the State’s general interest; all the more so since the State pre-emption right has lost the role of an instrument for controlling the access by foreigners to the national economy.”

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