Volume 5, Number 8, Page 2

Investment Treaties in Venezuela

by Jaime Martinez Estevez

When investing in Venezuela, it may be advisable to do it through a legal entity which is protected under one of the investment promotion and protection treaties signed by Venezuela. Such treaties may reduce the political and exchange risks of the foreign investment. The political risk may be diminished because of the treaty obligation regarding equal treatment, expropriation, compensation and dispute settlement procedures. Although Venezuelan law includes principles of equal treatment (nondiscrimination) and expropriation protection procedures, the treaty ranking and the dispute settlement procedures thereunder provide additional comfort. The effectiveness of the treaties regarding the exchange risk has been shown with respect to the exchange control that was in effect in Venezuela from 1994 to 1996.

Treaties in Effect

Venezuela has signed and ratified investment protection treaties (hereinafter collectively the "Treaties" and individually the "Treaty") with Holland, Argentina, Switzerland, Ecuador, Chile, Barbados, Portugal, United Kingdom, Lithuania, The Czech Republic, Denmark, Peru, Brazil, Spain, Paraguay, Trinidad and Tobago, Sweden, Canada, Costa Rica and Germany (Official Gazettes of August 6, 1993, November 1, 1994, November 1, 1994, November 2, 1994, December 29, 1995, February 8, 1995, January 26, 1995, July 30, 1996, June 23, 1996, July 17, 1996, June 23, 1996, August 11, l997, August 13, 1997, September 1, 1997, September 29, 1997, November 4, 1997, December 18, 1997, January 20, 1998, January 28, 1998). The free trade agreement signed by Mexico, Colombia and Venezuela also includes investment protection provisions (Official Gazette of December 29, 1994).

The Treaties are similar although not identical. The comments hereunder must be reviewed for each specific Treaty, because of possible discrepancies resulting from the particulars thereof.

Term

A Treaty becomes applicable after the signatories notify each other of the satisfaction of the constitutional requirements for its binding effect. In the case of Venezuela, the approval of Congress is necessary (Article 128 of the Constitution). Some of the Treaties will be in effect for a particular term, except that the parties may terminate them with one year advance notice.

Investors

The Treaties protect the investments made by persons, including individuals and legal entities of the other country, and entities controlled by such persons, irrespective if they are organized and with offices in such other country. Therefore, a subsidiary of a Chilean company may be protected by the Treaty even though it is chartered and domiciled in a country that is not a signatory of a Treaty.

The export promotion and investment agencies of a country will be subrogated in the rights of the investors, upon the payment of the indemnification under the political risk policies they have issued.

Investments

The Treaties apply to the investors' property and credit rights including ownership of real estate, movable assets, security interest thereof, securities, intellectual property rights (patent, trademarks, copyrights) and concessions.

The Treaty is applicable to the investments made before or after it has become effective, except that no claims would be accepted for events or actions occurring before they became effective.

Non-Discrimination

Under the Treaties, the parties must provide national treatment to the investors from the other party, that is, a treatment not less favorable than that accorded to national investors. Furthermore, the investors must be granted most favored nation treatment, that is not less favorable treatment than that accorded to investors from other countries. However, the most favored nation provision has some exceptions, including the cases of special treatments resulting from free trade agreements, customs unions or similar agreements, tax treaties (Venezuela has signed and ratified tax treaties with Italy, France, United Kingdom and Germany) and other specific agreements listed in the respective Treaty.

Free Transferability

The Treaties guaranty the free transferability and convertibility of the dividends and other profits resulting from the investment and the repatriation of the investment. Foreign exchange regulations should not affect the free transferability and convertibility rights. Based on these provisions of the Treaties, the Venezuelan Central Bank recently agreed to indemnify KLM (protected by the Holland Treaty) for the exchange losses that resulted from a delay in the processing of the foreign currency applications made during the exchange control that was in effect from July 1994 to April 1996.

Expropriation

Investors are protected against expropriation, nationalization or similar governmental action, unless such action results out of legal procedures based on public benefit, without discrimination and with a prompt, effective and adequate compensation. Indemnification for expropriation, nationalization or similar actions must be made based on the market value, with interest, at the commercial rate, from the time such action is taken until the indemnification is paid.

Dispute Settlement

Any dispute between the signatories will be settled through the diplomatic channels, except that if no solution is found within six months, the parties may resort to arbitration. Each party will appoint an arbitrator and both of them will designate a third arbitrator. If no agreement is reached with respect to the appointment of the arbitrators, any party may request the president of the International Court of Justice to make the appointments.

Disputes between one investor and the country hosting the investment could, if amicable negotiation fails, be settled through a procedure before the courts of the latter or international arbitration. The award under the international arbitration will be final and binding.

Jaime Martínez Estévez is with the law firm of Rodner, Martínez & Asociados in Caracas.