Pursuant to the Supplementary Finance Act 2008 published in July, companies benefiting from tax breaks in the scope of measures to encourage investment are now subject to the obligation to reinvest the share of the profits corresponding to the tax exemption. They are granted a four-year period during which the reinvestment operations must be carried out as from the end of the financial year whose results were covered by the incentive measures.

For information purposes and subject to an alternative interpretation by the tax authorities, the main investment incentive measures for companies are in principle set forth in the scope of the National Agency for Development and Investment through the general system and the special system (including investments carried out in areas where development requires a State contribution and contractual investments with a specific interest for the national economy). These systems trigger entitlement to tax exemptions, notably from tax on profits (currently set at 25%). The question can consequently be raised to ascertain whether exemptions applying to exporting companies are covered by the Act (see below).

Reinvestment in accordance with the Supplementary Finance Act, which amends Article 142 of the Indirect Taxation Code must be carried out for each financial year or for several consecutive financial years and applies to the results generated in the financial year 2008 and subsequent financial years.

In the event of failure to observe the new reinvestment obligation, the companies concerned shall be required to refund the tax breaks and pay a 30% tax fine.

The tax authorities need to clarify the current drafting of the provisions in question in relation to the following points:

• Does the reinvestment obligation only relate to companies benefiting from tax breaks with effect from future financial years (within a four-year period as from the financial year 2008) or does it also apply to companies currently benefiting from tax breaks?

Our interpretation, subject to the implementing circulars and a different interpretation by the tax authorities, is that companies which benefit from exemptions for the financial year 2008 shall be subject to the new provisions, when the results for the financial year are appropriated during the general meetings called to approve the financial statements held in 2009.

• Should exempt profits be considered as granted both under the general system and the special system in relation to the measures introduced by the National Agency for Development and Investment and for the export activity? 

In principle and subject to the same reservations as set forth above, the literal interpretation of the legislation assumes that it is applied as soon as the company is exempt (or benefits from tax relief). However, the question may arise that a distinction needs to be made between the National Agency for Development and Investment’s incentive system and the export system.

Indeed, Article 4 of the Supplementary Finance Act refers to exemptions granted in the scope of measures encouraging investment and moreover, the summary of the grounds of the Finance Act seems to mainly cover the National Agency for Development and Investment’s incentives. 

In our opinion, it will be necessary to await the authorities’ position on this point before taking a decision.

• Are the companies concerned prohibited from distributing dividends during the exemption period?

Subject to the same reservations as set forth above, in order to consider that there is a restriction in the distribution of dividends, it is necessary to supplement the regulatory measures.

It would be necessary for the parliament to require that special balance sheet reserves are created to hold the profits. If such a restriction is not laid down, we do not see why a company would not be in a position to distribute dividends, subject to paying tax penalties.

It may even be envisaged that the company carries out investments for equivalent amounts whilst also distributing dividends. Based on current legislation, no provisions under Algerian corpus (in particular foreign exchange regulations) prohibit the companies concerned from distributing dividends.

Therefore, it may be considered that if regulated reserves are not implemented, the company may distribute dividends, subject to paying tax penalties.

Nota Bene : The purpose of this memorandum is to explain the main measure introduced by the Supplementary Finance Act 2008 relating to foreign investment and does not provide exhaustive information.

Please note that the Supplementary Finance Act also provides a new instrument in the scope of tax audits (spot accounting checks).
The reduction in the rate of tax on profits (from 25% to 19%) applies to activities goods manufacturing, construction, civil engineering and tourism; however with the exception of other areas of the service industry.

Moreover, the introduction of a contribution corresponding to 1% of turnover to be paid by car dealers and a set tax of DZD50,000 to DZD150,000 to be paid by purchasers of new imported cars or new cars purchased locally.

The provisions of the Supplementary Finance Act 2008 shall enter into force with effect from 28 July 2008.

Contact

Frédéric Elbar, Partner
Tel : +33 1 47 38 56 42

Jean-Jacques Lecat , Partner
Tel : +33 1 47 38 56 82

Samir Sayah, Associate, Chief Representative
Tel : +213 (0) 21 37 07 07

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