Loucif + Co has contributed to the “Doing Business In Algeria 2023 Guide” in collaboration with Legal 500 Comparative Guides. This guide offers a practical overview of key legal considerations for businesses operating or considering investment in Algeria. It provides professional insights into the latest legal considerations impacting business activities in the country.
ABBC is proud to be co-operating with Rym Loucif and we are delighted top be able to present this material for the benefit of anyone interested in doing business in Algeria.
COUNTRY INFORMATION
Algeria is the leading natural gas producer in Africa and the second-largest natural gas supplier to Europe outside of the region.
With a territory of 2.4 million km² and a dynamic demography (+900,000 inhabitants/year, 44 million inhabitants on 1 January 2020), Algeria has the 4th largest GDP on the African continent (144 billion USD in 2020) and the highest GDP per capita in North Africa.
The Algerian economy is heavily reliant on hydrocarbon exports. On average, hydrocarbons represented 93% of the country’s exports, 43% of tax revenues and 21% of GDP over the period 2004-2020.
ECONOMIC INDICATORS
GDP per capita, USD PPP (2020): 10 656
GDP growth (2020): -4.9
Inflation (average 2020): 2.4
External debt (2020): 2% of GDP
USD/DZD exchange rate (2020 average): 127.1
EUR/DZD exchange rate (2020 average): 145.1
BUSINESS CLIMATE
Algeria remains a sizeable and lucrative market for foreign investors.
Several factors clearly outline Algeria’s future potential: the country’s strategic geographical position, its infrastructure, its oil wealth and abundant natural resources, and its growing population which recently reached 44 million.
In addition, Algeria offers a skilled and affordable workforce as well as electricity, gas, and water at competitive prices.
Although hydrocarbons remain the backbone of the Algerian economy, accounting for more than 90% of exports, there are business opportunities in numerous other sectors such as agriculture, infrastructure, housing, clean energy, and pharmaceuticals.
In 2020 the Algerian Government launched ambitious efforts to improve the investment climate and respond to the Coronavirus pandemic.
Steps taken have included revising the country’s investment legislation to ease market entry for foreign investors and ending the 49% cap on foreign equity in all non-strategic sectors. See below for further details.
CURRENT OPPORTUNITIES & FUTURE PROSPECTS
The COVID-19 pandemic seems to have acted as a catalyst for the pace of transformation: no less than three reforms have been initiated in less than two years, covering key sectors such as energy and pharmaceuticals.
• First solar tender:
On 23 December 2021, the Ministry of Energy Transition and Renewable Energy launched a long-awaited solar tender for the deployment of 1 GW of solar capacity (“Solar 1,000 MW”), marking the beginning of Algeria’s energy transition.
The tender relates to the construction of solar photovoltaic power plants with a total capacity of 1,000 MW divided into lots ranging from 50 MW to 300 MW each, according to a schedule specified in the tender documents.
The Algerian Renewable Energy Company (SHAEMS), a joint venture between state-owned Sonatrach and Sonelgaz to participate and facilitate the renewable energy projects, will partner with the selected developers by acquiring a stake of up to 25% of the share capital of the selected project companies.
Foreign investors can acquire a majority stake in the project company due to the recent abrogation of the 51/49 rule concerning the renewable energy power generation sector.
The electricity produced will be sold through a 25-year Power Purchase Agreement (PPA).
• Tenders launched by Sonelgaz in March 2023:
for the development and construction of 15 solar power plants with a total capacity of 2 GW. The projects will be built on 11 sites, with capacities ranging from 80 MW to 220 MW. Potential developers have until 29 May to submit their bids.
• Green hydrogen:
The Minister for Energy Transition stated that green hydrogen could be used to replace natural gas, as part of the energy mix. The development of the green hydrogen industry from renewable electrical energy appears to be one of the key solutions for a successful energy transition in Algeria.
In the framework of the Algerian-German energy partnership, and with the participation of the German Federal Ministry of Economy and Energy (BMWi), and the Algerian Ministries of Energy (MEM) and Energy Transition (MTEER), an exploratory study on the potential of Power-to-X (green hydrogen) for Algeria has been published by the German development agency, Deutsche Gesellschaft für internationale Zusammenarbeit (GIZ) GmbH.
The study reveals a significant potential for green hydrogen production in Algeria. It shows it is technically and economically possible to develop a green hydrogen industry in Algeria, thus contributing to the decarbonisation of several sectors and the reduction of dependence on hydrocarbons.
Algeria’s existing infrastructure in the oil and gas industry, its exceptional potential in wind and solar energy, and its geographical proximity to Europe make it a reliable future supplier of green hydrogen and/or other valuable gases.
• New hydrocarbons law:
a new law on hydrocarbons was published at the end of 2019. Law No. 19-13 of 11 December 2019 governing hydrocarbon activities which, in addition to a more favourable tax reform for foreign investors, provides for a more flexible contractual regime for the exercise of hydrocarbon exploration and exploitation activities.
The new law marks the return of the production sharing contract that existed in the previous law No.86-14 of 1986, which allowed the realisation of major hydrocarbon discoveries and the development of the Berkine basin in the 1990s.
The risk services contract has also been reintroduced, which should encourage the use of improved hydrocarbon recovery technologies to optimise the performance of deposits, particularly mature ones, and whose positive impact on production could be felt in the short/medium term.
The Ministry of Energy, the Governmental Agency ALNAFT, and the National Oil Company Sonatrach are preparing an international call for tenders for the exploration and exploitation of several blocks. The tender process is expected to begin in the second half of 2022.
• New pharmaceutical regulations:
The life sciences, health, and pharmaceutical sectors have undergone significant recent developments. The Council of Ministers adopted an action plan to promote the sector in July 2020, resulting in an overhaul of the legislative and institutional framework.
LEGAL SYSTEM
Algerian law is mostly based on the French civil law system. Accordingly, it is a codified system of law where the legislation is divided into codes which contain the primary legislation.
Furthermore, the Algerian Constitution dated 8 December 1996 and amended several times, contains, amongst others, provisions on division of powers, the tasks and the election procedure of institutions, and values of the Algerian society.
FORMS OF BUSINESS
The Algerian Commercial Code provides for six types of corporate forms of commercial companies, namely:
• Partnerships (société en nom collectif) ;
• Limited partnerships (société en commandite simple) ;
• Limited partnerships by shares (société en commandite par actions) ;
• Limited liability company (société à responsabilité limitée) ;
• Joint stock company (société par actions).
• Simplified joint stock company (société par actions simplifiée).
Recently, Law No. 22-09 of 5 May 2022 introduced a new form of commercial company, the simplified joint stock company, exclusively for companies certified as “start-ups”. One of the main characteristics of this type of company is the great freedom that the shareholders have to organise the functioning of their company in the articles of association. In contrast to the rigidity of the joint-stock company, the simplified joint-stock company is extremely flexible.
The limited liability company and the joint stock company are, in practice, the most used corporate forms because they limit the liability of their members to their contributions to the company’s share capital.
COMPANY FORMATION
The incorporation of an Algerian company involves the signing, in front of a public notary, of the articles of association. The articles must be drafted in Arabic and governed by Algerian law. Foreign investors must import foreign currencies through legitimate banking channels in order to subscribe and pay the Algerian company’s share capital in front of the notary.
NEW FOREIGN DIRECT INVESTMENT LEGAL FRAMEWORK
Since 2016, aware of the competition between Mediterranean countries, particularly within the Maghreb, to attract quality Foreign Direct Investments (FDIs), and given Algeria’s longstanding need to diversify its economy away from hydrocarbons, Algeria initiated a process to reform its investment law.
On 28 July 2022, a new Investment Law No. 22-18 dated 24 July 2022 (the “Law 22-18”) was published in the Official Gazette.
Eight texts implementing Law 22-18 were published in the Official Gazette on 18 September 2022, the main provisions of which are summarised below.
A few days before the publication of the new investment law, a law No. 22-15 of 20 July 2022 was published to introduce for the first time in Algeria the concept of free zones, each free zone is to be created by future executive decrees.
Certain provisions relevant to foreign investments (such as the so-called 51/49 rule) are also contained in finance laws and supplementary finance laws.
These new laws are all positive signs in the direction of investors, especially foreigners, to increase the attractiveness of the country.
Key aspects of the recent reform of Algerian investment law are discussed below to provide foreign investors with an understanding of the current overall legal framework for investment.
1. End of the obligation for foreign investors to set up a joint venture with a local partner holding at least 51% of its share capital
Before the publication of the Supplementary Finance Law for 2020, foreign investors had to find one or more Algerian partners in order to set up a joint venture. Algerian national resident(s) had to hold at least 51% of the share capital in the joint venture company regardless of the market sector the company planned to operate in.
In the decade following the introduction of the 51/49 rule the level of foreign direct investment drastically decreased, leading the Algerian Government to limit the 51/49 rule to a restricted list of activity sectors.
The Supplementary Finance Law for 2020 repeals the 51/49 rule except for the importation of goods in order to resell them in the same condition and for five strategic sectors (as defined below).
(i) Strategic sectors
Pursuant to the Supplementary Finance Law for 2020 (as amended), the strategic sectors subject to the 51/49 rule are defined as follows:
• The military industry and related activities placed under the authority of the Ministry of National Defense.
• Railways, ports and airports.
• The pharmaceutical industry except for investments related to the manufacturing of essential, innovative, high value-added products which require complex and protected technology and are intended for domestic market and export.
Pursuant to separate sets of laws and regulations, the following important sectors are also subject to the 51/49 rule:
• The exploitation of the national mining domain as well as all underground or surface resources relating to an extractive activity, except for quarries and sandpits of non-mineral products.
• The upstream sector as well as operating the distribution network and transportation of electrical energy by cable and transportation of hydrocarbons (liquids and gas) by overhead or underground pipelines.
An implementing regulation has been published and provides further details regarding the definition of strategic sectors.
Executive Decree No. 21-145 of 17 April 2021, published in the Official Gazette of 22 April 2021, has defined the list of strategic activities (“Decree 21-145”).
To this end, Decree 21-145 lists 44 activity codes considered as “strategic”.
As a general comment, it is interesting to note that Decree 21-145 marks an opening of the energy sector to foreigners: foreign investment will be unlimited in (i) the electricity production from renewable energies and in (ii) the downstream of the hydrocarbon sector (except transport by pipeline) such as oil services, refining or oil drilling.
In contrast, most of the activities in the pharmaceutical industry sector are qualified as strategic, thus restricting the participation of foreigners in the project companies to 49%.
(ii) Importation of goods for resale in the same condition
The objective of maintaining the 51/49 rule to activities of importing raw materials and finished goods for resale in the same condition is to discourage the development of these costly activities for the Algerian external balance and to limit the transfers of foreign currencies outside Algeria.
Given the above, all other activities associated with producing goods and services – including the telecommunication, banking and insurance, agri-food, and construction sectors – are now open to foreign investment without any obligation to create a partnership with a local party.
2. End of the State preemptive rights
The Supplementary Finance Law for 2020 repeals the pre-emptive right of the Algerian Government over any direct transfer of shares by or to a foreign investor.
Indirect transfers of shares in an Algerian company, up to 10% or more, provided that the Algerian company had benefited from advantages or incentives were also subject to the Algerian State right to repurchase. The Supplementary Finance Law for 2020 repeals such State right to repurchase.
The State pre-emption right has been replaced by the requirement that authorisation must be obtained from the “competent authorities” before any direct transfer of share capital
The Supplementary Finance Law for 2020 remains silent as to the way this authorisation can be obtained and refers to further regulations. It is, of course, desirable that any implementing legislation be adopted swiftly to a) mitigate the risk of blocking situations developing, b) clarify the law, and c) provide a uniform approach for supplying authorisation.
3. Investment guarantees
(i) Transfer guarantee
Law 22-18 reaffirms the transfer guarantee in favour of foreign investors, namely the right to transfer in foreign currency the capital invested, the income derived from it, as well as the proceeds from selling and liquidating the investment.
As before, in order to benefit from the transfer guarantee, foreign investors must make capital contributions in cash imported through the banking channel and denominated in a freely convertible currency (the amount of which must be equal to or higher than minimum thresholds defined according to the total cost of the project).
In addition, contributions in kind (contributions of new assets, assets transferred to Algeria, imported assets duly valued by a judicial expert) and reinvestments of profits and transferable dividends are also treated as external contributions.
(ii) Legal stabilisation
Law 22-18 provides for a legal stabilisation mechanism: The effects of any future revisions or repeals of Law 22-18 will not apply to investments made under Law 22-18, unless the investor expressly requests otherwise.
The legislator’s intention to create a positive environment for investment seems to be reflected in such a “freezing clause” in the new law.
(iii) Recourse to international arbitration
Like the previous law, Law 22-18 allows for recourse to international arbitration in the event of a dispute between the foreign investor and the Algerian State, provided that an international convention on arbitration exists. In the absence of an international convention, arbitration remains possible within the framework of a compromise between the Agency (acting on behalf of the State) and the investor (an innovation of the new law).
4. Incentive schemes
Whereas the previous law (and its implementing decrees) were unclear as to the investment incentive schemes, Law 22-18 provides for only three schemes. Investments must first be registered with a one-stop shop in order to benefit from these incentives.
These incentives essentially consist of an exemption from customs duties, value added tax and real estate tax during the investment phase and an exemption from taxes on profits and taxes on professional activities for a period of 5 to 10 years during the operating phase.
(i) Sectoral regime
Certain sectors listed by law are eligible for this regime, in particular renewable energy, pharmaceuticals, petrochemicals, agriculture, mining and quarrying, tourism, information technology, etc.
(ii) Zone regime
This regime applies to investments made in certain regions (the Highlands and the South) and in localities where the State intends to develop certain resources or encourage them to be developed.
(iii) Investment structuring regime
The favourable “structuring investment” regime applies to projects that create at least 500 jobs and are worth at least DZD 10 billion (approx. EUR 75 million).
EXCHANGE CONTROLS
An important question that frequently arises is how the repatriation of investment proceeds operates under Algerian law, and how it is effectively implemented in practice.
The Investment Law expressly provides in favour of foreign investors for the transfer guarantee of dividends and investment proceeds.
As a reminder, the transfer guarantee is the right for any foreign investor to transfer in foreign currency the dividends and other revenues resulting from its investment, subject to certain conditions being met.
Practice shows that in most cases, foreign investors can transfer in foreign currencies the dividends and other revenues distributed by their Algerian subsidiary, although such transfers are subject to a cumbersome administrative process with local banks, particularly for the first transfer.