When an Algerian company holds 90% or more of the shares of one or more Algerian companies, the group may choose to be taxed as a single entity. Hence, CIT is payable only by the parent company. Under this system, the profits and losses of all controlled subsidiaries in Algeria are consolidated. The consolidated group may also benefit from other tax advantages, such as exemption from VAT and TPA on the inter-group transactions.
An arm’s-length approach to transfer pricing applies. Companies that are members of groups of companies, including those operating in the hydrocarbons sector governed by the legislation relating to hydrocarbons, as well as foreign companies operating in Algeria temporarily, within the contractual framework of the real regime, must submit their transfer pricing documentation along with their annual tax returns (before 30 April of each year). Failing this, a penalty of DZD 2 million applies if the documentation to support transfer pricing practices is not provided by the deadline date and within 30 days after a first request is made by the Algerian tax administration. Moreover, tax authorities are entitled to apply a 25% penalty on the deemed transferred profits.
Please note that, since 2017, related companies should keep management accounts in order to justify their transfer pricing policies, which should be provided upon tax administration request. Moreover, since 2018, related companies are required to present the consolidated accounts, upon request of the tax administration, if these entities keep consolidated accounts.
As of 2019, companies obligated to submit transfer pricing documentation are required, upon a tax audit, to provide the auditors with additional documents in order to enable them to assess the reality of controlled transactions.
Article 2 of the FL 2019 provides a new provision that limits the deduction of financial interest paid to shareholders within the frame of their business relationships with the Algerian company.
As a reminder, Article 141 of the Direct Tax Code (CIDTA) provides full deductibility of interests on loans paid to shareholders concerning trading operations. However, the use of this type of financing allows companies to deduct interests on debt that may be artificial, or even to deduct interests instead of capital increases.
In this context, the new provision provides the deductibility of these charges to the average effective interest rates communicated by Bank of Algeria, with a double condition that the capital has to be fully paid-up and the sums available to the company should not exceed 50% of the capital. This measure is inspired by the so-called 'thin capitalisation measures' under Base Erosion and Profit Shifting (BEPS) Action 4.
According to this provision, the financial interests paid to the shareholders of the company established in Algeria are deductible from the CIT base. However, they remain within the limit of the amount that could have been obtained by applying the average rate communicated by Bank of Algeria. This measure makes it possible to avoid over-indebtedness of the company and negatively impacting the taxable income of the company.
Controlled foreign companies (CFCs)
There are no CFC rules in Algeria.