The tax system in Algeria is organized around six tax codes relating to direct taxes, indirect taxes, turnover taxes and registration, stamp and tax procedures. Since the 1990s, the taxation system in Algeria has changed substantially in order to adapt to the evolution of the economy and structural changes aimed at steering the country towards a free-market economy and at opening up to both private and foreign investment.
The Algerian tax system can be subject to several classifications such as direct and indirect taxes, state and local taxes, taxation of individuals and corporations, and taxation of residents and non-residents.
One core principle of the Algerian tax system, which is common to a lot of countries, is the principle that any income derived from Algeria has to be taxed in Algeria. This applies to individuals and corporations. For example, an employee working in Algeria, even if not a tax resident, will be subject to income tax on his/her salary, or to the fact that foreign companies providing services to Algerian clients are subject to a withholding tax in Algeria on the income derived from their activities.
Some of the key features of the Algerian tax sys-tem that an investor should be aware of are:
- Apart from specific taxes, such as land tax, it is a declarative system;
- Significant attention should be paid to formal obligations (legal books to complete, information to be provided in support of tax returns, etc);
- The importance of taxes withheld at source: income tax on salaries, taxes on dividends, interests or services provided by foreign service provider – this therefore puts an obligation on the person paying as well as on the person receiving the income; and
- The setting up of a directorate for large-sized enterprises dedicated to the oil and gas sector, foreign companies operating in Algeria, and the most important Algerian companies.
EASING THE LOAD: For more than a decade, the tax system has, from a legislative standpoint, embraced a trend towards a lighter tax burden for corporations, namely by abandoning scheduled taxation in favor of synthetic taxation.
In that context, successive provisions of the finance acts were meant to, among other things:
- Establish a corporate income tax whose normal rate was originally 42% in 1992 and then was successively lowered to 38%, 30% and then 25% for trade and services activities and 19% for goods production activities, construction activities and tourism activities, while the reduced rate was lowered from 33% to 15% and then 12.5% for reinvested profits and actually removed as of 2008;
- Remove certain taxes, such as the lump-sum tax (versement forfaitaire, VF), whose the rate was originally 6% of payroll and lowered to 2% before its removal;
- Reduce the number of value-added tax (VAT) rates from four rates ranging between 40% and 7% to one normal rate of 17% and one reduced rate of 7%;
- Reduce the tax rate on business activities (taxe sur I’activité professionnelle, TAP) from 2.55% to 2%;
- Reduce the land registration tax downward from 8% to 5% and 3% to 1%, respectively, and considerably reduce transfer taxes on real estate transactions from 14% to 8% and then to 5%;
- The registration fee applied upon establishing a corporation was initially set at 1% and then lowered to 0.5%;
A revision of the tax treatment of foreign (non-resident) corporations with contracts in Algeria;
- Development of a specific tax regime applicable to groups of companies;
- Introduction in 2007 and 2008 of transfer pricing rules for international and national transactions;
- Authorization of head office management fee (overhead expenses) deduction of up to 1% of the turnover;
- Further reduction of the progressive rate schedule applicable to individuals’ taxation. Now the rates range from 0% to 35% instead of 40%;
- Introduction in 2009 of additional measures to make the tax group regime more favorable and open to more companies; and
- Specific provisions applicable to leasing and leaseback operations.
CHANCES: The most recent modifications brought by the finance law and additional finance law for 2009 are the following:
- Assimilation of remitted profits by branches and any other type of temporary business presence with dividends;
- Limits on tax on professional activity (TAP) reductions and VAT deductions for cash transactions;
- Reimbursement of VAT credit and non-deductibility of tax credit;
- Taxation on capital gains from the sale of shares or shares created by non-residents;
- Tax certificate for all funds transferred abroad;
- Specific penalties for investors with National Investment Development Agency (ANDI) benefits;
- Revision and simplification of tax returns;
- Implementation of a 100% penalty charge for fraud;
- Extension of deadlines and tax committee seizing limits;
- Creation of a tax investigation service;
- Extension of the exemption period for financial market income;
- Establishment of the obligation to notify regarding definitive changes carried out by tax services;
- Changes to ordinance No. 01-03 on investment development (measures relating to obligation to have resident Algerian national shareholders);
- Extension of the obligation to reinvest to all the exemptions granted under the preferential tax regimes;
- Implications of the implementation of the new financial accounting system;
- Regulation of economic activity, promotion of domestic investment and foreign investment controls; and
- Measures restricting imports;
One of the key issues for future years will be the adaptation of the tax system to the new accounting system that has been adopted and should enter into force in 2010. Based on what has transpired thus far, the new accounting system proposal itself borrows heavily from International Financial Reporting Standards (IFRS). Once this evolutionary process is completed, Algeria will have a completely overhauled accounting framework which will be very close to international standards.
However, one factor that remains unknown so far is whether the tax rules will be adapted to this new financial system and if so, how.
Some other issues or possible changes for the future may include maintaining some specific reduced taxation scheme considering the fact that the level of taxes has been substantially reduced and methods to reduce the recourse to cash for transactions. Measures in order to develop the recourse to cheque payments are currently being studied, for example, by making it a condition for VAT deductibility or TAP-specific rebates.
RESIDENT CORPORATIONS: Companies operating in Algeria are subject to various taxes, particularly tax on income (impot sur le bénéfice des sociétés, IBS), TAP and VAT. Companies are liable for a training and apprenticeship tax (1% of payroll each) unless training efforts have been recognized by the ministry in charge of professional training.
Companies are responsible for withholding taxes, such as the income tax on employees’ salaries, with-holding tax on dividends (standard rate of 15%), on interest paid (10% in most cases) or on remuneration to foreign service providers (24%).
These rates may be modified when the sums are paid to companies that are based in countries that have signed double-tax treaties with Algeria. They may also be subject to registration duties on some operations and Customs duties.
IBS: Profits of firms with legal personalities are subject to an annual tax. Partnerships, undeclared partnerships and professional civil partnerships not constituted as joint stock companies or limited liability companies are not subject to IBS, but may choose this form of taxation. The taxable income is the profits or revenues realized in Algeria. Taxable income is the income from all operations that are carried out by the enterprise, including the transfer of assets, either during or at the end of operations.
Taxable income is based on the accounting income before taxes, corrected to take the tax into account. Operating revenues are the price of merchandise sold, work done and services provided.
Capital gains from re-evaluations are taxable, except where specific legislation provides for exemptions, as in 2007. Capital gains generated by transfer of fixed assets are taxed differently depending on whether they are short- or long-term gains, and may be exempt from tax when the capital gains and the cost of the sold assets are reinvested in fixed assets within three years.
DEDUCTIBLE CHARGES: Costs and charges are only deductible if they are linked to normal corporate operations and are effective, justified and included in the expenses of the fiscal year in which they were incurred. Fines, penalties and interest on arrears are not allowed as deductions against taxable income. It should be pointed out that the Finance Act of 2008 explicitly lays out the deductibility of unrecoverable VAT. This refers to the VAT that has been subjected to a reimbursement request to the pro rata of the deduction entitlement.
APPLICABLE RATES: In accordance with the provisions of the 2008 companion finance bill, IBS rates were reviewed as follows: 19% for production of goods activities, construction and public works, and activities in the tourist industry; and 25% for trade and service activities, as well as for joint activities when the level of turnover in respect of trade and services is more than 50% of total turnover excluding taxes. The production of goods includes the extraction, manufacturing, processing or transformation of products to the exclusion of packaging or commercial presentation for resale. Moreover, the term “production activities” does not include mining activities and hydrocarbons. The reduced rate for reinvestment has been abrogated. Taxpayers benefiting from exemption of corporate income tax because of investment incentive regimes, such as ANDI, are under obligation to reinvest the untaxed profits within a period of four years. This would apply, according to the bill, to profits incurred from financial year 2008 and onwards and to profits awaiting appropriation, which exist at the date of enactment of the additional finance law for 2008.
OBLIGATIONS: Firms liable for IBS are in particular required to keep accounting records in accordance with the laws and regulations and notably with regard to the National Accounting Plan (Plan Comptable National, PCN), and to keep documentation for a period of at least 10 years. A new financial and accounting system has been adopted that should enter into force in 2010. The new accounting system borrows much content from IFRS and, once it is effectively applied, Algeria will have a completely overhauled accounting framework, which will be very close to international standards. Taxpayers must submit a declaration of existence to the tax authorities with-in 30 days of beginning their activities. At the moment of transferring or winding up the company, owed taxes will be immediately assessed on the basis of the income that has not yet been taxed.
TAX RETURN AND PAYMENT: The annual income statement must be submitted at the latest on April 30 each year, even if the firm has suffered losses. The deficit of a fiscal year is deductible from the profits of subsequent fiscal years up to and including the fifth year. However, the firms must post their oldest losses first. Payment is made in three installments of 30% of the taxes associated with the income of the last fiscal year. The tax balance is recovered by tax roll or by spontaneous payment. For newly established corporations, each installment is equal to 30% of the tax calculated on the basis of an estimated 5% yield on called-up capital.
DIVIDENDS PAID: In accordance with the direct tax code, dividends distributed to shareholders of resident legal persons that have incurred IBS are not included in the base used to assess taxes due on the corporate earnings of corporate shareholders receiving dividends, provided they stem from regularly declared earnings. Subject to provisions of an applicable double-taxation treaty, dividends distributed to non-resident corporate shareholders are subject to a 15% withholding tax collected by the distributing corporation.
TAP: The taxable base consists of sales for the fiscal period, minus VAT. Certain operations are excluded from the taxable base. For example, the amount of sales operations; brokerage operations; or delivery operations pertaining to goods, supplies or merchandise earmarked for exportation are excluded from the taxable base. TAP is due on the basis of invoices issued by the corporation, at a rate of 2%.
The amount of tax is declared monthly on the amount of sales recorded during the month, and the tax is paid upon presentation of the declaration in each of the communes where the taxpayer possesses facilities or units. Payment must be made by the 20th of each month. Every year, firms are required to submit a declaration tracing the amount of sales subject to taxation along with the annual return (IBS and IRC). This declaration must specify the amount of taxable sales, the amount of exempt sales and the amount of sales benefiting from a reduction. The declaration for wholesale operations, which benefit from a 30% rebate of the taxable base, must be supported by a statement which includes all elements necessary to identify the client. This statement is not mandatory but affects the granting of the reduction.
VAT: VAT applies to any activity related to sales operations, construction work, the performance of services and imports. In the case of sales, a transaction is deemed to have taken place in Algeria when it is carried out in accordance with delivery terms and conditions of the merchandise in Algeria. In the case of other operations, a transaction is deemed to have taken place in Algeria when the service performed, the transferred right, the rented object or the studies done are used or exploited in Algeria.
RATES: There are three tax rates, one set at 17 % (normal rate), another at 7 % (reduced rate) and the last at 0% for certain products, such as Pharmaceuticals. The reduced rate applies to certain goods, products and materials, as well as certain operations specifically provided for by Article 23 of the turnover tax code. For instance, the Finance Act of 2006, wishing to steer consumption towards available, less-polluting energy sources, namely natural and propane gas, reduced the VAT rate on equipment earmarked for fuel. For transactions carried out domestically, these rates are applied to the price of merchandise, works or services, including all costs, duties and taxes, with the exception of the VAT itself.
Special rules are set for determining the tax assessment basis for operations relating to oil products, construction work, deliveries of goods to oneself, as well as for operations conducted by concession holders, forwarding agents, dependent firms and merchants involved in the sale of property and businesses. For imports, the rate applies to the Customs value, plus duties and taxes other than the VAT. Persons liable for VAT must, within 30 days of starting operations, submit to the tax authorities a declaration of existence supported by a copy of the articles of incorporation (for corporations) and of the trade register.
An identical declaration must be made for subsequent branches or agencies. The VAT must clearly appear on sales invoices. These documents must be prepared in accordance with the established regulatory provisions. Their accounting must respect the Commercial Code and the PCN. In the case of a suspension of activities, a declaration must be made to the tax authorities within 10 days.
DEDUCTIONS: Persons liable for VAT may deduct the taxes charged on their purchases and acquisitions from the collected VAT billed to his/her clients. Purchased or acquired goods must contribute to operations that are subject to VAT and not be excluded from the right of deduction. VAT-exempted operations and operations specifically excluded pertain to goods, services, materials and premises not tied to the exploitation of an activity liable for VAT, vehicles that are not the main operational tool of the enterprise, donations and gifts, merchants of goods, and agents and brokers.
GROUP REGIME: A specific definition and special conditions differentiate tax law from commercial law. The tax law states that a corporate group is any economic entity of two or more legally independent joint stock companies in which the parent company keeps the member companies under its control by directly holding 90% or more of the capital stock and whose capital may not be held either totally or partially by the member companies, or held in a proportion exceeding 90% by a third party eligible to be a parent company. The Finance Act of 2008 eliminated the requirement for corporations to prove they had been profitable over the last two-year period prior to the group’s integration. Newly established firms can integrate with the group provided that they meet the other requirements.
EARNINGS CONSOLIDATION REGIME: The earnings consolidation regime is only granted when the parent company opts for it and all of the member corporations give their consent. By opting for the earnings consolidation regime, the group automatically joins the group taxation regime. The group taxation regime provides for an exemption of capital gains that are realized as part of asset transactions between the members of the same group.
INVESTMENT INCENTIVES: Law No. 01-03 of August 20, 2001, which was amended and supplemented by order No. 06- 08 of July 15, 2006, provides for two tax incentives regimes relating to investment development: the general regime and the special regime, the details of which are to follow.
GENERAL REGIME TAX INCENTIVES: Except those expressly excluded by regulation, all investments relating to production of goods or services (hence excluding trading activities) are eligible for general regime tax incentives.
General regime tax incentives are as follows for the setting-up phase:
- Reduced registration duty of 0.2% for incorporation deeds and capital increases;
- Exemption from Customs duties on imported equipment and materials directly destined for the investment project (fixed assets);
- Exemption from VAT on goods and services directly destined for the investment project, whether imported or locally acquired; and
- Exemption from the registration fee on the transfer of immovable property specifically acquired in the framework of the investment project.
- In the active business phase and for three years after starting up, qualifying investments are eligible for exemption from IBS and TAP.
SPECIAL REGIME: The special tax regime applies to investments that particularly benefit the Algerian economy, especially those using clean technologies likely to protect the environment and natural resources, save energy and lead to sustainable development. The criteria for defining said investments are set out by the National Council for Investment (Conseil National de I’lnvestissement, CNI). The following tax incentives may be granted under the special regime (after negotiation with ANDI) for the setting-up phase (five years maximum):
- Application of reduced registration duty of 0.2% for incorporation deeds and capital increases;
- Exemption from taxes, duties, levies and imposts in respect of acquisitions of goods and services,
- which are directly destined to the investment project, whether imported or locally acquired;
- Exemption from VAT on non-expressly excluded;
- Exemption from registration and legal publication fee on transfer of immovable property specifically acquired and assigned to production activities; and
- Exemption from tax on immovable property assigned to production activities.
In the active business phase for up to a maximum of 10 years following the start-up of the activity, incentives include exemption from IBS and TAP. Other incentives may also be granted by the CNI. Obtaining incentives granted under the specific regime mainly depends on reaching an investment agreement between the investor and ANDI.
THE SERVICE PROVIDERS REGIME: Subject to the application of a tax treaty, non-resident foreign corporations performing service delivery contracts are subject to a withholding tax of 24%, which covers the IBS, the tax on professional activities and VAT when the services are delivered or used in Algeria. The tax base to calculate the withholding tax is the gross amount of billed services.
Corporations are required to register with the tax authorities within a month of the signing of the service delivery contract and must declare the salaries received by the employees for work performed in Algeria and pay taxes on those salaries.
THE REAL INCOME REGIME: Service providers that are subject to a 24% withholding tax may choose to be taxed on real income and therefore under the common tax regime. The tax authorities must be notified of such a decision within 15 days of the signing of the contract.
TAX TREATIES: When a tax treaty exists between Algeria and the country of residence of the service provider, the delivery of services should be taxable according to the provisions of that treaty.
However, the delivery of services physically performed in Algeria is taxable in Algeria, whether these services represent a permanent establishment according to the tax treaty or not. According to that same interpretation, services physically performed outside of Algeria by the headquarters of the corporation are not taxable in Algeria, but only in the location of the said headquarters.
THE CONSTRUCTION REGIME: Non-resident foreign corporations performing a construction contract or an engineering, procurement and construction contract are subject to ordinary tax arrangements and are taxed on their actual income. In the absence of a tax treaty, the same taxes as in the common regime are due on the corporation’s entire sales recorded as part of the contract. IBS is paid in monthly installments of 0.5% of recorded sales.
Establishments must be registered with the Algerian tax authorities in the month following the signing of the contract, keep accounting records based on actual income and submit monthly and annual tax declarations as domestic corporations are required to do. A construction or assembly site may be considered a permanent establishment if it exceeds the length of time provided for in the treaty (three to six months).
When the foreign corporation is deemed to have a permanent establishment within the country, its attributed earnings are taxed in Algeria. Equipment and services that arrive from outside Algeria may not be attributed to the permanent establishment.
To not be attributable to the establishment, those contract components must be billed separately from other components by the corporation’s external headquarters so as to not be liable for tax in Algeria.