The services of the Bank of Algeria (Exchange Management) have just set out in a private note dated December 9 of 2010 (hereafter, the "Note"), the treatment that should be applied to cash advances by non-resident parent companies to their Algerian subsidiaries.
The main issue dealt with is the status of cash advances in the light of the new provisions of Article 4bis of Ruling No. 01-03 of August 20, 2001, as amended and supplemented on the development of investments* (hereafter "the Ruling").
These new provisions prohibit the use by companies incorporated under Algerian law of external financing, except where it is used in the creation of its share capital.
Now it transpires that commercial banks have continued to channel loans (cash advances) between non-resident parent companies and their Algerian affiliates, without taking into consideration the above stated prohibition.
It seems that during the transfer of sums equivalent to the repayment of cash advances, the attention of the Bank of Algeria has been attracted by the irregular nature of these operations.
Also, the Note is expressed as an order "necessitated by the need for compliance under the current legal system".
The main measures introduced by the Note are:
- The obligation for Algerian companies to integrate their cash advances, incurred after July 26, 2009, into their share capital no later than December 31, 2010;
- After integration into share capital, these advances will benefit from transfer and repatriation guarantees in respect of the resultant income, under Regulation N°05-03 dated on June 6th, 2005, related to foreign investments. Therefore, we understand that without giving authorization to transfer funds related to the reimbursement of cash advances and their interests according to the modalities applicable before the 2009 Complementary finance act, Bank of Algeria authorizes, nevertheless, the transfer under another form, i.e. through the transfer of profits, dividends and products issue from foreign investments, pursuant to the Regulation N°05-03.
At last, we would like to specify that the measures of the Note might lead, in certain cases, to the application of the provisions of Article 4 bis of the Ordinance related to the repartition rule of the majority of the share capital of companies incorporated under Algerian law in favor of Algerian residents (51/49%).
As a matter of fact, if the parent company would not own 100% of the share capital of its Algerian incorporated subsidiary, the incorporation of the cash advances would lead to modify the repartition of the subsidiary share capital, insofar as the parent would be the only one to take part to such incorporation.
Consequently, considering the fact that this incorporation would lead to a modification of the share capital repartition is not provided amongst the exclusions to the 51/49% compliance rules, it seems that the National Centre of Commerce Registration (CNRC) departments would apply the 51/49% rule prior to the registration of the share capital raise.
If our interpretation is confirmed by the CNRC practice, the measures of this Note would constitute a new case of compliance obligation regarding the 49/51% rule.