Volume 6, Number 2, Page 3

Lending Into Venezuela

By Rodner, Martinez and Asociados

A contract for a foreign loan by a Venezuelan borrower does not require governmental authorization. Formerly, registration of foreign loans with the Superintendency of Foreign Investments or the Technical Office of Exchange Administration was required; currently no registration of a Foreign loan with any governmental authority is necessary. In cases where the borrower is a government-owned or government entity the Public Credit Organic Law (the “Public Credit Law”) may apply (see below).

Public Credit Law

The Republic of Venezuela, the States and the Municipalities and the entities in which they directly or indirectly own 51 percent or more Government Owned Entities are subject to the Public Credit Law. Pursuant to the Public Credit Law, the contracting of a foreign loan is subject to certain restrictions, including prior authorization.

With respect to restrictions: (i) no security interest can be created based on the assets of the Republic, individual Venezuelan States or Municipalities (Article 8), (ii) the States and the Municipalities may not enter into foreign credit transactions (Article 14), (iii) autonomous public sector entities may not enter into credit transactions (Article 38), and (iv) the Republic of Venezuela and government owned corporations may not guarantee third party obligations (Articles 27 and 40). The authorization that must be obtained by Government Owned Entities varies depending on the type of entity in question. However, approval from the President and the opinion of the Commissions of Congress and that of the Central Bank of Venezuela are required.

Some Government Owned Entities are not subject to the requirements of the Public Credit Law. This is the case with government owned corporations (i) subject to the General Banking and Other Financial Institutions Act, (ii) created pursuant to the Law Reserving the Petroleum Industry to State Owned Corporations, and (iii) created pursuant to Decree 580 of 1970, related to the iron mining industry. However, such entities must certify their credit worthiness to enter into credit transactions and must then complete certain publications and notices. The above exceptions are applicable to government owned banks, such as Banco Industrial de Venezuela.

Governing Law and Submission to Jurisdiction

In principle, foreign loan agreements may opt to be governed by foreign law and the borrower, including Government Owned Entities, may then submit to foreign jurisdiction for the settlement of disputes resulting thereof. The enforcement of a foreign judgment in Venezuela will, however, be subject to the satisfaction of certain conditions (the exequatur procedure, Article 850 and 851 of the Civil Procedure Code).

Free Convertibility

The conversion of Bolivars (local currency) into foreign currency shall not be restricted in any way (see Exchange Agreement Ndeg. 1 of April 17, 1996 and Resolution 96-04-09 of the Central Bank of Venezuela).

Venezuelan Taxes

Net income resulting from a foreign loan will be subject to Venezuelan income tax at the rate of 4.95 percent (Article 53 of the Income Tax Law). Interest payments are deemed net income (Article 32).

The 4.95 percent tax on interest will be withheld by the Borrower when making the interest payment (Article 9(3)(b) of Decree Ndeg. 1344 of May 29, 1996).

The issue of promissory notes to document domestic bank loans is subject to a stamp tax of one percent (Article 28 percent of the Stamp Tax Law). Such tax will not be applicable to promissory notes issued and payable abroad.

Venezuela has tax treaties with France, Italy and Great Britain, which contain special provisions for the taxing of certain types of financing.

The law firm of Rodner, Marinez and Asociados is located in Caracas, Venezuela.