As part of the WTS Global network ICON has excellent contacts to reliable cooperation partners in more than 35 African countries. Since Africa is becoming increasingly important for Austrian and European entrepreneurs we dedicate a newsletter series to the taxation of plant construction projects in selected African jurisdictions. In the following newsletter, we would like to briefly describe the most important tax regulations for international plant construction projects in Algeria.
Unlimited/limited tax liability – permanent establishment (PE)
Algerian Law
Due to the territorial tax system in Algeria, the tax residency of a legal person is not important for the determination of the Algerian tax liability. Algerian-sourced income of resident and non-resident com-panies is subject to Algerian corporate income tax. According to the current administrative practice, companies established in Algeria are considered to be resident in Algeria. The residency has among other things an impact on the applicability of double taxation agreements (DTA).
There is no Algerian definition of permanent establishment (PE). The Algerian tax authority usually applies the regulations in the applicable DTA. The existence of a PE does affect the taxation method in Algeria. Foreign companies without a PE are subject to a final Algerian withholding tax (WHT) with their Algerian-sourced income (referring to point WHT) on gross basis. Foreign companies with a PE in Algeria are subject to the taxes cited in point Corporate Tax (CIT) on net profits.
DTA-Law
Since December 1st 2006 (WHT), respectively January 1st 2006 (other taxes), a double taxation agreement (DTA) is applicable between Algeria and Austria, which regulates taxation rights in cross-border situa-tions.
According to Art. 2 (3) lit. b DTA, among others, the following Algerian taxes are included in the DTA:
- Impôt sur le bénéfice des sociétés (IBS)
- Taxe sur l‘activité professionnelle (TAP)
Income from a plant construction project is considered as business profits according to Art. 7 DTA. Art. 7 (1) DTA states that business profits of a company resident in Austria, are only subject to tax in Algeria, if the business profits are generated through a PE according to Art. 5 DTA.
Corporate Tax
Algerian Law
The entire income earned through an Algerian PE is subject to IBS and additionally the annual turnover of the PE is subject to TAP. For tax purposes a PE is treated as an Algerian company and must keep ap-propriate books and records.
- IBS
The corporate income tax rates are set as follows:- 19 % for manufacturing activities;
- 23 % for construction, public works and hydraulic activities in addition to tourism and spa ac-tivities, except travel agencies; and
- 26 % for other activities (including trade and services).
The taxable income is determined based on books and accounts according to Algerian law. The tax year corresponds to the calendar year. However, it is possible to apply for a different financial year.
PEs of foreign companies have to make an IBS down payment equal to 0.5 % of the amounts billed every month. When filing the annual IBS return, these IBS down payments are offset against the IBS due. De-pending on the activity, the IBS rate for plant manufacturers is 23 % or 26%. Under the condition that the foreign plant construction company contributes to the social security scheme of the construction sector in Algeria (CABOBATPH), the IBS for plant construction companies is 23 %.
- TAP
In addition to IBS, tax on business activity (TAP) is payable at a rate of 2 % (assessment basis is the taxa-ble turnover). TAP must be paid monthly (by the 20th of the following month at the latest) based on taxable turnover of the previous month.
DTA-Law
Art. 7 (1) DTA states that the Algerian taxation right is restricted to those cases, in which an Austrian plant construction company triggers a PE according to Art. 5 DTA in Algeria. In the case of a PE only the profits which are attributable to the PE are subject to tax in Algeria.
The term PE in connection with plant construction is determined in Art. 5 (3) which reads as follows:
“A building site or construction or installation project constitutes a permanent establishment only if it lasts more than six months.”
The PE registration for tax purposes in Algeria in general includes IBS / TAP and VAT.
Withholding Tax (WHT)
Algerian Law
According to Art. 150.2 of the Algerian Income Tax Code income from Algerian sources received by a non-resident without Algerian PE, is subject to Algerian WHT. Fees paid by resident persons to non-residents for rendering technical services are subject to a 24 % final withholding tax on the gross amount which must be withheld and paid to tax authority by the recipient of the services. Such WHT contains a VAT-part and TAP as well.
The contract agreement has an impact on the taxation method applicable in Algeria - the 23 % or 26 % IBS based on net profits or the 24 % WHT on gross remuneration. Therefore, the tax consequences should already be considered in the bidding phase and when drafting the contract.
Finance Law 2009 introduced a branch profits tax at the rate of 15 %. The branch tax is levied on the after-tax profits of Algerian PEs remitted to their foreign head office.
DTA-Law
According to DTA, only following transactions may be subject to WHT in Algeria:
- Art. 10 Dividends
- Art. 11 Interests
- Art. 12 Royalties
In cooperation with the Algerian client, the application of the DTA at source (= avoidance of WHT on services right at the time of the payment of the service fees) should be possible. In case a WHT has been deducted and paid by the Algerian client due to domestic regulations to the local tax authority, the refund process is a complicated and time-consuming procedure.
Algeria's right to tax business profits of Austrian plant construction companies is restricted by the DTA. Therefore, Algeria may tax such profits only in case a PE according to Art. 5(3) DTA has been triggered.
According to Art. 10 (5) DTA, the branch profits tax mentioned above must not be levied in relation to Austrian companies. However, it should be mentioned that Algerian tax authorities have a different interpretation of the regulation and the branch profits tax will be levied.
Elimination of double taxation
Double taxation of Algerian PE income (business profits according to Art. 7 DTA) of an Austrian company is avoided by the exemption method according to Art. 23 (1) lit. a DTA. The Algerian PE-income exempt-ed from Austrian CIT is determined in accordance with the Austrian tax law.
Taxes levied in Algeria against the provisions in the applicable DTA cannot be utilised in Austria (= elimi-nation of double taxation) without a mutual agreement procedure (Art. 25 DTA).
Algerian Value Added Tax (VAT)
Algerian VAT (Taxe sur la Valeur Ajoutée) is levied on supply of goods and services in Algeria as well as on the importation of goods. Services rendered abroad but used in Algeria are also subject to Algerian VAT. Standard VAT rate is 19 %, apart from the standard rate a reduced 9 % VAT rate applies to certain goods and services. Furthermore, for special sectors like oil and gas there is a tax rate of 0 %.
Tax registration of the PE in Algeria always includes IBS / TAP and VAT. A separate registration for VAT purposes is not possible in Algeria. Therefore, in case of a PE also VAT compliance work needs to be considered. If a PE is registered, the taxable person must submit monthly VAT returns. Input VAT from purchases can be claimed within the monthly VAT returns. A taxable person generally recovers input tax by offsetting it against output VAT charged on supplies made (= input tax credit). Besides the input tax credit, a VAT refund is possible only in case that different VAT rates apply to purchases and supplies of a taxable person and in the case of exports.
A reverse charge mechanism was introduced under Finance Law 2011 whereby the resident customer in Algeria is liable for VAT in respect of goods delivered or services supplied by non-resident persons with-out a PE in Algeria (no tax registration in Algeria).
If the Algerian customer is VAT-exempt, then all sales from foreign companies (without PE) to this customer are also VAT-exempt. On application, in this case there is the possibility that Algerian subcontractors also do not charge Algerian VAT to the foreign VAT-exempt general contractor.
Conclusion
If you are planning a project in Algeria in the future or have already received an order, we would be pleased to support you with our local cooperation partner Cabinet Zazoua to develop and implement a suitable tax concept. Due to the above described taxation impacts in Algeria, it is highly recommended to obtain a tax expertise already before signing a contract.
Short portrait: Cabinet Zazoua
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