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Algeria Publishes Circular on New Expense and Interest Deduction Limitations — Orbitax Tax News & Alerts

Algeria's Ministry of Finance has published Circular No. 1/ MF/DGI/DLRF/LF 2019 of 20 March 2019, which provides clarification on certain changes made by the Finance Law 2019 in relation to the deduction of certain expenses and interest ({News-2019-01-08/A/2-previous coverage}). The provisions of the circular take effect from 1 January 2019 and apply to expenses incurred as of that date.

Technical, Financial, and Accounting Assistance Expense Limitations

One of the key changes introduced is that the deduction of expenses incurred in connection with technical, financial, and accounting assistance provided by a non-resident entity is limited to:

  • 20% of the general expenses (overhead) and 5% of turnover of the paying company; and
  • 7% of turnover for engineering advisory firms.

The circular clarifies the definition of technical, financial and accounting assistance:

  • Technical assistance means assistance for the transfer of know-how or technology, including the provision of support by specialized technical experts, as well as technology support contracts;
  • Financial assistance means assistance in the form of foreign trade related financial services paid by commissions, borrowing, and other financial transactions; and
  • Accounting assistance means assistance in the management of the accounting of a company by making available competent human resources for the processing of accounting and financial information.

In applying the limitation provisions, the overhead and turnover amounts to be used for determining the ceilings of 20% and 5% are the amounts for the financial year in which the company recognized the related expense for the costs of technical, financial or accounting assistance. When the assistance service is performed on a continuous basis over multiple financial years, the company must specify the amount to be attached to each financial year and determine the ceiling of the deductible amount in relation to the overhead and turnover for each of the respective accounting years.

If during a financial year, the deduction limit is exceeded based on one of the two criteria (overhead/turnover), the excess must be reintegrated in the taxable result of the year. If during a financial year, the deduction limit is exceeded based on both of the two criteria, the higher proportion of excess expenses of the two criteria must be reintegrated into the taxable result for the year. If the excess is not reintegrated by the taxpayer, it will be reintegrated by the tax authority with penalties.

Lastly, the circular clarifies an exemption from the deduction limits, which provides that the limits do not apply for expenses incurred for technical assistance and studies in relation to heavy installations in the context of industrial activity, including the assembly of factories. This includes, for example, predominantly mechanical or electrical activities, shipbuilding, or power generation.

Interest Expense Limitation for Shareholder/Partner Loans

The circular also addresses that application of the limitation on the deduction of interest on loans granted by shareholders/partners. This includes that interest is deductible subject to the following conditions:

  • The interest rate may not exceed the annual average rate published by the Bank of Algeria;
  • The share capital must be fully paid up; and
  • The shareholder loans cannot exceed 50% of the share capital value;

The circular clarifies that this limitation on the deduction of interest expense applies to all companies subject to corporate income tax, regardless of their legal form.

Interest Expense Limitation for Related Parties

The Circular clarifies that the deduction of interest on loans made between related companies is limited to the average interest rate published by the Bank of Algeria. This covers all loans granted between related companies, including any other claim remunerated by interest.

However, the deduction limitation does not apply in certain cases, including for loans granted by related customers or suppliers if granted under normal commercial relations that the related customer or supplier has with other customers or suppliers, or for loans granted by credit institutions to related companies under conditions identical to those granted to other customers.

Deemed Interest Income for Interest-Free and Low-Rate Loans

With respect to the deemed interest rules for interest-free and low-rate loans, the circular clarifies that the lender is deemed to have derived interest income based on the average effective interest rate reported by the Bank of Algeria. This applies to loans granted by any company, whether related or not.