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New rules present challenges for foreign investors - International Law Office

International Law Office

Company & Commercial - Algeria

New rules present challenges for foreign investors

February 08 2010

Foreign trade activities
Foreign investment in production of goods and services


Since the end of 2008 the government has introduced various measures that limit foreign investment in Algeria.

Following decisions adopted by the Council of Ministers, the prime minister has approved instructions to the heads of the main public administrations and state-owned companies on the new foreign investment rules. Among other things, the guidance covers the rules on foreign share ownership, payment transfers and investment-related incentives. Ordinance 09-01 of July 22 2009 enacted the Complementary Finance Act 2009 and modified the Investment Code.(1) It confirms most of the provisions set forth by the prime minister's instructions.

The distinction between foreign trade activities and the production of goods or services is central to the changes.

Foreign trade activities

Trading activities, including foreign trade carried on by companies importing goods for resale, are ineligible for benefits under the code. Consequently, dividends resulting from such activities may not be transferred.

The act introduced a new rule regarding national ownership of companies engaged in foreign trade, which provides that a legal entity may not import goods for resale, unless at least 30% of its capital is held by resident Algerian nationals (either natural persons or legal entities owned by Algerian partners or shareholders).

The prime minister's instructions and a decree(2) enacted in May 2009 required all existing companies to comply with this condition,. The act does not impose a retroactive obligation and therefore applies only from July 28 2009. An executive decree adopted in September 2009, amending the May decree, confirms the lack of retroactive effect by deleting the obligation for existing companies to achieve the Algerian ownership requirement.(3)

Foreign investment in production of goods and services

Prior approval by National Investment Council
A proposed foreign capital investment - irrespective of the sector - which involves the production of goods or the supply of services must be declared to the National Development Investment Agency before its implementation. In addition, such investments must be submitted for prior examination by the agency's supervisory body, the National Investment Council, regardless of the size of the investment or its potential eligibility for tax incentives. The council is a ministerial body and is chaired by the prime minister. As a result of the need for high-level consideration, obtaining approval for foreign investment may take substantially longer than under the previous regime.

51% national ownership requirement
Investments may be made only where resident Algerian nationals represent 51% of the share capital. However, the nationality requirement may be met by several Algerian shareholders collectively and the foreign investor can be the main shareholder. For example, a foreign investor can hold 40% of the share capital while three Algerian shareholders each hold 20%.

Public economic enterprises and the state enjoy pre-emption rights over sales of shareholdings by foreign shareholders or to foreign investors.

Rules regarding notices, the form of approving the proposed sale and the determination of price have yet to be determined in implementing regulations.

The Investment Code defines 'investment' as:

  • the acquisition of assets in relation to the creation of new activities, the extension of production facilities and the operations of rehabilitation or restructuring;
  • the holding of share capital in a business in the form of a contribution in cash or in kind; and
  • the takeover of activities in relation to a partial or complete privatization.

The purchase of shares in an existing Algerian company is not included in this definition. As a result, the purchase of more than 51% of an existing company still appears to be possible, provided that the purpose of the company remains unchanged and the acquisition does not involve new investments by the company.

Restrictions on foreign currency transfers
The act further provides that projects including foreign investments must result in a net gain in foreign currency over the lifetime of the project - that is, the income in foreign currency must be greater than the expenditure in foreign currency.

A Regulation issued by the Central Bank on October 18 2009 specifies items to be included as credit and debit in order to determine the balance in foreign currency. The production of goods sold in Algeria in place of imported goods are deemed to count as foreign currency income.

The financing required to realize foreign investments must be made in dinars through local banks, except for the subscription of share capital and where other specific exceptions apply.

Obligation to reinvest tax benefits granted extended
Under the Supplementary Finance Act, companies that are granted tax benefits are required to reinvest the amount corresponding to all such benefits within four years of the year for which this preferential tax regime applied - formerly, this requirement applied only to benefits derived from an exemption from corporate income tax. However, investors may be exempt from this requirement by order of the National Investment Council. This requirement applies to income generated in 2010, in all consecutive years and to income pending assignment from the date of enactment of the law. In the event of failure to comply with this obligation, the taxes must be paid with a 30% penalty.

Securing foreign shareholders' rights
The rights of foreign shareholders holding up to 49% of an Algerian company may be secured by various means. However, provisions of shareholders' agreements that restrict the powers of directors and shareholders in contravention of Algerian company law cannot be fully enforced. If a company were to make a decision that contradicted a shareholders' agreement in order to comply with company law, the only available remedy would be financial damages (if a case for such damages could be made).

Corporate governance provisions to protect the interests of minority shareholders should be set out in the articles of association if possible. A number of mechanisms are possible:

  • Algerian company law allows for the creation of two classes of share in a company limited by shares. One class, to which foreign investors subscribe, can confer multiple voting rights and the right to propose a number of directors, whereas the other class, without multiple voting rights, benefits from a preferential right of subscription to a capital increase.
  • A company limited by shares can appoint a supervisory board and a management board (instead of a board of directors and a chairman of the board with managerial powers). This allows for the allocation of power between representatives of Algerian and foreign shareholders.
  • A partnership limited by shares also offers potential for structuring the relationship between foreign and Algerian investors.

Protection under bilateral treaties
The limits on the rights of foreign investors and dividend transfers potentially contradict the bilateral investment treaties that Algeria has signed with over 40 countries, including 15 European countries and the United States.

For further information on this topic please contact Jean-Jacques Lecat at CMS Bureau Francis Lefebvre by telephone (+33 1 4738 5500), fax (+33 1 4738 5555) or email (jean-jacques.lecat@cms-bfl.com).


(1) Enacted by Ordinance 01-03 of August 20 2001.

(2) Executive Decree 09-181 of May 12 2009, establishing the conditions for importing raw materials, products and goods purchased for resale.

(3) Executive Decree 09-296, dated September 2 2009.

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