Changes to the 49/51 Algerian majority ownership rule and the State’s preemption right confirmed

Introduction

In October 2019 we had published a short note (https://www.insideafricalaw.com/blog/algeria-any-reason-to-consider-investing-in-2020) about the increased communication by the Algerian Government on the introduction of changes to the 49/51 Algerian majority ownership rule. We had also briefly commented on the reasons for this increase. With an economy severely impacted by the Covid-19 crisis and the related further fall in oil prices these reasons are even more pressing today. The Government seems to have now confirmed that a number of important changes are forthcoming.

End of the 49/51 Rule and Strategic Sectors

On Sunday 10 May 2020 the Council of Ministers issued a press release about the 2020 Finance Bill confirming, yet again, that the 49/51 rule will be changed this year except for “strategic sectors” and resale activities.

It now seems that the “strategic sectors” will include:

• the mining sector;
• the upstream energy sector and other activities governed by the law on hydrocarbons (including downstream activities) and the operation of networks for the distribution and transportation of electricity and hydrocarbons (gas and liquid);
• the transportation infrastructure sector such as railways, ports and airports;
• the pharmaceutical industry, except for investments related to the manufacturing of essential innovative, high value-added products, requiring patented technology, intended for the local market and export; and
• the defence industry and related activities under the authority of the Ministry of National Defence.

Some distinctions could be drawn within these broad categories and it is interesting to note that the press release provides that the President of the Republic has required that “transparent regulations” be issued “in order to avoid any wrong or ambiguous interpretation of the 49/51 Rule as regards the preservation of the country’s national wealth.”

Other activities for the production of goods and services would no longer require a local partner.

Limitation of the State’s preemption right

The State’s right of pre-emption over the shares held by foreign shareholders in Algerian companies would be replaced by a “prior authorisation” which should apply to the transfer of shares to foreign companies and be limited to the above “strategic sectors.” The details will be set out in an implementing decree and it seems that the President of the Republic has required that this decree should also aim at introducing transparency and protecting national wealth. The preemption right would now fall within the authority the Prime Minister (probably in part because the powers of the “Conseil des Participations de L’Etat” (State Shareholdings Council) are under review) and be subject to thorough examination by experts when exercised.

Right to use foreign financing

Finally it seems that the obligation to use local financing will be lifted. The possibility to use international debt financing had already been re-introduced in 2016 for “strategic projects”. The forthcoming change would therefore further open the possibility to other companies and projects.

Other measures

Some of the other measures announced by the Government include:

• Some of the other measures announced by the Government include:
• increase from 24% to 30% of the withholding tax applicable to foreign companies operating under contracts for the provision of services in Algeria in order to encourage them to locate these activities in Algeria;
• the extension until 2025 of the 50% tax reduction on profits deriving from the southern regions;
• the revision of taxes on petroleum products and new vehicles; and
• a renewable two years exemption from customs taxes and Value Added Tax (VAT) for components purchased on the domestic market by subcontractors in the mechanical, electric and electronic, and spare parts industries, and the creation of a preferential regime for assembly activities.

As we have previously indicated, the 49/51 rule is not the only challenge for foreign investors and various other changes will be required if its cancellation is to have a major impact. However since some sizeable projects were developed with foreign partners with the 49/51 rule in place, its removal should only further encourage investors to start or continue identifying and doing preliminary or further due diligence on possible project opportunities, including, we would suggest, in the so-called “strategic sectors”.

Until the law is passed all of the above is of course subject to confirmation but we will review the final version and follow closely its implementation and will be happy to discuss any of the above with you.