On 20 March 2019, Algerian tax agency Direction Generale des Impots (DGI) published circular N°1 /MF/DGI/DLRF/LF amending the provision of article 141 of the code of direct taxes and assimilated taxes. The objective of the circular is to explain the application of article 2 of the finance bill 2019. The circular explains guidance on limitation of technical assistance costs and interest deductions under finance bill 2019.
Limitation of deductibility related expenses are as follows:
- The costs of technical, financial or accounting assistance;
- Interest paid to the partners in respect of the funds they leave or make available to the company in addition to their capital shares; and
- Interest on loans between related companies.
The deductibility of the charges incurred is only allowed within the limit of:
- 20% of the general expenses of the debtor company and 5% of turnover excluding taxes;
- 7% of turnover excluding taxes for engineering and consulting firms.
Through an example, the circular confirms that a reinstatement is mandatory in the case where one of the two thresholds is exceeded (turnover or overhead). It also specifies that the threshold is to be taken into concern for the determination of the non-deductible portion of the costs is the lowest threshold
The methods for determining deductible technical, financial or accounting assistance costs:
- The amount of the technical, financial or accounting assistance costs to be taken into account to make the deduction.
- The sum of all these expenses will be deductible only if this amount does not exceed 5% of the pre-tax annual turnover of the debtor company and 20% of the overhead.
According to Article 2 of finance bill 2019, the limitations on interest deductions are:
- Interest paid between related companies is deductible within the limits of the average effective interest rates communicated by the Bank of Algeria:
- The deduction is subject to the double condition that the capital has been fully paid up and that the sums placed at the disposal of the company do not exceed 50% of the capital; and
- The rates applicable to the sums deducted may not exceed the average interest rates reported by the Bank of Algeria.
The provisions of this circular take effect as of January 1, 2019. They are applicable to expenses incurred as of fiscal year 2019.
