Volume 6, Number 7, Page 1

Venezuelan Tax Treaties

By Rodner, Martínez and Asociados

Venezuela has entered into more than 31 bilateral agreements for the avoidance of double taxation. These tax treaties are of two types: (a) tax treaties to avoid double taxation with respect to income tax and (b) tax treaties to avoid double taxation regarding international transportation income. The former also cover tax on capital (business assets tax). Venezuelan income tax treaties ratified by Congress include those with Italy, France, the United Kingdom, Germany, Switzerland and Mexico. Venezuela has also entered into income tax treaties with the United States of America. However, the Venezuelan Congress has not yet ratified said tax treaty.

The tax treaties though similar, have their own particularities, including, with respect to the income tax treaties, different tax rates for specific types of income. They are based on OECD double taxation model convention. Variations result from changes in the text and from the protocols that are executed with respect thereto. The international transportation income tax treaties ordinarily exempt from taxes the income resulting from international transport activities performed by an entity of the country with which Venezuela entered into the treaty. The scope of the international transportation income tax treaties may vary from one to another; by the way the relevant income is defined. The general income tax treaties include provisions regarding international transportation (commonly Article 8) and where a prior special treaty on the subject has been entered into reference thereto is ordinarily made.

The purpose of the income tax treaties is to avoid double taxation, as a way to boost foreign investment in Venezuela. To that effect the tax treaties (i) allocate the taxing authority to one of the countries where both identify similar taxable events; (ii) contemplate tax exemptions in one of the two countries; (iii) stipulate maximum tax rates; or, (iv) allow credits for taxes paid in the other country. The tax treaties also purport to reduce tax evasion. As a supplement to the commitments of the countries under the tax treaties, they ordinarily include a non-discrimination provision and the obligation to share information.

The tax treaties create a more favorable tax treatment for entities of the countries with whom Venezuela has signed the treaties, by reducing the current applicable tax rates, exempting the income from Venezuelan taxes or limiting the possibility of changes in the existing tax law, by committing to maximum tax rates. The tax treaties will have preference of application above any other Venezuelan law (Article 12 of the Civil Procedure Code). In some instances, the current Income Tax Law establishes lower tax liabilities than those referred to by the tax treaties. In such cases, the Income Tax Law will apply.

Absent an international transportation income tax treaty, foreign entities operating ships or aircraft internationally including Venezuela, will be subject to Venezuelan income tax at the ordinary corporate tax rate (up to 34%). Such entities will be deemed to have a net income equivalent to 10% of their gross income, which will be deemed to be 50% of the amounts of freight and tickets to or from Venezuela (Article 37 of the Income Tax Law). Therefore, a tax of 1.70% of the amounts of freight and tickets will be imposed (a rate lower than 34% is applicable for the net income up to 3,000 tax units (Article 53 of the Income Tax Law), currently equivalent to US$ 38,500.00, approximately).

The most significant changes, regarding Venezuelan income tax, arising from the tax treaties include the following:

1. Dividends.

2. Currently, dividend payments are not subject to Venezuelan income tax (Article 14 of the Income Tax Law). The tax treaties ordinarily establish a maximum tax rate on dividends (commonly Article 10 of the treaty). The maximum tax rate set forth by the treaties may vary depending on the stockholdings of the foreign shareholder. The larger the holdings the lower the taxes, including that in some cases a tax exemption applies for holdings above certain levies.

3. Interest.

4. The tax treaties establish maximum tax rates for interest payments (usually Article 11 of the treaty). This maximum rate is lower than the ordinary corporate tax rate applicable to loans made by entities other than foreign financial institutions. Foreign financial institutions are taxed at the rate of 4.95% on interest payments under the current Income Tax Law (First Paragraph of Article 53).

5. Most of the tax treaties contemplate a tax exemption for interest payments made on loans granted or guaranteed by the foreign government or government-owned entities. This will cover the loans made by or guaranteed by export promotion agencies of the country with which Venezuela signed the treaty.

6. Capital Gains.

7. The tax treaties allocate taxing power regarding capital gains based on the type of asset. The treaties ordinarily refer to capital gains resulting from the disposition of real estate, movable property related to a permanent establishment, vessels and aircraft, and other assets (ordinarily in Article 13 of the treaty). Most of the tax treaties will eliminate Venezuelan taxes on the sale of Venezuelan securities by a foreign investor (such transactions will only be taxed by the country of residence of the foreign investor). Nowadays, the sale of Venezuelan securities is subject to Venezuelan income tax (Articles 1 and 4 of the Income Tax Law) at the ordinary corporate tax rate, except that if Venezuelan shares are sold through a local stock exchange the tax will be of 1% of the sale price (Article 68 of the Income Tax Law), with the tax to be withheld by the stock exchange (Articles 9(20) and 17(5) of Decree 1808 of April 23, 1997). If the sale of stock is made out of the stock exchange, the buyer shall withhold 5% of the price paid to the foreign seller (Article 9(21) of Decree 1818).

8. Royalties.

9. Ordinarily the tax treaties incorporate a maximum rate for taxes on technology payments (Article 12 of the treaty). Under current Venezuelan Income Tax Law, technology payments are taxed at the rate of 10.20% if qualified as technical assistance payments, 17% if deemed technology services payments and 30.60% if royalties (Articles 40, 42 and 53 of the Income Tax Law). The tax treaties commonly establish lower tax rates.

For the tax treaties to become effective they must be ratified by each country and the ratification instruments exchanged. The ratification is given in Venezuela pursuant to a law of Congress (Article 128 of the Constitution). The tax treaty will then apply as of the beginning of the succeeding year (usually Article 28 of the treaties includes the provisions as to their effectiveness). However, taxes calculated by periods, as it will be the case of the Venezuelan income tax, will only be affected by the treaty as of the fiscal year beginning following the 1st of January next to the date of exchange of the ratification instruments. This is consistent with the Venezuelan rule for the coming into effect of changes in the tax legislation (Article 9 of the Organic Tax Code).

Some provisions of the tax treaty may appear confusing and require interpretation. When construing the treaty, the following guidelines can be followed:

1. In case of a difference of interpretation the parties may establish a mutual understanding (usually Article 26 of the treaty).

2. (If a term used in the treaty is not defined therein but under the domestic law of one of the countries, the meaning provided by such domestic law will be used when it refers to taxes from such country.

3. The rules of the Vienna Convention on the Law of Treaties of May 23, 1969 (not signed but followed by Venezuela in its practice) must be attended, including that (i) the treaty shall be interpreted in good faith, in accordance with the ordinary meaning given to the terms of the treaty in their contest and in the light of its object and purpose (Article 31), which coincide with the principles of interpretation for Venezuelan law (Article 6 of the Organic Tax Code and Article 4 of the Civil Code); (ii) a treaty party may not invoke the provisions of its internal law as a justification for its failure to perform the treaty (Article 27) (under Venezuelan law a treaty, upon ratification by Congress, has a higher ranking than ordinary laws, Article 8 of the Civil Procedure Code); and, (iii) when a treaty is authenticated in two or more languages, which is normally the case, the text is equally authoritative in each language (Article 33).

Rodner, Martínez and Asociados is a law firm with offices in Caracas, Venezuela.