The 2020 Finance Act, which has come into force, revisited two flagship measures introduced by the 2009 Complementary Finance Act: (i) the 51/49 rule and (ii) the prohibition of using international loans to finance the national economy.
Relaxation of the 51/49 rule
Article 109 of the 2020 Finance Act lifts the restrictions provided under the so-called 51/49 rule applicable to foreign investment in Algeria for “non-strategic sectors.”
According to the government release issued before the presentation of the bill of law to parliament, this measure aims "to enhance the attractiveness of the national economy."
Introduced in July 2009, the 51/49 rule sets, as a maximum, the shareholding of foreign investors in a company governed by Algerian law at 49%, compared to a minimum rate of 51% of the share capital for local investors.
The technicalities of the implementation of the 51/49 rule have been specified through several modifications made in successive Finance Acts.
Despite such specifications, the implementation of the 51/49 rule has always been a difficult task for practitioners (essentially lawyers and notaries), and for the administration, especially with respect to companies that are majority owned by foreign investors formed before the 2009 Complementary Finance Act.
These companies were navigating through a complex series of exceptions to the mandatory reorganization of said companies in accordance with the 51/49 rule. Those exceptions were almost always interpreted by the competent administration in a restrictive way for foreign investors1.
The strategic sectors for which the 51/49 rule will remain applicable are to be defined in a forthcoming regulation to be issued by the government.
As of today, no information has been released with respect to the government’s intent.
One may suppose that “strategic sectors” could cover the oil and gas industry (which has already had its own 51/49 scheme for many years), and a small additional number of activities such as power production, desalination, mining, and agriculture. In order to attract foreign investment, it will probably not cover the sectors in which proprietary technologies are involved or significant financial resources are needed such as biotech, telecoms, electronics, financial services and the automobile sector.
Until the list of strategic sectors is made available by the government, it is unclear how the new law will be implemented by the administration, in particular the National Centre of the Registry of Commerce.
In sum, there are two options:
Either all foreign investment is uncapped in terms of shareholding in Algerian entities until the list of strategic sectors is fixed by the government for which the 51/49 rule would apply; or
Maintaining the status quo and freezing in practice the abrogation of the 51/49 rule until the list of strategic sectors is fixed by the government. Thereafter, foreign investment would become uncapped in terms of shareholding in Algerian entities operating in non-strategic sectors. The issue would be that with all exceptions to mandatory reorganization in accordance with the 51/49 rule having been suppressed by Article 109 of the 2020 Finance Act, there would be virtually no possibility for existing Algerian entities that are majority owned by foreign investors to undertake any actions that were once considered by the law as exceptions without being threatened with reorganization in accordance with the 51/49 rule or simply be blocked.
Logically, Option 1 would be the only way to apply the new Article 109 of the 2020 Finance Act because the 51/49 rule is now formally abrogated as a principle and should be reinstated only for the strategic sectors once such sectors are defined in a forthcoming government regulation and in accordance with the terms specified in that regulation, as the current Article 109 of the 2020 Finance Act provides no details for the technicalities of implementating the 51/49 rule to the strategic sectors.
However, in an administration largely dominated by bureaucracy, implementation of Article 109 of the 2020 Finance Act in accordance with Option 2 cannot be excluded. It would then be a bad signal for investment, and go against the government’s intent.
The possibility of foreign loans
The 2009 Complementary Finance Act has, in principle, prohibited the possibility for an Algerian resident to enter into a loan agreement denominated in a foreign currency with a foreign lender.
The rigor of this rule has been softened since then.
Firstly, the Executive Decree No. 13-230 of 26 September 2013 has authorized, under certain conditions, loans granted by non-resident shareholders to the Algerian companies in which they were holding a stake.
Secondly, the Article 55 of the 2016 Finance Act has permitted Algerian companies to resort to international loans designed to finance strategic investments subject to prior authorization by the government.
The 2020 Finance Act continues in the same vein by providing in its Article 108 the possibility to resort to financing from international multilateral institutions with respect to strategic projects subject to prior authorization by the competent governmental authorities.
It is uncertain that the 2020 Finance Act would add anything to the existing scheme created by Article 55 of the 2016 Finance Act from a strictly legal viewpoint.
In that respect, the 2020 Finance Act should rather be regarded as the government’s announcement of its intent to enter into loans granted by international multilateral institutions this year.