The Finance Law (FL) for 2012 was published in the Official Journal of 29 December 2011. Among the changes it has introduced are amendments to Order 01-03 of 20 August 2001, concerning the promotion of investment (the Order). These relate more specifically to articles 4 bis (Part I below) and 11 (Part II).
I. Amendments to article 4 bis of the Order
It may be recalled that the Supplementary Finance Law (SFL) for 2009 had initially amended the Order so as to provide that all foreign investment requires either a majority local interest of 51%, or a minority interest of 30%, depending on the circumstances (the capital interests rules).
Extending this measure, the SFL for 2010 completed article 4 bis of the Order by providing that "before any amendment is made to the entries in the commercial register, the concerned company must be brought into conformity with the capital interests rules set out above".
The article also creates exceptions in relation to amendments to the modification of the registration on the commercial register, for:
- "any alteration in company capital (whether by way of increase or decrease) not involving a change in share ownership or the proportions of the shareholders' capital interests;
- the deletion of a business activity or the addition of a related activity;
- any amendment to the registered business activity which is due to a change in the business activity codification ;
- the appointment of a company manager or directors;
- a change of the registered address".
Among the changes made by the FL for 2012, the following should be noted:
Article 63 of the FL for 2012 has amended and supplemented article 4 bis of the Order by adding the following exception to those listed above:
- "the transfer or exchange for consideration in kind, as between former and new directors, of the guarantee shares referred to in article 619 of the Commercial Code, provided that the value of those shares does not exceed 1% of the company capital."
Guarantee shares are of course those which the board of directors is obliged to hold, representing at least twenty percent (20%) of the company capital. These shares provide security in respect of all the directors' acts of management.
Each new director must therefore hold at least one share(1), in order to be a member of the company's board. It should be noted that a change of directors is a relatively frequent event in the life of a company.
We had been inclined to think that the obligation to comply with the capital interests rules would not be triggered by the appointment of a new director, since the fourth exception in article 4 bis, referred to above and concerning "the appointment of the company's general manager or officers" seemed to apply. This exception should have been applicable to directors because they are officers.
However, in practice, where a company director was replaced, the tax administration took the view that the subsequent transfer of the guarantee share triggered the compliance obligation.
By introducing this new exception, the legislature has now addressed the difficulties caused to companies in foreign or mixed ownership by the fact that the capital interests rules became applicable following the replacement of a director and the transfer of guarantee shares.
However, this exception is subject to a limit, which consists in that the value of the guarantee shares must not exceed 1% of the company capital. This limitation is understood since the proportion of company capital represented by the guarantee shares to be transferred remains relatively limited, and the replacement of a director holding shares representing more than 1% of the capital would represent a substantial change in the company's capital structure.
In line with this facilitative approach, it would also have been appropriate to exempt transfers of guarantee shares from the right of pre-emption which the government and Public Economic Enterprises (PEEs) have under article 4 quinquies of the Order. This is firstly because of the relatively high number of transfers of guarantee shares, which we would view as presenting an administrative difficulty for the responsible tax department, in terms of the need to assess every case. It is also because it cannot be in the interests of the government to acquire a single share intended to secure a legal obligation.
However, as no such amendment has been made, we understand that transfers of guarantee shares will remain subject to a right of pre-emption on the part of the government and PEEs, in the same way as transfers of ordinary shares.
The article 65 of the FL for 2012 has also amended and supplemented article 4 bis of the Order by amending some of the exceptions referred to above, the new wording running as follows:
- "any alteration in company capital (whether by way of increase or decrease) not involving a change in the ratio of capital interests laid down above;
- the appointment of directors of the company".
In relation to changes in company capital, we understand the new wording of the exception to mean that such changes may only be made to reflect an increase or reduction in the capital of the company. Share transfers remain outside this exception.
What is new in the revised exception, however, is the wording relating to the ratio of capital interests in the company to which the amendment relates. The new drafting is interesting, since any change in the shareholders has hitherto triggered the compliance obligation, whereas it appears that, in future, only a change in the ratio of capital interests will do so.
In other words, the legislature must henceforth be understood as permitting changes of shareholders, provided only that they do not alter the original ratio of capital holdings as between resident Algerian shareholders and foreign shareholders.
However, the new drafting is ambiguous in the following respect: The FL for 2012 refers to "the ratio of capital interests laid down above".
The inserted words "laid down above" would seem to refer to the minimum capital interest which, in relation to a mixed ownership company, is required to be held by resident Algerians (namely 30% for companies engaged in external commercial activities, and 51% for other companies). However, a reference to the minimum Algerian interest would seem to indicate that that the companies to which the exception applied were those already subject to the shareholder rules, whereas on our reading that would not serve any purpose. In fact, it would divest the provision of all substance, since it simply amounts to saying that the apparent exception is not in fact an exception.
We regard this as a "slip", and in our view the purpose of these new provisions (like those enabling transfers of guarantee shares) can only be to relax the existing provisions. Accordingly, we think the legislature intended that changes (increases or reductions) in company capital should not trigger the compliance obligation where they do not affect the ratio of the capital interests held respectively by resident Algerian shareholders and other shareholders in the company, as it stood prior to the intended change (increase or reduction).
Concerning the appointment of company directors, our understanding of the FL for 2012 is that, since company managers are considered officers of the company, it was no longer necessary to mention them separately.
Lastly, it should be noted that two separate articles of the FL for 2012 make amendments to the same provision (article 4 bis) of the Order.
A consolidated version of articles 63 and 65, both of which amend article 4 bis of the Order, would be as follows:
"Prior to any foreign investment in the economic activities of production of goods and provision of services, a declaration of investment is required to be made to the agency referred to in article 6 above.
Foreign investments may only be made on the basis of a commercial partnership in which the national resident shareholding represents a minimum of 51% of company capital. The national shareholding referred to may be made up of the shareholdings of several distinct parties.
Notwithstanding the provisions of the foregoing paragraph, external commercial activities may be carried out only by foreign persons, natural or legal, on the basis of a commercial partnership in which the national resident shareholding represents a minimum of 30% of company capital.
Prior to any amendment being made to the commercial register entries relating to a company, that company must be brought into conformity with the capital interests rules set out above.
Nevertheless, that obligation shall not apply where the purpose of the amendment is:
- the transfer or exchange, as between previous and new directors, of the guarantee shares referred to in article 619 of the Commercial Code, provided that the value of those shares does not exceed 1% of company capital;
- any alteration in company capital (whether by way of increase or decrease) not involving a change in the ratio of capital interests laid down above;
- the deletion of a business activity or the addition of a related activity;
- any amendment to the registered business activity which is due to a change in the business activity nomenclature;
- the appointment of directors of the company.
- a change of registered address.
All intended direct foreign investments, and all investments intended to be made on a partnership basis using foreign capital, shall be submitted for the consideration of the National Investment Council referred to in article 18 above.
In respect of foreign investments made directly or through a commercial partnership, a currency surplus for Algeria must be shown throughout the investment period. The monetary authority will publish regulations laying down the manner in which this paragraph is to apply.
The necessary financing to make foreign investments, including direct investments and those made through a commercial partnership, but excluding those making up company capital, is to be raised, except in special circumstances, by recourse to local financing. Insofar as necessary, the manner in which these provisions are to apply will be laid down in regulations".
II. Amendments to article 11 of the Order
The FL for 2012 has made two substantial amendments to article 11 of the Order:
― It may be recalled that under article 11.2 of the Order, tax advantages were available once the tax authorities had issued a declaration that operations had begun, this being done at the investor's request. In particular, there were additional tax advantages intended to benefit and/or facilitate investment, relating for example to carrying forward losses and amortization periods.
Henceforth, the additional tax advantages will take the form of exemptions from registration fees, costs of giving public notice and deed fees relating to authorized transfers of real property assets which are made for the purposes of an intended investment.
― It should also be noted that the FL for 2012 has given the Council of Ministers power to authorize intended investments. Under the new wording of articles 9 and 11 of the Order, intended investments which have been authorized in advance by a decision of the Council of Ministers have the benefit of the provisions relating to tax advantages granted under the general and special regimes.
1 Except where statute requires a greater number of guarantee shares